preliminaryofficial!statement!dated!july25,!2016 ·...

PRELIMINARY OFFICIAL STATEMENT DATED JULY 25, 2016

NEW ISSUE - FULL BOOK-ENTRY RATINGS: S&P: “A+” (Underlying)

Moody’s: “A1” (Underlying) See “RATINGS” herein

In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, subject, however to certain qualifications described in this Official Statement, under existing law, interest on the Bonds is excluded from gross income for federal income tax purposes, and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, interest on the Bonds is taken into account in determining certain income and earning. In the further opinion of Bond Counsel, interest on the Bonds is exempt from California personal income taxes. See “TAX MATTERS.”

$6,000,000* SOUTH BAY UNION SCHOOL DISTRICT

(San Diego County, California) General Obligation Bonds 2008 Election, Series B


(San Diego County, California) General Obligation Bonds 2012 Election, Series B (GO Reauthorization Bonds®)

Dated: Date of Delivery Due: August 1, as shown on inside front cover Authority and Purposes. The South Bay Union School District (San Diego County, California) General Obligation Bonds,

2008 Election, Series B (the “2008B Bonds”) and the General Obligation Bonds, 2012 Election, Series B (GO Reauthorization Bonds®) (the “2012B Bonds,” and together with the 2008B Bonds, the “Bonds”) are being issued by the South Bay Union School District (the “District”) pursuant to certain provisions of the California Government Code and resolutions of the Board of Trustees of the District adopted on July 21, 2016, respectively (together, the “Bond Resolutions”). The 2008B Bonds are being issued under authorization received at an election of the registered voters of the District held on November 4, 2008 (the “2008 Authorization”), which authorized the issuance of $59,400,000 principal amount of general obligation bonds for the purpose of financing the renovation, construction and improvement of school facilities. The 2012B Bonds are being issued under authorization received at an election of the registered voters of the District held on November 6, 2012, which approved the reauthorization of $26,000,000 of the 2008 Authorization. See “THE BONDS – Authority For Issuance” and “THE FINANCING PLAN” herein.

Security. The Bonds are general obligations of the District, payable solely from ad valorem property taxes levied on taxable property within the District and collected by San Diego County (the “County”). The County Board of Supervisors is empowered and is obligated to annually levy ad valorem taxes for the payment of interest on, and principal of, the Bonds upon all property subject to taxation by the District, without limitation of rate or amount (except certain personal property which is taxable at limited rates). See “SECURITY FOR THE BONDS.”

Book-Entry Only. The Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”). Purchasers will not receive physical certificates representing their interests in the Bonds. See “THE BONDS” and “APPENDIX F - DTC AND THE BOOK-ENTRY ONLY SYSTEM.”

Payments. The Bonds will be dated the date of delivery, and are being issued as Current Interest Bonds and Capital Appreciation Bonds (both terms as defined herein). The Current Interest Bonds accrue interest at the rates set forth on the inside cover page hereof, payable semiannually on each February 1 and August 1 until maturity, commencing February 1, 2017. The Capital Appreciation Bonds accrete interest at the accretion rates set forth on the inside cover page hereof, compounded semiannually on February 1 and August 1 of each year, commencing on February 1, 2017 until payment of the accreted value thereof at maturity or upon earlier redemption (if any). Payments of principal of and interest on the Bonds will be paid by the Treasurer-Tax Collector of the County of San Diego, as the designated paying agent, registrar and transfer agent (the “Paying Agent”), to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Bonds. See “THE BONDS - Description of the Bonds.”

Redemption. The Bonds are subject to redemption prior to maturity as described herein. See “THE BONDS – Optional Redemption.”

Bond Insurance. The District has applied for municipal bond insurance for the Bonds, and will decide at the time of sale of the Bonds whether to purchase such insurance. See “BOND INSURANCE.”

MATURITY SCHEDULE (See inside cover)

Cover Page. This cover page contains certain information for general reference only. It is not a summary of all the provisions of the Bonds. Prospective investors must read the entire Official Statement to obtain information essential to making an informed investment decision.

The Bonds will be offered when, as and if issued and accepted by the Underwriter, subject to the approval as to legality by Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel to the District, and subject to certain other conditions. Jones Hall is also serving as Disclosure Counsel to the District. Norton Rose Fulbright US LLP, Los Angeles, California is serving as Underwriter’s Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of DTC in New York, New York, on or about August 18, 2016.

The date of this Official Statement is August __, 2016. *Preliminary;; subject to change.

This Preliminary Official Statement and the information contained herein are subject to com

pletion or amendm

ent. Under no circum

stances shall this Preliminary Official Statement constitute an offer to

sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer solicitation or sale would be unlawful prior to registration or qualification under the

securities laws of such jurisdiction.

MATURITY SCHEDULES* Base CUSIP†: 836411

SOUTH BAY UNION SCHOOL DISTRICT

(San Diego County, California) General Obligation Bonds,

2008 Election, Series B

$_________ Current Interest Bonds

Maturity Date (August 1)

Principal Amount

Interest Rate

Yield

Price

CUSIP†

$________ Denominational Amount

($_______ Maturity Value) Capital Appreciation Bonds


Initial Principal Amount

Accretion Rate

Yield to Maturity

Maturity Value

CUSIP†

SOUTH BAY UNION SCHOOL DISTRICT (San Diego County, California) General Obligation Bonds, 2012 Election, Series B

(GO Reauthorization Bonds®)

$_________ Current Interest Bonds


Principal Amount

Interest Rate

Yield

Price

CUSIP†

$________ Denominational Amount

($_______ Maturity Value) $_________ Capital Appreciation Bonds


Initial Principal Amount

Accretion Rate

Yield to Maturity

Maturity Value

CUSIP†

*Preliminary;; subject to change. † Copyright 2016, American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, managed by Standard & Poor's Capital IQ, and are provided for convenience of reference only. Neither the District nor the Underwriter assumes any responsibility for the accuracy of these CUSIP data.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

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

Estimates and Forecasts. 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 or any other entity described or referenced herein, 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. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the District or any other entity described or referenced herein since the date hereof.

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 prices of the Bonds at levels above that which 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 Bonds to certain securities dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the inside 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 Bond Resolutions or other 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.

No Securities Laws Registration. The Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon exceptions therein for the issuance and sale of municipal securities. The Bonds have not been registered or qualified under the securities laws of any state.

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 Bonds will, under any circumstances, give rise to any implication that there has been no change in the affairs of the District, the County, the other parties described in this Official Statement, or the condition of the property within the District since the date of this Official Statement.

Website. The District maintains a website. However, the information presented on the website is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Bonds.

SOUTH BAY UNION SCHOOL DISTRICT COUNTY OF SAN DIEGO STATE OF CALIFORNIA

DISTRICT BOARD OF TRUSTEES

Barbara Elliott-Sanders, President Elvia Aguilar, Vice President Thomas Schaaf, Trustee Chris Brown, Trustee

Melanie Ellsworth, Trustee

DISTRICT ADMINISTRATION

Katie McNamara, Ed.D., Superintendent Abdollah Saadat, Assistant Superintendent, Business Services

FINANCIAL ADVISOR

Dale Scott & Company Inc. San Francisco, California

BOND and DISCLOSURE COUNSEL

Jones Hall, A Professional Law Corporation San Francisco, California

PAYING AGENT, TRANSFER AGENT, AND BOND REGISTRAR

Treasurer-Tax Collector, County of San Diego San Diego, California

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TABLE OF CONTENTS Page

INTRODUCTION ................................................................................................................................... 1 THE FINANCING PLAN ........................................................................................................................ 3 The 2008B Bonds .............................................................................................................................. 3 The 2012B Bonds .............................................................................................................................. 3

SOURCES AND USES OF FUNDS ...................................................................................................... 4 APPLICATION OF PROCEEDS OF BONDS ........................................................................................ 4 Building Funds ................................................................................................................................... 4 Debt Service Funds ........................................................................................................................... 4 Investment of Proceeds of Bonds ...................................................................................................... 5

THE BONDS .......................................................................................................................................... 6 Description of the Bonds ................................................................................................................... 6 Paying Agent ..................................................................................................................................... 7 Book-Entry Only System ................................................................................................................... 8 Optional Redemption ......................................................................................................................... 8 Notice of Redemption ........................................................................................................................ 9 Partial Redemption of Bonds ............................................................................................................. 9 Right to Rescind Notice of Redemption ............................................................................................. 9 Registration, Transfer and Exchange of Bonds ................................................................................. 9 Defeasance ..................................................................................................................................... 10

DEBT SERVICE SCHEDULES ........................................................................................................... 12 SECURITY FOR THE BONDS ............................................................................................................ 15 Ad Valorem Taxes ........................................................................................................................... 15 Debt Service Funds ......................................................................................................................... 16 Not a County Obligation .................................................................................................................. 16

PROPERTY TAXATION ...................................................................................................................... 17 Property Tax Collection Procedures ................................................................................................ 17 Taxation of State-Assessed Utility Property .................................................................................... 18 Assessed Valuations ....................................................................................................................... 18 Reassessments and Appeals of Assessed Value ........................................................................... 21 Typical Tax Rates ............................................................................................................................ 22 Teeter Plan ...................................................................................................................................... 22 Largest Property Owners ................................................................................................................. 24 Debt Obligations .............................................................................................................................. 25

BOND INSURANCE ............................................................................................................................ 26 TAX MATTERS ................................................................................................................................... 27 CERTAIN LEGAL MATTERS .............................................................................................................. 29 Legality for Investment .................................................................................................................... 29 Absence of Litigation ....................................................................................................................... 29 Compensation of Certain Professionals .......................................................................................... 29 Financial Advisor ............................................................................................................................. 29

CONTINUING DISCLOSURE ............................................................................................................. 29 RATINGS ............................................................................................................................................. 30 UNDERWRITING ................................................................................................................................ 30 ADDITIONAL INFORMATION ............................................................................................................. 31 EXECUTION ........................................................................................................................................ 31

APPENDIX A - DISTRICT GENERAL AND FINANCIAL INFORMATION - DISTRICT FINANCIAL INFORMATION .............................................................................................................. A-1

APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2015 ................................................................ B-1 APPENDIX C - GENERAL INFORMATION ABOUT THE CITY OF IMPERIAL BEACH AND THE COUNTY OF SAN DIEGO ............................................................................................ C-1 APPENDIX D - PROPOSED FORMS OF OPINION OF BOND COUNSEL ......................................... D-1 APPENDIX E - FORM OF CONTINUING DISCLOSURE CERTIFICATE .............................................. E-1 APPENDIX F - DTC AND THE BOOK-ENTRY ONLY SYSTEM ............................................................ F-1 APPENDIX G - SAN DIEGO COUNTY INVESTMENT POOL – INVESTMENT POLICY AND QUARTERLY INVESTMENT REPORT ................................................. G-1 APPENDIX H - TABLE OF ACCRETED VALUES…………………………………………………………… H-1

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(San Diego County, California) General Obligation Bonds 2012 Election, Series B (GO Reauthorization Bonds®)

The purpose of this Official Statement, which includes the cover page, inside cover page

and attached appendices, is to set forth certain information concerning the sale and delivery of the general obligation bonds captioned above (the “2008B Bonds” and the “2012B Bonds,” respectively, and together, the “Bonds) by the South Bay Union School District (the “District”).

INTRODUCTION

This Introduction is not a summary of this Official Statement. It is only a brief description

of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement and the documents summarized or described in this Official Statement. A full review should be made of the entire Official Statement. The offering of Bonds to potential investors is made only by means of the entire Official Statement.

The District. The District, which is the most southwesterly school district in the United

States, provides an educational program for pre-kindergarten through eighth grade students. The District currently operates twelve schools, including two dependent charter schools and one preschool, and has an enrollment of approximately 7,587 students in fiscal year 2015-16. For more information regarding the District and its finances, see Appendix A and Appendix B attached hereto. See also Appendix C hereto for demographic and other information regarding the City of Imperial Beach (the “City”) and the County.

Purposes. The Bonds are being issued to finance voter-approved school projects and

to pay related costs of issuance, as described below. 2008B Bonds. The 2008B Bonds are being issued under authorization (the “2008 Authorization”) received at an election of the registered voters of the District held on November 4, 2008 (the “2008 Bond Election”), which authorized the issuance of $59,400,000 principal amount of general obligation bonds for the purpose of financing the renovation, construction and improvement of school facilities. 2012B Bonds. The 2012B Bonds are being issued under authorization (the “2012 Reauthorization”) received at an election of the registered voters of the District held on November 6, 2012 (the “2012 Bond Election”), which approved the reauthorization of $26,000,000 of the 2008 Authorization. See “THE FINANCING PLAN” herein.

*Preliminary;; subject to change.

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Authority for Issuance of the Bonds. The Bonds will be issued pursuant to Article 4.5 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing at Section 53506 (the “Bond Law”), and pursuant to resolutions adopted by the Board of Trustees of the District on July 21, 2016 (together, the “Bond Resolutions”). In accordance with State law, the Bond Resolutions were presented to the District Board on June 9, 2016 as an information item, and were presented as an action item on July 21, 2016. See “THE BONDS - Authority for Issuance” herein.

Payment and Registration of the Bonds. The Bonds are being issued as current

interest bonds (the “Current Interest Bonds”) and capital appreciation bonds (the “Capital Appreciation Bonds”). The Bonds mature in the years and in the amounts as set forth on the inside cover page hereof. The Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee for DTC. Purchasers will not receive physical certificates representing their interest in the Bonds. See “THE BONDS” and “APPENDIX F - DTC AND THE BOOK-ENTRY ONLY SYSTEM.”

Redemption. The Bonds are subject to redemption prior to maturity as described

herein. See “THE BONDS – Optional Redemption.” Security and Sources of Payment for the Bonds. The Bonds are general obligation

bonds of the District payable solely from ad valorem property taxes levied on taxable property located in the District and collected by the County. The County is empowered and is obligated to annually levy ad valorem taxes for the payment of interest on, and principal of, the Bonds upon all property subject to taxation by the District, without limitation of rate or amount (except with respect to certain personal property which is taxable at limited rates). The 2008B Bonds are the second series of bonds issued pursuant to the 2008 Authorization, and the 2012B Bonds are the second series of bonds issued pursuant to the 2012 Authorization. See “SECURITY FOR THE BONDS.”

Bond Insurance. The District has applied for municipal bond insurance for the Bonds,

and will decide at the time of the sale of the Bonds whether to purchase such insurance. See “BOND INSURANCE.”

Continuing Disclosure. The District has covenanted and agreed that it will comply with

and carry out all of the provisions of the Continuing Disclosure Certificate, dated the date of the Bonds and executed by the District (the “Continuing Disclosure Certificate”). The form of the Continuing Disclosure Certificate is included in Appendix E hereto. See “THE BONDS - Continuing Disclosure.”

Legal Opinions. Upon delivery of the Bonds, Jones Hall, A Professional Law

Corporation, San Francisco, California, Bond Counsel (“Bond Counsel”) will release its final approving legal opinions with respect to each series of Bonds, regarding the validity and tax-exempt status of the Bonds, in the respective forms attached hereto as Appendix D.

Other Information. This Official Statement speaks only as of its date, and the

information contained in this Official Statement is subject to change. Copies of documents referred to in this Official Statement and information concerning the Bonds are available from the District from the Superintendent’s Office at 601 Elm Avenue, Imperial Beach, California 91932;; telephone (619) 628-1672. The District may impose a charge for copying, mailing and handling.

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THE FINANCING PLAN

The 2008B Bonds

At the 2008 Bond Election, the District received authorization, by 76.44% of affirmative votes of the qualified electors (exceeding the required 55%), and in accordance with Article XIIIA of the California Constitution, to issue $59,400,000 in general obligation bonds (the “2008 Authorization”). The abbreviated form of the ballot measure presented to voters is:

“To improve the quality of education, renovate and modernize classrooms, restrooms, and school facilities;; make health and safety improvements;; upgrade electrical systems, improve access to computers and technology;; repair and replace roofs, plumbing, heating, ventilation, and air-conditioning systems;; and qualify the District for $17,000,000 in State matching grants, shall South Bay Union School District issue $59,400,000 of bonds at lowest possible interest rates, with no money for teacher/administrator salaries, and spending reviewed by an independent oversight committee?” On March 5, 2009 the District issued $16,000,000 original principal amount General

Obligation Bonds, 2008 Election, Series A (the “2008A Bonds”). The 2008B Bonds described herein will be issued pursuant to the 2008 Authorization, the Bond Law and the applicable Bond Resolution. The net proceeds thereof will be used to finance voter-approved projects. As described below, $26,000,000 of the bonds authorized pursuant to the 2008 Bond Election was reauthorized pursuant to the 2012 Reauthorization (defined below), and as part of the reauthorization proceedings, the District covenanted to cancel that portion of the 2008 Authorization when and if bonds are issued pursuant to the 2012 Reauthorization. See “SOURCES AND USES” and “APPLICATION OF PROCEEDS OF THE BONDS.”

The 2012B Bonds

At the 2012 Bond Election, the District received authorization, by 75.93% of affirmative votes of the qualified electors (exceeding the required 55%), and in accordance with Article XIIIA of the California Constitution, to issue $26,000,000 in general obligation bonds (the “2012 Reauthorization”), representing a reauthorization of a portion of the bonds approved at the 2008 Bond Election. The abbreviated form of the ballot measure presented to voters is:

“To continue elementary classroom/school renovations;; safety improvements;; computers/technology access;; roof, plumbing, heating/air-conditioning repairs;; and reduce overall borrowing costs, shall $26,000,000 of South Bay Union School District General Obligation Bonds, previously approved by voters in November 2008, be reauthorized through issuance of new bonds, with no increase in total authorized District debt, interest rates below legal limits, independent citizen oversight, no money for administrator salaries, and all funds spent locally and not take by the State?" On May 23, 2013 the District issued $17,000,000 original principal amount General

Obligation Bonds, 2012 Election, Series A (the “2012A Bonds”). The 2012B Bonds described herein will be issued pursuant to the 2012 Reauthorization, the Bond Law and the applicable Bond Resolution, and will be the second and final series issued pursuant to the authority of the 2012 Reauthorization. The net proceeds thereof will be used to finance voter-approved projects. See “SOURCES AND USES” and “APPLICATION OF PROCEEDS OF THE BONDS.”

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SOURCES AND USES OF FUNDS

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

Sources of Funds 2008B Bonds 2012B Bonds Principal Amount of Bonds Net Original Issue Premium

Total Sources Uses of Funds Building Fund Debt Service Fund Costs of Issuance(1)

Total Uses (1) All estimated costs of issuance including, but not limited to, Underwriter’s discount, printing costs, and fees of Bond Counsel, Disclosure Counsel, the financial advisor, the Paying Agent, bond insurance premium, if any, and the rating agency.

APPLICATION OF PROCEEDS OF BONDS

Building Funds Pursuant to the Bond Resolutions, the net proceeds from the sale of each series of

Bonds will be paid and credited to the respective funds established and held by the San Diego County Treasurer (the “County Treasurer”) and designated as (i) the “South Bay Union School District, Election of 2008, Series B Building Fund,” and (ii) the “South Bay Union School District, Election of 2012, Series B Building Fund,” respectively, and together, the “Building Funds”. Amounts credited to the Building Funds will be expended by the District for the purpose of financing any of the projects for which the Bond proceeds are authorized to be expended under the 2008 Authorization and the 2012 Reauthorization, respectively, and further including all incidental expenses and related costs of issuance. All interest and other gain arising from the investment of proceeds of each series of Bonds will be retained in the respective Building Fund and used for the purposes thereof. All moneys held in the Building Funds will be invested in Authorized Investments (as defined in the Bond Resolutions) in accordance with the investment policies of the County, as such policies exist at the time of investment. Pursuant to the Bond Resolutions and applicable provisions of the Education Code, a portion of the proceeds of each series of Bonds may be deposited with a fiscal agent for the purpose of paying costs of issuance. See also “APPENDIX G – SAN DIEGO COUNTY INVESTMENT POLICY AND QUARTERLY INVESTMENT REPORT” herein.

Debt Service Funds

Pursuant to the Bond Resolutions, the amount of premium, if any, received by the

County from the sale of the Bonds, will be deposited and kept separate and apart in the respective funds established and held by the County Treasurer and designated as (i) the “South Bay Union School District Election of 2008, Series B General Obligation Bonds Debt Service Fund” and (ii) the “South Bay Union School District Election of 2012, Series B General Obligation Bonds Debt Service Fund.” Each of these debt service funds (together, the “Debt

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Service Funds”), is pledged for the payment of the principal of and interest on the applicable series of Bonds when and as the same become due.

All taxes levied by the County for the payment of the principal of and interest and

premium (if any) on the respective series of Bonds will be deposited in the applicable Debt Service Fund by the County promptly upon apportionment of said levy.

Any moneys remaining in the Debt Service Fund for a particular series of Bonds,

following the payment of the principal of and interest on such Bonds have been paid in full, shall be transferred to any other interest and sinking fund or account for general obligation bond indebtedness of the District, including refunding bonds, and in the event there is no such debt outstanding, shall be transferred to the District’s general fund upon the order of the County Auditor, as provided in Section 15234 of the Education Code.

Investment of Proceeds of Bonds

All moneys held in any of the funds or accounts established with the County under the

Bond Resolutions will be invested in accordance with the investment policies of the County, as such policies exist at the time of investment. Obligations purchased as an investment of moneys in any fund or account will be deemed to be part of such fund or account. All interest or gain derived from the investment of amounts in any of the funds or accounts established under the Bond Resolutions will be deposited in the fund or account from which such investment was made, and will be expended for the purposes thereof.

In accordance with Government Code Section 53600 et seq., the County Treasurer

manages funds deposited with it by the District. The County is required to invest such funds in accordance with California Government Code Sections 53601 et seq. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code. See “APPENDIX G – SAN DIEGO COUNTY INVESTMENT POLICY AND QUARTERLY INVESTMENT REPORT.”

[Remainder of Page Intentionally Left Blank]

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THE BONDS Description of the Bonds

The Bonds are being issued as Current Interest Bonds and Capital Appreciation Bonds.

Both types of Bonds are described below. The Bonds mature in the years and in the amounts as set forth on the inside cover page hereof. The Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee for DTC. Purchasers will not receive physical certificates representing their interest in the Bonds. See “Book-Entry Only System” below and “APPENDIX F – DTC and the Book-Entry Only System.”

Current Interest Bonds. The Current Interest Bonds will be issued in the

denominations of $5,000 principal amount each or any integral multiple thereof. Interest on the Current Interest Bonds is payable semiannually on each February 1 and August 1, commencing February 1, 2017 (each, an “Interest Payment Date”). Each Current Interest Bond will bear interest from the Interest Payment Date next preceding the date of registration and authentication thereof unless (i) it is authenticated as of an Interest Payment Date, in which event it will bear interest from such date, or (ii) it is authenticated prior to an Interest Payment Date and after the close of business on the fifteenth (15th) day of the month preceding the Interest Payment Date (each, a “Record Date”), in which event it will bear interest from such Interest Payment Date, or (iii) it is authenticated prior to January 15, 2017, in which event it will bear interest from the date of delivery of the Bonds identified on the cover page hereof. Notwithstanding the foregoing, if interest on any Current Interest Bond is in default at the time of authentication thereof, such Current Interest Bond will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. Payments of principal of and interest on the Current Interest Bonds will be paid by the Paying Agent to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Current Interest Bonds.

Capital Appreciation Bonds. Certain Definitions.

The following terms used herein are defined in the Bond Resolutions to have the

following meanings with respect to the Capital Appreciation Bonds:

“Accreted Value” means, with respect to any Capital Appreciation Bond, the total amount of principal thereof and interest payable thereon as of any Compounding Date determined solely by reference to the Table of Accreted Values set forth on such Capital Appreciation Bond, which is attached to this Official Statement as Appendix H. The Accreted Value of any Capital Appreciation Bond as of any date other than a Compounding Date will be the sum of (a) the Accreted Value as of the Compounding Date immediately preceding the date as of which the calculation is being made plus (b) interest on the Accreted Value determined under the preceding clause (a), computed to the date as of which the calculation is being made at the Accretion Rate set forth on such Capital Appreciation Bond (computed on the basis of a 360-day year of twelve 30-day months). “Accretion Rate” means the rate which, when applied to the principal amount of any Capital Appreciation Bond and compounded semiannually on each

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Compounding Date, produces the Maturity Value of such Capital Appreciation Bond on the maturity date thereof. “Capital Appreciation Bonds” means bonds the interest on which is compounded semiannually on each Compounding Date and is payable in full at maturity as shown in the table of Accreted Value for the Capital Appreciation Bonds and attached to this Official Statement as Appendix H. “Compounding Date” means, with respect to any Capital Appreciation Bond, each February 1 and August 1, commencing February 1, 2017, to and including the date of maturity or redemption of such Capital Appreciation Bond. “Denominational Amount” means, with respect to any Capital Appreciation Bond, the original amount of such Capital Appreciation Bond as of the Closing Date. “Maturity Value” means, with respect to any Capital Appreciation Bond, the Accreted Value of such Capital Appreciation Bond to be paid at maturity. The Capital Appreciation Bonds will be dated the date of delivery, and will accrete

interest from such date. The Denominational Amount of each maturity of the Capital Appreciation Bonds shall be as shown on the inside cover page hereof. The Capital Appreciation Bonds will be issued in denominations such that the Maturity Value thereof shall equal $5,000 or an integral multiple thereof. The Capital Appreciation Bonds are payable only at maturity, in the years and amounts set forth on the inside cover page hereof.

Interest on the Capital Appreciation Bonds is compounded on February 1 and August 1

of each year, commencing February 1, 2017. Each Capital Appreciation Bond accretes in value daily over the term to its maturity, from its Denominational Amount on the Closing Date to its Accreted Value on its maturity date. The Accreted Value payable on any date shall be determined solely by reference to the Table of Accreted Values attached to such Capital Appreciation Bond. See “APPENDIX H– Accreted Value Tables.”

The interest portion of the Accreted Value of any Capital Appreciation Bond that is

payable on the date of maturity shall represent interest accreted and coming due on such date. The Accreted Value of any Capital Appreciation Bond at maturity shall be payable by check or draft mailed by first-class mail, in lawful money of the United State of America upon presentation and surrender of such Bond at the Office of the Paying Agent. See “APPENDIX F- Book-Entry Only System.”

Paying Agent

The San Diego County Treasurer-Tax Collector, San Diego, California, will act as the

registrar, transfer agent, and paying agent for the Bonds (the “Paying Agent”). As long as DTC is the registered owner of the Bonds and DTC's book-entry method is used for the Bonds, the Paying Agent will send any notice of redemption or other notices to owners only to DTC. Any failure of DTC to advise any DTC Participant, or of any DTC Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings relating to the redemption of the Bonds called for redemption or of any other action covered by such notice.

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The Paying Agent, the District, the County and the Underwriter of the Bonds have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership, of interests in the Bonds.

Book-Entry Only System

The Bonds will be issued in book-entry form only, and will be initially issued and

registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”). Purchasers of the Bonds (the “Beneficial Owners”) will not receive physical certificates representing their interest in the Bonds. Payments of principal of and interest on the Bonds will be paid by the Paying Agent to DTC for subsequent disbursement to DTC Participants which will remit such payments to the Beneficial Owners of the Bonds.

As long as DTC’s book-entry method is used for the Bonds, the Paying Agent will send

any notice of prepayment or other notices to owners only to DTC. Any failure of DTC to advise any DTC Participant, or of any DTC Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings relating to the prepayment of the Bonds called for prepayment or of any other action premised on such notice. See “APPENDIX F - DTC AND THE BOOK-ENTRY ONLY SYSTEM.”

The Paying Agent, the District, and the Underwriter of the Bonds have no responsibility

or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership, of interests in the Bonds.

Optional Redemption*

The Bonds maturing on or after August 1, 2027 are subject to redemption prior to

maturity, at the option of the District, in whole or in part among maturities on such basis as shall be designated by the District and by lot within a maturity, from any available source of funds, on August 1, 2026, or on any date thereafter, at a price equal to 100% of the principal amount (or, in the case of Capital Appreciation Bonds, the Accreted Value) thereof, without premium, together with, in the case of Current Interest Bonds, accrued interest thereon to the redemption date.

For the purpose of selection for optional redemption, Bonds will be deemed to consist of

$5,000 portions (principal amount or Maturity Value, as applicable), and any such portion may be separately redeemed. Whenever less than all of the outstanding Bonds of any one maturity are designated for redemption, the Paying Agent shall select the outstanding Bonds of such maturity to be redeemed by lot in any manner deemed fair by the Paying Agent. For purposes of such selection, each Bond will be deemed to consist of individual bonds of $5,000 portions (principal amount or Maturity Value, as applicable). The Bonds may all be separately redeemed.

*Preliminary;; subject to change.

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Notice of Redemption The Paying Agent is required to give notice of the redemption of the Bonds, at the

expense of the District, at least 30 days but not more than 60 days prior to the date fixed for redemption. Notice of any redemption of Bonds shall specify: (a) the Bonds or designated portions thereof (in the case of redemption of the Bonds in part but not in whole) which are to be redeemed, (b) the date of redemption, (c) the place or places where the redemption will be made, including the name and address of the Paying Agent, (d) the redemption price, (e) the CUSIP numbers (if any) assigned to the Bonds to be redeemed, (f) the Bond numbers of the Bonds to be redeemed in whole or in part and, in the case of any Bond to be redeemed in part only, the principal amount of such Bond to be redeemed, and (g) the original issue date, interest rate and stated maturity date of each Bond to be redeemed in whole or in part. Such notice shall further state that on the specified date there shall become due and payable upon each Bond or portion thereof being redeemed the redemption price thereof, and that from and after such date, interest thereon shall cease to accrue or accrete.

Neither failure to receive or failure to send any notice of redemption nor any defect in

any such redemption notice so given shall affect the sufficiency of the proceedings for the redemption of the affected Bonds.

Partial Redemption of Bonds

Upon the surrender of any Bond redeemed in part only, the Paying Agent shall execute

and deliver to the Owner thereof a new Bond or Bonds of like tenor and maturity and of authorized denominations equal in transfer amounts to the unredeemed portion of the Bond surrendered. Such partial redemption shall be valid upon payment of the amount required to be paid to such Owner, and the County and the District shall be released and discharged thereupon from all liability to the extent of such payment.

Right to Rescind Notice of Redemption

The District has the right to rescind any notice of the optional redemption of Bonds by

written notice to the Paying Agent on or prior to the date fixed for redemption. Any notice of redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption. The District and the Paying Agent have no liability to the Bond owners or any other party related to or arising from such rescission of redemption. The Paying Agent shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent under the Bond Resolution.

Registration, Transfer and Exchange of Bonds

If the book entry system is discontinued, the District shall cause the Paying Agent to

maintain and keep at its principal corporate trust office all books and records necessary for the registration, exchange and transfer of the Bonds.

If the book entry system is discontinued, the person in whose name a Bond is registered

on the Bond Register shall be regarded as the absolute owner of that Bond. Payment of the principal of and interest on any Bond shall be made only to or upon the order of that person;; neither the District, the County nor the Paying Agent shall be affected by any notice to the contrary, but the registration may be changed as provided the Bond Resolution.

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Bonds may be exchanged at the principal corporate trust office of the Paying Agent in

Los Angeles, California for a like aggregate principal amount of Bonds of authorized denominations and of the same maturity. Any Bond may, in accordance with its terms, but only if (i) the District determines to no longer maintain the book entry only status of the Bonds, (ii) DTC determines to discontinue providing such services and no successor securities depository is named or (iii) DTC requests the District to deliver Bond certificates to particular DTC Participants, be transferred, upon the books required to be kept pursuant to the provisions of the Bond Resolution, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation at the office of the Paying Agent, accompanied by delivery of a written instrument of transfer in a form approved by the Paying Agent, duly executed.

No exchanges of Bonds shall be required to be made (a) fifteen days prior to an Interest

Payment Date or the date established by the Paying Agent for selection of Bonds for redemption until the close of business on the Interest Payment Date or day on which the applicable notice of redemption is given or (b) with respect to a Bond after such Bond has been selected or called for redemption in whole or in part.

Defeasance

The Bonds may be paid by the District, in whole or in part, in any one or more of the

following ways: (a) by paying or causing to be paid the principal or redemption price of and

interest on such Bonds, as and when the same become due and payable;; (b) by irrevocably depositing, in trust, at or before maturity, money or

securities in the necessary amount (as provided in the Bond Resolution) to pay or redeem such Bonds;; or

(c) by delivering such Bonds to the Paying Agent for cancellation by it. Whenever in the Bond Resolution it is provided or permitted that there be deposited with

or held in trust by the Paying Agent money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may be held by the Paying Agent or by any other fiduciary. Such money or securities may include money or securities held by the Paying Agent in the funds and accounts established under the Bond Resolution and will be:

(i) lawful money of the United States of America in an amount equal to the

principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption is given as provided in the Bond Resolution or provision satisfactory to the Paying Agent is made for the giving of such notice, the amount to be deposited or held will be the principal amount or redemption price of such Bonds and all unpaid interest thereon to the redemption date;; or

(ii) Federal Securities (not callable by the issuer thereof prior to maturity) the

principal of and interest on which when due, in the opinion of a certified

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public accountant delivered to the County and the District, will provide money sufficient to pay the principal or redemption price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or redemption price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption is given as provided in the Bond Resolution or provision satisfactory to the Paying Agent is made for the giving of such notice.

Upon the deposit, in trust, at or before maturity, of money or securities in the necessary

amount (as described above) to pay or redeem any outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), then all liability of the County and the District in respect of such Bond will cease and be completely discharged, except only that thereafter the owner thereof will be entitled only to payment of the principal of and interest on such Bond by the District, and the District will remain liable for such payment, but only out of such money or securities deposited with the Paying Agent for such payment.

“Federal Securities” means: (a) any direct general obligations of the United States of

America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), for which the full faith and credit of the United States of America are pledged;; (b) obligations of any agency, department or instrumentality of the United States of America, the timely payment of principal and interest on which are directly or indirectly secured or guaranteed by the full faith and credit of the United States of America.


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DEBT SERVICE SCHEDULES

2008B Bonds. The following table shows the debt service schedule with respect to the

2008B Bonds, assuming no optional redemptions.

SOUTH BAY UNION SCHOOL DISTRICT 2008 Election, Series B Bonds Debt Service Schedule

Current Interest 2008B Bonds

Capital Appreciation 2008B Bonds

Bond Year Ending August 1

Principal

Interest

Denominational Amount

Accreted Interest

Total Debt Service

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 Total

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2012B Bonds. The following table shows the debt service schedule with respect to the 2012B Bonds, assuming no optional redemptions.


2012 Election, Series B Bonds Debt Service Schedule

Current Interest 2012B Bonds

Capital Appreciation 2012B Bonds

Bond Year Ending August 1

Principal

Interest

Denominational Amount

Accreted Interest

Total Debt Service

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 Total

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Combined Debt Service. The following table shows the combined debt service

schedule for outstanding general obligation bonds of the District, assuming no optional redemptions.

SOUTH BAY UNION SCHOOL DISTRICT Combined Annual Debt Service Schedule All Outstanding General Obligation Bonds

Period Ending August 1

Outstanding GO Bonds Debt Service*

2008B and 2012B Bonds Debt Service

Aggregate Annual Debt Service

2016 $1,922,012.50 2017 3,016,617.19 2018 3,091,137.50 2019 3,206,787.50 2020 3,302,937.50 2021 3,377,737.50 2022 3,473,987.50 2023 2,340,487.50 2024 2,377,237.50 2025 2,455,737.50 2026 2,472,637.50 2027 2,490,687.50 2028 2,523,750.00 2029 2,617,625.00 2030 2,606,587.50 2031 2,776,787.50 2032 2,746,887.50 2033 2,714,875.00 2034 1,130,750.00 2035 1,134,250.00 2036 1,130,250.00 2037 1,134,000.00 TOTAL $54,043,767.19

*Includes debt service on 2016 General Obligation Refunding Bonds expected to be issued on July 28, 2016.

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SECURITY FOR THE BONDS Ad Valorem Taxes

Bonds Payable from Ad Valorem Property Taxes. The Bonds are general obligations of the District, payable solely from ad valorem property taxes levied and collected by the County. The County is empowered and is obligated to annually levy ad valorem taxes for the payment of the Bonds and the interest thereon upon all property within the District subject to taxation by the District, without limitation of rate or amount (except certain personal property which is taxable at limited rates). In no event is the District obligated to pay principal of and interest and redemption premium, if any, on the Bonds out of any funds or properties of the District other than ad valorem taxes levied upon all taxable property in the District;; provided, however, nothing in the Bond Resolution prevents the District from making advances of its own moneys howsoever derived to any of the uses or purposes permitted by law.

Other Bonds Payable from Ad Valorem Property Taxes. The District has previously

issued other general obligation bonds, which are payable from ad valorem taxes on a parity basis. In addition to the general obligation bonds issued by the District, there is other debt issued by entities with jurisdiction in the District, which is payable from ad valorem taxes levied on parcels in the District. See “PROPERTY TAXATION – Direct and Overlapping Debt” below.

Levy and Collection. The County will levy and collect such ad valorem taxes in such

amounts and at such times as is necessary to ensure the timely payment of debt service. Such taxes, when collected, will be deposited into a debt service fund for the Bonds, which is maintained by the County and which is irrevocably pledged for the payment of principal of and interest on the Bonds when due.

District property taxes are assessed and collected by the County in the same manner

and at the same time, and in the same installments as other ad valorem taxes on real property, and will have the same priority, become delinquent at the same times and in the same proportionate amounts, and bear the same proportionate penalties and interest after delinquency, as do the other ad valorem taxes on real property. See “PROPERTY TAXATION -Teeter Plan” below.

Statutory Lien on Ad Valorem Tax Revenues. Pursuant to Senate Bill 222 effective

January 1, 2016, voter approved general obligation bonds which are secured by ad valorem tax collections, including the Bonds, are secured by a statutory lien on all revenues received pursuant to the levy and collection of the property tax imposed to service those bonds. Said lien attaches automatically and is valid and binding from the time the bonds are executed and delivered. The lien is enforceable against the school district or community college district, its successors, transferees, and creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without the need for any further act.

Annual Tax Rates. The amount of the annual ad valorem tax levied by the County to

repay the Bonds will be determined by the relationship between the assessed valuation of taxable property in the District and the amount of debt service due on the Bonds. Fluctuations in the annual debt service on the Bonds and the assessed value of taxable property in the District may cause the annual tax rate to fluctuate.

Economic and other factors beyond the District’s control, such as economic recession,

deflation of land values, a relocation out of the District or financial difficulty or bankruptcy by one

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or more major property taxpayers, or the complete or partial destruction of taxable property caused by, among other eventualities, earthquake, flood, fire, drought or other natural disaster, could cause a reduction in the assessed value within the District and necessitate a corresponding increase in the annual tax rate.

Debt Service Funds

The County will establish Debt Service Funds for the Bonds, which will be established as

separate funds to be maintained distinct from all other funds of the County. All taxes levied by the County for the payment of the principal of and interest and premium (if any) on the Bonds will be deposited in the Debt Service Funds by the County promptly upon receipt. The Debt Service Funds are pledged for the payment of the principal of and interest and premium (if any) on the respective series of Bonds when and as the same become due. The District will transfer amounts in the Debt Service Funds to the Paying Agent to the extent necessary to pay the principal of and interest and premium (if any) on the Bonds as the same become due and payable.

If, after payment in full of the Bonds, any amounts remain on deposit in a Debt Service

Fund, the District shall transfer such amounts to other debt service funds of the District with respect to outstanding general obligation bonds of the District, if any, and if none, then to its General Fund, to be applied solely in a manner which is consistent with the requirements of applicable state and federal tax law.

Not a County Obligation

The Bonds are payable solely from the proceeds of an ad valorem tax levied and

collected by the County, for the payment of principal and interest on the Bonds. Although the County is obligated to collect the ad valorem tax for the payment of the Bonds, the Bonds are not a debt of the County.

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PROPERTY TAXATION

Property Tax Collection Procedures In California, property which is subject to ad valorem taxes is classified as “secured” or

“unsecured.” The “secured roll” is that part of the assessment roll containing (1) state assessed public utilities’ property and (2) property the taxes on which are a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. A tax levied on unsecured property does not become a lien against such unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens arising pursuant to State law on such secured property, regardless of the time of the creation of the other liens. Secured and unsecured property are entered separately on the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property.

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 after December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of the delinquent taxes and a delinquency penalty, plus a redemption penalty of 1-1/2% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to sale by the County.

Property taxes are levied for each fiscal year on taxable real and personal property

situated in the taxing jurisdiction as of the preceding January 1. A bill enacted in 1983, Senate Bill 813 (Statutes of 1983, Chapter 498), however, provided for the supplemental assessment and taxation of property as of the occurrence of a change of ownership or completion of new construction. Thus, this legislation eliminated delays in the realization of increased property taxes from new assessments. As amended, Senate Bill 813 provided increased revenue to taxing jurisdictions to the extent that supplemental assessments of new construction or changes of ownership occur subsequent to the January 1 lien date and result in increased assessed value.

Property taxes on the unsecured roll are due on the January 1 lien date and become

delinquent, if unpaid on the following August 31. A 10% penalty is also attached to delinquent taxes in respect of property on the unsecured roll, and further, an additional penalty of 1-1/2% per month accrues with respect to such taxes beginning the first day of the third month following the delinquency date. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer;; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer;; (3) filing a certificate of delinquency for record in the county recorder’s office, in order to obtain a lien on certain property of the taxpayer;; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. The exclusive means of enforcing the payment of delinquent taxes in respect of property on the secured roll is the sale of the property securing the taxes for the amount of taxes which are delinquent.

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Taxation of State-Assessed Utility Property The State Constitution provides that most classes of property owned or used by

regulated utilities be assessed by the State Board of Equalization (“SBE”) and taxed locally. Property valued by the SBE as an operating unit in a primary function of the utility taxpayer is known as “unitary property,” a concept designed to permit assessment of the utility as a going concern rather than assessment of each individual element of real and personal property owned by the utility taxpayer. State-assessed unitary and “operating nonunitary” property (which excludes nonunitary property of regulated railways) is allocated to the counties based on the situs of the various components of the unitary property. Except for unitary property of regulated railways and certain other excepted property, all unitary and operating nonunitary property is taxed at special county-wide rates and tax proceeds are distributed to taxing jurisdictions according to statutory formulae generally based on the distribution of taxes in the prior year.

Assessed Valuations

Assessed Valuation History. The assessed valuation of property in the District is

established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the “full value” of the property, as defined in Article XIIIA of the California Constitution. 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 Appendix A under the heading “CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES 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. No reimbursement is made by the State for such exemptions.

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Property within the District has a total taxable assessed valuation for fiscal year 2015-16 of approximately $3.86 billion. Shown in the following table are the assessed valuations for the District for the past eleven fiscal years.


Assessed Valuation Fiscal Year 2005-06 through Fiscal Year 2015-16

Fiscal Year Local Secured

Utility

Unsecured

Total

Percent Change

2005-06 $2,936,479,438 $209,404 $54,808,596 $2,991,497,438 -- 2006-07 3,286,902,016 242,122 55,748,394 3,342,892,532 11.9% 2007-08 3,549,825,066 113,000 62,623,867 3,612,561,933 8.0 2008-09 3,589,965,971 113,000 69,151,785 3,659,230,756 1.1 2009-10 3,300,099,499 113,000 78,006,756 3,378,219,255 (8.1) 2010-11 3,217,597,285 113,000 78,210,445 3,295,807,730 (2.5) 2011-12 3,214,718,688 113,000 55,237,642 3,270,069,330 (0.1) 2012-13 3,308,304,680 113,000 45,474,621 3,353,892,301 2.9 2013-14 3,399,982,999 113,000 47,716,520 3,447,812,519 2.8 2014-15 3,533,772,649 113,000 50,356,328 3,584,241,977 3.9 2015-16 3,803,577,874 113,000 56,440,410 3,860,131,284 7.6

Source: California Municipal Statistics, Inc. As indicated in the previous table, assessed valuations are subject to change in each

year. Increases or decreases in assessed valuation may result from a variety of factors including but not limited to general economic conditions, supply and demand for real property in the area, government regulations such as zoning, and natural disasters such as earthquakes, fires, floods and droughts. With respect to droughts specifically, the State of California is currently facing water shortfalls, and on January 17, 2014, the Governor declared a state of drought emergency, calling on Californians to conserve water. As part of his declaration, the Governor directed State officials to assist agricultural producers and communities that may be economically impacted by dry conditions. Thereafter, the California State Water Resources Control Board (the “Water Board”) issued a statewide notice of water shortages and potential future curtailment of water right diversions. On April 1, 2015, the Governor issued an executive order mandating certain conservation measures including a requirement that the Water Board impose restrictions to achieve a statewide 25% reduction in urban water usage through February 28, 2016. On February 2, 2016, based on the Governor’s executive order, the Water Board approved an updated and expanded emergency regulation that will continue mandatory reductions through October 2016. On May 9, 2016, the Governor issued an additional executive order directing the Water Board to adjust and extend is emergency water conservation regulations through the end of January 2017 in recognition of the differing water supply conditions of many communities. On May 18, 2016, the Water Board adopted new regulations to meet the requirements of the Governor’s latest executive order. The District cannot predict or make any representations regarding the effects that the current drought has had, or, if it should continue, may have on the value of taxable property within the District, or to what extent the drought could cause disruptions to economic activity within the boundaries of the District.

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Parcels by Land Use. The property in the District is largely residential, with approximately 91.28% of assessed valuation of property in the District used for residential purposes, and 8.72% of assessed valuation of property in the District used for non-residential purposes. The following table shows a breakdown of local secured property assessed value and parcels within the District by land use for fiscal year 2015-16.


Local Secured Property Assessed Valuation and Parcels by Land Use Fiscal Year 2015-16

2015-16 % of No. of % of Assessed Valuation (1) Total Parcels Total Non-Residential: Agricultural $ 4,422,031 0.12% 20 0.13% Commercial 221,005,666 5.81 326 2.10 Vacant Commercial 13,055,916 0.34 63 0.41 Industrial 84,864,609 2.23 74 0.48 Vacant Industrial 1,449,007 0.04 11 0.07 Recreational 3,222,530 0.08 5 0.03 Government/Social/Institutional 3,702,136 0.10 22 0.14 Subtotal Non-Residential $331,721,895 8.72% 521 3.36% Residential: Single Family Residence $1,904,296,318 50.07% 8,987 58.00% Condominium/Townhouse 637,018,937 16.75 3,703 23.90 Mobile Home 33,125,214 0.87 620 4.00 Mobile Home Park 59,631,256 1.57 25 0.16 2-4 Residential Units 328,744,807 8.64 1,183 7.64 5+ Residential Units/Apartments 497,920,188 13.09 314 2.03 Miscellaneous Residential 1,015,345 0.03 11 0.07 Vacant Residential 10,103,914 0.27 130 0.84 Subtotal Residential $3,471,855,979 91.28% 14,973 96.64% Total $3,803,577,874 100.00% 15,494 100.00% (1) Local Secured Assessed Valuation;; excluding tax-exempt property. Source: California Municipal Statistics, Inc.


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Per Parcel Assessed Valuation of Single-Family Homes. The table below shows the per parcel assessed valuation of single-family homes in the District for fiscal year 2015-16.


Per Parcel Assessed Valuation of Single Family Homes Fiscal Year 2015-16

No. of 2015-16 Average Median Parcels Assessed Valuation Assessed Valuation Assessed Valuation Single Family Residential 8,987 $1,904,296,318 $211,895 $201,234 2015-16 No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels (1) Total % of Total Valuation Total % of Total $0 - $24,999 8 0.089% 0.089% $142,575 0.007% 0.007% $25,000 - $49,999 212 2.359 2.448 9,050,129 0.475 0.483 $50,000 - $74,999 1,014 11.283 13.731 62,181,955 3.265 3.748 $75,000 - $99,999 641 7.133 20.863 55,221,389 2.900 6.648 $100,000 - $124,999 442 4.918 25.782 49,743,958 2.612 9.260 $125,000 - $149,999 666 7.411 33.192 91,657,076 4.813 14.073 $150,000 - $174,999 671 7.466 40.659 109,109,616 5.730 19.803 $175,000 - $199,999 818 9.102 49.761 153,104,069 8.040 27.843 $200,000 - $224,999 672 7.477 57.238 142,522,494 7.484 35.327 $225,000 - $249,999 646 7.188 64.426 153,066,506 8.038 43.365 $250,000 - $274,999 548 6.098 70.524 143,568,372 7.539 50.904 $275,000 - $299,999 517 5.753 76.277 148,124,448 7.778 58.683 $300,000 - $324,999 558 6.209 82.486 174,465,895 9.162 67.844 $325,000 - $349,999 513 5.708 88.194 172,331,083 9.050 76.894 $350,000 - $374,999 458 5.096 93.290 164,420,133 8.634 85.528 $375,000 - $399,999 229 2.548 95.838 88,585,249 4.652 90.180 $400,000 - $424,999 138 1.536 97.374 56,592,143 2.972 93.152 $425,000 - $449,999 77 0.857 98.231 33,499,558 1.759 94.911 $450,000 - $474,999 42 0.467 98.698 19,308,748 1.014 95.925 $475,000 - $499,999 31 0.345 99.043 15,116,784 0.794 96.719 $500,000 and greater 86 0.957 100.000 62,484,138 3.281 100.000 Total 8,987 100.000% $1,904,296,318 100.000% (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc.

Reassessments and Appeals of Assessed Value

There are general means by which assessed values can be reassessed or appealed that

could adversely impact property tax revenues within the District.

Appeals may be based on Proposition 8 of November 1978, which requires that for each January 1 lien date, the taxable value of real property must be the lesser of its base year value, annually adjusted by the inflation factor pursuant to Article XIIIA of the State Constitution, or its full cash value, taking into account reductions in value due to damage, destruction, depreciation, obsolescence, removal of property or other factors causing a decline in value. See “CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS – Article XIIIA of the California Constitution” in Appendix A.

Under California law, property owners may apply for a Proposition 8 reduction of their property tax assessment by filing a written application, in form prescribed by the State Board of Equalization, with the County board of equalization or assessment appeals board. In most

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cases, the appeal is filed because the applicant believes that present market conditions (such as residential home prices) cause the property to be worth less than its current assessed value.

Any reduction in the assessment ultimately granted as a result of such appeal applies to the year for which application is made and during which the written application was filed. These reductions are subject to yearly reappraisals and are adjusted back to their original values, adjusted for inflation, when market conditions improve. Once the property has regained its prior value, adjusted for inflation, it once again is subject to the annual inflationary factor growth rate allowed under Article XIIIA.

A second type of assessment appeal involves a challenge to the base year value of an assessed property. Appeals for reduction in the base year value of an assessment, if successful, reduce the assessment for the year in which the appeal is taken and prospectively thereafter. The base year is determined by the completion date of new construction or the date of change of ownership. Any base year appeal must be made within four years of the change of ownership or new construction date.

Proposition 8 reductions may also be unilaterally applied by the County Assessor. The

District cannot predict the changes in assessed values that might result from pending or future appeals by taxpayers or by reductions initiated by the County Assessor. Any reduction in aggregate District assessed valuation due to appeals, as with any reduction in assessed valuation due to other causes, will cause the tax rate levied to repay the Bonds to increase accordingly, so that the fixed debt service on the Bonds (and other outstanding general obligation bonds, if any) may be paid.

Typical Tax Rates

Below are historical typical tax rates in the tax rate area within the District for the years

2013-14 through 2015-16.

SOUTH BAY UNION SCHOOL DISTRICT Typical Tax Rates per $100 of Assessed Valuation

Fiscal Years 2013-14 through 2015-16 TRA 8-035 – 2015-16 Assessed Valuation: $1,067,349,744

2013-14 2014-15 2015-16 General $1.000000 $1.000000 $1.000000 City of San Diego .00500 .00500 .00500 South Bay Union School District .07671 .07631 .07167

Sweetwater UHSD .05823 .05407 .05169 Southwestern Community College District .03675 .03582 .03961 Metropolitan Water District .00350 .00350 .00350 Total 1.18019 1.17470 1.17147 Source: California Municipal Statistics, Inc.

Teeter Plan

The District’s total secured tax collections and delinquencies are apportioned on a

County-wide basis, according to the District’s designated tax rate amount. Therefore, the total secured tax levies, as well as collections and delinquencies reported, do not represent the actual secured tax levies, collections and delinquencies of tax payers within the tax areas of the District. In addition, the District’s total secured tax levy does not include special assessments,

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supplemental taxes or other charges which have been assessed on property within the District or other tax rate areas of the County.

The Board of Supervisors of the County has 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. Under the Teeter Plan, each entity levying property taxes in the County may draw on the amount of uncollected secured taxes credited to its fund, in the same manner as if the amount credited had been collected. The District participates in the County’s Teeter Plan, and thus receives 100% of secured property taxes levied in exchange for foregoing any interest and penalties collected on delinquent taxes. Currently, the County includes the District’s general obligation bond levies in its Teeter Plan.

So long as the Teeter Plan remains in effect and the County continues to include the

District in the Teeter Plan, the District’s receipt of revenues with respect to the levy of ad valorem property taxes 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 and, in addition, the Board of Supervisors could terminate the Teeter Plan with respect to the District if the delinquency rate for all ad valorem property taxes levied within the District in any year exceeds 3%. In the event that the Teeter Plan were terminated with regard to the secured tax roll, the amount of the levy of ad valorem property taxes in the District would depend upon the collections of the ad valorem property taxes and delinquency rates experienced with respect to the parcels within the District.

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Largest Property Owners

The following table shows the 20 largest owners of taxable property in the District as determined by secured assessed valuation in fiscal year 2015-16. Each taxpayer listed below is a unique name listed on the tax rolls. The District cannot determine from County assessment records whether individual persons, corporations or other organizations are liable for tax payments with respect to multiple properties held in various names that in aggregate may be larger than is suggested by the table below. A large concentration of ownership in a single individual or entity results in a greater amount of tax collections which are dependent upon that property owner’s ability or willingness to pay property taxes.

SOUTH BAY UNION SCHOOL DISTRICT Largest Local Secured Taxpayers

Fiscal Year 2015-16 2015-16 % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Kreutzkamp Revocable 2000 Trust Apartments $89,780,520 2.36% 2. Seacoast Inn LP Hotel 37,132,417 0.98 3. Standard Rio Vista LP Apartments 24,441,558 0.64 4. Imperial Strand Holdings LLC Apartments 23,669,928 0.62 5. Shadow Associates Ltd. Apartments 18,117,029 0.48 6. HCA intergreen Ltd. Apartments 13,298,915 0.35 7. SAB Pacific LLC Mobile Home Park 13,021,322 0.34 8. Home Depot USA Inc. Commercial 12,907,416 0.34 9. FAOF Candlelight LLC Apartments 12,866,988 0.34 10. Thomas M. Murray Trust Apartments 11,243,263 0.30 11. Wal-Mart Real Estate Business Trust Shopping Center 9,439,364 0.25 12. Mariners Point Holdings LLC Apartments 9,361,635 0.25 13. Robert & Helen Hoe Family LP Apartments 8,360,822 0.22 14. 1400-13th Street Imperial House Apts LLC Apartments 8,200,000 0.22 15. Allen Family Trust Apartments 8,147,579 0.21 16. SPP Corp. Commercial 7,820,856 0.21 17. Bayside Palms Investors LLC Mobile Home Park 7,486,032 0.20 18. Pan-American Industrial LP Industrial 7,467,642 0.20 19. La Pacifica LLC Mobile Home Park 7,348,141 0.19 20. Casa de Flores Apartments LP Apartments 7,240,101 0.19 Totals $337,351,528 8.87% (1) 2015-16 Local Secured Assessed Valuation: $3,803,577,874. Source: California Municipal Statistics, Inc.

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Debt Obligations Set forth below is a direct and overlapping debt report (the “Debt Report”) prepared by

California Municipal Statistics, Inc. with respect to debt dated as of June 1, 2016. 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.


Statement of Direct and Overlapping Bonded Debt Dated as of June 1, 2016

2015-16 Assessed Valuation: $3,860,131,284 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 6/1/16 Metropolitan Water District 0.087% $ 80,793 Southwestern Community College District 8.136 27,356,785 Sweetwater Union High School District 9.723 41,967,544 South Bay Union School District 100.000 33,487,633(1) Sweetwater Union High School District Community Facilities District No. 5 11.238 393,598 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $103,286,353 OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 0.872% $ 2,684,278 San Diego County Pension Obligation Bonds 0.872 5,666,779 San Diego County Superintendent of Schools Certificates of Participation 0.872 115,932 Southwestern Community College District General Fund Obligations 8.136 79,733 Sweetwater Union High School District Certificates of Participation 9.723 4,069,076 City of San Diego General Fund Obligations 1.045 6,207,770 TOTAL OVERLAPPING GENERAL FUND DEBT $18,823,568 OVERLAPPING TAX INCREMENT DEBT: $38,015,000 COMBINED TOTAL DEBT $160,124,921(2) (1) Excludes Bonds to be sold, and refinancing of bonds with the proceeds of 2016 General Obligation Refunding Bonds to be issued on July 28, 2016. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal due at maturity.

Ratios 2015-16 Assessed Valuation: Direct Debt ($33,487,633) ............................................... 0.87% Total Direct and Overlapping Tax and Assessment Debt . 2.68% Combined Total Debt ........................................................ 4.15% Ratios to Redevelopment Incremental Valuation ($949,456,848) Overlapping Tax Increment Debt ...................................... 4.00% Source: California Municipal Statistics, Inc.

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BOND INSURANCE

General. The District has applied for bond insurance with respect to the Bonds, to guarantee the scheduled payment of principal of and interest (or Accreted Value) on all or a portion of the Bonds and, if a commitment is issued to insure all or a portion of the Bonds, will determine prior to the sale of the Bonds whether to obtain such insurance. If purchased, any such bond insurance policy would be issued concurrently with the delivery of such insured Bonds (the “Insured Bonds”).

In the event of a default of the payment of principal of or interest on Insured Bonds,

when all or some becomes due, any owner of an Insured Bond may have a claim under any applicable municipal bond insurance policy (a “Policy”) secured in connection with the Insured Bonds. Any such Policy may not insure against redemption premium, if any, with respect to the Insured Bonds.

In the event that the provider of any such Policy (an “Insurer”) is unable to make

payment of principal of or interest on the Insured Bonds as such payments become due under such a Policy, the Insured Bonds will be payable solely as otherwise described herein. In the event that any such Insurer becomes obligated to make payments on the Insured Bonds, no assurance can be given that such event would not adversely affect the market price of the Insured Bonds or the marketability (liquidity) of the Insured Bonds.

Bond Insurance Risk Factors. In the event of default of the payment of principal and

interest with respect to the Bonds when all or some becomes due, any owner of the Bonds shall have a claim under the Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy does not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional prepayment of the Bonds by the District which is recovered by the District from the bond owner as a voidable preference under applicable bankruptcy law is covered by the insurance policy, however, such payments will be made by the Insurer at such time and in such amounts as would have been due absence 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 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 bond documents.

In the event the Insurer is unable to make payment of principal and interest as such

payments become due under the Policy, the Bonds are payable solely from the moneys received pursuant to the applicable bond documents. In the event the Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds.

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The long-term ratings on the Bonds are dependent in part on the financial strength of the Insurer and its claim 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 Bonds insured by the Insurer will not be subject to downgrade and such event could adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. See “RATINGS” herein.

TAX MATTERS

Federal Tax Status. In the opinion of Jones Hall, A Professional Law Corporation, San

Francisco, California, Bond Counsel, subject, however to certain qualifications set forth below, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations;; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The opinions set forth in the preceding sentence are subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. Bond Counsel expresses no opinion regarding other federal tax consequences arising with respect to the ownership, sale or disposition of the Bonds, or the amount, accrual or receipt of interest on the Bonds.

Tax Treatment of Original Issue Discount and Premium. If the initial offering price to

the public (excluding bond houses and brokers) at which a Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes "original issue discount" for purposes of federal income taxes and State of California personal income taxes. If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is greater than the amount payable at maturity thereof, then such difference constitutes "original issue premium" for purposes of federal income taxes and State of California personal income taxes. De minimis original issue discount and original issue premium is disregarded.

Under the Tax Code, original issue discount is treated as interest excluded from federal

gross income and exempt from State of California personal income taxes to the extent properly allocable to each owner thereof subject to the limitations described in the first paragraph of this section. The original issue discount accrues over the term to maturity of the Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). The amount of original issue discount accruing during each period is added to the adjusted basis of such Bonds to determine taxable gain upon disposition (including sale, redemption, or payment on maturity) of such Bond. The Tax Code contains certain provisions relating to the accrual of original issue discount in the case of purchasers of the Bonds who purchase the Bonds after the initial offering of a substantial amount of such maturity. Owners of such Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of purchasers who do not purchase in the original offering, the allowance of a deduction for any loss on a sale or other disposition, and the treatment of

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accrued original issue discount on such Bonds under federal individual and corporate alternative minimum taxes.

Under the Tax Code, original issue premium is amortized on an annual basis over the

term of the Bond (said term being the shorter of the Bond's maturity date or its call date). The amount of original issue premium amortized each year reduces the adjusted basis of the owner of the Bond for purposes of determining taxable gain or loss upon disposition. The amount of original issue premium on a Bond is amortized each year over the term to maturity of the Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). Amortized bond premium is not deductible for federal income tax purposes. Owners of premium Bonds, including purchasers who do not purchase in the original offering, should consult their own tax advisors with respect to State of California personal income tax and federal income tax consequences of owning such Bonds.

California Tax Status. In the further opinion of Bond Counsel, interest on the Bonds is

exempt from California personal income taxes. Other Tax Considerations. Owners of the Bonds should also be aware that the

ownership or disposition of, or the accrual or receipt of interest on, the Bonds may have federal or state tax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Bonds other than as expressly described above, including any opinion regarding federal tax consequences arising with respect to the ownership, sale or disposition of the Bonds, or the amount, accrual or receipt of interest on the Bonds.

In addition, future legislation, if enacted into law, or clarification of the Tax Code may

cause interest on the Bonds to be subject to, directly or indirectly, federal income taxation, or otherwise prevent owners of the Bonds from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Tax Code may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion.

Forms of Opinions. Copies of the proposed forms of opinions of Bond Counsel are

attached hereto as APPENDIX D.

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CERTAIN LEGAL MATTERS Legality for Investment

Under provisions of the California Financial Code, the Bonds are legal investments for commercial banks in California to the extent that the Bonds, in the informed opinion of the bank, are prudent for the investment of funds of depositors, and under provisions of the California Government Code, the Bonds are eligible to secure deposits of public moneys in California.

Absence of Litigation

No litigation is pending or threatened concerning the validity of the Bonds, and a certificate to that effect will be furnished to purchasers at the time of the original delivery of the Bonds. The District is not aware of any litigation pending or threatened 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 issue and retire the Bonds.

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

aggregate 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.

Compensation of Certain Professionals

Payment of the fees and expenses of Jones Hall, A Professional Law Corporation, as Bond Counsel and Disclosure Counsel to the District, Dale Scott & Company Inc., San Francisco, California, as financial advisor to the District, and Norton Rose Fulbright US LLP, Los Angeles, California, as Underwriter’s Counsel, is contingent upon issuance of the Bonds.

Financial Advisor

Dale Scott & Company (“DS&C”) has been engaged by the District to perform municipal advisory services in relation to the sale and delivery of the Bonds (the “Municipal Advisor”). DS&C will not participate in the underwriting of the Bonds. The Municipal Advisor is not contractually obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement.

CONTINUING DISCLOSURE

The District has covenanted for the benefit of holders and beneficial owners of the Bonds to provide certain financial information and operating data relating to the District by not later than nine (9) months following the end of the District’s fiscal year (which currently would be by March 31 each year based upon the June 30 end of the District’s fiscal year), commencing March 31, 2017, with the report for the 2015-16 Fiscal Year (the “Annual Report”), and to provide notices of the occurrence of certain enumerated events. The Annual Report and any event notices will be filed by the District with the Municipal Securities Rulemaking Board (the “MSRB”). The specific nature of the information to be contained in an Annual Report or other notices is set forth below under the caption “APPENDIX E - Form of Continuing Disclosure Certificate.” These covenants have been made in order to assist the Purchaser in complying with S.E.C. Rule 15c2-12(b)(5) (the “Rule”).

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The District has made undertakings pursuant to the Rule in connection with the issuance

of prior debt issuances. See Appendix A under the heading “DISTRICT FINANCIAL INFORMATION – Long-Term Indebtedness - General Obligation Bonds.” Specific instances of non-compliance with prior undertakings in the previous five years are the failure to link on the MSRB’s Electronic Municipal Market Access the District’s fiscal year 2011-12 annual report and audited financial statements to the District’s outstanding 2010 Bond Anticipation Notes, and the late filing of notices of insured rating changes occurring in 2011 and 2013. Identification of these instances of noncompliance does not constitute a representation that the District has determined that such instances were material for purposes of the Rule. The District has engaged Dale Scott & Company Inc. to serve as its dissemination agent for each of its undertakings pursuant to the Rule, including the undertaking for the Bonds.

The District elected to participate in the Securities and Exchange Commission’s (the

Municipalities Continuing Disclosure Cooperation Initiative (the “Initiative”) prior to the December 1, 2014 filing deadline. The purpose of the Initiative was to encourage issuers and underwriters of municipal securities to self-report possible violations involving materially inaccurate statements relating to prior compliance with their continuing disclosure undertakings.

RATINGS S&P Global Ratings, a Standard & Poor’s Financial Services LLC business (“S&P”) has

assigned a rating of “A+” to the Bonds and Moody’s Investors Service (“Moody’s”) has assigned a rating of “A1” to the Bonds. Such ratings reflects only the views of S&P and Moody’s, respectively, and an explanation of the significance of such ratings may be obtained only from the rating agencies. The District has provided certain additional information and materials to the rating agencies (some of which does not appear in this Official Statement). There is no assurance that such rating will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds.

UNDERWRITING

The Bonds are being purchased by RBC Capital Markets, LLC (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at the following respective prices:

2008B Bonds. $___________, which is equal to the initial principal amount of the 2008B Bonds of $_____________, plus original issue premium of $_________, less an Underwriter’s discount of $___________. 2012B Bonds. $___________, which is equal to the initial principal amount of the 2012B Bonds of $_____________, plus original issue premium of $_________, less an Underwriter’s discount of $___________. The purchase contracts relating to the Bonds provides that the Underwriter will purchase

all of the Bonds (if any are purchased), and provides that the Underwriter’s obligation to purchase is subject to certain terms and conditions, including the approval of certain legal matters by counsel.

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The Underwriter may offer and sell Bonds to certain dealers and others at prices lower

than the offering prices stated on the inside cover page hereof. The offering prices may be changed 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 Issuer. 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 Issuer.

ADDITIONAL INFORMATION

The discussions herein about the Bond Resolutions and the Continuing Disclosure Certificate 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 such documents. Copies of these documents mentioned are available from the Underwriter and following delivery of the Bonds will be on file at the offices of the Paying Agent in San Diego, 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 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 Bonds.

EXECUTION

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


By:

Superintendent

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APPENDIX A

DISTRICT GENERAL AND FINANCIAL INFORMATION

The information in this section concerning the operations of the District, its operating budget and the District's general fund finances is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Bonds is payable from the general fund of the District. The Bonds are payable solely from the proceeds of an ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof. See “SECURITY FOR THE BONDS” herein.

DISTRICT GENERAL INFORMATION

General Information

The District was established in 1920 and provides an educational program for pre-kindergarten through eighth grade students. The District is the most southwesterly school district in the United States. The District currently operates twelve schools, including two dependent charter schools and one preschool, and has an enrollment of approximately 7,587 students in fiscal year 2015-16. District Governance and Administration

Board of Trustees. The District is governed by a five-member Board of Trustees (the “Board”), each member of which is elected to a four-year term. Elections are held every two years, in even-numbered years, with three seats open in one election year and two seats open the next election year. Current members of the Board, together with their office and the date their term expires, are listed below:

South Bay Union School District Current Board of Trustees

Name Office Current Term Expires

Barbara Elliott-Sanders President November 2016 Elvia Aguilar Vice President November 2018 Thomas Schaaf Trustee November 2016 Chris Brown Trustee November 2018 Melanie Ellsworth Trustee November 2018

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Administration. The Superintendent of the District is appointed by the Board and is

responsible for management of the day-to-day operations of the District and supervises the work of other District administrators. Dr. Katie McNamara is the current District Superintendent.

Recent Enrollment and ADA Trends

The following table shows recent enrollment and average daily attendance (“ADA”)

history for the District.

South Bay Union School District Annual Enrollment and Average Daily Attendance

Fiscal Years 2010-11 through 2017-18

School Year Enrollment % Change ADA % Change 2010-11 7,708 --% 6,547 --% 2011-12 7,682 (0.3) 6,441 (1.6) 2012-13 7,773 1.2 5,498 (14.6) 2013-14 7,702 (0.9) 5,528 0.5 2014-15 7,646 (0.7) 5,420 (2.0) 2015-16** 7,587 (0.8) 5,386 (0.6) 2016-17** 7,517 (0.9) 5,347 (0.7) 2017-18** 7,447 (0.9) 5,307 (0.7)

* Does not include charter school enrollment. **Estimated, budgeted and projected, respectively. Sources: Enrollment: California Department of Education for 2009-10 through 2014-15;; remaining information: South Bay Union School District.

Employee Relations

For fiscal year 2015-16, the District had 440.2 full time equivalent (“FTE”) certificated, 218.0 FTE classified and 42.0 FTE management/supervisor/confidential FTE positions. Two unions represent District employees. The following table identifies the employees covered and the current status of the contracts with the bargaining units.


Employee Bargaining Groups

Bargaining Unit Type of

Employees Covered Current Contract Expiration Date

Southwest Teachers Association Certificated June 30, 2015* California School Employees Association Classified June 30, 2017

*Currently in negotiation. Operating pursuant to existing terms until settlement of new terms. Source: South Bay Union School District.

Insurance

The District participates in one joint powers agreement entity, the San Diego County

Schools Risk Management (“SDCRM”). SDCRM arranges for and provides for various types of insurance for its member districts as requested. SDCRM is governed by a board consisting of a representative from each member district. The board controls the operations of SDCRM, including selection of management and approval of operating budgets, independent of any

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influence by the member districts beyond their representation on the board. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionate to their participation in SDCRM.

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 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 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 grant is $2,375 more than the average revenue limit provided prior to LCFF implementation. The base grants will be adjusted upward each year to reflect cost-of-living increases. In addition, grades K-3 and 9-12 are subject to adjustments of 10.4% and 2.6%, respectively, to cover the costs of class size reduction in grades K-3 and the provision of career technical education in grades 9-12.

• A 20% supplemental grant for English 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 22.5% of a local education agency’s

base grant, based on the number of English learners, students from low-income families and foster youth served by the local agency that comprise more than 55% of enrollment.

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• An economic recovery target to ensure that almost every local education agency

receives at least their pre-recession funding level, adjusted for inflation, at full implementation of the LCFF.

The LCFF was implemented for fiscal year 2013-14 and will be 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 will have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of a district’s funding gap.

Based on revenue projections, districts will reach what is referred to as “full funding” in

eight years, being fiscal year 2020-21. This projection assumes that the State’s economy will improve each year;; if the economy falters it could take longer to reach full funding.

The target LCFF amounts for State school districts and charter schools based on grade

levels and Targeted Students is shown below.

Grade Span Funding at Full LCFF Implementation (Target Amount)

Grade Span

Base Grant(1)

K-3 Class Size

Reduction and 9-12

Adjustments

Average

Assuming 0% Targeted Students

Average


Average


Average Assuming

100% Targeted Students

K-3 $6,845 $712 $7,557 $7,935 $8,313 $10,769 4-6 6,947 N/A 6,947 7,294 7,642 9,899 7-8 7,154 N/A 7,154 7,512 7,869 10,194 9-12 8,289 $216 8,505 8,930 9,355 12,119

(1) Does not include adjustments for cost of living. Source: California Department of Education.

The new legislation included a “hold harmless” provision which provides that a district or

charter school would maintain total revenue limit and categorical funding at least equal to its 2012-13 level, adjusted for changes in ADA.

The LCFF includes an accountability component. Districts are required to increase or

improve services for English language learners, low income, and foster youth students in proportion to supplemental and concentration grant funding received. All school districts, county offices of education, and charter schools are required to develop and adopt local control and accountability plans, which identify local goals in areas that are priorities for the State, including pupil achievement, parent engagement, and school climate.

County superintendents review and provide support to the districts under their

jurisdiction, and the Superintendent of Public Instruction performs a corresponding role for county offices of education. In addition, the 2013-14 Budget created the California Collaborative for Education Excellence to advise and assist school districts, county offices of education, and charter schools in achieving the goals identified in their plans. Under the LCFF and related legislation, the State will continue to measure student achievement through statewide

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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 funds, with each group consisting of a

separate accounting entity. 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. For more information on the District’s basis of accounting and fund accounting, see “APPENDIX B – Audited Financial Statements of the District for Fiscal Year Ended June 30, 2015 – Note 1 - Summary of Significant Accounting Policies” herein.

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 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 fiscal year 2014-15 were prepared by Wilkinson Hadley King & Co., LLP, El Cajon, California. Audited financial statements for the District for the fiscal year ended June 30, 2015 and prior fiscal years are on file with the District and available for public inspection at the South Bay Union School District, 601 Elm Avenue, Imperial Beach, California 619.628.1600;; telephone (619) 628.1600. See Appendix B hereto for the 2014-15 Audited Financial Statements. Copies of such financial statements will be mailed to prospective investors and their representatives upon written request to the District.

The District has not requested nor did the District obtain permission from the Auditor to

include the audited financial statements as an appendix to this Official Statement. Accordingly,

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the Auditor has not performed any post-audit review of the financial condition or operations of the District.

General Fund Revenues, Expenditures and Changes in Fund Balance. The

following table shows the audited general fund income and expense statements for the District for fiscal years 2010-11 through 2014-15.


Summary of General Fund Revenues, Expenditures and Changes in Fund Balance For Fiscal Years 2010-11 through 2014-15 (audited)

Audited 2010-11

Audited 2011-12

Audited 2012-13

Audited 2013-14

Audited 2014-15

Revenues Revenue limit/LCFF sources (1) $35,095,705 34,431,309 $29,519,119 $39,471,821 $43,447,871 Federal 8,707,859 5,114,333 4,705,264 4,438,735 4,034,625 Other State 11,164,605 10,498,744 10,421,448 5,606,779 4,799,188 Other local 7,515,279 7,282,708 6,882,067 6,946,595 7,086,009 Total Revenues 62,483,447 57,327,094 51,527,898 56,463,930 59,367,693 Expenditures Instruction 42,009,371 39,191,684 36,164,346 40,429,266 41,253,866 Instruction-related services 6,744,905 7,972,990 7,263,507 7,743,661 7,911,489 Pupil services 3,044,885 3,121,271 3,255,928 3,678,336 4,598,147 Community Services 12,582 7,501 11,432 22,066 18,487 General Administration 3,536,899 3,385,361 3,989,718 3,842,052 4,211,060 Plant services 5,982,621 5,638,054 5,422,202 5,918,887 6,483,583 Other outgo 279,576 284,149 352,265 465,584 209,817 Debt service Principal -- -- -- 57,913 284,625 Interest and other -- -- -- -- 21,503 Total Expenditures 61,610,839 59,601,010 56,459,398 62,157,765 64,992,577

Excess (Deficiency) of Revenues Over (Under) Expenditures

872,608 (2,273,916) (4,931,500) (5,693,835) (5,624,884)

Other Financing Sources (Uses)

Transfers in 3,874,779 2,630,121 3,979,402 6,320,849 6,454,918 Other sources -- -- -- 272,002 1,262,438 Transfers out (1,458,710) (1,388,345) (1,245,251) (2,995,006) (3,068,733) Net Financing Sources (Uses) 2,416,069 1,241,776 2,734,151 3,597,845 4,648,623 Net change in fund balance 3,288,677 (1,032,140) (2,197,349) (2,095,990) (976,261) Fund Balance, July 1 (as adjusted)

22,123,880 25,412,557 24,380,417 22,183,069 20,087,079

Fund Balance, June 30 $25,412,557 $24,380,417 $22,183,068 $20,087,079 $19,110,818 (1) LCFF commenced in fiscal year 2013-14. Source: South Bay Union School District Audit Reports.

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District Budget and Interim Financial Reporting

Budgeting and Interim Reporting Procedures. State law requires school districts to maintain a balanced budget in each fiscal year. The State Department of Education imposes a uniform budgeting and accounting format for school districts.

Under current law, a school district governing board must adopt and file with the county

superintendent of schools a tentative budget by July 1 in each fiscal year. The District is under the jurisdiction of the Tuolumne County Superintendent of Schools (the "County Superintendent").

The County Superintendent must review and approve or disapprove the budget no later

than August 15. The County Superintendent is required to examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance with the established standards. If the budget is disapproved, it is returned to the District with recommendations for revision. The District is then required to revise the budget, hold a public hearing thereon, adopt the revised budget and file it with the County Superintendent no later than September 8. Pursuant to State law, the County Superintendent has available various remedies by which to impose and enforce a budget that complies with State criteria, depending on the circumstances, if a budget is disapproved. After approval of an adopted budget, the school district's administration may submit budget revisions for governing board approval.

Subsequent to approval, the County Superintendent will monitor each district under its

jurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis if the district can meet its current or subsequent year financial obligations. If the County Superintendent determines that a district cannot meet its current or subsequent year obligations, the County Superintendent will notify the district's governing board of the determination and may then do either or both of the following: (a) assign a fiscal advisor to enable the district to meet those obligations or (b) if a study and recommendations are made and a district fails to take appropriate action to meet its financial obligations, the County Superintendent will so notify the State Superintendent of Public Instruction, and then may do any or all of the following for the remainder of the fiscal year: (i) request additional information regarding the district's budget and operations;; (ii) after also consulting with the district's board, develop and impose revisions to the budget that will enable the district to meet its financial obligations;; and (iii) stay or rescind any action inconsistent with such revisions. However, the County Superintendent may not abrogate any provision of a collective bargaining agreement that was entered into prior to the date upon which the County Superintendent assumed authority.

A State law adopted in 1991 ("A.B. 1200") imposed additional financial reporting

requirements on school districts, and established guidelines for emergency State aid apportionments. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the County Superintendent (on December 15, for the period ended October 31, and by mid-March for the period ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The County Superintendent reviews the certification and issues either a positive, negative or qualified certification.

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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 county office of education reviews the certification and issues the following types of certifications:

• Positive certification - the school district that will meet its financial

obligations for the current fiscal year and subsequent two fiscal years. • Negative certification - the school district will be unable to meet its

financial obligations for the remainder of the fiscal year or subsequent fiscal year.

• Qualified certification - the school district may not meet its financial

obligations for the current fiscal year or subsequent two 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 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 District has

not received any qualified or negative certifications of its financial reports in the past five years, nor have any of its budgets been disapproved. The District’s most recent interim report, the Second Interim Report for fiscal year 2015-16, was certified as positive by the Board

Copies of budgets and interim reports are available from the Superintendent of the

District, South Bay Union School District, 601 Elm Avenue, Imperial Beach, California 91932;; telephone (619) 628-1608. The District may impose a charge for copying, mailing and handling.

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District’s General Fund 2015-16 Estimated Actual and 2016-17 Adopted Budget. The following table shows the income and expense statements for the District’s General Fund for fiscal year 2015-16 (estimated actuals) and for fiscal year 2016-17 (Adopted Budget).


Revenues, Expenditures, and Changes in General Fund Balance Fiscal Year 2015-16 (Estimated Actuals) and Fiscal Year 2016-17 (Adopted Budget)(1)(2)

Estimated Actuals Fiscal Year 2015-16

Budgeted Fiscal Year 2016-17

Revenues Local Control Funding Formula (2) $49,538,788 $52,262,788 Federal revenues 4,926,915 3,950,753 Other state revenues 7,332,332 5,004,124 Other local revenues 7,594,006 6,422,679 Total Revenues 69,392,041 67,640,344 Expenditures Certificated Salaries 32,523,481 32,008,600 Classified Salaries 9,535,895 9,778,352 Employee Benefits 17,615,719 19,514,037 Books and Supplies 9,024,363 2,801,700 Services, Other Operating Expenses 8,219,100 7,533,668 Capital outlay 3,401,196 914,561 Other Outgo 420,059 391,174 Other Outgo–Transfers of Ind. Costs (388,899) (295,262) Total Expenditures 80,350,914 72,646,830 Excess of Revenues Over/(Under) Expenditures (10,958,873) (5,006,486)

Other Financing Sources (Uses) Operating Transfers In 5,376,750 4,835,645 Operating Transfers Out -- -- Total Other Financing Sources (Uses) 5,376,750 4,835,645 Net Change in Fund Balance (5,582,123) (170,841) Fund Balance, July 1 14,106,863 8,524,740 Fund Balance, June 30 $8,524,740 $8,353,899 (1) The District’s reserves are not accounted for in its General Fund for purposes of budgeting. As such, beginning and ending fund balance figures do not correspond with presentation of audited financial statements in the previous table, which account for reserve funds within the General Fund. (2) Figures may not foot due to rounding. Source: South Bay Union School District. District Reserves. In general, the State requires that the California school districts the

size of the District maintain the equivalent of 3% of annual general fund expenditures in reserve to be available during financial crisis. The Board adopted a minimum fund balance policy for the General Fund in order to protect the District against revenue shortfalls or unpredicted one-time expenditures. The policy established a goal of maintaining a reserve for Economic Uncertainties consisting of unassigned amounts equal to no less than five percent of General Fund expenditures and other financing uses. The District has historically had an unrestricted reserve in the General Fund in excess of the 3% minimum state requirement.

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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 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 County Superintendent under certain circumstances.

In August of 2015, Senate Bill 799 (“SB 799”) was introduced into the State Senate in

response to SB 858 proposing reforms to the reserve cap. SB 799 proposes a cap on unassigned reserves and special reserves for other than capital outlay of seventeen percent, with exemptions from the cap for school districts with less then 2,500 average daily attendance and basic aid districts.

The District cannot predict how SB 858 or SB 799, if enacted, will impact its reserves

and future spending. See “STATE FUNDING OF EDUCATION;; RECENT STATE BUDGETS- 2015-16 Adopted State Budget.”

Attendance - Revenue Limit and LCFF Funding

As described herein, prior to fiscal year 2013-14, school districts in California derived most State funding based on a formula which considered a revenue limit per unit of average daily attendance (“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 total LCFF funding for the District for fiscal years 2013-14 through 2016-17 (Projected).

SOUTH BAY UNION SCHOOL DISTRICT ADA and LCFF Entitlement

Fiscal Years 2013-14 through 2016-17 (Projected)

Fiscal Year

ADA LCFF Entitlement

per ADA(1) 2013-14 5,528 $6,968 2014-15 5,420 8,015 2015-16* 5,386 9,108 2016-17* 5,347 9,682

*Budgeted. (1) Average across grade spans. Source: South Bay Union School District.

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Under LCFF, school districts are entitled to supplemental funding based on the unduplicated count of targeted students. Concentration grant funding is available for districts with unduplicated counts above 55%. The District’s percentage of unduplicated students is above 55%, at approximately 64.1%, and therefore the District is eligible for both supplemental funding 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 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. 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.

Federal Revenues. The federal government provides funding for several District

programs, including special education programs, programs under No Child Left Behind, 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 “-State Funding of

Education.”

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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

Qualified employees of the District are covered under multiple-employer defined benefit

pension plans maintained by agencies of the State. Certificated employees are members of the State Teachers’ Retirement System (“STRS”) and classified employees are members of the Public Employees’ Retirement System (“PERS”). Both STRS and PERS are operated on a Statewide basis. 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 Purchaser.

Implementation of GASB Nos. 68 and 71. Commencing with fiscal year ended June

30, 2015, the District implemented the provisions of GASB Statement No. 68, as amended by GASB Statement No. 71, which imposes certain new pension accounting and financial reporting requirements in the notes to its audited financial statements commencing with financial statements for fiscal years ending after June 30, 2014. Statement No. 68, as amended, generally requires the District to recognize its proportionate share of the unfunded pension obligation for STRS and PERS by recognizing a net pension liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. As a result of the implementation of GASB Statement Nos. 68 and 71, the District was required to restate its beginning net position as of July 1, 2014. See “APPENDIX B - Audited Financial Statements of the District For Fiscal Year Ending June 30, 2015” and particularly Notes 1 and Note 13.

STRS. All full-time certificated employees participate in STRS, a cost-sharing, multiple-

employer contributory public employee retirement system. STRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program. Benefit provisions and contribution amounts are established by State statutes, as legislatively amended. The program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers and the State. The District’s employer contributions to STRS for recent fiscal years are set forth in the following table.

SOUTH BAY UNION SCHOOL DISTRICT Annual Regular STRS Contributions

Fiscal Year Contribution

2011-12 $2,693,567 2012-13 2,723,792 2013-14 2,819,263 2014-15 4,498,440 2015-16(1) 5,459,788 2016-17(2) 6,100,501

(1) Estimated Actuals. (2) Budgeted. Source: The District.

Historically, employee, employer and State contribution rates did not vary annually to

account for funding shortfalls or surpluses in the STRS plan. In recent years, the combination of

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investment earnings and statutory contributions were not sufficient to pay actuarially required amounts. As a result, the STRS defined benefit program showed an estimated unfunded actuarial liability of approximately $76.2 billion as of June 30, 2015 (the date of the last actuarial valuation). In connection with the State’s adoption of its fiscal year 2014-15 Budget, the Governor signed into law Assembly Bill 1469 (“AB 1469”), which represents a legislative effort to address the unfunded liabilities of the STRS pension plan. AB 1469 addressed the funding gap by increasing contributions by employees, employers and the State. In particular, employer contribution rates are scheduled to increase through at least fiscal year 2020-21, from a contribution rate of 8.88% in fiscal year 2013-14 to 19.1% in fiscal year 2020-21. Thereafter, employer contribution rates will be determined by the STRS board to reflect the contribution required to eliminate unfunded liabilities by June 30, 2046.

The District’s employer contribution rates for fiscal years 2014-15 and 2015-16 were

8.88% and 10.73%, respectively. Projected employer contribution rates for school districts (including the District) for fiscal year 2016-17 through fiscal year 2020-21 are set forth in the following table.

PROJECTED EMPLOYER CONTRIBUTION RATES (STRS)

Fiscal Years 2016-17 through 2020-21

Fiscal Year Projected Employer Contribution Rate(1)

2016-17 12.58% 2017-18 14.43 2018-19 16.28 2019-20 18.13 2020-21 19.10

(1) Expressed as a percentage of covered payroll. Source: AB 1469

PERS. All full-time and some part-time classified employees participate in PERS, an

agent multiple-employer contributory public employee retirement system that acts as a common investment and administrative agent for participating public entities within the State. PERS provides retirement, disability, and death benefits to plan members and beneficiaries. The District is part of a cost-sharing pool within PERS known as the “Schools Pool.” Benefit provisions are established by State statutes, as legislatively amended. Contributions to PERS are made by employers and employees. Each fiscal year, the District is required to contribute an amount based on an actuarially determined employer rate. The District’s employer contributions to PERS for recent fiscal years are set forth in the following table.

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SOUTH BAY UNION SCHOOL DISTRICT Annual Regular PERS Contributions

Fiscal Year Contribution

2011-12 $1,096,333 2012-13 1,148,032 2013-14 1,172,842 2014-15 1,904,454 2015-16* 1,185,476 2016-17* 1,222,292

(1) Estimated Actuals (2) Budgeted Source: The District.

Like the STRS program, the PERS program has experienced an unfunded liability in

recent years. The PERS unfunded liability, on a market value of assets basis, was approximately $8.7 billion as of June 30, 2014 (the date of the last actuarial valuation). To address this issue, the PERS board has taken a number of actions. In April 2013, for example, the PERS board approved changes to the PERS amortization and smoothing policy intended to reduce volatility in employer contribution rates. In addition, in April 2016, PERS set new contribution rates, reflecting new demographic assumptions and other changes in actuarial assumptions. The new rates and underlying assumptions, which are aimed at eliminating the unfunded liability of PERS in approximately 30 years, will be implemented for school districts beginning in fiscal year 2016-17, with the costs spread over 20 years and the increases phased in over the first five years.

The District’s employer contribution rates for fiscal years 2014-15 and 2015-16 were

11.771% and 11.847%, respectively. Projected employer contribution rates for school districts (including the District) for fiscal year 2016-17 through fiscal year 2020-21 are set forth in the following table.

PROJECTED EMPLOYER CONTRIBUTION RATES (PERS) Fiscal Years 2016-17 through 2020-21(1)

Fiscal Year Projected Employer Contribution Rate(2)

2016-17 15.0% 2017-18 16.6 2018-19 18.2 2019-20 19.9 2020-21 20.4

(1) Rates were estimated by PERS in 2014 using 2012 financial data. The PERS board is expected to approve official employer contribution rates for each fiscal year shown during the immediately preceding fiscal year. (2) Expressed as a percentage of covered payroll. Source: PERS

California Public Employees’ Pension Reform Act of 2013. On September 12, 2012,

the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”), which impacted various aspects of public retirement systems in the State, including the STRS and PERS programs. In general, PEPRA (i) increased the retirement age for public employees depending on job function, (ii) capped the annual pension benefit payouts for public

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employees hired after January 1, 2013, (iii) required public employees hired after January 1, 2013 to pay at least 50% of the costs of their pension benefits (as described in more detail below), (iv) required final compensation for public employees hired after January 1, 2013 to be determined based on the highest average annual pensionable compensation earned over a period of at least 36 consecutive months, and (v) attempted to address other perceived abuses in the public retirement systems in the State. PEPRA applies to all public employee retirement systems in the State, except the retirement systems of the University of California, and charter cities and charter counties whose pension plans are not governed by State law. PEPRA’s provisions went into effect on January 1, 2013 with respect to new State, school, and city and local agency employees hired on or after that date;; existing employees who are members of employee associations, including employee associations of the District, have a five-year window to negotiate compliance with PEPRA through collective bargaining.

PERS has predicted that the impact of PEPRA on employees and employers, including

the District and other employers in the PERS system, will vary, based on each employer’s current level of benefits. As a result of the implementation of PEPRA, new members must pay at least 50% of the normal costs of the plan, which can fluctuate from year to year. To the extent that the new formulas lower retirement benefits, employer contribution rates could decrease over time as current employees retire and employees subject to the new formulas make up a larger percentage of the workforce. This change would, in some circumstances, result in a lower retirement benefit for employees than they currently earn.

With respect to the STRS pension program, employees hired after January 1, 2013 will

pay the greater of either (1) fifty percent of the normal cost of their retirement plan, rounded to the nearest one-quarter percent, or (2) the contribution rate paid by then-current members (i.e., employees in the STRS plan as of January 1, 2013). The member contribution rate could be increased from this level through collective bargaining or may be adjusted based on other factors. Employers will pay at least the normal cost rate, after subtracting the member’s contribution.

The District is unable to predict the amount of future contributions it will have to make to

PERS and STRS as a result of the implementation of PEPRA, and as a result of negotiations with its employee associations, or, notwithstanding the adoption of PEPRA, resulting from any legislative changes regarding the PERS and STRS employer contributions that may be adopted in the future.

Additional Information. Additional information regarding the District’s retirement

programs is available in the District’s audited financial statements attached hereto as APPENDIX B. In addition, both STRS and PERS issue separate comprehensive financial reports that include financial statements and required supplemental information. Copies of such reports may be obtained from STRS and PERS, respectively, as follows: (i) STRS, P.O. Box 15275, Sacramento, California 95851-0275;; and (ii) PERS, 400 Q Street, Sacramento, California 95811. More information regarding STRS and PERS can also be obtained at their websites, www.calstrs.com and www.calpers.ca.gov, respectively. The references to these Internet websites are shown for reference and convenience only and the information contained on such websites is not incorporated by reference into this Official Statement. The information contained on these websites may not be current and has not been reviewed by the District or the Purchaser for accuracy or completeness.

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Other Post-Employment Benefit Obligation

Plan Description. The District administers a single-employer healthcare plan (the “Plan”). The District offers medical, dental, and vision benefits to its retirees. District employees who have attained age 55 and have completed at least fifteen years of service with the District are eligible to receive a District-paid contribution equal to the currently capped 2011 Kaiser HMO retiree only rate ($409.24) per month. The retiree pays for the cost of medical coverage in excess of the cap plus any elected dental and vision coverage. Employees who perform service with the District at less than 100% full time equivalency may achieve the fifteen-year requirement by adding together partial years of service until the total equals or exceeds fifteen years. District-paid benefits end at age 65. Spouses, domestic partners, and eligible dependent children of District retirees may be covered under the District's health plans at the retiree's expense. Dental and vision coverage may be self-paid at the retiree's option. As of July 1, 2014 the date of the most recent actuarial valuation) the membership of the plan consists of approximately 671 eligible active employees and 76 eligible retirees who are in receipt of health benefits.

The contribution requirements of Plan members and the District are established and

amended by the District and the Southwest Teachers Association and the local California Service Employee Association. The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year 2014-15, the District contributed $458,397 to the Plan, all of which was used for current premiums.

Annual OPEB Cost and Net OPEB Obligation. The District’s annual OPEB cost

(expense) is calculated based on the annual required contribution, 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 liabilities over a period not to exceed 30 years.

A summary of the District’s OPEB obligation, as shown in the District’s audited financial

statements as of June 30, 2015, is as follows:

SOUTH BAY UNION SCHOOL DISTRICT OPEB Obligation as of June 30, 2015

Annual required contribution $1,372,327 Interest on net OPEB obligation 11,674 Adjustment to annual required contribution (199,842) Annual OPEB cost (expense) 1,184,159 Contributions for the fiscal year (458,159) Change in net OPEB obligation 725,762 Net OPEB obligation- June 30, 2013 2,896,803 Net OPEB obligation- June 30, 2014 $3,622,565 Source: District Audited Financial Statements.

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A history of the District’s annual OPEB cost, the percentage of annual OPEB cost contributed, and the net OPEB obligation as of the July 1, 2014 actuarial date, is as follows:


Schedule of Funding Progress

Actuarial Valuation Date

As of July 1

Actuarial Value

of Assets

Actuarial Accrued

Liability (AAL) -- Entry Age

Unfunded AAL (UAAL)

Funded Ratio

Covered Payroll

UAAL as

Percentage of Covered Payroll

2008 -- $10,527,832 $10,527,832 -- $50,591,521 20.81% 2010 -- 7,813,603 7,813,603 -- 44,261,000 17.60 2011 -- 7,909,367 7,909,367 -- 44,813,818 17.65 2013 -- 11,258,786 11,258,786 -- 46,763,764 24.08 2014 -- 11,258,786 11,258,786 -- 40,343,000 27.91

Source: District Audited Financial Statements.

The District’s annual OPEB cost for the year, the percentage of annual OPEB cost

contributed, and the net OPEB obligation for fiscal years 2011-12 through 2014-15 is as follows:

SOUTH BAY UNION SCHOOL DISTRICT OPEB Cost History

Fiscal Year Annual

OPEB Cost

Actual Contribution % of Annual OPEB

Contributed

Net OPEB Asset 2011-12 $27,846 $71,143 18.46% $(58,007) 2012-13 51,353 76,333 (8.72) (82,987) 2013-14 51,549 71,998 (43.67) (103,436) 2014-15 51,708 55,759 (92.77) (107,487)

Source: District Audited Financial Statements.

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Long-Term Indebtedness

General. The District has never defaulted on the payment of principal or interest on any of its indebtedness. As of June 30, 2015, the District had the following long-term debt outstanding (excluding the Bonds described herein):

SOUTH BAY UNION SCHOOL DISTRICT Summary of Outstanding Long Term Debt

Balance

6/30/2015 Due in One Year

General Obligation Bonds $40,131,519 $1,495,013 Capital leases 214,089 144,208 Net OPEB Obligation 3,622,565 -- Compensated absences - net 343,060 330,752 Source: District Audited Financial Statements.

General Obligation Bonds. In addition to the Bonds described herein, the District has

other outstanding general obligation bonds or refunding bonds, each of which is secured by ad valorem taxes upon all property subject to taxation by the District, as summarized in the following table and as more particularly described below.


Summary of Outstanding General Obligation Bond Debt as of May 1, 2016*

Date Issued Final Maturity

Original Issue Amount

Amount Outstanding (May 1, 2016)

1997 Election GO Bonds Series A 6/19/1997 7/01/2022 $8,496,918 $6,472,480†

2008 Election GO Bonds Series A 2/19/2009 8/01/2031 16,000,000 15,700,000

2012 Election GO Bonds Series A 5/23/2013 8/01/2037 17,000,000 16,235,000

*The District has sold 2016 General Obligation Refunding Bonds for the purpose of refinancing certain maturities ($14,225,000 principal amount) of its outstanding 2008A Bonds, which are expected to be issued on July 28, 2016 in the principal amount of $15,205,000. †Not including accreted interest. Source: The District.

1997 Election. The District received authorization at an election held in the District on

November 2, 1997, by more than the requisite 2/3 vote of the qualified electors, to issue general obligation bonds in a principal amount of $8,500,000 (the “1997 Authorization”). Pursuant to the 1997 Authorization, on June 19, 1997 the District issued its $8,496,918 General Obligation Bonds, Election of 1997, Series A (the “1997A Bonds”). There is no 1997 Authorization remaining.


November 4, 2008, by more than the requisite fifty-five percent vote of the qualified electors, to issue general obligation bonds in a principal amount of $59,400,000 (the “2008 Authorization”). Pursuant to the 2008 Authorization, on March 5, 2009 the District issued its $16,000,000 General Obligation Bonds, 2008 Election, Series A (the “2008A Bonds”). There is $43,400,000

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of 2008 Authorization remaining, provided, however, $26,000,000 of said amount was reauthorized in the 2012 Election proceedings described below. When bonds are issued pursuant to the 2012 Reauthorization, the District will cancel a like principal amount of the 2008 Authorization. A portion of the 2008A Bonds are expected to be refunded with the proceeds of 2016 General Obligation Refunding Bonds to be issued on July 28, 2016. The 2008B Bonds described in this Official Statement represent the second series of bonds issued pursuant to the 2008 Authorization.


November 6, 2012, by more than the requisite fifty-five percent vote of the qualified electors, to issue general obligation bonds in a principal amount of $26,000,000 (the “2012 Reauthorization”). Pursuant to the 2012 Reauthorization, on May 23, 2013 the District issued its $17,000,000 General Obligation Bonds, 2012 Election, Series A, GO Reauthorization Bonds®” (the “2012A Bonds”). The 2012B Bonds described herein represent the second and final series of bonds issued pursuant to the 2012 Reauthorization.

Capital Leases. In March 2014, the District entered into a lease agreement with

Creative Fleet Leasing to finance the purchase of two school buses for $272,002. The lease requires five annual payments of $57,913, which is inclusive of interest at a rate of 3.23%. Upon final payment, the lease contains a bargain purchase option of $1 to transfer ownership of the buses to the District.

In October 2014, the District entered into a lease agreement with Capital One Public

Financing, LLC to refinance the lease with Creative Fleet Leasing for two school busses along with the purchase of additional school busses. The lease was issued for $1,262,438 and requires 16 semi-annual payments of $89,157, which includes interest at a rate of 2.95%. Upon final payment, the lease contains a bargain purchase option of $1 to transfer ownership of the buses to the District.

Investment of District Funds

Education Code Section 41001 et. seq. provides that all school district funds, except as

otherwise set forth below, shall be deposited into the County Treasury to the credit of the proper fund of the district. Education Code Section 41015 provides that funds held in a special reserve fund or any surplus moneys not required for the immediate necessities of the district may be invested in investments specified in Section 16430 or 53601 of the Government Code. Accordingly, all funds of the District not subject to the exception, including cash receipts and other moneys received by the District for deposit to the general fund of the District are deposited with the County Treasury. Currently, the District has not established special reserve funds or identified surplus moneys for investments subject to the exception set forth above. Such current practices, however, should not be construed to predict the future investment practices of the District in accordance with applicable law. The County’s investment policy and most recent investment report can be accessed through the County Treasurer’s web site at the County Auditor – Controller/Treasurer – Tax Collector Division, http://sdcounty.ca.gov/ttc/index.html. The reference to this internet website is shown for reference and convenience only. The information contained within the website may not be current and has not been reviewed by the District and is not incorporated herein by reference.

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Effect of State Budget on Revenues Public school districts in California are dependent on revenues from the State for a large

portion of their operating budgets. California school districts generally receive the majority of their operating revenues from various State sources. The primary source of funding for school districts is LCFF funding, which is derived from a combination of State funds and local property taxes (see “—State Funding of Education – Revenue Limits” above). State funds typically make up the majority of a district’s LCFF funding. School districts also receive funding from the State for some specialized programs such as special education.

The availability of State funds for public education is a function of constitutional

provisions affecting school district revenues and expenditures (see “CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES 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. The District cannot predict how education funding may further be changed in the future, or the state of the economy which in turn can impact the amounts of funds available from the State for education funding. See “STATE FUNDING OF EDUCATION;; RECENT STATE BUDGETS” below.

STATE FUNDING OF EDUCATION;; RECENT STATE BUDGETS 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 are revenues under the LCFF, which are 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 allocation. School districts also receive substantial funding from the State for various categorical programs.

The availability of State funds for public education is a function of constitutional

provisions affecting school district revenues and expenditures (see “CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES 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. Neither the District, the Purchaser or the County is 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.

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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.

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 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

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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 2015-16 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 30 at the November 2, 2012 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.

2013-14 State Budget: Significant Change in Education Funding. As described

previously herein, the 2013-14 State Budget and its related implementing legislation enacted significant reforms to the State’s system of K-12 education finance with the enactment of the LCFF. Significant reforms such as the LCFF and other changes in law may have significant impacts on the District’s finances.

2016-17 Adopted State Budget

On June 27, 2016, the Governor signed the 2016-17 State Budget (the “2016-17 State

Budget”) into law. The 2016-17 State Budget package calls for $122.5 billion in general fund spending and $44.6 billion in special fund spending, along with $3.6 billion in bond spending. The 2016-17 State Budget includes more money for higher education, repeals a cap on welfare payments, raises rates for child care providers and puts an additional $3.3 billion into the State’s rainy-day reserve, including an optional $2 billion shift to protect against a future economic downturn. The 2016-17 State Budget establishes a multiyear plan that is balanced and that, among other items, provides for the following:

• contributions to both state budget reserves: the Special Fund for Economic

Uncertainties, the state’s discretionary reserve, and the Budget Stabilization Account, the state’s constitutional rainy day fund, raising such reserves to $6.7 billion;;

• an increase in funding for K-12 schools of more than $2.9 billion

(representing an increase of 5.4 percent over the LCFF funding level for fiscal year 2014-15 and bringing the LCFF level implementation to 96% complete);;

• an increase of more than $1.3 billion in one-time discretionary general funds

for school districts, charter schools and county offices of education to use at local discretion (for activities such as deferred maintenance, professional development, induction for beginning teachers, instructional materials, technology, and the implementation of new educational standards);;

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• a $1.6 billion early education block grant by combining three existing programs to promote local flexibility, focusing on disadvantaged students and improved accountability;;

• $807 million for statewide deferred maintenance at levees, state parks,

universities, community colleges, prisons, state hospitals, and other state facilities;;

• a $3.1 billion cap-and-trade expenditure plan to reduce greenhouse gas

emissions;;

• over $2 billion in funds for various infrastructure improvements, $688 million for critical deferred maintenance at levees, state parks, universities, community colleges, prisons, state hospitals, and other state facilities;;

• a $1.2 billion pay-down of debt and liabilities from Proposition 2 funds;; and • $710 million to pay for the costs of wildfires and for other effects of the

drought. The execution of the 2016-17 State Budget may be affected by numerous factors,

including but not limited to: (i) shifts of costs from the federal government to the State, (ii) national, State and international economic conditions, (iii) litigation risk associated with proposed spending reductions, (iv) rising health care costs and (v) other factors, all or any of which could cause the revenue and spending projections in the 2016-17 State Budget to be unattainable. The District cannot predict the impact that the 2016-17 State Budget, or subsequent budgets, will have on its own finances and operations. Additionally, the District cannot predict the accuracy of any projections made in the 2016-17 State Budget.

The complete enacted 2016-17 State Budget is available from the California State

Department of Finance Budget website at www.ebudget.ca.gov. The District cannot, and does not, take any responsibility for the continued accuracy of such internet address or for the accuracy, completeness or timeliness of information posted on such address, and such information is not incorporated in this Official Statement by such reference.

Disclaimer Regarding State Budgets. The execution of the foregoing State Budgets

may be affected by numerous factors, including but not limited to: (i) shifts of costs from the federal government to the State, (ii) national, State and international economic conditions, (iii) litigation risk associated with proposed spending reductions, (iv) rising health care costs and (v) other factors, all or any of which could cause the revenue and spending projections included in such budgets to be unattainable. The District cannot predict the impact that the State Budgets, or subsequent budgets, will have on its own finances and operations. Additionally, the District cannot predict the accuracy of any assumptions or projections made in the State Budgets.

Availability of State Budgets. The complete 2015-16 State Budget and 2016-17

Proposed State Budget are available from the California Department of Finance website at www.dof.ca.gov. The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated in this Official Statement by such reference. The

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information referred to above should not be relied upon in making an investment decision with respect to the Bonds.

Uncertainty Regarding Future State Budgets. The District cannot predict what

actions will be taken in future years by the State Legislature and the Governor to address the State’s current or future budget deficits. Future State budgets will be affected by national and state economic conditions and other factors over which the District has no control. The District cannot predict what impact any future budget proposals will have on the financial condition of the District. To the extent that the State budget process results in reduced revenues to the District, the District will be required to make adjustments to its budgets.

The State has not entered into any contractual commitment with the District, the County,

or the Owners of the Bonds to provide State budget information to the District or the owners of the Bonds. 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. However, the Bonds are secured by ad valorem taxes levied and collected on taxable property in the District, without limit as to rate or amount, and are not secured by a pledge of revenues of the District or its general fund.

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.

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CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS

Principal of and interest on the Bonds are payable from the proceeds of an ad valorem

tax levied by the County for the payment thereof. Articles XIIIA, XIIIB, XIIIC, and XIIID of the State Constitution, Propositions 62, 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 levy taxes and spend tax proceeds for operating and other purposes, and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the District to levy taxes for payment of the Bonds. The tax levied by the County for payment of the Bonds was approved by the District's voters in compliance with Article XIIIA and all applicable laws.

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.

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-thirds 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, but only if certain accountability measures are included in the proposition (which provided the authority for the issuance of the 2011 Bonds). 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, 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.

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).

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The 1% property tax is automatically levied by the county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1979.

Increases of assessed valuation resulting from reappraisals of property due to new

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

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. 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.

Article XIIIB of the California Constitution

Article XIIIB (“Article XIIIB”) of the State Constitution, as subsequently amended by

Propositions 98 and 111, respectively, limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and in population and for transfers in the financial responsibility for providing services and for certain declared emergencies. For fiscal years beginning on or after July 1, 1990, the appropriations limit of each entity of government shall be the appropriations limit for the 1986-87 fiscal year adjusted for the changes made from that fiscal year under the provisions of Article XIIIB, as amended.

The appropriations of an entity of local government subject to Article XIIIB limitations

include the proceeds of taxes levied by or for that entity and the proceeds of certain state subventions to that entity. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to the entity from (a) regulatory licenses, user charges and user fees (but only to the extent that these proceeds exceed the reasonable costs in providing the regulation, product or service), and (b) the investment of tax revenues.

Appropriations subject to limitation do not include (a) refunds of taxes, (b) appropriations

for debt service, (c) appropriations required to comply with certain mandates of the courts or the federal government, (d) appropriations of certain special districts, (e) appropriations for all qualified capital outlay projects as defined by the legislature, (f) appropriations derived from certain fuel and vehicle taxes and (g) appropriations derived from certain taxes on tobacco products.

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Article XIIIB includes a requirement that all revenues received by an entity of government other than the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be returned by a revision of tax rates or fee schedules within the next two subsequent fiscal years. However, in the event that a school district’s revenues exceed its spending limit, the district may in any fiscal year increase its appropriations limit to equal its spending by borrowing appropriations limit from the State.

Article XIIIB also includes a requirement that 50% of all revenues received by the State

in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be transferred and allocated to the State School Fund under Section 8.5 of Article XVI of the State Constitution. Unitary Property

Some amount of property tax revenue of the District is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions (“unitary property”). Under the State Constitution, such property is assessed by the State Board of Equalization (“SBE”) as part of a “going concern” rather than as individual pieces of real or personal property. State-assessed unitary and certain other property is allocated to the counties by SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year. 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

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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.

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 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 Bonds.

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 changes State funding of public education below the university level and the operation of the State’s appropriations limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (hereinafter referred to collectively as “K-14 school districts”) at a level equal to the greater of (a) the same percentage of general fund revenues as the percentage appropriated to such districts in 1986-87, and (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The Accountability Act permits the Legislature to suspend this formula for a one-year period.

The Accountability Act also changes how tax revenues in excess of the State

appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 school districts. Any such transfer to K-14 school districts would be excluded from the appropriations limit for K-14 school districts and the K-14 school district appropriations limit for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K 14 school districts for subsequent years, creating further pressure on

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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 are to be transferred to K-14 school districts with the balance returned to taxpayers;; under prior law, 100% of excess State tax revenues went to K-14 school districts, but only up to a maximum of 4% of the schools’ minimum funding level. Also, reversing prior law, any excess State tax revenues transferred to K-14 school districts are not built into the school districts’ base expenditures for calculating their entitlement for State aid in the next year, and the State’s appropriations limit is not to be increased by this amount.

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, is to be recalculated beginning in fiscal year 1990-91. It is based on the actual limit for fiscal year 1986-87, adjusted forward to 1990-91 as if Proposition 111 had been in effect.

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

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revenues. Under prior law, K-14 school districts were guaranteed the greater of (1) 40.9% of State general fund revenues (the “first test”) or (2) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the “second test”). Under Proposition 111, schools will receive the greater of (1) the first test, (2) the second test, or (3) a third test, which will replace the second test in any year when growth in per capita State general fund revenues from the prior year is less than the annual growth in California per capita personal income (the “third test”). Under the third test, schools will receive the amount appropriated in the prior year adjusted for change in enrollment and per capita State general fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test will become a “credit” to schools which will be paid in future years when State general fund revenue growth exceeds personal income growth.

Proposition 39

On November 7, 2000, California voters approved an amendment (commonly known as

“Proposition 39”) to the California Constitution. This amendment (1) allows school facilities bond measures to be approved by 55 percent (rather than two-thirds) of the voters in local elections and permits property taxes to exceed the current 1 percent limit in order to repay the bonds and (2) changes existing statutory law regarding charter school facilities. As adopted, the constitutional amendments may be changed only with another Statewide vote of the people. The statutory provisions could be changed by a majority vote of both houses of the Legislature and approval by the Governor, but only to further the purposes of the proposition. The local school jurisdictions affected by this proposition are K-12 school districts, community college districts, including the District, and county offices of education. As noted above, the California Constitution previously limited property taxes to 1 percent 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, 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. Legislation approved in June 2000 places certain limitations on local school bonds to be approved by 55 percent of the voters. These provisions require that the tax rate levied as the result of any single election be no more than $60 (for a unified school district), $30 (for an elementary school district or high school district), or $25 (for a community college district), per $100,000 of taxable property value. These requirements are not part of this proposition and can be changed with a majority vote of both houses of the Legislature and approval by the Governor.

Proposition 30

Proposition 30 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

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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 $340,000 but less than $408,000 for heads of household and over $500,000 but less than $600,000 for joint filers), (ii) 2% for taxable income over $300,000 but less than $500,000 for single filers (over $408,000 but less than $680,000 for heads of household and over $600,000 but less than $1,000,000 for joint filers), and (iii) 3% for taxable income over $500,000 for single filers (over $680,000 for heads of household and over $1,000,000 for joint 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.

Proposition 1A and Proposition 22

On November 2, 2004, California voters approved 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

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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, 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).

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.

California Senate Bill 222

Senate Bill 222 (“SB 222”) was signed by the California Governor on July 13, 2015 and

became effective on January 1, 2016. SB 222 amended Section 15251 of the California Education Code and added Section 52515 to the California Government Code to provide that voter approved general obligation bonds which are secured by ad valorem tax collections such as the Bonds are secured by a statutory lien on all revenues received pursuant to the levy and collection of the property tax imposed to service those bonds. Said lien shall attach automatically and is valid and binding from the time the bonds are executed and delivered. The lien is enforceable against the issuer, its successors, transferees, and creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without the need for any further act. The effect of SB 222 is the treatment of general obligation bonds as secured debt in bankruptcy due to the existence of a statutory lien.

Future Initiatives

Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID of the California Constitution and Propositions 98, 22, 26, 30 and 39 were each adopted as measures that qualified for the ballot under the State’s initiative process. From time to time other initiative measures could be adopted further affecting District revenues or the District’s ability to expend revenues. The nature and impact of these measures cannot be anticipated by the District.

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APPENDIX B

AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2015

SOUTH BAY UNION SCHOOL DISTRICTCOUNTY OF SAN DIEGO

IMPERIAL BEACH, CALIFORNIA

AUDIT REPORT

JUNE 30, 2015

Wilkinson Hadley King & Co. LLPCPA's and Advisors218 W. Douglas Ave.El Cajon, California

Introductory Section

South Bay Union School DistrictAudit Report

For The Year Ended June 30, 2015

TABLE OF CONTENTS

Page Exhibit/Table

FINANCIAL SECTION

Independent Auditor's Report..................................................................................................... 1Management's Discussion and Analysis (Required Supplementary Information).................. 4

Basic Financial Statements

Government-wide Financial Statements:Statement of Net Position................................................................................................ 12 Exhibit A-1Statement of Activities..................................................................................................... 13 Exhibit A-2

Fund Financial Statements:Balance Sheet - Governmental Funds............................................................................ 14 Exhibit A-3Reconciliation of the Governmental Funds

Balance Sheet to the Statement of Net Position....................................................... 15 Exhibit A-4Statement of Revenues, Expenditures, and Changes in

Fund Balances - Governmental Funds...................................................................... 16 Exhibit A-5Reconciliation of the Statement of Revenues, Expenditures, and Changes in

Fund Balances of Governmental Funds to the Statement of Activities.................... 17 Exhibit A-6Statement of Net Position - Internal Service Fund......................................................... 19 Exhibit A-7Statement of Revenues, Expenses, and Changes in

Fund Net Position - Internal Service Fund................................................................ 20 Exhibit A-8Statement of Cash Flows - Proprietary Funds............................................................... 21 Exhibit A-9Statement of Fiduciary Net Position - Fiduciary Funds.................................................. 22 Exhibit A-10Statement of Changes in Fiduciary Net Position - Fiduciary Funds.............................. 23 Exhibit A-11

Notes to the Financial Statements ....................................................................................... 24

Required Supplementary Information

Budgetary Comparison Schedules:

General Fund................................................................................................................... 53 Exhibit B-1Charter School Fund........................................................................................................ 54 Exhibit B-2

Schedule of Funding Progress for Other Post Employment Benefits Plan........................ 55Schedule of the District's Proportionate Share of the

Net Pension Liability - California State Teachers Retirement System.......................... 56Schedule of District's Contributions - California State Teachers Retirement System........ 57Schedule of the District's Proportionate Share of the

Net Pension Liability - California Public Employees Retirement System...................... 58Schedule of District's Contributions - California Public Employees Retirement System... 59Notes to Required Supplementary Information.................................................................... 60

South Bay Union School DistrictAudit Report

For The Year Ended June 30, 2015

TABLE OF CONTENTS

Page Exhibit/Table

Combining Statements as Supplementary Information:

Combining Balance Sheet - All Nonmajor Governmental Funds........................................ 61 Exhibit C-1Combining Statement of Revenues, Expenditures and Changes in

Fund Balances - All Nonmajor Governmental Funds..................................................... 62 Exhibit C-2

Special Revenue Funds:

Combining Balance Sheet - Nonmajor Special Revenue Funds................................... 63 Exhibit C-3Combining Statement of Revenues, Expenditures and Changes

in Fund Balances - Nonmajor Special Revenue Funds............................................ 64 Exhibit C-4

Capital Projects Funds:

Combining Balance Sheet - Nonmajor Capital Projects Funds..................................... 65 Exhibit C-5Combining Statement of Revenues, Expenditures and Changes

in Fund Balances - Nonmajor Capital Projects Funds.............................................. 67 Exhibit C-6

OTHER SUPPLEMENTARY INFORMATION SECTION

Local Education Agency Organization Structure...................................................................... 69Schedule of Average Daily Attendance..................................................................................... 70 Table D-1Schedule of Instructional Time................................................................................................... 71 Table D-2Schedule of Financial Trends and Analysis.............................................................................. 72 Table D-3Reconciliation of Annual Financial and Budget Report

With Audited Financial Statements....................................................................................... 73 Table D-4Schedule of Charter Schools..................................................................................................... 74 Table D-5Schedule of Expenditures of Federal Awards .......................................................................... 75 Table D-6Notes to the Schedule of Expenditures of Federal Awards...................................................... 77Report on Internal Control over Financial Reporting and on Compliance and

Other Matters Based on an Audit of Financial Statements Performedin Accordance with Government Auditing Standards.......................................................... 78

Report on Compliance for Each Major Program and on InternalControl over Compliance Required by OMB Circular A-133............................................... 80

Independent Auditor's Report on State Compliance................................................................. 82Schedule of Findings and Questioned Costs ........................................................................... 85Summary Schedule of Prior Audit Findings............................................................................... 88

Financial Section

Independent Auditor's Report

To the Board of TrusteesSouth Bay Union School DistrictImperial Beach, California 91932

Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities, each major fund, andthe aggregate remaining fund information of the South Bay Union School District ("the District") as of and forthe year ended June 30, 2015, and the related notes to the financial statements, which collectively comprisethe 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 inaccordance with accounting principles generally accepted in the United States of America; this includes thedesign, implementation, and maintenance of internal control relevant to the preparation and fair presentation offinancial 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 ouraudit in accordance with auditing standards generally accepted in the United States of America and thestandards applicable to financial audits contained in Government Auditing Standards, issued by theComptroller General of the United States. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement.

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

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

Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the respectivefinancial position of the governmental activities, each major fund, and the aggregate remaining fund informationof South Bay Union School District as of June 30, 2015, and the respective changes in financial position, and,where applicable, cash flows thereof for the year then ended in accordance with accounting principlesgenerally accepted in the United States of America.

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Emphasis of Matter

Change in Accounting Principles

As described in Note A to the financial statements, in 2015, South Bay Union School District adopted newaccounting guidance, Government Accounting Standards Board (GASB) Statement No. 68, Accounting andFinancial Reporting for Pensions, and GASB Statement No. 71, Pension Transition for Contributionsmade Subsequent to the Measurement Date -- an amendment of GASB Statement No. 68. Ouropinion is not modified with respect to this matter.

Other Matters


Accounting principles generally accepted in the United States of America require that the Management'sDiscussion and Analysis, budgetary comparison information, schedule of funding progress for OPEB benefits,schedule of the District's proportionate share of the net pension liability and schedule of District pensioncontributions identified as Required Supplementary Information in the table of contents be presented tosupplement the basic financial statements. Such information, although not a part of the basic financialstatements, is required by the Governmental Accounting Standards Board, who considers it to be an essentialpart of financial reporting for placing the basic financial statements in an appropriate operational, economic, orhistorical context. We have applied certain limited procedures to the Required Supplementary Information inaccordance with auditing standards generally accepted in the United States of America, which consisted ofinquiries of management about the methods of preparing the information and comparing the information forconsistency with management's responses to our inquiries, the basic financial statements, and otherknowledge we obtained during our audit of the basic financial statements. We do not express an opinion orprovide any assurance on the information because the limited procedures do not provide us with sufficientevidence 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 collectivelycomprise the South Bay Union School District's basic financial statements. The combining financial statementsare presented for purposes of additional analysis and are not required parts of the basic financial statements.The schedule of expenditures of federal awards is presented for purposes of additional analysis as requiredby U. S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, andNon-Profit Organizations, and is also not a required part of the basic financial statements. Theaccompanying other supplementary information is presented for purposes of additional analysis as required bythe State's audit guide, Standards and Procedures for Audits of California K-12 Local Education Agencies2014-15, published by the Education Audit Appeals Panel, and is also not a required part of the basicfinancial statements.

The combining financial statements and other supplementary information and the schedule of expenditures offederal awards are the responsibility of management and were derived from and relate directly to theunderlying accounting and other records used to prepare the basic financial statements. Such information hasbeen subjected to the auditing procedures applied in the audit of the basic financial statements and certainadditional procedures, including comparing and reconciling such information directly to the underlyingaccounting and other records used to prepare the basic financial statements or to the basic financialstatements themselves, and other additional procedures in accordance with auditing standards generallyaccepted in the United States of America. In our opinion, the combining financial statements and othersupplementary information and the schedule of expenditures of federal awards are fairly stated in all materialrespects 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 October 1,2015 on our consideration of South Bay Union School District's internal control over financial reporting and onour tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements andother matters. The purpose of that report is to describe the scope of our testing of internal control overfinancial reporting and compliance and the results of that testing, and not to provide an opinion on internalcontrol over financial reporting or on compliance. That report is an integral part of an audit performed inaccordance with Government Auditing Standards in considering South Bay Union School District's internalcontrol over financial reporting and compliance.

El Cajon, CaliforniaOctober 1, 2015

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Wilkinson Hadley King & Co. LLP

4

SOUTH BAY UNION SCHOOL DISTRICT MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited) For the Fiscal Year Ended June 30, 2015

This section of South Bay Union School District’s (SBUSD) annual financial report presents our discussion and analysis of the District’s financial performance during the fiscal year that ended on June 30, 2015. The intent of this discussion and analysis is to look at the district’s financial performance as a whole. Readers should also review the notes to the basic financial statements and the financial statements to enhance their understanding of the district’s financial performance.

USING THESE FINANCIAL STATEMENTS

This report consists of a series of financial statements and notes to those statements. These statements are organized so the reader can understand the South Bay Union School District as a complex financial entity. The statements then proceed to provide an increasingly detailed look at specific financial activities. The South Bay Union School District does not operate any business-type activities and the information presented is solely for governmental activities.

The Statement of Net Position and Statement of Activities provide information about the activities of the entire district, presenting both an aggregate view of the district’s finances and a longer-term view of those finances. Fund financial statements provide more detailed information.

FINANCIAL HIGHLIGHTS

Key financial highlights for 2014-15 are as follows:

Total net capital assets are $88,548,555

Restricted net position (net position restricted for capital projects, debt service, educationalprograms and other expendable and nonexpendable purposes) are $9,190,444.

Overall revenues in all governmental funds were $84,610,910; expenses were $87,086,955.

The District reduced its outstanding bond debt by $1,413,569. In November 2008, Proposition Xwas a school classroom, safety and repair measure approved to provide $59.4 million in funds torepair and improve the school facilities. In February 2009, $16 million of the Series A GeneralObligation Bond was sold. In June 2010, $3.3 million of a General Obligation Bond AnticipationNote (BAN) was issued with a maturity date of August 1, 2013. The $3.3 million BAN was paidback in the 2013-14 fiscal year. On November 6, 2012, Proposition Y was approved toreauthorize $26,000,000 of general obligation bonds which were previously approved by voterson November 4, 2008. On May 8, 2013, the $17.0 million of Series A bonds were sold. The bondproceeds from Propositions X and Y were spent at the end of the 2013-14 fiscal year.

2008-09 marked the first year of GASB 45 implementation for OPEB (Other PostemploymentBenefits). Fund 67-16 was created as an internal service fund to separate monies for retireehealth benefit costs from the operating funds of the District. In its seventh year of GASB 45implementation, the 2014-15 year fully recognized $458,397 as the annual contribution whichequates to 39% of the annual OPEB cost of $1,184,159.

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GASB Statement 67, Financial Reporting for Pension Plans (replaces GASB 35) and Statement

68, Accounting and Financial Reporting for Pensions (an amendment to GASB Number 27) are new requirements for school districts regarding new pension accounting changes. GASB 67 was implemented in CalSTRS financial statements for the fiscal year that ended June 30, 2014. GASB 68 requires school and community college districts to recognize their proportionate share of the net pension liability of their employees’ pension programs (CalSTRS and CalPERS). Additional information is provided under Note Q – Pensions Plans.

OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts—management’s discussion and analysis (this section), the basic financial statements, and required supplementary information. The basic financial statements include two kinds of statements that present different views of the District: The first two statements are district-wide financial statements that provide both short-term and

long-term information about the District’s overall financial status. The remaining statements are fund financial statements that focus on individual parts of the

District, reporting the District’s operations in more detail than the district-wide statements. The governmental funds statements tell how basic services like regular and special education

were financed in the short term as well as what remains for future spending.

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The financial statements also include notes that explain Figure A-1. Organization of SBUSD’s some of the information in the statement and provide Annual Financial Report more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the financial statements with a comparison of the District’s budget for the year. Figure A-1 shows how the various parts of this annual report are arranged and related to one another. Figure A-2 summarizes the major features of the Districts financial statements, including the portion of the District’s activities they cover and the types of information they contain. The remainder of this overview section of management’s discussion and analysis highlights the structure and contents of each Summary Detail of the statements.

Management’s

Discussion and

Analysis

Basic


Required

Supplementary Information

District-Wide


Fund


Notes to the


Figure A-2. Major Features of the

District-Wide and Fund Financial Statements

Fund Statements

Type of Statements District-wide Governmental Funds

Scope Entire District, except fiduciary activities The activities of the district that are not proprietary or fiduciary, such as special education and building maintenance

Statement of net position Balance sheet

Required financial statements Statement of activities Statement of revenues, expenditures & changes in fund balances

Accounting basis and measurement focus

Accrual accounting and economic resources focus

Modified accrual accounting and current financial resources focus

Type of asset/liability information All assets and liabilities, both financial and capital, short-term and long-term

Only assets expected to be used up and liabilities that come due during the year or soon thereafter; no capital assets included

Type of inflow/outflow information All revenues and expenses during year, regardless of when cash is received or paid

Revenues for which cash is received during or soon after the end of the year; expenditures when goods or services have been received and payment is due during the year or soon thereafter

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District-wide Statements The district-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The statement of net position includes all of the District’s assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. All of the current year’s revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two district-wide statements report the District’s net position and it has changed. Net position—the difference between the District’s assets and deferred outflows of resources, and liabilities and deferred inflows of resources—is one way to measure the District’s financial health or position. Over time, increases or decreases in the District’s net position is an indicator of whether its

financial position is improving or deteriorating, respectively. To assess the overall health of the District, you need to consider additional non-financial factors

such as changes in the District’s property tax base and the condition of school buildings and other facilities.

In the district-wide financial statements the District’s activities is presented as: Governmental activities—Most of the District’s basic services are included here, such as regular

and special education, transportation, administration. Property taxes and state formula aid finance most of these activities.

Fund Financial Statements The fund financial statements provide more detailed information about the District’s most significant funds—not the District as a whole. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs: Some funds are required by State law and by bond covenants. The District establishes other funds to control and manage money for particular purposes (like

repaying its long-term debts) or to show that it is properly using certain revenues (like federal grants).

The District has two kinds of funds: Governmental funds—Most of the District’s basic services are included in governmental funds,

which generally focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the District’s programs.

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Fiduciary funds—The District is the trustee, or fiduciary, for assets that belong to others, such asthe Trish Baldwin and Iva Havens Memorial Perpetual Scholarship Fund and the student activityfunds such as Camp and Student Association. The District is responsible for ensuring that theassets reported in these funds are used only for their intended purposes and by those to whom theassets belong. We exclude these activities from the district-wide financial statements because theDistrict cannot use these assets to finance its operations.

REPORTING THE DISTRICT AS A WHOLE FINANCIAL ENTITY

Statement of Net Position and Statement of Activities

While this document contains several funds used by the district to provide programs and activities, the view of the district as a whole looks at all financial transactions and asks the question, “How did we do financially during the 2014-15 year?” The Statement of Net Position and the Statement of Activities answer this question. These statements include all assets, deferred outflows of resources, liabilities, and deferred inflow of resources using the accrual basis of accounting similar to the accounting used by most private-sector companies. This basis of accounting takes into account all of the current year’s revenues and expenses, regardless of when cash is received or disbursed.

These two statements report the district’s net position and how it has changed. This change in net position is important because it tells the reader whether, for the district as a whole, the financial position of the district has improved or diminished.

In the Statement of Net Position and the Statement of Activities, the district information is presented in just one kind of activity, Governmental Activities. All District programs and services are reported here, including instructional, support services, and the operation and maintenance of plant and facilities. The district does not operate any business-type activities and none are presented here.

REPORTING THE DISTRICTS MOST SIGNIFICANT INDIVIDUAL FUNDS

Fund Financial Statements

Major Funds: The analysis of the districts major funds is included in the audit report. Fund financial reports provide detailed information about the District’s major funds. The District uses many funds to account for a multitude of financial transactions. However, these fund financial statements focus on the most significant funds. The major governmental fund, which accounts for most of the day-to-day programs and services provided by the district, are the General Fund and the Charter School Funds.

Governmental Funds: Most of the District’s activities are reported in governmental funds, which focus on how money flows into and out of those funds. Balances remaining at year-end are available for spending in future periods. These funds are reported using an accounting method called modified accrual, which measures cash and all other financial assets that can readily be converted into 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 one determine the financial resources that can be spent in the near future to finance educational programs. The relationship (or differences) between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds is reconciled in the financial statements.

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SOUTH BAY UNION SCHOOL DISTRICT AS A COMPLETE FINANCIAL ENTITY

Recall that the Statement of Net Position provides the perspective of the district as a whole. Table 1 provides a summary of the district’s net position for 2014-15.

Table 1 Statement of Net Position

June 30, 2015

Assets 2012-13 2013-14 2014-15Cash $51,553,161 $26,995,443 $30,327,098Receivables 11,978,473 9,541,302 3,814,992Stores 281,762 319,019 363,025Prepaid Expenses 584,209 117,268 659,578Capital Assets: Land 12,154,198 12,154,198 12,154,198 Sites and Improvements 8,756,891 8,975,175 9,313,047 Buildings and Improvements 70,695,571 94,545,184 95,259,193 Equipment 10,949,934 11,447,323 12,749,900 Work In Progress 11,383,185 191,165 209,582

Less: Accumulated Depreciation (33,693,065) (37,207,777) (41,137,365)

Total Assets 144,644,319 127,078,300 123,713,248

Deferred Outflows of Resources (See Note H) $47,371 $10,107,065

Liabilities Accounts Payable 17,417,224 3,138,932 2,380,784Unearned Revenue 387,459 356,354 345,394Long-Term Liabilities: Due Within One Year 4,551,909 2,089,058 1,422,411 Accreted Interest Due Within One Year 547,562 Due In More Than One Year 38,710,961 37,948,185 95,306,719 Accreted Interest Due in More Than 1 Year 4,266,663 4,196,510 3,514,847Total Liabilities 65,334,216 47,729,039 103,517,717

Deferred Inflows of Resources (See Note N) $5,370,035 $20,007,343

Net Position Net Investment in Capital Assets 35,617,341 $49,325,467 $47,225,134Restricted 29,395,170 15,530,651 9,190,444Unrestricted 14,297,592 9,170,479 (46,120,325)Total Net Position 79,310,103 $74,026,597 $10,295,253

Implementation of GASB 65 in 2013-14 and GASB 68 & 71 in 2014-15 result in material changes that make the years not comparable.

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Revenue in the Governmental Funds is divided into general revenue, which funds the basic ongoing instructional program and related support services, and program revenue, which funds specific program activities that support the children enrolled in the District’s schools.

Table 2 Revenue – Government-wide Financial Statements

2012-13 2013-14 2014-15General Revenue $47,891,753 $51,254,008 $63,234,628Program Revenue 31,847,842 28,191,941 21,376,282 Total Revenue $79,739,595 $79,445,949 $84,610,910 The primary sources of general revenue are the state LCFF (Local Control Funding Formula, including the Education Protection Act) and local property tax revenue. The primary sources of program revenue are the state of California and the federal government, which fund many programs operated by the district.

Table 3 Expenditures – Government-wide Financial Statements

2012-13 2013-14 2014-15Classroom Instruction $44,992,526 $50,413,601 $50,665,451Instructional Related Services 8,750,381 9,450,510 9,665,900Pupil Services 7,164,114 7,586,014 7,960,482Community Services 11,432 22,066 18,487General Administration 4,271,572 4,157,214 7,932,115Plant Services 26,709,122 20,016,788 6,379,189Other Services and Activities 2,135,915 6,099,841 2,046,278 Total Expenditures $94,035,062 $97,746,034 $84,667,902 This table does not include interest payments on long-term general obligation bond debt to be paid from property tax collections in future years. CAPITAL ASSETS At the end of the 2014-15 fiscal year, the District had $129,685,920 invested in land, buildings and capital equipment. Depreciation totaling $41,137,365 was charged against the value of those assets for net capital assets of $88,548,555. CURRENT FINANCIAL RELATED ACTIVITIES Over the years, South Bay Union School District has maintained a strong, fiscally responsible budget. Each year the district takes a very careful look at revenue and expenditure projections on a multi-year basis, and adjusts its budget accordingly to maintain an acceptable and safe reserve balance. As the preceding information shows, assets are substantial and the amount of debt paid from general revenues is a very small percentage of the overall budget. However, the District is dependent on the state of California for the bulk of its general operating revenue, and as the State experiences financial problems, the District is faced with uncertain revenues.

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The District continues to develop budget reduction proposals to deal with an anticipated decrease in state revenue and a continuation of declining enrollment. This will be accomplished by a list of budget reductions as approved by the Governing Board. For the past several years, SBUSD has developed the Performance Based Budgeting System process. This is a comprehensive budget document that divides all services into program categories, constructing program packages which reflect established incremental funding levels, and determines service priorities by rank ordering the program packages.

The 2013-14 California Budget Act included landmark legislation that greatly simplifies the state’s school finance system. The changes introduced by the Local Control Funding Formula (LCFF) represent a major shift in how California funds Local Educational Agencies (LEAs). For nearly 40 years, California has relied on a system that included general purpose funding (known as revenue limits) and more than 50 tightly defined categorical programs to provide state funding to LEAs.

Under LCFF, California funds school districts, charter schools, and county offices of education equally per student with adjustments based on grade levels and demographic characteristics. LCFF replaces complexity in favor of equity, transparency, and performance.

In addition, the State Budget established a comprehensive local accountability system, which will require LEAs, including charter schools, to adopt a local control and accountability plan (LCAP). The LCAP must include local goals that reflect priorities of the state, student achievement measures, parent engagement strategies, and a report on school climate.

The State Board of Education is charged with adopted regulations to implement the accountability system, and the county offices of education and the State Superintendent of Public Instruction are directed to review and amend a district’s LCAP when a district fails to meet its academic performance goals.

FACTORS BEARING ON THE DISTRICT’S FUTURE

The District has experienced declining enrollment since the 2001-02 fiscal year, ranging in CBEDS enrollment of 9,802 in 2001-02 to 7,646 in 2014-15. Chiefly because of the cost of housing and the state of the economy, it appears that enrollment will continue to slide for the next several years.

In the 2010-11 school year, Nestor Elementary School converted to a district sponsored charter school under the name of Nestor Language Academy serving students in grades K-8. In the 2012-13 school year, Imperial Beach Elementary and West View Elementary Schools also converted to a district sponsored charter school under the name of Imperial Beach Charter School serving students in grades K-7 in 2012-13 and K-8 in 2013-14 and onward. Both charter schools are locally funded arms of SBUSD.

CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, investors and creditors with a general overview of the District’s finances and to demonstrate the District’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact Fiscal Services, South Bay Union School District, 601 Elm Avenue, Imperial Beach, CA 91932.

Basic Financial Statements

EXHIBIT A-1

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF NET POSITIONJUNE 30, 2015

GovernmentalActivities

ASSETSCash $ 30,327,098Receivables 3,814,992Stores 363,025Prepaid Expenses 659,578Capital Assets: Land 12,154,198 Improvements 9,313,047 Buildings 95,259,193 Equipment 12,749,900 Work in Progress 209,582 Less Accumulated Depreciation (41,137,365) Total Assets 123,713,248

DEFERRED OUTFLOWS OF RESOURCES 10,107,065

LIABILITIES Accounts Payable and Other Current Liabilities 2,380,784 Unearned Revenue 345,394Long-Term Liabilities: Due Within One Year 1,422,411 Accreted Interest Due Within One Year 547,562 Due in More Than One Year 95,306,719 Accreted Interest Due in More Than One Year 3,514,847 Total Liabilities 103,517,717

DEFERRED INFLOWS OF RESOURCES 20,007,343

NET POSITIONNet Investment in Capital Assets 47,225,134Restricted for: Capital Projects 824,990 Debt Service 2,529,140 Educational Programs 2,409,615 Other Purposes (Expendable) 2,371,885 Other Purposes (Nonexpendable) 1,054,814Unrestricted (46,120,325)Total Net Position $ 10,295,253

The accompanying notes are an integral part of this statement.

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EXHIBIT A-2

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF ACTIVITIESFOR THE YEAR ENDED JUNE 30, 2015

Net (Expense)Revenue andChanges in

Program Revenues Net PositionOperating Capital

Charges for Grants and Grants and GovernmentalFunctions Expenses Services Contributions Contributions ActivitiesGovernmental Activities:

Instruction $ 50,665,451 $ 1,623,481 $ 10,588,041 $ - $ (38,453,929)Instruction-Related Services: Instructional Supervision and Administration 3,925,580 968,713 1,481,134 - (1,475,733) Instructional Library, Media and Technology 1,187,466 27,933 1,888 - (1,157,645) School Site Administration 4,552,854 116,388 571,863 - (3,864,603)Pupil Services: Home-to-School Transportation 1,786,918 - - - (1,786,918) Food Services 4,260,573 177,425 3,807,510 - (275,638) All Other Pupil Services 1,912,991 14,095 799,162 - (1,099,734)General Administration: Centralized Data Processing 4,120,407 - - - (4,120,407) All Other General Administration 3,811,708 39,978 784,648 - (2,987,082)Plant Services 6,379,189 131,957 226,792 - (6,020,440)Community Services 18,487 4,002 11,272 - (3,213)Interest on Long-Term Debt 1,829,617 - - (1,829,617)Other Outgo - Transfers Between Agencies 216,661 - - - (216,661) Total Expenses $ 84,667,902 $ 3,103,972 $ 18,272,310 $ - $ (63,291,620)

General Revenues: Taxes and Subventions: Taxes Levied for General Purposes 9,761,235 Taxes Levied for Debt Service 3,024,211 Taxes Levied for Other Specific Purposes 452,732 Federal and State Aid Not Restricted to Specific Programs 48,826,813 Interest and Investment Earnings 107,815 Interagency Revenues 284,243 Miscellaneous 777,579 Total General Revenues $ 63,234,628

Change in Net Position (56,992)

Net Position Beginning - Restated (See Note O) 10,352,245Net Position Ending $ 10,295,253


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EXHIBIT A-3

SOUTH BAY UNION SCHOOL DISTRICTBALANCE SHEET - GOVERNMENTAL FUNDSJUNE 30, 2015

Charter Other TotalGeneral School Governmental Governmental

Fund Fund Funds FundsASSETS AND DEFERRED OUTFLOWS OF RESOURCES:Assets:Cash in County Treasury $ 21,271,028 $ 2,970,785 $ 3,827,388 $ 28,069,201Cash on Hand and in Banks 50,000 - 415,755 465,755Cash in Revolving Fund 20,000 - - 20,000Accounts Receivable 2,538,941 165,361 1,108,998 3,813,300Due from Other Funds 4,457,926 2,177,614 866,306 7,501,846Stores Inventories 201,803 - 161,222 363,025Prepaid Expenditures 659,578 - - 659,578Total Assets 29,199,276 5,313,760 6,379,669 40,892,705

Deferred Outflows of Resources: - - - -

Total Assets and Deferred Outflows of Resources $ 29,199,276 $ 5,313,760 $ 6,379,669 $ 40,892,705

LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND FUND BALANCE:Liabilities: Accounts Payable $ 1,445,117 $ 139,341 $ 153,317 $ 1,737,775 Due to Other Funds 3,042,379 4,120,350 339,117 7,501,846 Unearned Revenue 345,025 369 - 345,394Total Liabilities 4,832,521 4,260,060 492,434 9,585,015

Deferred Inflows of Resources:Unearned Revenue (See Note N) 5,255,937 - - 5,255,937Total Deferred Inflows of Resources 5,255,937 - - 5,255,937

Fund Balance:Nonspendable Fund Balances 893,593 - 161,222 1,054,815Restricted Fund Balances 1,355,915 56,160 1,468,639 2,880,714Committed Fund Balances - - 1,182,444 1,182,444Assigned Fund Balances 14,882,470 997,540 3,074,930 18,954,940Unassigned Fund Balances 1,978,840 - - 1,978,840Total Fund Balance 19,110,818 1,053,700 5,887,235 26,051,753

Total Liabilities, Deferred Inflows, and Fund Balances $ 29,199,276 $ 5,313,760 $ 6,379,669 $ 40,892,705


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EXHIBIT A-4

SOUTH BAY UNION SCHOOL DISTRICTRECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEETTO THE STATEMENT OF NET POSITIONJUNE 30, 2015

Total fund balances - governmental funds balance sheet $ 26,051,753

Amounts reported for governmental activities in the statement of net position are different fromamounts reported in governmental funds because:

Capital assets: In governmental funds, only current assets are reported. In the statement of netposition, all assets are reported, including capital assets and accumulated depreciation.

Capital assets relating to governmental activities, at historical cost: 129,685,920Accumulated depreciation (41,137,365)

Net 88,548,555

Unamortized costs: In governmental funds, bond insurance at debt issue are recognized asexpenditures in the period they are incurred. In the government-wide statements, the bondinsurance is amortized over the life of the debt. Unamortized bond insurance costs included indeferred outflows of resources on the statement of net position are: 128,177

Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is notrecognized until the period in which it matures and is paid. In the government-wide statement ofactivities, it is recognized in the period that it is incurred. The additional liability for unmaturedinterest owing at the end of the period was: (643,009)

Long-term liabilities: In governmental funds, only current liabilities are reported. In the statementof net position, all liabilities, including long-term liabilities, are reported. Long-term liabilitiesrelating to governmental activities consist of:

General obligation bonds payable 40,131,519Net pension liability 55,514,801Compensated absences payable 330,752Capital leases payable 1,191,902

Total (97,168,974)

Deferred outflows and inflows of resources relating to pensions: In governmental funds, deferredoutflows and inflows of resources relating to pensions are not reported because they areapplicable to future periods. In the statement of net position, deferred outflows and inflows ofresources relating to pensions are reported.

Deferred outflows of resources relating to pensions 9,978,888Deferred inflows of resources relating to pensions (14,751,406)

Internal service funds: Internal service funds are used to conduct certain activities for which costsare charged to other funds on a full cost-recovery basis. Because internal service funds arepresumed to operate for the benefit of governmental activities, assets and liabilities of internalservice funds are reported with governmental activities in the statement of netposition. Net position for internal service funds are: (1,848,731)

Net position of governmental activities - statement of net position $ 10,295,253


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EXHIBIT A-5

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF REVENUES, EXPENDITURES, AND CHANGESIN FUND BALANCES - GOVERNMENTAL FUNDSFOR THE YEAR ENDED JUNE 30, 2015

Charter Other TotalGeneral School Governmental Governmental

Fund Fund Funds FundsRevenues: LCFF Sources: State Apportionment or State Aid $ 28,532,573 $ 8,425,477 $ - $ 36,958,050 Education Protection Account Funds 7,510,285 2,465,041 - 9,975,326 Local Sources 7,405,013 2,039,554 316,669 9,761,236 Federal Revenue 4,034,625 213,843 4,535,915 8,784,383 Other State Revenue 4,799,188 838,710 2,021,156 7,659,054 Other Local Revenue 7,086,009 36,413 4,350,439 11,472,861 Total Revenues 59,367,693 14,019,038 11,224,179 84,610,910

Expenditures: Instruction 41,253,866 8,427,797 2,056,002 51,737,665 Instruction - Related Services 7,911,489 1,473,054 570,682 9,955,225 Pupil Services 4,598,147 100,260 4,405,283 9,103,690 Community Services 18,487 - - 18,487 General Administration 4,211,060 28,921 357,612 4,597,593 Plant Services 6,483,583 398,617 1,061,175 7,943,375 Other Outgo 209,817 - - 209,817 Debt Service: Principal 284,625 - 1,189,455 1,474,080 Interest 21,503 - 2,025,520 2,047,023 Total Expenditures 64,992,577 10,428,649 11,665,729 87,086,955

Excess (Deficiency) of Revenues Over (Under) Expenditures (5,624,884) 3,590,389 (441,550) (2,476,045)

Other Financing Sources (Uses): Transfers In 6,454,918 - 854,635 7,309,553 Transfers Out (3,068,733) (3,976,820) (264,000) (7,309,553) Other Sources 1,262,438 - - 1,262,438 Total Other Financing Sources (Uses) 4,648,623 (3,976,820) 590,635 1,262,438

Net Change in Fund Balance (976,261) (386,431) 149,085 (1,213,607)

Fund Balance, July 1 20,087,079 1,440,131 5,738,150 27,265,360Fund Balance, June 30 $ 19,110,818 $ 1,053,700 $ 5,887,235 $ 26,051,753


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EXHIBIT A-6

SOUTH BAY UNION SCHOOL DISTRICTRECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDSTO THE STATEMENT OF ACTIVITIESFOR THE YEAR ENDED JUNE 30, 2015

Net change in fund balances - total governmental funds $ (1,213,607)

Amounts reported for governmental activities in the statement of activities are different because:

Capital outlay: In governmental funds, the costs of capital assets are reported as expenditures inthe period when the assets are acquired. In the statement of activities, costs of capital assets areallocated over their estimated useful lives as depreciation expense. The difference betweencapital outlay expenditures and depreciation expense for the period is:

Expenditures for capital outlay 2,661,404Depreciation expense (4,208,819)

Net (1,547,415)

Debt service: In governmental funds, repayments of long-term debt are reported asexpenditures. In the government-wide statements, repayments of long-term debt are reportedas reductions of liabilities. Expenditures for repayment of the principal portion of long-term debtwere: 1,979,625

Debt proceeds: In governmental funds, proceeds from debt are recognized as other financingsources. In the government-wide statements, proceeds from debt are reported as increases toliabilities. Amounts recognized in governmental funds as proceeds from debt, net of issuepremium or discount, were: (1,262,438)

Unmatured interest on long-term debt: In governmental funds, interest on long-term debt isrecognized in the period it becomes due. In the government-wide statement of activities, it isrecognized in the period that it is incurred. Unmatured interest owing at the end of the period,less matured interest paid during the period but owing from the prior period, was: (378,152)

Debt issue costs for prepaid debt insurance: In governmental funds, debt issue costs arerecognized as expenditures in the period they are incurred. In the government-wide statements,debt issue costs for prepaid debt insurance are amortized over the life of the debt. Thedifference between debt issue costs for prepaid insurance incurred in the current period andprepaid insurance costs amortized for the period is:

Prepaid debt insurance incurred during the period -Prepaid debt insurance amortized for the period (6,844)

Net (6,844)

Gain or loss from disposal of capital assets: In governmental funds, the entire proceeds fromdisposal of capital assets are reported as revenue. In the statement of activities, only theresulting gain or loss is reported. The difference between the proceeds from disposal of capitalassets and the resulting gain or loss is: (9,298)

Compensated absences: In governmental funds, compensated absences are measured by theamounts paid during the period. In the statement of activities, compensated absences aremeasured by the amounts earned. The difference between compensated absences paid andcompensated absences earned was: 12,308

Pensions: In government funds, pension costs are recognized when employer contributions aremade. In the statement of activities, pension costs are recognized on the accrual basis. This year,the difference between accrual-basis pension costs and actual employer contributions was: 2,709,396

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Amortization of debt issue premium or discount or deferred gain or loss from debt refunding: Ingovernmental funds, if debt is issued at a premium or at a discount, the premium or discount isrecognized as an Other Financing Source or an Other Financing Use in the period it is incurred.In the government-wide statements, the premium or discount, plus any deferred gain or loss fromdebt refunding, is amortized as interest over the life of the debt. Amortization of debt issuepremium or discount, or deferred gain or loss from debt refunding, for the period is: 90,013

Internal Service Funds: Internal service funds are used to conduct certain activities for whichcosts are charged to other funds on a full cost-recovery basis. Because internal service funds arepresumed to benefit governmental activities, internal service activities are reported asgovernmental in the statement of activities. The net increase or decrease in internal servicefunds was: (430,580)

Change in net position of governmental activities - statement of activities $ (56,992)


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EXHIBIT A-7

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF NET POSITIONINTERNAL SERVICE FUNDJUNE 30, 2015

NonmajorInternal Service

Fund

Self-InsuranceFund

ASSETS:Current Assets:Cash in County Treasury $ 1,772,145Accounts Receivable 1,689 Total Current Assets 1,773,834 Total Assets 1,773,834

LIABILITIES:Noncurrent Liabilities: Other Postemployment Benefits $ 3,622,565 Total Noncurrent Liablities 3,622,565 Total Liabilities 3,622,565

NET POSITION:Unrestricted (Deficit) (1,848,731) Total Net Position $ (1,848,731)


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EXHIBIT A-8

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF REVENUES, EXPENSES, AND CHANGESIN FUND NET POSITION - INTERNAL SERVICE FUNDFOR THE YEAR ENDED JUNE 30, 2015


Fund

Self-InsuranceFund

Operating Revenues:Local Revenue $ 295,182 Total Revenues 295,182

Operating Expenses:Services and Other Operating Expenses 725,762 Total Expenses 725,762

Income (Loss) before Contributions and Transfers (430,580)


Total Net Position - Beginning (1,418,151)Total Net Position - Ending $ (1,848,731)


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EXHIBIT A-9

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF CASH FLOWSPROPRIETARY FUNDSFOR THE YEAR ENDED JUNE 30, 2015


Funds

Self InsuranceFund

Cash Flows from Operating Activities:Cash Receipts for Interfund Services Provided $ 307,123

Net Cash Provided (Used) by Operating Activities 307,123

Cash Flows from Investing Activities:Interest and Dividends on Investments 6,229

Net Cash Provided (Used) for Investing Activities 6,229

Net Increase (Decrease) in Cash and Cash Equivalents 313,352Cash and Cash Equivalents at Beginning of Year 1,458,793Cash and Cash Equivalents at End of Year $ 1,772,145

Reconciliation of Operating Income to Net CashProvided by Operating & Investing Activities:

Operating Income (Loss) $ (430,580)Adjustments to Reconcile Operating Income to Net Cash Provided by Operating ActivitiesChange in Assets and Liabilities:

Decrease (Increase) in Receivables (278)Decrease (Increase) in Due From Other Funds 18,448Increase (Decrease) in Net OPEB Liability 725,762 Total Adjustments 743,932

Net Cash Provided (Used) by Operating & Investing Activities $ 313,352


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EXHIBIT A-10

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF FIDUCIARY NET POSITIONFIDUCIARY FUNDSJUNE 30, 2015

AgencyFund

Foundation StudentTrust BodyFund Fund

ASSETS:Cash in County Treasury $ 13,521 $ -Cash on Hand and in Banks - 144,740Accounts Receivable 14 - Total Assets 13,535 144,740

LIABILITIES:Due to Student Groups $ - $ 144,740 Total Liabilities - 144,740

NET POSITION:Held in Trust 13,535 - Total Net Position $ 13,535 $ -


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EXHIBIT A-11

SOUTH BAY UNION SCHOOL DISTRICTSTATEMENT OF CHANGES IN FIDUCIARY NET POSITIONFIDUCIARY FUNDSFOR THE YEAR ENDED JUNE 30, 2015

FoundationTrustFund

Additions:Investment Income $ 59 Total Additions 59

Deductions:Operating Expenses 1,300 Total Deductions 1,300


Net Position-Beginning of the Year 14,776Net Position-End of the Year $ 13,535


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SOUTH BAY UNION SCHOOL DISTRICTNOTES TO THE FINANCIAL STATEMENTSYEAR ENDED JUNE 30, 2015

A. Summary of Significant Accounting Policies

South Bay Union School District (District) accounts for its financial transactions in accordance with the policies andprocedures of the Department of Education's "California School Accounting Manual". The accounting policies of theDistrict conform to accounting principles generally accepted in the United States of America (GAAP) as prescribed bythe Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants(AICPA).

1. Reporting Entity

The District's combined financial statements include the accounts of all its operations. The District evaluatedwhether any other entity should be included in these financial statements. The criteria for includingorganizations as component units within the District's reporting entity, as set forth in GASB Statement No. 14,"The Financial Reporting Entity," include whether:

- the organization is legally separate (can sue and be sued in its name)- the District holds the corporate powers of the organization- the District appoints a voting majority of the organization's board- the District is able to impose its will on the organization- the organization has the potential to impose a financial benefit/burden on the District- there is fiscal dependency by the organization on the District

The District also evaluated each legally separate, tax-exempt organization whose resources are used principallyto provide support to the District to determine if its omission from the reporting entity would result in financialstatements which are misleading or incomplete. GASB Statement No. 14 requires inclusion of such anorganization as a component unit when: 1) The economic resources received or held by the organization areentirely or almost entirely for the direct benefit of the District, its component units or its constituents; and 2) TheDistrict or its component units is entitled to, or has the ability to otherwise access, a majority of the economicresources received or held by the organization; and 3) Such economic resources are significant to the District.

Based on these criteria, the District has no component units. Additionally, the District is not a component unit ofany other reporting entity as defined by the GASB Statement.

2. Basis of Presentation, Basis of Accounting

a. Basis of Presentation

Government-wide Statements: The statement of net position and the statement of activities include thefinancial activities of the overall government, except for fiduciary activities. Eliminations have been madeto minimize the double-counting of internal activities. Governmental activities generally are financedthrough taxes, intergovernmental revenues, and other nonexchange transactions.

The statement of activities presents a comparison between direct expenses and program revenues for eachfunction of the District's governmental activities. Direct expenses are those that are specifically associatedwith a program or function and, therefore, are clearly identifiable to a particular function. The District doesnot allocate indirect expenses in the statement of activities. Program revenues include (a) fees, fines, andcharges paid by the recipients of goods or services offered by the programs and (b) grants and contributionsthat are restricted to meeting the operational or capital requirements of a particular program. Revenuesthat are not classified as program revenues, including all taxes, are presented as general revenues.

Fund Financial Statements: The fund financial statements provide information about the District's funds,with separate statements presented for each fund category. The emphasis of fund financial statements is onmajor governmental funds, each displayed in a separate column. All remaining governmental funds areaggregated and reported as nonmajor funds.

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Proprietary fund operating revenues, such as charges for services, result from exchange transactionsassociated with the principal activity of the fund. Exchange transactions are those in which each party receivesand gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings,result from nonexchange transactions or ancillary activities.

The District reports the following major governmental funds:

General Fund. This is the District's primary operating fund. It accounts for all financial resources of theDistrict except those required to be accounted for in another fund.

Charter School Fund. This fund is used to account for the activities of the District's charter schools.

In addition, the District reports the following fund types:

Special Revenue Funds: These funds are established to account for the proceeds from specific revenuesources (other than trusts, major capital projects, or debt service) that are restricted or committed to thefinancing of particular activities and that compose a substantial portion of the inflows of thefund. Additional resources that are restricted, committed, or assigned to the purpose of the fund mayalso be reported in the fund.

Capital Projects Funds: These funds are established to account for financial resources to be used for theacquisition or construction of major capital facilities and other capital assets (other than those financedby proprietary funds and trust funds).

Debt Service Funds: These funds are established to account for the accumulation of resources for andthe payment of principal and interest on general long-term debt.

Internal Service Funds: These funds are used to account for revenues and expenses related to services providedto parties inside the District. These funds facilitate distribution of support costs to the users of supportservices on a cost-reimbursement basis. Because the principal users of the internal services are theDistrict's governmental activities, this fund type is included in the "Governmental Activities" column of thegovernment-wide financial statements.

Private-Purpose Trust Funds: These funds are used to report trust arrangements under which principal andincome benefit individuals, private organizations, or other governments not reported in other fiduciary fund types.

Agency Funds: These funds are used to report student activity funds and other resources held in a purely custodialcapacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary investment, andremittance of fiduciary resources to individuals, private organizations, or other governments.

Fiduciary funds are reported in the fiduciary fund financial statements. However, because their assets are held ina trustee or agent capacity and are therefore not available to support District programs, these funds are notincluded in the government-wide statements.

b. Measurement Focus, Basis of Accounting

Government-wide, Proprietary, and Fiduciary Fund Financial Statements: These financial statements arereported using the economic resources measurement focus. The government-wide and proprietary fundfinancial statements are reported using the accrual basis of accounting. Revenues are recorded whenearned and expenses are recorded at the time liabilities are incurred, regardless of when the related cashflows take place. Nonexchange transactions, in which the District gives (or receives) value without directlyreceiving (or giving) equal value in exchange, include property taxes, grants, entitlements, and donations.On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes arelevied. Revenue from grants, entitlements, and donations is recognized in the fiscal year in which alleligibility requirements have been satisfied.

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Governmental Fund Financial Statements: Governmental funds are reported using the current financialresources measurement focus and the modified accrual basis of accounting. Under this method, revenuesare recognized when measurable and available. The District does not consider revenues collected after itsyear-end to be available in the current period. Revenues from local sources consist primarily of propertytaxes. Property tax revenues and revenues received from the State are recognized under thesusceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cashbecause they are generally not measurable until actually received. Investment earnings are recorded asearned, since they are both measurable and available. Expenditures are recorded when the related fundliability is incurred, except for principal and interest on general long-term debt, claims and judgments, andcompensated absences, which are recognized as expenditures to the extent they have matured. Generalcapital asset acquisitions are reported as expenditures in governmental funds. Proceeds of generallong-term debt and acquisitions under capital leases are reported as other financing sources.

When the District incurs an expenditure or expense for which both restricted and unrestricted resources maybe used, it is the District's policy to use restricted resources first, then unrestricted resources.

3. Encumbrances

Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for whichcommitments have been made. Encumbrances are recorded for purchase orders, contracts, and othercommitments when they are written. Encumbrances are liquidated when the commitments are paid. Allencumbrances are liquidated as of June 30.

4. Budgets and Budgetary Accounting

Annual budgets are adopted on a basis consistent with generally accepted accounting principles for allgovernmental funds. By state law, the District's governing board must adopt a final budget no later than July 1.A public hearing must be conducted to receive comments prior to adoption. The District's governing boardsatisfied these requirements.

These budgets are revised by the District's governing board and district superintendent during the year to giveconsideration to unanticipated income and expenditures.

Formal budgetary integration was used as a management control device during the year for all budgeted funds.The District employs budget control by minor object and by individual appropriation accounts. Expenditurescannot legally exceed appropriations by major object code.

5. Revenues and Expenses

a. Revenues - Exchange and Non-Exchange

Revenue resulting from exchange transactions, in which each party gives and receives essentially equalvalue, 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 becomeavailable. Available means that the resources will be collected within the current year or expected tobe 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 amongCalifornia districts and so as to not distort normal revenue patterns, with specific respect to reimbursementgrants and corrections to State-aid apportionments, the California Department of Education has definedavailable for districts as collectible within one year. The following revenue sources are considered to beboth measurable and available at fiscal year-end: State apportionments, interest, certain grants, and otherlocal sources.

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Non-exchange transactions are transactions in which the District receives value without directly giving equalvalue in return, including property taxes, certain grants, entitlements, and donations. Revenue fromproperty 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 beensatisfied. 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.

b. Expenses/Expenditures

On the accrual basis of accounting, expenses are recognized at the time they are incurred. Themeasurement focus of governmental fund accounting is on decreases in net financial resources(expenditures) rather than expenses. Expenditures are generally recognized in the accounting period inwhich the related fund liability is incurred, if measurable, and typically paid within 90 days. Principal andinterest on long-term obligations, which has not matured, are recognized when paid in the governmentalfunds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized inthe governmental funds but are recognized in the government-wide financial statements.

6. Assets, Liabilities, and Equity

a. Deposits and Investments

Cash balances held in banks and in revolving funds are insured to $250,000 by the Federal DepositoryInsurance Corporation. All cash held by the financial institutions is fully insured or collateralized. Forpurposes of the statement of cash flows, highly liquid investments are considered to be cash equivalents ifthey have a maturity of three months or less when purchased.

In accordance with Education Code Section 41001, the District maintains substantially all its cash in theSan Diego County Treasury. The county pools these funds with those of other districts in the county andinvests the cash. These pooled funds are carried at cost, which approximates market value. Interest earnedis deposited quarterly into participating funds, except for the Tax Override Funds, in which interest earnedis credited to the general fund. Any investment losses are proportionately shared by all funds in the pool.

The county is authorized to deposit cash and invest excess funds by California Government Code Section53648 et seq. The funds maintained by the county are either secured by federal depository insurance or arecollateralized.

Information regarding the amount of dollars invested in derivatives with San Diego County Treasury wasnot available.

b. Stores Inventories and Prepaid Expenditures

Inventories are recorded using the purchases method in that the cost is recorded as an expenditure at thetime individual inventory items are purchased. Inventories are valued at average cost and consist ofexpendable supplies held for consumption. Reported inventories are equally offset by a fund balancereserve, which indicates that these amounts are not "available for appropriation and expenditure" eventhough they are a component of net current assets.

The District has the option of reporting an expenditure in governmental funds for prepaid items either whenpurchased or during the benefiting period. The District has chosen to report the expenditure during thebenefiting period.

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c. Capital Assets

Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated fixed assetsare recorded at their estimated fair value at the date of the donation. The cost of normal maintenance and repairsthat do not add to the value of the asset or materially extend assets' lives are not capitalized. A capitalizationthreshold of $5,000 is used.

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

EstimatedAsset Class Useful Lives

Buildings 25-50Building Improvements 20Vehicles 5-15Office Equipment 5-15Computer Equipment 5-15

d. Compensated Absences

Accumulated unpaid employee vacation benefits are recognized as liabilities of the District. The currentportion of the liabilities is recognized in the general fund at year end.

Accumulated sick leave benefits are not recognized as liabilities of the District. The District's policy is torecord sick leave as an operating expense in the period taken since such benefits do not vest nor is paymentprobable; however, unused sick leave is added to the creditable service period for calculation of retirementbenefits when the employee retires.

e. 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 theincurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria aremet, or when the District has a legal claim to the resources, the liability for unearned revenue is removedfrom the balance sheet and revenue is recognized.

f. Interfund Activity

Interfund activity results from loans, services provided, reimbursements or transfers between funds. Loansare reported as interfund receivables and payables as appropriate and are subject to elimination uponconsolidation. Services provided, deemed to be at market or near market rates, are treated as revenues andexpenditures or expenses. Reimbursements occur when one fund incurs a cost, charges the appropriatebenefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treatedas transfers. Transfers In and Transfers Out are netted and presented as a single "Transfers" line on thegovernment-wide statement of activities. Similarly, interfund receivables and payables are netted andpresented as a single "Internal Balances" line of the government-wide statement of net position.

g. Property Taxes

Secured property taxes attach as an enforceable lien on property as of March 1. Taxes are payable in twoinstallments on November 15 and March 15. Unsecured property taxes are payable in one installment on orbefore August 31. The County of San Diego bills and collects the taxes for the District.

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h. Fund Balances - Governmental Funds

Fund balances of the governmental funds are classified as follows:

Nonspendable Fund Balance - represents amounts that cannot be spent because they are either not inspendable form (such as inventory or prepaid insurance) or legally required to remain intact (such as notesreceivable or principal of a permanent fund).

Restricted Fund Balance - represents amounts that are constrained by external parties, constitutionalprovisions or enabling legislation.

Committed Fund Balance - represents amounts that can only be used for a specific purpose because of aformal action by the District's governing board. Committed amounts cannot be used for any other purposeunless the governing board removes those constraints by taking the same type of formal action. Committedfund balance amounts may be used for other purposes with appropriate due process by the governingboard. Commitments are typically done through adoption and amendment of the budget. Committed fundbalance amounts differ from restricted balances in that the constraints on their use do not come fromoutside parties, constitutional provisions, or enabling legislation.

Assigned Fund Balance - represents amounts which the District intends to use for a specific purpose, butthat do not meet the criteria to be classified as restricted or committed. Intent may be stipulated by thegoverning board or by an official or body to which the governing board delegates the authority. Specificamounts that are not restricted or committed in a special revenue, capital projects, debt service orpermanent fund are assigned for purposes in accordance with the nature of their fund type or the fund'sprimary purpose. Assignments within the general fund conveys that the intended use of those amounts is fora specific purpose that is narrower than the general purposes of the District itself.

Unassigned Fund Balance - represents amounts which are unconstrained in that they may be spent for anypurpose. Only the general fund reports a positive unassigned fund balance. Other governmental fundsmight report a negative balance in this classification because of overspending for specific purposes forwhich amounts had been restricted, committed or assigned.

When an expenditure is incurred for a purpose for which both restricted and unrestricted fund balance isavailable, the District considers restricted funds to have been spent first. When an expenditure is incurred forwhich committed, assigned, or unassigned fund balances are available, the District considers amounts tohave been spent first out of committed funds, then assigned funds, and finally unassigned funds.

i. Minimum Fund Balance

The District's fund balance policy establishes a minimum unassigned fund balance equal to 5% of totalgeneral fund expenditures and transfers out. The District is committed to maintaining a prudent level offinancial resources to project against the need to reduce service levels because of temporary revenueshortfalls or unexpected expenditures. The District's minimum fund balance policy requires a reserve foreconomic uncertainties (REU), consisting of unassigned amounts, equal to 5% (3% required for economicuncertainties plus 2% additional for budget reserve) of the total general fund expenditures and transfersout. The governing board of the District has approved the additional 2% budget reserve be spent down overthree years, beginning in the 2011-12 year to return to the state required 3% REU. In the event the balancedrops below the established minimum level of 3%, the District's governing board will develop a plan toreplenish the fund balance to the established minimum level within the time frames and guidelines setforth by the California Department of Education.

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7. Deferred Inflows and Deferred Outflows of Resources

Deferred outflows of resources is a consumption of net assets or net position that is applicable to a future reportingperiod. Deferred inflows of resources is an acquisition of net assets or net position that is applicable to a futurereporting period. Deferred outflows of resources and deferred inflows of resources are recorded in accordance withGASB Statement numbers 63 and 65.

8. GASB 54 Fund Presentation

Consistent with fund reporting requirements established by GASB Statement No. 54, Fund 17 (Special Reserve Fundfor Other Than Capital Outlay) and Fund 20 (Special Reserve Fund for Postemployment Benefits) are merged withthe General Fund for purposes of presentation in the audit report.

9. Pensions

For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows ofresources related to pensions and pension expense, information about the fiduciary net position of the CalPERSSchools Pool Cost-Sharing Multiple-Employer Plan (CalPERS Plan) and CalSTRS Schools Pool Cost-SharingMultiple Employer Plan (CalSTRS Plan), and additions to/deductions from the CalPERS Plan and CalSTRSPlan's fiduciary net positions have been determined on the same basis as they are reported by the CalPERSFinancial Office and CalSTRS Financial Office. For this purpose, benefit payments (including refunds ofemployee contributions) are recognized when currently due and payable in accordance with the benefit terms.Investments are reported at fair value.

GASB 68 requires that the reported results must pertain to liability and asset information within certain definedtime frames. For this report, the following time frames are used:

Valuation Date (VD) June 30, 2013

Measurement Date (MD) June 30, 2014

Measurement Period (MP) July 1, 2013 to June 30, 2014

10. Use of Estimates

The preparation of financial statements in conformity with GAAP requires the use of management's estimates.Actual results could differ from those estimates.

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11. Change in Accounting Policies

In June, 2012 the GASB issued Statement No. 68, "Accounting and Financial Reporting for Pensions -- anAmendment of GASB No. 27," which is effective for fiscal years beginning after June 15, 2014. The District hasimplemented the provisions of this Statement for the year ended June 30, 2015.

The Statement requires numerous new pension disclosures in the notes to the financial statements and two new10-year schedules as required supplementary information. Also, for the first time the District is required torecognize pension expense, report deferred outflows of resources and deferred inflows of resources related topensions, a net pension liability for its proportionate shares of the collective pension expense, collectivedeferred outflows of resources and deferred inflows of resources related to pensions, and collective net pensionliability. The reporting of these new amounts on the government-wide financial statements, along with the effectof the restatement of the beginning net position, if any, will also affect the District's government-wide netposition.

In November, 2013 the GASB issued Statement No. 71, "Pension Transition for Contributions Made Subsequentto the Measurement Date - an amendment of GASB Statement No. 68". This Statement amends paragraph 137of Statement 68 to require that, at transition, a government recognize a beginning deferred outflow of resourcesfor its pension contributions, if any, made subsequent to the measurement date of the beginning net pensionliability. Statement 68, as amended, continues to require that beginning balances for other deferred outflows ofresources and deferred inflows of resources related to pensions be reported at transition only if it is practical todetermine all such amounts. The District has implemented the provisions of this Statement for the year endedJune 30, 2015.

B. Compliance and Accountability

1. Finance-Related Legal and Contractual Provisions

In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of finance-related legal and contractual provisions, if any, are reported below, along with actions taken to address suchviolations.

Violation Action TakenNone reported Not applicable

2. Deficit Fund Balance or Fund Net Position of Individual Funds

Following are funds having deficit fund balances or fund net position at year end, if any, along with remarks whichaddress such deficits:

DeficitFund Name Amount RemarksSelf Insurance Fund $ 1,848,731 The deficit in Self-Insurance Fund can be

attributed to the increase in Net OPEBObligation as a result of only partial fundingof the annual required contribution.

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C. Excess of Expenditures Over Appropriations

As of June 30, 2015, expenditures exceeded appropriations in individual funds as follows:

ExcessAppropriations Category Expenditures

General Fund:Employee benefits $ 677,273Debt service principal 266,004

Charter School Fund:Employee benefits 297,435Direct support/indirect costs 1,436

General Fund: The district did not initially budget for payments made by the state of California on behalf ofdistrict employees for contributions to CalSTRS. In accordance with GASB Statement No. 24these amounts have been included as both revenue and expenses.

The district incurred additional payments in debt service as a result of a new capital leaseentered into during the 2014-15 fiscal year. The district did not initially budget for thesepayments because the loan was unknown at the time of budget preparation.

Charter School: The district did not initially budget for payments made by the state of California on behalf ofdistrict employees for contributions to CalSTRS. In accordance with GASB Statement No. 24these amounts have been included as both revenue and expenses.

The district underestimated amounts charged to indirect costs for the charter school fund.

D. Cash and Investments

1. Cash in County Treasury:

In accordance with Education Code Section 41001, the District maintains substantially all of its cash in the SanDiego County Treasury as part of the common investment pool ($29,854,867 as of June 30, 2015). The fairvalue of the District's portion of this pool as of that date, as provided by the pool sponsor, was $29,854,867.Assumptions made in determining the fair value of the pooled investment portfolios are available from theCounty Treasurer.

The District is considered to be an involuntary participant in an external investment pool as the District isrequired to deposit all receipts and collections of monies with their County Treasurer (Education Code Section41001). The fair value of the District's investments in the pool is reported in the accounting financial statementsas amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for theentire portfolio (in relation to the amortized cost of the portfolio). The balance available for withdrawal is basedon the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis.

2. Cash on Hand, in Banks, and in Revolving Fund

Cash balances on hand and in banks ($610,495 as of June 30, 2015) and in the revolving fund ($20,000) areinsured up to $250,000 by the Federal Depository Insurance Corporation.

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3. Investments Authorized by the California Government Code and the District's Investment Policy

The table below identifies the investment types that are authorized for the District by the CaliforniaGovernment Code (or the District's investment policy, where more restrictive). The table also identifies certainprovisions of the California Government Code (or the District's investment policy where more restrictive) thataddress interest rate risk, credit risk, and concentration of credit risk. This table does not address investments ofdebt proceeds held by bond trustee that are governed by the provisions of debt agreements of the District,rather than the general provisions of the California Government Code or the District's investment policy.

Maximum Maximum MaximumRemaining Percentage Investment in

Authorized Investment Type Maturity of Portfolio One Issuer

Local 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 N/A None NoneJoint Powers Authority Pools N/A None None

4. Analysis of Specific Deposit and Investment Risks

GASB Statement No. 40 requires a determination as to whether the District was exposed to the following specificinvestment risks at year end and if so, the reporting of certain related disclosures:

a. Credit Risk

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Thecounty is restricted by Government Code Section 53635 pursuant to Section 53601 to invest only in timedeposits, U.S. government securities, state registered warrants, notes or bonds, State Treasurer's investmentpool, bankers' acceptances, commercial paper, negotiable certificates of deposit, and repurchase or reverserepurchase agreements. The ratings of securities by nationally recognized rating agencies are designed togive an indication of credit risk. The San Diego County Investment Pool is rated AAAf/S1 by Standard &Poors. At year end the District was not exposed to credit risk.

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b. Custodial Credit Risk

Deposits are exposed to custodial credit risk if they are not covered by depository insurance and thedeposits are uncollateralized, collateralized with securities held by the pledging financial institution, orcollateralized with securities held by the pledging financial institution's trust department or agent but notin the District's name. The California Government Code and the District's investment policy do not containlegal or policy requirements that would limit the exposure to custodial credit risk for deposits, other thanthe following provision for deposits: The California Government code requires that a financial institutionsecure deposits made by state or local governmental units by pledging securities in an undividedcollateral pool held by a depository regulated under state law (unless so waived by the governmentalunit). The market value of the pledged securities in the collateral pool must equal at least 110% of thetotal amount deposited by the public agencies. California law also allows financial institutions to securedeposits by pledging first trust deed mortgage notes having a value of 150% of the secured publicdeposits.

Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registeredin the name of the government, and are held by either the counterparty or the counterparty's trustdepartment or agent but not in the District's name.

As of June 30, 2015, the District's bank balances (including revolving cash) of $358,350 was exposed tocustodial credit risk because it was insured and collateralized with securities held by the pledgingfinancial institution's trust department or agent, but not in the name of the District.

c. Concentration of Credit Risk

This risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer.

The investment policy of the District contains no limitations on the amount that can be invested in anyone issuer beyond the amount stipulated by the California Government Code. Investments in any oneissuer that represent five percent or more of the total investments are either an external investment pooland are therefore exempt. As such, the District was not exposed to concentration of credit risk.

d. Interest Rate Risk

This is the risk that changes in interest rates will adversely affect the fair value of aninvestment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fairvalue to changes in market interest rates. The District manages its exposure to interest rate risk byinvesting in the county pool.

e. Foreign Currency Risk

This is the risk that exchange rates will adversely affect the fair value of an investment. At year end, theDistrict was not exposed to foreign currency risk.

5. Investment Accounting Policy

The District is required by GASB Statement No. 31 to disclose its policy for determining which investments, ifany, are reported at amortized cost. The District's general policy is to report money market investments andshort-term participating interest-earning investment contracts at amortized cost and to report nonparticipatinginterest-earning investment contracts using a cost-based measure. However, if the fair value of an investment issignificantly affected by the impairment of the credit standing of the issuer or by other factors, it is reported at fairvalue. All other investments are reported at fair value unless a legal contract exists which guarantees a highervalue. The term "short-term" refers to investments which have a remaining term of one year or less at time ofpurchase. The term "nonparticipating" means that the investment's value does not vary with market interest ratechanges. Nonnegotiable certificates of deposit are examples of nonparticipating interest-earning investmentcontracts.

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The District's investments in external investment pools are reported at an amount determined by the fair valueper share of the pool's underlying portfolio, unless the pool is 2a7-like, in which case they are reported at sharevalue. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission ("SEC") as aninvestment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with theSEC's Rule 2a7 of the Investment Company Act of 1940.

E. Accounts Receivable

Accounts receivable for the year ended June 30, 2015, was as follows:

Major Governmental FundsCharter Nonmajor Total

General School Governmental GovernmentalFund Fund Funds Funds

Federal Government:Federal Programs $ 1,427,822 $ - $ 990,688 $ 2,418,510

State Government:LCFF Sources - 18 - 18Lottery 302,845 160,529 - 463,374Special Education 214,575 - - 214,575Other State Programs 206,689 - 102,532 309,221

Local Sources:Interest 21,413 2,722 2,009 26,144Transportation Contract 120,606 - - 120,606After School Program 197,454 - - 197,454Other Local Revenues 47,537 2,092 13,769 63,398

Total $ 2,538,941 $ 165,361 $ 1,108,998 $ 3,813,300

Self Foundation TotalInsurance Trust Other

Fund Fund FundsLocal Sources:

Interest $ 1,689 $ 14 $ 1,703

Total $ 1,689 $ 14 $ 1,703

All accounts receivable are considered to be collectible in full and as such no allowance for doubtful accounts hasbeen established.

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F. Capital Assets

Capital asset activity for the year ended June 30, 2015, was as follows:

Beginning EndingBalances Increases Decreases Balances

Governmental activities:Capital assets not being depreciated:Land $ 12,154,198 $ - $ - $ 12,154,198Work in progress 191,165 209,582 191,165 209,582Total capital assets not being depreciated 12,345,363 209,582 191,165 12,363,780

Capital assets being depreciated:Buildings 94,545,184 746,481 32,472 95,259,193Improvements 8,975,175 363,572 25,700 9,313,047Equipment 11,447,323 1,532,934 230,357 12,749,900Total capital assets being depreciated 114,967,682 2,642,987 288,529 117,322,140

Less accumulated depreciation for:Buildings (26,218,153) (2,658,353) (32,472) (28,844,034)Improvements (2,985,397) (399,511) (18,950) (3,365,958)Equipment (8,004,227) (1,150,955) (227,809) (8,927,373)

Total accumulated depreciation (37,207,777) (4,208,819) (279,231) (41,137,365)Total capital assets being depreciated, net 77,759,905 (1,565,832) 9,298 76,184,775

Governmental activities capital assets, net $ 90,105,268 $ (1,356,250) $ 200,463 $ 88,548,555

Depreciation was charged to functions as follows:

Instruction $ 326,386Instruction-Related Services 108,515Pupil Services 264,406General Administration 3,509,512

$ 4,208,819

G. Interfund Balances and Activities

1. Due To and From Other Funds

Balances due to and due from other funds at June 30, 2015, consisted of the following:

Due To Fund Due From Fund Amount Purpose

Charter School Fund General Fund $ 2,177,614 Property taxes and reimbursement of expenses

Nonmajor Governmental General Fund 864,766 Indirect costs and reimbursement of expenses

General Fund Charter School Fund 4,118,810 Reimbursement of expensesNonmajor Governmental Charter School Fund 1,540 Reimbursement of expensesGeneral Fund Nonmajor Governmental 339,116 Reimbursement of expenses

Total $ 7,501,846

All amounts due are scheduled to be repaid within one year.

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2. Transfers To and From Other Funds

Transfers to and from other funds at June 30, 2015, consisted of the following:

Transfers From Transfers To Amount Reason

General Fund General Fund $ 2,214,098 Drawdown of reservesGeneral Fund Nonmajor Governmental 854,635 Maintenance projectsCharter School Fund General Fund 3,976,820 Fees for servicesNonmajor Governmental General Fund 264,000 Drawdown of reserves

Total $ 7,309,553

Note: General fund includes balances and transactions from Fund 17 (special reserve fund for other than postemployment benefits) and Fund 20 (special reserve fund for other post employment benefits).

H. Deferred Outflows of Resources

On February 19, 2009 the District issued general obligation bonds in the amount of $16,000,000. When the bondswere issued, the District prepaid bond insurance in the amount of $112,000. In accordance with GASB StatementNo. 65 this prepaid insurance is recorded as a deferred outflow of resources to be amortized over the life of the bondusing the straight line method.

On May 8, 2013 the District issued general obligation bonds in the amount of $17,000,000. When the bonds wereissued, the District prepaid bond insurance in the amount of $49,345. In accordance with GASB Statement No. 65this prepaid insurance is recorded as a deferred outflow of resources to be amortized over the life of the bond usingthe straight line method.

In addition, in accordance with GASB Statement No. 68 & 71, payments made subsequent to the net pension liabilitymeasurement date are recorded as deferred outflows of resources.

A summary of the deferred outflow of resources as of June 30, 2015 is as follows:

Amortization Balance Current Year BalanceDescription Issue Date Term July 1, 2014 Additions Amortization June 30, 2015

Bond insurance 02/19/2009 23 Years $ 87,650 $ - $ 4,870 $ 82,780Bond insurance 05/08/2013 23 Years 47,371 - 1,974 45,397Pension related 06/30/2015 1 Year - 9,978,888 - 9,978,888

Total Deferred Outflows of Resources $ 135,021 $ 9,978,888 $ 6,844 $ 10,107,065

Future amortization of deferred outflows of resources is as follows:

Year Ending Bond PensionJune 30 Insurance Related Total

2016 $ 6,844 $ 9,978,888 $ 9,985,7322017 6,844 - 6,8442018 6,844 - 6,8442019 6,844 - 6,8442020 6,844 - 6,844

2021-2025 34,217 - 34,2172026-2030 34,215 - 34,2152031-2035 19,606 - 19,6062036-2040 5,919 - 5,919

Total $ 128,177 $ 9,978,888 $ 10,107,065

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I. Accounts Payable

Accounts payable for the year ended June 30, 2015, was as follows:



Vendor payables $ 777,237 $ 9,319 $ 106,681 $ 893,237Pension related liabilities 288,622 53,481 21,808 363,911Payroll and related benefits 379,258 76,541 24,828 480,627

Total $ 1,445,117 $ 139,341 $ 153,317 $ 1,737,775

J. Unearned Revenue

Unearned revenue for the year ended June 30, 2015, was as follows:



Federal Government:Categorical programs $ 75,938 $ 369 $ - $ 76,307

State Government:Categorical programs 164,331 - - 164,331

Local Sources:Other local sources 104,756 - - 104,756

Total $ 345,025 $ 369 $ - $ 345,394

K. Short-Term Debt Activity

The District accounts for short-term debts for maintenance purposes through the General Fund. The proceeds fromloans are shown in the financial statements as Other Resources.

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L. Long-Term Obligations

1. Long-Term Obligation Activity

Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the year endedJune 30, 2015, are as follows:

AmountsBeginning Ending Due Within

Governmental activities: Balance Increases Decreases Balance One YearGeneral Obligation Bonds Principal Balance $ 35,534,526 $ - $ 1,189,455 $ 34,345,071 $ 857,438 Accreted interest 4,196,510 371,444 505,545 4,062,409 547,562 Premium 1,814,052 - 90,013 1,724,039 90,013 Total GO Bonds 41,545,088 371,444 1,785,013 40,131,519 1,495,013

Capital leases 214,089 1,262,438 284,625 1,191,902 144,208-

Net OPEB Obligation 2,896,803 1,184,159 458,397 3,622,565 -

Net Pension Liability 69,399,609 - 13,884,808 55,514,801 -

Compensated absences * 343,060 - 12,308 330,752 330,752Total governmental activities $ 114,398,649 $ 2,818,041 $ 16,425,151 $ 100,791,539 $ 1,969,973

* Other long-term liabilitiesThe funds typically used to liquidate other long-term liabilities in the past are as follows:

Liability Activity Type FundCompensated absences Governmental General Fund

2. Debt Service Requirements

Debt service requirements on long-term debt, net of bond premiums, net OPEB obligation, and net pensionliability at June 30, 2015, are as follows:

Governmental ActivitiesAccreted

Year Ending June 30, Principal Interest Interest Total2016 $ 1,332,398 $ 547,562 $ 1,544,831 $ 3,424,7912017 1,124,985 593,508 1,519,620 3,238,1132018 1,260,683 637,223 1,491,582 3,389,4882019 1,312,886 684,565 1,458,563 3,456,0142020 1,419,263 732,866 1,421,684 3,573,8132021-2025 7,457,510 2,499,205 6,296,507 16,253,2222026-2030 8,930,000 - 4,504,512 13,434,5122031-2035 9,945,000 - 2,156,696 12,101,6962036-2040 3,085,000 - 413,875 3,498,875Totals $ 35,867,725 $ 5,694,929 $ 20,807,870 $ 62,370,524

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3. Capital Leases

In March 2014, the District entered into a lease agreement with Creative Fleet Leasing to finance the purchaseof two school buses for $272,002. The lease requires five annual payments of $57,913 which is inclusive ofinterest at a rate of 3.23%. Upon final payment, the lease contains a bargain purchase option of $1 to transferownership of the buses to the District. The buses have been included in capital assets disclosed in Note F.

In October 2014, the District entered into a lease agreement with Capital One Public Financing, LLC torefinance the lease with Creative Fleet Leasing for two school busses along with the purchase of additionalschool busses. The lease was issued for $1,262,438 and requires 16 semi-annual payments of $89,157 whichincludes interest at a rate of 2.95%. Upon final payment, the lease contains a bargain purchase option of $1 totransfer ownership of the buses to the District. The buses have been included in capital assets disclosed in Note F.

Commitments under capitalized lease agreements for facilities and equipment provide for minimum future lease paymentsas of June 30, 2015, as follows:

Year Ending June 30, Principal Interest Total2016 $ 144,208 $ 34,106 $ 178,3142017 148,493 29,820 178,3132018 152,906 25,407 178,3132019 157,451 20,863 178,3142020 162,129 16,184 178,3132021-2025 426,715 19,067 445,782Totals $ 1,191,902 $ 145,447 $ 1,337,349

4. General Obligation Bonds

General obligation bonds at June 30, 2015, consisted of the following:

Amount ofDate of Interest Maturity Original Issue Rate Date Issue

1997 Election Series A 06/19/1997 3.00-6.00% 07/01/2022 $ 8,496,9182008 Election Series A 02/19/2009 3.75-6.25% 08/01/2031 16,000,0002012 Election Series A 05/08/2013 2.00-5.00% 08/01/2037 17,000,000Total GO Bonds $ 41,496,918

Balance Balance07/01/2014 Increases Decreases 06/30/2015

1997 Election Series APrincipal Balance $ 2,734,526 $ - $ 324,455 $ 2,410,071Accreted Interest 4,196,510 371,444 505,545 4,062,409Total 1997-A Bonds 6,931,036 371,444 830,000 6,472,480

2008 Election Series APrincipal Balance 15,800,000 - 100,000 15,700,000Bond Premium 765,287 - 42,515 722,772Total 2008-A Bonds 16,565,287 - 142,515 16,422,772

2012 Election Series APrincipal Balance 17,000,000 - 765,000 16,235,000Bond Premium 1,048,765 - 47,498 1,001,267Total 2012-A Bonds 18,048,765 - 812,498 17,236,267

Total GO Bonds Outstanding $ 41,545,088 $ 371,444 $ 1,785,013 $ 40,131,519

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The annual requirements to amortize the bonds outstanding at June 30, 2015 are as follows:

AccretedYear Ending June 30, Principal Interest Interest Total2016 $ 857,438 $ 547,562 $ 1,510,725 $ 2,915,7252017 976,492 593,508 1,489,800 3,059,8002018 1,107,777 637,223 1,466,175 3,211,1752019 1,155,435 684,565 1,437,700 3,277,7002020 1,257,134 732,866 1,405,500 3,395,5002021-2025 7,030,795 2,499,205 6,277,440 15,807,4402026-2030 8,930,000 - 4,504,512 13,434,5122031-2035 9,945,000 - 2,156,696 12,101,6962036-2040 3,085,000 - 413,875 3,498,875Totals $ 34,345,071 $ 5,694,929 $ 20,662,423 $ 60,702,423

5. Accreted Interest

Accreted interest in the Long-Term Obligation Activity chart represents amounts that have compounded as ofJune 30, 2015 for bonds which were issued as capital appreciation bonds. Accreted interest in the repaymentschedules represent the entire amount that will be repaid in the years the accreted interest becomes due.

6. Bond Premium

Bond premium arises when the market rate of interest is higher than the stated interest rate on thebond. Generally Accepted Accounting Principles (GAAP) require that the premium increase the face valueof the bond and then amortize the premium over the life of the bond.

2008 Election Series A bonds issued February 19, 2009 and 2012 Election Series A bonds issued May 8, 2013were both issued at a premium. The premiums are being amortized over the life of the bonds using the straightline method.

Premiums issued on bonds resulted in effective interest rates as follows:

2008-A Bonds 2012-A BondsTotal Interest Payments on Bonds 15,849,104 10,414,057Less Bond Premium (977,867) (1,092,464)Net Interest Payments 14,871,237 9,321,593

Par amount of Bonds 16,000,000 17,000,000Periods 23 25Effective Interest Rate 4.041% 2.193%

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M. Components of Ending Fund Balance

Ending fund balance for the year ended June 30, 2015, consisted of:



Nonspendable Fund BalancesRevolving Cash $ 20,000 $ - $ - $ 20,000Stores Inventory 201,803 - 161,222 363,025Prepaid Items 659,578 - - 659,578Other Nonspendable Funds 12,212 - - 12,212Total Nonspendable 893,593 - 161,222 1,054,815

Restricted Fund BalancesCapital Projects - - 270,003 270,003Child Nutrition Program - - 1,092,931 1,092,931Deferred Maintenance - - 105,705 105,705Educational Programs 1,355,915 56,160 - 1,412,075Total Restricted 1,355,915 56,160 1,468,639 2,880,714

Committed Fund BalancesCapital Projects - - 112,441 112,441Deferred Maintenance - - 1,070,003 1,070,003Total Committed - - 1,182,444 1,182,444

Assigned Fund BalancesCapital Projects - - 543,866 543,866Child Development Program - - 1,924 1,924Debt Service - - 2,529,140 2,529,140OPEB Liability 4,907,716 - - 4,907,716Budget Contingencies 96,239 - - 96,239Educational Programs 9,878,515 997,540 - 10,876,055Total Assigned 14,882,470 997,540 3,074,930 18,954,940

Unassigned Fund BalancesFor Economic Uncertainty 1,978,840 - - 1,978,840Total Unassigned 1,978,840 - - 1,978,840

Total Fund Balance $ 19,110,818 $ 1,053,700 $ 5,887,235 $ 26,051,753

N. Deferred Inflows of Resources

In 2002 the district incurred a liability associated with the closing of a charter school. While the liability was not indispute, the agency responsible for collecting the funds never billed for the funds. The district has made numerousattempts to contact the responsible agency with no success as to whether the funds will ever be collected. In 2008 thedistrict obtained legal council to review the statute of limitations to determine if the funds could still be collected.While the statute of limitations is clearly set at 3 years, there is case law which causes into question when the statuteof limitations begins. As there is ambiguity in the law, the district is uncomfortable with removal of the liability. Giventhe length of time from the inception of the liability and the district's documented attempts to contact the responsibleagency, the likeliness of the collection of those funds decreases with each given year. The liability has beenreclassified as a deferred inflow of resources and will be amortized over 5 years.

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A summary of the deferred inflows of resources as of June 30, 2015 is as follows:

Amortization Balance Current Year BalanceDescription Term July 1, 2014 Additions Amortization June 30, 2015

Unearned Revenue 5 Years $ 5,370,035 $ - $ 114,098 $ 5,255,937Pension related 4 Years - 14,751,406 - 14,751,406

Total Deferred Outflows of Resources $ 5,370,035 $ 14,751,406 $ 114,098 $ 20,007,343

Future amortization of deferred inflows of resources is as follows:

Year Ending Unearned PensionJune 30 Revenue Related Total

2016 $ 1,313,984 $ 3,687,851 $ 5,001,8352017 1,313,984 3,687,851 5,001,8352018 1,313,984 3,687,852 5,001,8362019 1,313,985 3,687,852 5,001,837Total $ 5,255,937 $ 14,751,406 $ 20,007,343

O. Adjustment to Beginning Net Position

The District implemented GASB Statement No. 68 & 71 during the current fiscal year which resulted to accountingchanges for net pension liability. Under previous standards, net pension liability was not recorded on the statement ofnet position. Under newly implemented standards the net pension liability is recorded as a liability on the statementof net position. In addition, resulting from a difference in the measurement date for the net pension liability anycontributions to pensions subsequent to the measurement date are now recorded as deferred outflows of resources. Inaddition to the change in accounting policies, the district made corrections for two items involving long term debt thatwere discovered during the year. The combination of changes due to accounting policies and correction of errorsresulted in an adjustment to beginning net position as follows:

Net Position, Beginning (As Originally Stated) $ 74,026,597

Adjustments for:Change in Accounting Policy - Net Pension Liability (69,399,609)Change in Accounting Policy - Deferred Outflows Pension Related 6,402,894Correction of Errors - Long Term Debt Related (677,637)

Net Position, Beginning (As Restated) $ 10,352,245

P. Joint Ventures (Joint Powers Agreements)

The District participates in four joint powers agreements (JPA) entities, the San Diego County Schools RiskManagement (SDCSRM), the Southern California Regional Liability Excess Fund (SCRLEF), the Protected InsuranceProgram for Schools (PIPS), and the California Qualified School Bond Joint Powers Authority. The relationshipbetween the District and the JPA's is such that the JPA's are not component units of the District.

The SDCSRM JPA arranges for and provides for various types of insurances for its member districts as requested.The SDCSRM JPA is governed by a board consisting of a representative from each member district. The boardcontrols the operations of the JPA, including selection of management and approval of operating budgets,independent of any influence by the member districts beyond their representation on the board. Each memberdistrict pays a premium commensurate with the level of coverage requested and shares surpluses and deficitsproportionate to their participation in the SDCSRM JPA.

Financial information on the District's share of the SDCSRM JPA for the year ended June 30, 2015 was not availableat the time this report was issued. The information can be obtained by contacting the JPA directly.

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In May 2009, the District formed a joint powers authority agreement with Lemon Grove School District designated asthe California K-14 Facilities and Technology Financing Authority through a joint exercise of powersagreement. The joint powers authority was formed for the purpose of financing the construction of educationalfacilities through issuance of Qualified Zone Academy Bonds on behalf of the Authority and for the purpose ofassisting the financing and refinancing of public capital improvements of its joint powers members or any other localeducation agency.

The Authority has the power, in its own name, to construct, buy, sell or lease property, and to issue, sell and deliverbonds for the purpose of assisting the financing and refinancing of public capital improvements of its members orany other local education agency and for any other purpose authorized under the agreement. The Authority hasthe power to provide financing for the financing of public capital improvements by purchasing any bonds, includingqualified zone academy bonds, qualified school construction bonds, and other types of bonds, notes or otherobligations issued by local education agencies for that purpose.

The Authority has the power to make and enter contracts, to employ agents and employees, and to sue and be suedin its own name and is governed by a board whose members, at all times, are the chief business officer from eachschool district. In connection with providing financial assistance to any member or other local education agency, theAuthority may charge a reasonable administrative fee which upon receipt by the Authority is divided equally betweenits members.

The Protected Insurance Program for Schools (PIPS) provides workers compensation insurance for its members asrequested. The hybrid self-insurance and reinsurance model covers school districts and community collegesthroughout California. Since there is no self insured retention for individual local educational agencies, PIPS ismanaged as a group and individual financial statements are not required.

The Southern California Regional Liability Excess Fund (SCRLEF) is a member owned and operated California JPAproviding property and liability insurance protection and is comprised of northern and southern California localeducational agencies. The program is managed as a group and individual financial statements are not required;however, SCRLEF tracks the net costs and equity for each individual member by program year.

Combined condensed unaudited financial information for the District's share of the California Qualified School BondJoint Powers Authority, Southern California Regional Liability Excess Fund, and Protected Insurance Program forSchools for the year ended June 30, 2015 can be obtained from the JPA.

Q. Pension Plans

1. General Information About the Pension Plans

a. Plan Descriptions

Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies ofthe State of California. Certificated employees are members of the California State Teachers Retirement System(CalSTRS) and classified employees are members of the California Public Employees' Retirement System(CalPERS). Benefit provisions under the Plans are established by State statute and Local Governmentresolution. CalSTRS and CalPERS issue publicly available reports that include a full description of the pensionplans regarding benefit provisions, assumptions and membership information that can be found on their respectivewebsites.

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b. Benefits Paid

CalSTRS and CalPERS provide service retirement and disability benefits, annual cost of living adjustments anddeath benefits to plan members. Benefits are based on years of credited service, equal to one year of full-timeemployment. Members with five years of total service are eligible to retire at age 62 for normal benefits or at age 55with statutorily reduced benefits. Employees hired prior to January 1, 2013 are eligible to retire at age 60 for normalbenefits or at age 55 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after10 years of service. All members are eligible for death benefits after one year of total service.

The Plans' provisions and benefits in effect at June 30, 2015 are summarized as follows:

CalSTRS CalPERSBefore On or After Before On or After

Hire Date Jan. 1, 2013 Jan. 1, 2013 Jan. 1, 2013 Jan. 1, 2013Benefit Formula 2% at 60 2% at 62 2% at 55 2% at 62Benefit Vesting Schedule 5 Years 5 Years 5 Years 5 YearsBenefit Payments Monthly for Life Monthly for Life Monthly for Life Monthly for LifeRetirement Age 50-62 55-67 50-62 52-67Monthly benefits, as a % of eligible compensation 1.1 - 2.4% 1.0 - 2.4%* 1.1 - 2.5% 1.0 - 2.5%Required employee contribution rates (Average) 8.000% 8.000% 6.974% 6.974%Required employer contribution rates 8.250% 8.250% 11.442% 11.442%

*Amounts are limited to 120% of Social Security Wage Base.

c. Contributions - CalPERS

Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates forall public employers be determined on an annual basis by the actuary and shall be effective on the July 1 followingnotice of a change in the rate. The CalPERS Board retains the authority to amend contribution rates. The total plancontributions are determined through CalPERS' annual actuarial valuation process. The actuarially determined rateis the estimated amount necessary to finance the costs of benefits earned by employees during the year, with anadditional amount to finance any unfunded accrued liability. The employer is required to contribute the differencebetween the actuarially determined rate and the contribution rate of employees. For the measurement period endedJune 30, 2014 (measurement date), the average active employee contribution rate is 6.974% of annual pay, and theemployer's contribution rate is 11.442% of annual payroll.

d. Contributions - CalSTRS

For the measurement period ended June 30, 2014 (measurement date), Section 22950 of the California Educationcode requires members to contribute monthly to the system 8% of the creditable compensation upon which members'contributions under this part are based. In addition the employer required rates established by the CalSTRS Boardhave been established at 8.25% of creditable compensation. Rates are defined in Section 22950.5 throughmeasurement period ending June 30, 2021. Beginning in the fiscal year 2021-22 and for each fiscal year thereafter,the CalSTRS Board has the authority to increase or decrease percentages paid specific to reflect the contributionrequired to eliminate by June 30, 2046, the remaining unfunded actuarial obligation with respect to service creditedto members before July 1, 2014, as determined by the Board based upon a recommendation from its actuary.

e. On Behalf Payments

Consistent with Section 22955.1 of the California Education Code, the State of California makes contributions toCalSTRS on behalf of employees working for the District. For the measurement period ended June 30, 2014(measurement date) the State contributed 5.204002% of salaries creditable to CalSTRS. Under accounting principlesgenerally accepted in the United States of America, these amounts are to be reported as revenues and expenditures.Accordingly, these amounts have been recorded in these financial statements. On behalf payments have beenexcluded from the calculation of available reserves, and have not been included in the budgeted amounts reportedin the General Fund Budgetary Comparison Schedule.

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F. Contributions Recognized

For the year ended June 30, 2015, the contributions recognized as part of pension expense for each Plan were asfollows:

CalSTRS CalPERSContributions - Employer 1,720,640 1,176,603Contributions - Employee (paid by employer) 1,726,720 727,851Contributions - State On Behalf Payments 1,051,080 -Total Pension Expense $ 4,498,440 1,904,454

2. Pension Liabilities, Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions

As of June 30, 2015, the District reported net pension liabilities for its proportionate shares of the net pension liabilityof each plan as follows:

ProportionateShare of Net

Pension LiabilityCalSTRS 44,412,120CalPERS 11,102,681 Total Net Pension Liability $ 55,514,801

The District's net pension liability for each Plan is measured as the proportionate share of the net pension liability.The net pension liability of each of the Plans is measured as of June 30, 2014, and the total pension liability foreach Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2013rolled forward to June 30, 2014 using standard update procedures. The District's proportion of the net pension liabilitywas based on a projection of the District's long-term share of contributions to the pension plans relative to theprojected contributions of all participating employers, actuarially determined. Although a valid comparison of theDistrict's proportion at June 30, 2014 to its proportion at June 30, 2013 is not available in the first year ofimplementation of GASB Statement No. 68, that disclosure will be available in subsequent years.

The District's proportionate share of the net pension liability for each Plan as of June 30, 2013 and 2014 was asfollows:

CalSTRS CalPERSProportion - June 30, 2013 0.0760% 0.0978%Proportion - June 30, 2014 0.0760% 0.0978%Change - Increase (Decrease) - -

For the year ended June 30, 2015, the District recognized pension expense of $6,402,894. At June 30, 2015, theDistrict reported deferred outflows of resources and deferred inflows of resources related to pensions from the followingsources:

Deferred DeferredOutflows of Inflows ofResources Resources

Pension contributions subsequent to measurement date $ 9,978,888 $ -Differences between actual and expected experience - -Changes in assumptions - -Change in employer's proportion and differences between the employer's contributions and the employer's proportionate share of contributions -Net difference between projected and actual earnings on plan investments - (14,751,406)

Total $ 9,978,888 $ (14,751,406)

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$9,978,888 reported as deferred outflows of resources related to contributions subsequent to the measurement datewill be recognized as a reduction of the net pension liability in the year ended June 30, 2016. The other amountsreported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized aspension expense as follows:

Year EndedJune 30

2016 $ (3,687,851)2017 (3,687,851)2018 (3,687,852)2019 (3,687,852)Total $ (14,751,406)

a. Actuarial Assumptions

The total pension liabilities in the June 30, 2013 actuarial valuations were determined using the following actuarialassumptions:

CalSTRS CalPERSValuation Date June 30, 2013 June 30, 2013Measurement Date June 30, 2014 June 30, 2014Actuarial Cost Method Entry Age - Normal Cost Method for both CalSTRS & CalPERSActuarial Assumptions:

Discount Rate 7.6% 7.5%Inflation 3.0% 2.75%Payroll Growth 3.75% 3.00%Projected Salary Increase 0.05%-5.6% (1) 3.20%-10.80% (1)Investment Rate of Return 7.5% (2) 7.5% (2)Mortality .013%-0.435% (3) 0.00125-0.45905 (3)

(1) Depending on age, service and type of employment(2) Net of pension plan investment expenses, including inflation(3) Depending on age, gender, and type of job

b. Discount Rate

The discount rate used to measure the total pension liability was 7.60% for CalSTRS and 7.50% for CalPERS. Todetermine whether the District bond rate should be used in the calculation of a discount rate for each plan, CalSTRSand CalPERS stress tested plans that would most likely result in a discount rate that would be different from theactuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, thecurrent 7.60% and 7.50% discount rates are adequate and the use of the District bond rate calculation is notnecessary. The long-term expected discount rate of 7.60% and 7.50% will be applied to all plans in the CalSTRSand CalPERS retirement funds. The stress test results are presented in a detailed report that can be obtained from theCalPERS and CalSTRS websites.

According to Paragraph 30 of GASB Statement No. 68, the long-term discount rate should be determined withoutreduction for pension plan administrative expense. The investment return assumption used in the accountingvaluations is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. Aninvestment return excluding administrative expenses would have been 7.65%. Using this lower discount rate hasresulted in a slightly higher Total Pension Liability and Net Pension Liability. CalSTRS and CalPERS checked themateriality threshold for the difference in calculation and did not find it to be a material difference.

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CalSTRS and CalPERS are scheduled to review all actuarial assumptions as part of their regular Asset LiabilityManagement (ALM) review cycle that is scheduled to be completed in February 2018. Any changes to the discountrate will require board action and proper stakeholder outreach. For these reasons, CalSTRS and CalPERS expect tocontinue using a discount rate net of administrative expenses for GASB 67 and GASB 68 calculations through at leastthe 2017-18 fiscal year. CalSTRS and CalPERS will continue to check the materiality of the difference in calculationuntil such time as they have changed their methodology.

The long-term expected rate of return on pension plan investments was determined using a building-block method inwhich best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investmentexpense and inflation) are developed for each major asset class.

In determining the long-term expected rate of return, CalSTRS and CalPERS took into account both short-term andlong-term market return expectations as well as the expected pension fund cash flows. Using historical returns of allthe funds' asset classes, expected compound returns were calculated over the short-term (first 10 years) and 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 thesingle equivalent expected return that arrived at the same present value of benefits for cash flows as the onecalculated using both short-term and long-term returns. The expected rate of return was then set equivalent to thesingle equivalent rate calculated above and rounded down to the nearest quarter of one percent.

The table below reflects the long-term expected real rate of return by asset class. The rate of return was calculatedusing the capital market assumptions applied to determine the discount rate and asset allocation. These rates ofreturn are net of administrative expenses.

Strategic Real Return Real ReturnAsset Class Allocation (Years 1-10)(1) (Years 11+)(2)Global Equity 47.00% 5.25% 5.71%Global Fixed Income 19.00% 0.99% 2.43%Inflation Sensitive 6.00% 0.45% 3.36%Private Equity 12.00% 6.83% 6.95%Real Estate 11.00% 4.50% 5.13%Infrastructure and Forestland 3.00% 4.50% 5.09%Liquidity 2.00% -0.55% -1.05%

(1) An expected inflation of 2.5% used for this period(2) An expected inflation of 3.0% used for this period

c. Sensitivity to Proportionate Share of the Net Pension Liability to Changes in the Discount Rate

The following represents the District's proportionate share of the net pension liability for each Plan, calculated usingthe discount rate for each Plan, as well as what the District's proportionate share of the net pension liability would beif it were calculated using a discount rate that is 1 percentage point lower or 1 percentage point higher than thecurrent rate:

CalSTRS CalPERS

1% Decrease 6.60% 6.50%Net Pension Liability $ 77,908,996 $ 19,476,637

Current Discount Rate 7.60% 7.50%Net Pension Liability $ 44,412,120 $ 11,102,681

1% Increase 8.60% 8.50%Net Pension Liability $ 16,422,103 $ 4,105,397

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d. Total Pension Liability, Pension Plan Fiduciary Net Position and Net Pension Liability

CalSTRSIncrease (Decrease)

Total Plan NetPension Fiduciary PensionLiability Net Position Liability

(a) (b) (a) - (b)

Balance at June 30, 2014 $ 180,717,360 $ 126,425,240 $ 54,292,120

Changes for the year:Service cost 4,056,880 - 4,056,880Interest 13,544,720 - 13,544,720Differences between expected and actual experience -Contributions - Employer - 1,720,640 (1,720,640)Contributions - Employee - 1,726,720 (1,726,720)Contributions - State On Behalf - 1,051,080 (1,051,080)Net investment income - 23,105,520 (23,105,520)Other income - 1,520 (1,520)Benefit payments, including refunds of employee contributions (9,146,600) (9,146,600)Administrative expenses - (117,040) 117,040Other expenses - (6,840) 6,840

Net Changes 8,455,000 18,335,000 (9,880,000)

Balance at June 30, 2015 $ 189,172,360 $ 144,760,240 $ 44,412,120

CalPERSIncrease (Decrease)

Total Plan NetPension Fiduciary PensionLiability Net Position Liability

(a) (b) (a) - (b)

Balance at June 30, 2014 $ 63,605,342 $ 48,497,853 $ 15,107,489

Changes for the year:Service cost 1,541,354 - 1,541,354Interest 4,713,098 - 4,713,098Differences between expected and actual experience -Contributions - Employer - 1,176,603 (1,176,603)Contributions - Employee - 727,851 (727,851)Net investment income - 8,354,806 (8,354,806)Benefit payments, including refunds of employee contributions (3,069,435) (3,069,435)Administrative expenses - -Other expenses - -

Net Changes 3,185,017 7,189,825 (4,004,808)

Balance at June 30, 2015 $ 66,790,359 $ 55,687,678 $ 11,102,681

Detailed information about each pension plan's fiduciary net position is available in the separately issued CalSTRSand CalPERS financial reports.

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R. Postemployment Benefits Other Than Pension Benefits

Plan Description

The South Bay Union School District (District) administers a single-employer healthcare plan (Plan). The District offersmedical, dental, and vision benefits to its retirees. District employees who have attained age 55 and have completedat least fifteen years of service with the District are eligible to receive a District-paid contribution equal to the currentlycapped 2011 Kaiser HMO retiree only rate ($409.24) per month. The retiree pays for the cost of medical coverage inexcess of the cap plus any elected dental and vision coverage. Employees who perform service with the District at lessthan 100% full time equivalency may achieve the fifteen year requirement by adding together partial years of serviceuntil the total equals or exceeds fifteen years. District-paid benefits end at age 65. Spouses, domestic partners,and eligible dependent children of District retirees may be covered under the District's health plans at the retiree'sexpense. Dental and vision coverage may be self-paid at the retiree's option. As of July 1, 2014 the membershipof the plan consists of approximately 671 eligible active employees and 76 eligible retirees who are in receipt ofhealth benefits.

Contribution Information

The contribution requirements of Plan members and the District are established and amended by the District and theSouthwest Teachers Association (SWTA) and the local California Service Employee Association (CSEA). Therequired contribution is based on projected pay-as-you-go financing requirements. For fiscal year 2014-15, the Districtcontributed $458,397 to the Plan, all of which was used for current premiums.

Annual OPEB Cost and Net OPEB Obligation

The District's annual other post employment benefit (OPEB) cost (expense) is calculated based on the annualrequired contribution of the employer (ARC), and amount actuarially determined in accordance with the parametersof GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected tocover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) overa period not to exceed thirty years. The following table shows the components of the Districts annual OPEB cost ofthe year, the amount actually contributed to the plan and changes in the District's net obligation to the Plan:

Annual required contribution $ 1,372,327Interest on net OPEB obligation 11,674Adjustment to annual required contribution (199,842)Annual OPEB Cost 1,184,159Contribution made (458,397)Increase in net OPEB obligation 725,762Net OPEB obligation, beginning of year 2,896,803Net OPEB obligation, end of year $ 3,622,565

The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligationfor the years ended June 30, 2013, 2014 and 2015 are as follows:

Year Ended Annual Percentage Net OPEBJune 30, OPEB Cost Contributed Obligation

2013 $ 816,943 50.00% $ 2,548,2512014 811,459 57.05% 2,896,8032015 1,184,159 38.71% 3,622,565

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Funding Status and Funding Progress

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions aboutthe probability of occurrences 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 annualrequired contributions of the employer are subject to continual revision as actual results are compared with pastexpectations and new estimates are made about the future. The schedule of funding progress, presented as requiredsupplementary information following the notes to the financial statements, presents multiyear trend information aboutwhether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accruedliabilities for benefits.

Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the Plan as understood bythe employer and Plan members) and include the types of benefits provided at the time of each valuation and thehistorical pattern of sharing benefit costs between employer and Plan members to that point. The actuarial methodsand assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarialaccrued liabilities and the actuarial value of assets, consistent with long-term perspective of the calculations.

In the July 1, 2014 actuarial valuation, the actuarial cost method used was Projected Unit Credit with service prorate.Under this method, the Actuarial Accrued Liability is the present value of projected benefits multiplied by the ratio ofbenefit service as of the valuation date to the projected benefit service at retirement, termination, disability or death.The Normal Cost for a plan is the expected increase in the Accrued Liability during the plan year. All employeeseligible as of the measurement date in accordance with the provisions of the Plan listed in the data provided by theemployer were included in the valuation.

Medical cost trend rates ranged from an initial rate of 7.0% reduced to a rate of 5.0% after five years. The UAAL isbeing amortized at a level dollar method with the remaining amortization period at June 30, 2015 of 23 years. Theactuarial value of assets was not determined in this actuarial valuation; however, any assets of the plan to bedetermined will be on a market value basis. As of the valuation date, there are no GASB eligible assets.

S. Commitments and Contingencies

Litigation

The District is involved in various litigation. In the opinion of management and legal counsel, the disposition of alllitigation pending will not have a material effect on the financial statements.

State and Federal Allowances, Awards, and Grants

The District has received state and federal funds for specific purposes that are subject to view and audit by the grantoragencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believedthat any required reimbursement will not be material.

51


T. Subsequent Events

New Accounting Pronouncements

GASB Statement No. 72

In February 2015, the Governmental Accounting Standards Board (GASB) issued Statement No. 72, Fair ValueMeasurement and Application. The primary objective of this Statement is to address accounting and financialreporting issues related to fair value measurements. This Statement requires a government to use valuationtechniques that are appropriate under circumstances and for which sufficient data are available to measure fairvalue. The techniques should be consistent with one or more of the following approaches:

The Market Approach: This approach uses prices and other relevant information generated by markettransactions involving identical or comparable assets, liabilities, or a group of assets and liabilities.

The Cost Approach: This approach reflects the amount that would be required to replace the present servicecapacity of the asset.

The Income Approach: This approach converts future amounts (such as cash flows or income and expenses) to asingle current (discounted) amount.

In addition to establishing fair value techniques the Statement establishes a hierarchy of inputs to valuationtechniques and requires additional note disclosures about fair value in the financial statements. The requirements ofthis Statement will enhance comparability of financial statements among governments by requiring measurement ofcertain assets and liabilities at fair value using a consistent and more detailed definition of fair value and acceptedvaluation techniques. This Statement will also enhance fair value application guidance and related disclosures inorder to provide information to financial statement users about the impact of fair value measurements on agovernment's financial position.

The Statement is effective for years beginning after June 15, 2015 and as such the District is implementingeffective for the 2015-16 fiscal year.

GASB Statement No. 76

In June 2015, the GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles ForState and Local Governments. The objective of this Statement is to identify, in the context of the currentgovernmental financial reporting environment, the hierarchy of generally accepted accounting principles(GAAP). This Statement supersedes Statement No. 55 and is effective for financial statement periods beginningafter June 15, 2015 and as such the District is implementing effective for the 2015-16 fiscal year.

52


Required supplementary information includes financial information and disclosures required by the GovernmentalAccounting Standards Board but not considered a part of the basic financial statements.

SOUTH BAY UNION SCHOOL DISTRICT EXHIBIT B-1GENERAL FUNDBUDGETARY COMPARISON SCHEDULEFOR THE YEAR ENDED JUNE 30, 2015

Variance withFinal Budget

Budgeted Amounts PositiveOriginal Final Actual (Negative)

Revenues: LCFF Sources: State Apportionment or State Aid $ 30,814,596 $ 28,370,728 $ 28,532,573 $ 161,845 Education Protection Account Funds 5,020,970 7,510,285 7,510,285 - Local Sources 7,169,996 7,663,842 7,405,013 (258,829) Federal Revenue 3,946,059 4,924,754 4,034,625 (890,129) Other State Revenue 2,639,641 3,229,693 4,799,188 1,569,495 Other Local Revenue 6,287,823 13,190,829 7,063,982 (6,126,847) Total Revenues 55,879,085 64,890,131 59,345,666 (5,544,465)

Expenditures: Current: Certificated Salaries 28,219,117 30,630,955 29,203,372 1,427,583 Classified Salaries 8,825,157 9,516,381 9,243,897 272,484 Employee Benefits 13,399,269 13,756,854 14,434,127 (677,273) Books And Supplies 4,225,434 5,941,803 3,448,845 2,492,958 Services And Other Operating Expenditures 7,647,841 9,093,909 6,750,626 2,343,283 Other Outgo 450,438 1,219,335 209,817 1,009,518 Direct Support/Indirect Costs (354,372) (357,782) (386,533) 28,751 Capital Outlay 860,219 2,544,603 1,782,298 762,305 Debt Service: Principal 54,401 18,621 284,625 (266,004) Interest 3,513 70,536 21,503 49,033 Total Expenditures 63,331,017 72,435,215 64,992,577 7,442,638

Excess (Deficiency) of Revenues Over (Under) Expenditures (7,451,932) (7,545,084) (5,646,911) 1,898,173

Other Financing Sources (Uses): Transfers In 5,479,693 5,692,538 6,340,820 648,282 Transfers Out (1,211,675) (895,006) (968,733) (73,727) Other Sources - - 1,262,438 1,262,438 Total Other Financing Sources (Uses) 4,268,018 4,797,532 6,634,525 1,836,993

Net Change in Fund Balance (3,183,914) (2,747,552) 987,614 3,735,166

Fund Balance, July 1 13,119,249 13,119,249 13,119,249 -Fund Balance, June 30 $ 9,935,335 $ 10,371,697 $ 14,106,863 $ 3,735,166

The accompanying notes to required supplementary information are an integral part of this statement.

53

SOUTH BAY UNION SCHOOL DISTRICT EXHIBIT B-2CHARTER SCHOOL FUNDBUDGETARY COMPARISON SCHEDULEFOR THE YEAR ENDED JUNE 30, 2015

Variance withFinal Budget

Budgeted Amounts PositiveOriginal Final Actual (Negative)

Revenues: LCFF Sources: State Apportionment or State Aid $ 10,724,187 $ 10,583,714 $ 8,425,477 $ (2,158,237) Education Protection Account Funds 1,598,834 2,465,041 2,465,041 - Local Sources - - 2,039,554 2,039,554 Federal Revenue 210,820 214,214 213,843 (371) Other State Revenue 310,214 435,662 838,710 403,048 Other Local Revenue 14,000 39,982 36,413 (3,569) Total Revenues 12,858,055 13,738,613 14,019,038 280,425

Expenditures: Current: Certificated Salaries 6,113,608 7,350,028 6,486,705 863,323 Classified Salaries 783,710 815,271 777,154 38,117 Employee Benefits 2,264,945 2,316,299 2,613,734 (297,435) Books And Supplies 207,586 479,471 356,275 123,196 Services And Other Operating Expenditures 28,731 202,664 145,185 57,479 Direct Support/Indirect Costs 9,272 27,485 28,921 (1,436) Capital Outlay - 20,675 20,675 - Total Expenditures 9,407,852 11,211,893 10,428,649 783,244

Excess (Deficiency) of Revenues Over (Under) Expenditures 3,450,203 2,526,720 3,590,389 1,063,669

Other Financing Sources (Uses): Transfers Out (2,887,598) (3,024,651) (3,976,820) (952,169) Total Other Financing Sources (Uses) (2,887,598) (3,024,651) (3,976,820) (952,169)

Net Change in Fund Balance 562,605 (497,931) (386,431) 111,500

Fund Balance, July 1 1,440,131 1,440,131 1,440,131 -Fund Balance, June 30 $ 2,002,736 $ 942,200 $ 1,053,700 $ 111,500

The accompanying notes to required supplementary information are an integral part of this statement.

54

SOUTH BAY UNION SCHOOL DISTRICTREQUIRED SUPPLEMENTARY INFORMATIONSCHEDULE OF FUNDING PROGRESS - HEALTHCARE PLANYEAR ENDED JUNE 30, 2015

Actuarial Actuarial Accrued Unfunded UAAL as aActuarial Value of Liability (AAL) AAL Funded Covered Percentage ofValuation Assets - Entry Age (UAAL) Ratio Payroll Covered Payroll

Date (a) (b) (b-a) (a/b) (c) ((b-a)/c)

07/01/2008 $ - $ 10,527,832 $ 10,527,832 - $ 50,591,521 20.81%07/01/2010 - 7,813,603 7,813,603 - 44,261,000 17.60%07/01/2011 - 7,909,367 7,909,367 - 44,813,818 17.65%07/01/2013 - 11,258,786 11,258,786 - 46,763,764 24.08%07/01/2014 - 11,258,786 11,258,786 - 40,343,000 27.91%

55

SOUTH BAY UNION SCHOOL DISTRICTSCHEDULE OF THE DISTRICT'S PROPORTIONATESHARE OF THE NET PENSION LIABILITYCALIFORNIA STATE TEACHERS RETIREMENT SYSTEM (CALSTRS)LAST TEN FISCAL YEARS *

Fiscal Year2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

District's proportion of the netpension liability (asset) 0.076% N/A N/A N/A N/A N/A N/A N/A N/A N/A

District's proportionate share ofthe net pension liability (asset) $ 44,412,120 N/A N/A N/A N/A N/A N/A N/A N/A N/A

District's covered-employee payroll $ 20,889,360 N/A N/A N/A N/A N/A N/A N/A N/A N/A

District's proportionate share of the netpension liability (asset) as a percentageof its covered-employee payroll 212.61% N/A N/A N/A N/A N/A N/A N/A N/A N/A

Plan fiduciary net position as a percentageof the total pension liability 76.52% N/A N/A N/A N/A N/A N/A N/A N/A N/A

* This schedule is presented to illustrate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, this schedule provides the information only for those years for which information is available.

N/A - 2014-15 is the first implementation year and as such no information is being presented for years prior to implementation.

Notes to Schedule:

1) Benefit Changes: In 2015 there were no changes to benefits.

2) Changes in Assumptions: In 2015, amounts reported as changes in assumptions resulted primarily from adjustments to expected retirement ages of general employees.

56

SOUTH BAY UNION SCHOOL DISTRICTSCHEDULE OF DISTRICT CONTRIBUTIONSCALIFORNIA STATE TEACHERS RETIREMENT SYSTEM (CALSTRS)LAST TEN FISCAL YEARS *

Fiscal Year2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

Contractually required contribution $ 3,447,360 N/A N/A N/A N/A N/A N/A N/A N/A N/A

Contributions in relation to thecontractually required contribution (3,447,360) N/A N/A N/A N/A N/A N/A N/A N/A N/A

Contribution deficiency (excess) $ - N/A N/A N/A N/A N/A N/A N/A N/A N/A


Contributions as a percentage ofcovered-employee payroll 16.50% N/A N/A N/A N/A N/A N/A N/A N/A N/A

* This schedule is presented to illustrate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, this schedule provides the information for thoseyears for which information is available.

N/A - 2014-15 is the first year of implementation and as such information is not being presented for years prior to implementation.

Notes to Schedule:

Actuarial methods and assumptions

The total pension liability for the CalSTRS Plan was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2013, and rolling forward the totalpension liability to June 30, 2014. The financial reporting actuarial valuation as of June 30, 2013, used the following actuarial methods and assumptions, applied to all prior periods includedin the measurement:

Valuation Date June 30, 2013Experience Study July 1, 2006, through June 30, 2010Actuarial Cost Method Entry age normalInvestment Rate of Return1 7.60%Consumer Price Inflation 3.00%Wage Growth 3.75%Post-retirement Benefit Increases 2.00% simple

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 CalSTRSexperience. RP2000 series tables are an industry standard set of mortality rates published by the Society of Actuaries. See CalSTRS July 1, 2006 – June 30, 2010 Experience Analysisfor more information.

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 bestestimate ranges were developed using capital marketassumptions from CalSTRS general investment consultant (Pension Consulting Alliance - PCA) as an input to the process. Based on the model from CalSTRS consulting actuary’s(Milliman) investment practice, a best estimate range was determined by assuming the portfolio is re-balanced annually and that annual returns are lognormally distributed and independentfrom year to year to develop expected percentiles for the long-term distribution of annualized returns. The assumed asset allocation by PCA is based on board policy for target assetallocation in effect on February 2, 2012, the date the current experience study was approved by the board.

57

SOUTH BAY UNION SCHOOL DISTRICTSCHEDULE OF THE DISTRICT'S PROPORTIONATESHARE OF THE NET PENSION LIABILITYCALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM (CALPERS)LAST TEN FISCAL YEARS *

Fiscal Year2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

District's proportion of the netpension liability (asset) 0.098% N/A N/A N/A N/A N/A N/A N/A N/A N/A

District's proportionate share ofthe net pension liability (asset) $ 11,102,681 N/A N/A N/A N/A N/A N/A N/A N/A N/A


District's proportionate share of the netpension liability (asset) as a percentageof its covered-employee payroll 107.98% N/A N/A N/A N/A N/A N/A N/A N/A N/A

Plan fiduciary net position as a percentageof the total pension liability 83.38% N/A N/A N/A N/A N/A N/A N/A N/A N/A

* This schedule is presented to illustrate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, this schedule provides the information only for those years for which information is available.

N/A - 2014-15 is the first year of implementation and as such years previous to implementation are not presented in this schedule.

Notes to Schedule:

1) Benefit changes: In 2015 there were no changes to the benefits.

2) Changes in assumptions: In 2015, amounts reported as changes in assumptions resulted primarily from adjustments to expected retirement ages of general employees.

58

SOUTH BAY UNION SCHOOL DISTRICTSCHEDULE OF DISTRICT CONTRIBUTIONSCALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM (CALPERS)LAST TEN FISCAL YEARS *

Fiscal Year2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

Contractually required contribution $ 1,904,454 N/A N/A N/A N/A N/A N/A N/A N/A N/A

Contributions in relation to thecontractually required contribution (1,904,454) N/A N/A N/A N/A N/A N/A N/A N/A N/A

Contribution deficiency (excess) $ - N/A N/A N/A N/A N/A N/A N/A N/A N/A


Contributions as a percentage ofcovered-employee payroll 18.52% N/A N/A N/A N/A N/A N/A N/A N/A N/A

* This schedule is presented to illustrate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, this schedule provides the information for thoseyears for which information is available.

N/A - 2014-15 fiscal year was the first year of implementation and as such years previous to implementation are not presented in this schedule.

Notes to Schedule

For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30,2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions:

Actuarial Cost Method Entry Age Normal in accordance with the requirements of GASB Statement No. 68Actuarial Assumptions

Discount Rate 7.50%Inflation 2.75%Salary Increases Varies by Entry Age and ServiceInvestment Rate of Return 7.5% Net of Pension Plan Investment and Administrative Expenses; includes inflationMortality Rate Table Derived using CalPERS Membership Data for all fundsPost Retirement Increase Contract COLA up to 2.00% until purchasing power protection allowance floor on purchasing power applies, 2.75% thereafter

The mortality table used was developed based on CalPERS specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. For more details onthis table, please refer to the 2014 experience study report.

All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salaryincrease, mortality and retirement rates. Further details of the Experience Study can be found at CalPERS’ website.

59

SOUTH BAY UNION SCHOOL DISTRICTNOTES TO REQUIRED SUPPLEMENTARY INFORMATIONFOR THE YEAR ENDED JUNE 30, 2015

Budgetary Comparison Schedule - General Fund

As described in Note A to these financial statements, for purposes of reporting in conformity with GASBStatement No. 54, the District's Special Reserve Fund for Other Than Capital Outlay (Fund 17) and SpecialReserve Fund for Postemployment Benefits (Fund 20) were included with the General Fund. The BudgetaryComparison Schedule included in the Required Supplementary Information is based on the legally adoptedbudget for the General Fund only.

General Fund - Fund Financial Statements Ending Fund Balance $ 19,110,818Less Fund 17 Fund Balance (96,239)Less Fund 20 Fund Balance (4,907,716)

General Fund - Budgetary Comparison Schedule Ending Fund Balance $ 14,106,863

General Fund - Fund Financial Statements Net Change in Fund Balance $ (976,261)Change in Fund Balance attributed to Fund 17 2,097,423Change in Fund Balnce attributed to Fund 20 (133,548)

General Fund - Budgetary Comparison Schedule Change in Fund Balance $ 987,614

60

Combining Statements and Budget Comparisonsas Supplementary Information

This supplementary information includes financial statements and schedules not required by the Governmental AccountingStandards Board, nor a part of the basic financial statements, but are presented for purposes of additional analysis.

EXHIBIT C-1

SOUTH BAY UNION SCHOOL DISTRICTCOMBINING BALANCE SHEETNONMAJOR GOVERNMENTAL FUNDSJUNE 30, 2015

DebtService TotalFund Nonmajor

Special Bond Capital GovernmentalRevenue Interest Projects Funds (See

Funds & Redemption Funds Exhibit A-3)ASSETS:Cash in County Treasury $ 467,370 $ 2,529,140 $ 830,878 $ 3,827,388Cash on Hand and in Banks 415,755 - - 415,755Accounts Receivable 1,108,223 - 775 1,108,998Due from Other Funds 866,183 - 123 866,306Stores Inventories 161,222 - - 161,222Total Assets 3,018,753 2,529,140 831,776 6,379,669

LIABILITIES AND FUND BALANCE:Liabilities: Accounts Payable $ 146,530 $ - $ 6,787 $ 153,317 Due to Other Funds 339,116 - 1 339,117Total Liabilities 485,646 - 6,788 492,434

Fund Balance:Nonspendable Fund Balances: Stores Inventories 161,222 - - 161,222Restricted Fund Balances 1,198,636 - 270,003 1,468,639Committed Fund Balances 1,070,003 - 112,441 1,182,444Assigned Fund Balances 103,246 2,529,140 442,544 3,074,930Total Fund Balance 2,533,107 2,529,140 824,988 5,887,235

Total Liabilities and Fund Balances $ 3,018,753 $ 2,529,140 $ 831,776 $ 6,379,669

61

EXHIBIT C-2

SOUTH BAY UNION SCHOOL DISTRICTCOMBINING STATEMENT OF REVENUES, EXPENDITURES,AND CHANGES IN FUND BALANCESNONMAJOR GOVERNMENTAL FUNDSFOR THE YEAR ENDED JUNE 30, 2015 Debt

Service TotalFund Nonmajor

Special Bond Capital GovernmentalRevenue Interest Projects Funds (See

Funds & Redemption Funds Exhibit A-5)Revenues: LCFF Sources: Local Sources $ 316,669 $ - $ - $ 316,669 Federal Revenue 4,535,915 - - 4,535,915 Other State Revenue 1,843,904 40,185 137,067 2,021,156 Other Local Revenue 1,138,529 2,992,340 219,570 4,350,439 Total Revenues 7,835,017 3,032,525 356,637 11,224,179

Expenditures: Instruction 2,056,002 - - 2,056,002 Instruction - Related Services 570,682 - - 570,682 Pupil Services 4,405,283 - - 4,405,283 General Administration 357,612 - - 357,612 Plant Services 601,223 - 459,952 1,061,175 Debt Service: Principal - 1,189,455 - 1,189,455 Interest - 2,025,520 - 2,025,520 Total Expenditures 7,990,802 3,214,975 459,952 11,665,729

Excess (Deficiency) of Revenues Over (Under) Expenditures (155,785) (182,450) (103,315) (441,550)

Other Financing Sources (Uses): Transfers In 854,635 - - 854,635 Transfers Out - - (264,000) (264,000) Total Other Financing Sources (Uses) 854,635 - (264,000) 590,635

Net Change in Fund Balance 698,850 (182,450) (367,315) 149,085

Fund Balance, July 1 1,834,257 2,711,590 1,192,303 5,738,150Fund Balance, June 30 $ 2,533,107 $ 2,529,140 $ 824,988 $ 5,887,235

62

EXHIBIT C-3

SOUTH BAY UNION SCHOOL DISTRICTCOMBINING BALANCE SHEETNONMAJOR SPECIAL REVENUE FUNDSJUNE 30, 2015

TotalNonmajorSpecial

Child Deferred RevenueDevelopment Cafeteria Maintenance Funds (See

Fund Fund Fund Exhibit C-1)ASSETS:Cash in County Treasury $ 40,377 $ 16,315 $ 410,678 $ 467,370Cash on Hand and in Banks - 415,755 - 415,755Accounts Receivable 57,843 1,049,935 445 1,108,223Due from Other Funds 1 11,547 854,635 866,183Stores Inventories - 161,222 - 161,222Total Assets 98,221 1,654,774 1,265,758 3,018,753

LIABILITIES AND FUND BALANCE:Liabilities: Accounts Payable $ 23,396 $ 33,084 $ 90,050 $ 146,530 Due to Other Funds 72,900 266,216 - 339,116Total Liabilities 96,296 299,300 90,050 485,646

Fund Balance:Nonspendable Fund Balances: Stores Inventories - 161,222 - 161,222Restricted Fund Balances - 1,092,931 105,705 1,198,636Committed Fund Balances - - 1,070,003 1,070,003Assigned Fund Balances 1,925 101,321 - 103,246Total Fund Balance 1,925 1,355,474 1,175,708 2,533,107

Total Liabilities and Fund Balances $ 98,221 $ 1,654,774 $ 1,265,758 $ 3,018,753

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EXHIBIT C-4

SOUTH BAY UNION SCHOOL DISTRICTCOMBINING STATEMENT OF REVENUES, EXPENDITURES,AND CHANGES IN FUND BALANCESNONMAJOR SPECIAL REVENUE FUNDSFOR THE YEAR ENDED JUNE 30, 2015 Total

NonmajorSpecial

Child Deferred RevenueDevelopment Cafeteria Maintenance Funds (See

Fund Fund Fund Exhibit C-2)Revenues: LCFF Sources: Local Sources $ - $ - $ 316,669 $ 316,669 Federal Revenue 580,571 3,955,344 - 4,535,915 Other State Revenue 1,408,274 298,563 137,067 1,843,904 Other Local Revenue 914,009 222,957 1,563 1,138,529 Total Revenues 2,902,854 4,476,864 455,299 7,835,017

Expenditures: Instruction 2,056,002 - - 2,056,002 Instruction - Related Services 570,682 - - 570,682 Pupil Services 1,211 4,404,072 - 4,405,283 General Administration 132,814 224,798 - 357,612 Plant Services 141,182 176,867 283,174 601,223 Total Expenditures 2,901,891 4,805,737 283,174 7,990,802

Excess (Deficiency) of Revenues Over (Under) Expenditures 963 (328,873) 172,125 (155,785)

Other Financing Sources (Uses): Transfers In - - 854,635 854,635 Total Other Financing Sources (Uses) - - 854,635 854,635

Net Change in Fund Balance 963 (328,873) 1,026,760 698,850

Fund Balance, July 1 962 1,684,347 148,948 1,834,257Fund Balance, June 30 $ 1,925 $ 1,355,474 $ 1,175,708 $ 2,533,107

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SOUTH BAY UNION SCHOOL DISTRICTCOMBINING BALANCE SHEETNONMAJOR CAPITAL PROJECTS FUNDSJUNE 30, 2015

CapitalBuilding Facilities

Fund FundASSETS:Cash in County Treasury $ 1 $ 112,359Accounts Receivable - 82Due from Other Funds - -Total Assets 1 112,441

LIABILITIES AND FUND BALANCE:Liabilities: Accounts Payable $ - $ - Due to Other Funds 1 -Total Liabilities 1 -

Fund Balance:Restricted Fund Balances - -Committed Fund Balances - 112,441Assigned Fund Balances - -Total Fund Balance - 112,441

Total Liabilities and Fund Balances $ 1 $ 112,441

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EXHIBIT C-5

TotalNonmajor

CapitalCounty School Special Reserve Projects

Facilities Capital Outlay Funds (SeeFund Fund Exhibit C-1)

$ 276,442 $ 442,076 $ 830,878347 346 775

1 122 123276,790 442,544 831,776

$ 6,787 $ - $ 6,787- - 1

6,787 - 6,788

270,003 - 270,003- - 112,441- 442,544 442,544270,003 442,544 824,988

$ 276,790 $ 442,544 $ 831,776

66

SOUTH BAY UNION SCHOOL DISTRICTCOMBINING STATEMENT OF REVENUES, EXPENDITURES,AND CHANGES IN FUND BALANCESNONMAJOR CAPITAL PROJECTS FUNDSFOR THE YEAR ENDED JUNE 30, 2015

CapitalBuilding Facilities

Fund FundRevenues: Other State Revenue $ - $ - Other Local Revenue 1 75,135 Total Revenues 1 75,135

Expenditures: Plant Services 1 48,301 Total Expenditures 1 48,301

Excess (Deficiency) of Revenues Over (Under) Expenditures - 26,834

Other Financing Sources (Uses): Transfers Out - - Total Other Financing Sources (Uses) - -

Net Change in Fund Balance - 26,834

Fund Balance, July 1 - 85,607Fund Balance, June 30 $ - $ 112,441

67

EXHIBIT C-6

TotalNonmajor

CapitalCounty School Special Reserve Projects

Facilities Capital Outlay Funds (SeeFund Fund Exhibit C-2)

$ 137,067 $ - $ 137,0671,736 142,698 219,570

138,803 142,698 356,637

411,650 - 459,952411,650 - 459,952

(272,847) 142,698 (103,315)

- (264,000) (264,000)- (264,000) (264,000)

(272,847) (121,302) (367,315)

542,850 563,846 1,192,303$ 270,003 $ 442,544 $ 824,988

68

Other Supplementary Information

This section includes financial information and disclosures not required by the Governmental Accounting StandardsBoard and not considered a part of the basic financial statements. It may, however, include information which isrequired by other entities.

Supplementary Information Section

SOUTH BAY UNION SCHOOL DISTRICTLOCAL EDUCATION AGENCYORGANIZATION STRUCTUREJUNE 30, 2015

The South Bay Union School District was established in 1869 and became a Union District in 1920 serving studentsin the cities of Imperial Beach and parts of San Diego. There were no changes in the boundaries of the districtduring the current year. The district is currently operating nine elementary schools, grades kindergarten throughgrade six, and one pre-school. Beginning with the 2010-11 fiscal year, Nestor Elementary School began operatingas Nestor Language Academy Charter School with grades kindergarten through grade eight. Beginning with the2012-13 fiscal year, Imperial Beach and West View Elementary Schools combined to form the Imperial BeachCharter School which began operating with grades kindergarten through grade eight.

Governing Board

Name Office Term and Term Expiration

Chris Brown President Four year termExpires November 2018

Barbara Elliott-Sanders Vice President Four year termExpires November 2016

Melanie Ellsworth Clerk Four year termExpires November 2018

Elvia Aguilar Member Four year termExpires November 2018

Thomas Schaaf** Member Four year termExpires November 2016

Administration

Katie McNamara, Ed.D.Superintendent

Cindy WagnerAssistant SuperintendentEducational Leadership

Kim PhiferAssistant SuperintendentHuman Resources and

Organizational Development

Abdollah SaadatAssistant Superintendent

Business Services

Guadalupe Avilez-HerreraPrincipal - Nestor Language Academy

Pamela Reichart-MontielPrincipal - Imperial Beach Charter School

** Member is completing the four year term for deceased member, Nicholas Inzunza.

69

SOUTH BAY UNION SCHOOL DISTRICT TABLE D-1SCHEDULE OF AVERAGE DAILY ATTENDANCEYEAR ENDED JUNE 30, 2015

South Bay Union School District

Second Period Report Annual ReportOriginal Revised Original Revised

TK/K-3: Regular ADA 3,025.15 N/A 3,004.55 N/A Extended Year Special Education 5.16 N/A 5.16 N/A Nonpublic, Nonsectarian Schools 0.20 N/A 0.30 N/A Extended Year - Nonpublic - N/A 0.19 N/ATK/K-3 Totals 3,030.51 N/A 3,010.20 N/A

Grades 4-6: Regular ADA 2,419.84 N/A 2,405.47 N/A Extended Year Special Education 2.08 N/A 2.08 N/A Nonpublic, Nonsectarian Schools 1.58 N/A 1.66 N/A Extended Year - Nonpublic - N/A 0.22 N/AGrades 4-6 Totals 2,423.50 N/A 2,409.43 N/A

ADA totals 5,454.01 N/A 5,419.63 N/A

Imperial Beach Charter School


TK/K-3: Regular ADA - Classroom Based 385.92 N/A 385.08 N/A

Grades 4-6: Regular ADA - Classroom Based 363.48 N/A 363.53 N/A


ADA totals 868.82 N/A 867.54 N/A

Nestor Language Academy


TK/K-3: Regular ADA - Classroom Based 468.92 N/A 473.03 N/A



ADA totals 916.52 N/A 922.07 N/A

N/A - There were no audit findings which resulted in necessary revisions to attendance.

Average daily attendance is a measurement of the number of pupils attending classes of the district or charterschool. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on whichapportionments of state funds are made to school districts and charter schools. This schedule provides informationregarding the attendance of students at various grade levels and in different programs.

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-2SCHEDULE OF INSTRUCTIONAL TIMEYEAR ENDED JUNE 30, 2015

Ed. Code Ed. Code Number Number46207 46207 2014-15 of Days of Days

Minutes Adjusted & Actual Traditional MultitrackGrade Level Requirement Reduced Minutes Calendar Calendar Status

South Bay Union School District

Transitional Kindergarten 36,000 35,000 52,695 177 - CompliedKindergarten 36,000 35,000 52,695 177 - CompliedGrade 1 50,400 49,000 54,465 177 - CompliedGrade 2 50,400 49,000 54,465 177 - CompliedGrade 3 50,400 49,000 54,465 177 - CompliedGrade 4 54,000 52,500 54,465 177 - CompliedGrade 5 54,000 52,500 54,465 177 - CompliedGrade 6 54,000 52,500 54,465 177 - Complied

Imperial Beach Charter School

Grade 2 50,400 48,960 54,465 177 - CompliedGrade 3 50,400 48,960 54,465 177 - CompliedGrade 4 54,000 52,457 54,465 177 - CompliedGrade 5 54,000 52,457 54,465 177 - CompliedGrade 6 54,000 52,457 54,465 177 - CompliedGrade 7 54,000 52,457 58,005 177 - CompliedGrade 8 54,000 52,457 58,005 177 - Complied

Nestor Language Academy

Transitional Kindergarten 36,000 34,971 52,695 177 - CompliedKindergarten 36,000 34,971 52,695 177 - CompliedGrade 1 50,400 48,960 54,465 177 - CompliedGrade 2 50,400 48,960 54,465 177 - CompliedGrade 3 50,400 48,960 54,465 177 - CompliedGrade 4 54,000 52,457 54,465 177 - CompliedGrade 5 54,000 52,457 54,465 177 - CompliedGrade 6 54,000 52,457 54,465 177 - CompliedGrade 7 54,000 52,457 61,545 177 - CompliedGrade 8 54,000 52,457 61,545 177 - Complied

School districts and charter schools must maintain their instructional minutes as defined in Education Code Section 46207.This schedule is required of all districts, including basic aid districts.

The district has received incentive funding for increasing instructional time as provided by the Incentives for LongerInstructional Day. This schedule presents information on the amount of instruction time offered by the district and whetherthe district complied with the provisions of Education Code Sections 46200 through 46207. The district and charter schoolsneither met nor exceeded their target funding.

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-3SCHEDULE OF FINANCIAL TRENDS AND ANALYSISYEAR ENDED JUNE 30, 2015

Budget 2016

General Fund (Note 1) 2015 2014 2013

Revenues and other financial sources $ 70,839,797 $ 66,948,924 $ 62,133,926 $ 55,958,245

Expenditures, other uses and transfers out 70,638,500 65,961,310 63,052,771 59,076,916

Change in fund balance (deficit) 201,297 987,614 (918,845) (3,118,671)

Ending fund balance $ 14,308,160 $ 14,106,863 $ 13,119,249 $ 14,038,094

Available reserves (Note 2) $ 12,919,023 $ 11,857,355 $ 9,524,351 $ 10,648,888

Available reserves as a percentage of total outgo (Note 3) 18.3% 18.0% 15.5% 18.5%

Total long-term debt $ 99,166,720 $ 100,791,539 $ 44,233,755 $ 47,529,533

Average daily attendance at P-2 7,134 7,239 7,315 7,325

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 reasonableperiod of time.

The general fund balance has decreased by $3,049,902 over the past three years. The fiscal year 2015-16 budgetprojects an increase of $201,297. For a district of this size, the State recommends available reserves of at least 3% oftotal general fund expenditures, transfers out and other uses (total outgo).

Total long-term debt has increased by $53,241,962 over the past two years (Note 6).

Average daily attendance has decreased by 86 over the past two years.

Notes:1 Budget 2016 is included for analytical purposes only and has not been subjected to audit.2 Available reserves consist of all assigned fund balances, all unassigned fund balances and all funds reserved for

economic uncertainties contained within the General Fund.3 On behalf payments of $1,872,760, $1,422,604, and $1,372,267, have been excluded from the calculation of

available reserves as a percentage of total outgo for the fiscal years ending June 30, 2015, 2014, and 2013.4 Average daily attendance includes the ADA from district schools and charter schools.5 As described in Note A to these financial statements, for purposes of reporting in conformity with GASB

Statement No. 54, the District's Special Reserve Fund for Other Than Capital Outlay (Fund 17) and SpecialReserve Fund for Postemployment Benefits (Fund 20) were included with the general fund. The above Scheduleof Financial Trends and Analysis contains only the financial information of the general fund.

6 As a result of implementation of GASB Statement No. 68, long term liabilities for the year ended June 30, 2015include net pension liabilities which were not previously accounted for. As such, total long term debt for the yearended June 30, 2015 is not comparable to previous years represented in this table.

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-4RECONCILIATION OF ANNUAL FINANCIAL AND BUDGETREPORT WITH AUDITED FINANCIAL STATEMENTSYEAR ENDED JUNE 30, 2015

Special ReserveFund for Special Reserve

Other Than Fund forGeneral Capital Outlay Postemployment

Fund Projects BenefitsJune 30, 2015, annual financial and budget report fund balances $ 14,106,863 $ 96,239 $ 4,907,716

Adjustments and reclassifications:

Increasing (decreasing) the fund balance:

GASB # 54 inclusion of Fund 17 and 20 5,003,955 (96,239) (4,907,716)

June 30, 2015 audited financial statement fund balances $ 19,110,818 $ - $ -

This schedule provides the information necessary to reconcile the fund balances of all funds and the total liabilities balanceof the general long-term debt account group as reported on the SACS report to the audited financial statements. Fundsthat required no adjustment are not presented.

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-5SCHEDULE OF CHARTER SCHOOLSYEAR ENDED JUNE 30, 2015

The South Bay Union School District charters the following charter schools:

Included InCharter Schools Audit?

Nestor Language Academy Yes

Imperial Beach Charter School Yes

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-6SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Page 1 of 2YEAR ENDED JUNE 30, 2015

Federal Grantor/ Federal Pass-ThroughPass-Through Grantor/ CFDA Entity Identifying FederalProgram Title Number Number Expenditures

U. S. DEPARTMENT OF HEALTH AND HUMAN SERVICESDirect Programs:

Medi-Cal Cluster:Medi-Cal Billing Option 93.778 $ 179,254Medi-Cal MAA 93.778 - 72,264 Total Medi-Cal Cluster 251,518

Total Direct Programs 251,518Passed Through Episcopal Community Services:

Head Start 93.600 - 580,570Total U. S. Department of Health and Human Services 832,088

U. S. DEPARTMENT OF EDUCATIONDirect Programs:

Impact Aid - P.L. 81.874 * 84.041 - 23,134Total Direct Programs 23,134Passed Through State Department of Education:

Title I Cluster:Title I Part A 84.010 14329 1,559,977Title I Part A - Charter Schools 84.010 14329 144,535 Total Title I Cluster 1,704,512

Special Education ClusterSpecial Education: IDEA Basic 84.027 13379 1,176,341Special Education: IDEA Mental Health 84.027 14468 83,404Special Education: IDEA Preschool Local 84.027A 13682 98,625Special Education: IDEA Preschool 84.173 13430 50,275Special Education: IDEA Preschool Staff Development 84.173A 13431 593 Total Special Education Cluster 1,409,238

Title III ClusterTitle III Immigrant Education Program 84.365 14346 63,823Title III Limited English Proficiency 84.365 14346 292,206Title III Limited English Proficiency - Charter Schools 84.365 14346 33,434 Total Title III Cluster 389,463

Title II ClusterTitle II Teacher Quality 84.367 14341 531,900Title II Teacher Quality - Charter Schools 84.367 14341 35,875 Total Title II Cluster 567,775

Total Passed Through State Department of Education 4,070,988Total U. S. Department of Education 4,094,122

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SOUTH BAY UNION SCHOOL DISTRICT TABLE D-6SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Page 2 of 2YEAR ENDED JUNE 30, 2015

Federal Grantor/ Federal Pass-ThroughPass-Through Grantor/ CFDA Entity Identifying FederalProgram Title Number Number Expenditures

U. S. DEPARTMENT OF AGRICULTUREDirect Program:

Wildlife Reserve Funds 10.665 - 7,063Passed Through State Department of Education:

Child Nutrition ClusterSchool Breakfast Program 10.553 13526 588,857National School Lunch Program Section 11 10.555 13396 2,554,326National School Lunch Program Section 4 10.555 13391 429,985National School Lunch Program Meal Supplement 10.555 23165 211,974Commodity Supplemental Food Program * 10.555 - 170,203 Total Child Nutrition Cluster 3,955,345

Total Passed Through State Department of Education 3,955,345Total U. S. Department of Agriculture 3,962,408TOTAL EXPENDITURES OF FEDERAL AWARDS $ 8,888,618

* Indicates noncash expenditure

The accompanying notes are an integral part of this schedule.

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SOUTH BAY UNION SCHOOL DISTRICTNOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDSFOR THE YEAR ENDED JUNE 30, 2015

1. Basis of Presentation

The accompanying schedule of expenditures of federal awards includes the federal grant activity ofSouth Bay Union School District and is presented on the modified accrual basis of accounting. Theinformation in this schedule is presented in accordance with the requirements of OMB Circular A-133,Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amountspresented in this schedule may differ from amounts presented in, or used in the preparation of, thegeneral purpose financial statements.

2. Subrecipients

Of the federal expenditures presented in the schedule, South Bay Union School District provided federalawards to subrecipients as follows:

Federal CFDA Amount ProvidedProgram Title Number to Subrecipients

Title I 84.010 $ 8,543Title II Teacher Quality 84.367 10,190Title III Limited English Proficiency 84.365 7,348

Total Provided to Subrecipients $ 26,081

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Other Independent Auditor's Reports

Independent Auditor's Report on Internal Control over Financial Reporting andOn Compliance and Other Matters Based on an Audit of Financial StatementsPerformed In Accordance With Government Auditing Standards

Board of TrusteesSouth Bay Union School DistrictImperial Beach, California 91932

Members of the Board of Trustees:

We have audited, in accordance with the auditing standards generally accepted in the United States ofAmerica and the standards applicable to financial audits contained in Government Auditing Standardsissued by the Comptroller General of the United States, the financial statements of the governmentalactivities, each major fund, and the aggregate remaining fund information of South Bay Union School District,as of and for the year ended June 30, 2015, and the related notes to the financial statements, whichcollectively comprise South Bay Union School District's basic financial statements, and have issued ourreport thereon dated October 1, 2015.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered the South Bay Union SchoolDistrict's internal control over financial reporting (internal control) to determine the audit procedures that areappropriate in the circumstances for the purpose of expressing our opinions on the financial statements, butnot for the purpose of expressing an opinion on the effectiveness of the South Bay Union School District'sinternal control. Accordingly, we do not express an opinion on the effectiveness of the South Bay UnionSchool District's internal control.

A deficiency in internal control exists when the design or operation of a control does not allow managementor 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, ininternal control, such that there is a reasonable possibility that a material misstatement of the entity's financialstatements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is adeficiency, 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.

Our consideration of internal control was for the limited purpose described in the first paragraph of thissection and was not designed to identify all deficiencies in internal control that might be material weaknessesor significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies ininternal control that we consider to be material weaknesses. However, material weaknesses may exist thathave not been identified.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the South Bay Union School District's financialstatements are free from material misstatement, we performed tests of its compliance with certain provisionsof laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct andmaterial effect on the determination of financial statement amounts. However, providing an opinion oncompliance with those provisions was not an objective of our audit, and accordingly, we do not expresssuch an opinion. The results of our tests disclosed instances of noncompliance or other matters that arerequired to be reported under Government Auditing Standards and which are described in theaccompanying schedule of findings and questioned costs as item(s) 2015-001.

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South Bay Union School District's Response to Findings

South Bay Union School District's response to the findings identified in our audit is described in theaccompanying schedule of findings and questioned costs. South Bay Union School District's response wasnot subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, weexpress no opinion on it.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and complianceand the results of that testing, and not to provide an opinion on the effectiveness of the entity's internalcontrol or on compliance. This report is an integral part of an audit performed in accordance withGovernment Auditing Standards in considering the entity's internal control and compliance. Accordingly,this communication is not suitable for any other purpose.


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Independent Auditor's Report on Compliance for Each Major Program andon Internal Control Over Compliance Required by OMB Circular A-133



Report on Compliance for Each Major Federal Program

We have audited the South Bay Union School District's compliance with the types of compliance requirementsdescribed in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect oneach of the South Bay Union School District's major federal programs for the year ended June 30, 2015.South Bay Union School District's major federal programs are identified in the summary of auditor's resultssection of the accompanying schedule of findings and questioned costs.

Management's Responsibility

Management is responsible for compliance with the requirements of laws, regulations, contracts, and grantsapplicable to its federal programs.


Our responsibility is to express an opinion on compliance for each of South Bay Union School District's majorfederal programs based on our audit of the types of compliance requirements referred to above. Weconducted our audit of compliance in accordance with auditing standards generally accepted in the UnitedStates of America; the standards applicable to financial audits contained in Government AuditingStandards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits ofStates, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133require that we plan and perform the audit to obtain reasonable assurance about whether noncompliancewith the types of compliance requirements referred to above that could have a direct and material effect on amajor federal program occurred. An audit includes examining, on a test basis, evidence about the South BayUnion School District's compliance with those requirements and performing such other procedures as weconsidered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion on compliance for each major federalprogram. However, our audit does not provide a legal determination of the South Bay Union School District'scompliance.

Opinion on Each Major Federal Program

In our opinion, the South Bay Union School District complied, in all material respects, with the types ofcompliance requirements referred to above that could have a direct and material effect on each of its majorfederal programs identified in the summary of auditor's results section of the accompanying schedule offindings and questioned costs for the year ended June 30, 2015.

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Other Matters

The results of our auditing procedures disclosed instances of noncompliance, which are required to bereported in accordance with OMB Circular A-133 and which are described in the accompanying schedule offindings and questioned costs as item 2015-001 Our opinion on each major federal program is not modifiedwith respect to these matters.

South Bay Union School District's response to the noncompliance findings identified in our audit is describedin the accompanying schedule of findings and questioned costs. South Bay Union School District's responsewas not subjected to the auditing procedures applied in the audit of compliance and, accordingly, weexpress no opinion on the response.

Report on Internal Control Over Compliance

Management of the South Bay Union School District is responsible for establishing and maintaining effectiveinternal control over compliance with the types of compliance requirements referred to above. In planning andperforming our audit of compliance, we considered the South Bay Union School District's internal control overcompliance with the types of requirements that could have a direct and material effect on each major federalprogram to determine the auditing procedures that are appropriate in the circumstances for the purpose ofexpressing an opinion on compliance for each major federal program and to test and report on internal controlover compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinionon the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on theeffectiveness of the South Bay Union School District's internal control over compliance.

Our consideration of internal control over compliance was for the limited purpose described in the precedingparagraph and was not designed to identify all deficiencies in internal control over compliance that might bematerial weaknesses or significant deficiences and therefore, material weaknesses or significantdeficiencies may exist that were not identified. However, as discussed below, we identified certaindeficiencies in internal control over compliance that we consider to be significant deficiencies.

A deficiency in internal control over compliance exists when the design or operation of a control overcompliance does not allow management or employees, in the normal course of performing their assignedfunctions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of afederal program on a timely basis. A material weakness in internal control over compliance is a deficiency,or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibilitythat material noncompliance with a type of compliance requirement of a federal program will not beprevented, or detected and corrected, on a timely basis. We did not identify any deficiencies in internalcontrol over compliance that we consider to be material weaknesses.

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 lesssevere than a material weakness in internal control over compliance, yet important enough to merit attentionby those charged with governance. We consider the deficiencies in internal control over compliancedescribed in the accompanying schedule of findings and questioned costs as item 2015-001 to be asignificant deficiency.

South Bay Union School District's response to the internal control over compliance findings identified in ouraudit is described in the accompanying schedule of findings and questioned costs. South Bay Union SchoolDistrict's response was not subjected to the auditing procedures applied in the audit of compliance and,accordingly, we express no opinion on the response.

The purpose of this report on internal control over compliance is solely to describe the scope of our testing ofinternal control over compliance and the results of that testing based on the requirements of OMB CircularA-133. Accordingly, this report is not suitable for any other purpose.


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Independent Auditor's Report on State Compliance



Report on State Compliance

We have audited the District's compliance with the types of compliance requirements described in the2014-15 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reportingpublished by the California Education Audit Appeals Panel that could have a direct and material effect oneach of the District's state programs identified below for the fiscal year ended June 30, 2015.

Management's Responsibility for State Compliance

Management is responsible for compliance with the requirements of laws, regulations, contracts, andgrants applicable to its state programs.


Our responsibility is to express an opinion on compliance for each applicable program as identified in theState's audit guide, 2014-15 Guide for Annual Audits of K-12 Local Education Agencies andState Compliance Reporting published by the Education Audit Appeals Panel. We conducted our auditof 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 theComptroller General of the United States; and the State's audit guide, 2014-15 Guide for AnnualAudits of K-12 Local Education Agencies and State Compliance Reporting published by theEducation Audit Appeals Panel. Those standards and audit guide require that we plan and perform theaudit to obtain reasonable assurance about whether noncompliance with the compliance requirementsreferred to above that could have a direct and material effect on the state programs noted belowoccurred. An audit includes examining, on a test basis, evidence about the District's compliance withthose requirements and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does notprovide a legal determination of the District's compliance with those requirements.

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In connection with the audit referred to above, we selected and tested transactions and records todetermine the District's compliance with the state laws and regulations applicable to the following items:

Procedures inAudit Guide

Compliance Requirements Performed?

LOCAL EDUCATION AGENCIESOTHER THAN CHARTER SCHOOLS:Attendance Accounting:

Attendance Reporting YesTeacher Certification and Misassignments YesKindergarten Continuance YesIndependent Study N/AContinuation Education N/A

Instructional Time YesInstructional Materials YesRatio of Administrative Employees to Teachers YesClassroom Teacher Salaries YesEarly Retirement Incentive N/AGANN Limit Calculation YesSchool Accountability Report Card YesJuvenile Court Schools N/AMiddle or Early College High Schools N/AK-3 Grade Span Adjustment YesTransportation Maintenance of Effort YesRegional Occupational Centers or Programs Maintenance of Effort N/AAdult Eduction Maintenance of Effort N/A

SCHOOL DISTRICTS, COUNTY OFFICES OFEDUCATION, AND CHARTER SCHOOLS:California Clean Energy Jobs Act YesAfter School Education and Safety Program:

After School YesBefore School YesGeneral Requirements Yes

Proper Expenditure of Education Protection Account Funds YesCommon Core Implementation Funds YesUnduplicated Local Control Funding Formula Pupil Counts YesLocal Control and Accountability Plan Yes

CHARTER SCHOOLS:Attendance YesMode of Instruction YesNonclassroom-Based Instruction/Independent Study N/ADetermination of Funding for Nonclassroom-Based Instruction N/AAnnual Instructional Minutes - Classroom Based YesCharter School Facility Grant Program N/A

The term "N/A" is used above to mean either the District did not offer the program during the current fiscalyear or the program applies to a different type of local education agency.

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Opinion on State Compliance

In our opinion, South Bay Union School District complied, in all material respects, with the compliancerequirements referred to above that are applicable to the statutory requirements listed in the scheduleabove for the year ended June 30, 2015.

Purpose of This Report

The purpose of this report is solely to describe the scope of our testing of compliance and the results ofthat testing, and not to provide an opinion of the effectiveness of the entity's internal control or oncompliance outside of the items tested as noted above. This report is an integral part of an auditperformed in accordance with the 2014-15 Guide for Annual Audits of K-12 Local EducationAgencies and State Compliance Reporting, published by the Education Audit Appeals Panel inconsidering the entity's compliance. Accordingly, this communication is not suitable for any other purpose.


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Findings and Recommendations Section

SOUTH BAY UNION SCHOOL DISTRICTSCHEDULE OF FINDINGS AND QUESTIONED COSTSFOR THE YEAR ENDED JUNE 30, 2015

A. Summary of Auditor's Results

1. Financial Statements

Type of auditor's report issued: Unmodified

Internal control over financial reporting:

One or more material weaknesses identified? Yes X No

One or more significant deficiencies identified thatare not considered to be material weaknesses? Yes X None Reported

Noncompliance material to financial statements noted? Yes X No

2. Federal Awards

Internal control over major programs:

One or more material weaknesses identified? Yes X No

One or more significant deficiencies identified thatare not considered to be material weaknesses? X Yes None Reported

Type of auditor's report issued on compliance for major programs: Unmodified

Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? X Yes No

Identification of major programs:

CFDA Number(s) Name of Federal Program or Cluster10.553 & 10.555 Child Nutrition Cluster84.365 Title III84.367 Title II Teacher Quality93.778 Medi-Cal

Dollar threshold used to distinguish between type A and type B programs: $300,000

Auditee qualified as low-risk auditee? Yes X No

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3. State Awards

Any audit findings disclosed that are required to bereported in accordance with Standards and Proceduresfor Audits of California K-12 Local Education Agencies? Yes X No

Type of auditor's report issued on compliance for state programs: Unmodified

B. Financial Statement Findings

None

C. Federal Award Findings and Questioned Costs

Finding 2015-001 (50000)Allowable Costs/Cost Principles - Documentation of Employee Time and Effort

Federal Program Information10.553 & 10.555 - Child Nutrition Cluster (2014-15 Grant)84.365 - Title III (2014-15 Grant)93.778 - Medi-Cal (2014-15 Expenditures)

Federal Grantor Agency10.553 & 10.555 - Child Nutrition Cluster: U.S. Department of Agriculture84.365 - Title III: U.S. Department of Education93.778 - Medi-Cal: U.S. Department of Health and Human Services

Pass-Through Grantor Agency10.553 & 10.555 - Child Nutrition Cluster: California Department of Education84.365 - Title III: California Department of Education93.778 - Medi-Cal: Direct Program

Criteria or Specific RequirementOMB Circular A-87 requires that when federal funds are expended employees charged to theprogram document their time and effort to support the charges. When the employee is paid from asingle program or cost objective the documentation must be completed periodically (at leastsemi-annually). When the employee is paid from multiple programs or cost objectives thedocumentation must be completed monthly. Documentation under both methods must be anafter-the-fact certification of actual effort expended.

ConditionIn our review of employees charged to major programs we noted that the district was unable toprovide periodic or monthly certifications of actual effort expended in accordance with OMB CircularA-87 for twelve employees charged to the Child Nutrition, Title III, and Medi-Cal programs.

Questioned Costs10.553 & 10.555 - Child Nutrition Cluster (2014-15 Grant) - $199,58584.365 - Title III (2014-15 Grant) - $1,85893.778 - Medi-Cal (2013-14 Expenditures) - $854Total Questioned Costs - $202,297

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EffectThe district did not comply with the requirements of OMB Circular A-87 with regards to twelveemployees.

CauseIndividuals charged with responsibility for obtaining certifications to document employee time andeffort did not understand the requirements of OMB Circular A-87. In addition, the district did not havea procedure in place to ensure that the required documentation was obtained for all employeescharged to federal programs. Documentation for some employees was obtained prior to the end ofthe period being certified. In addition, some employees in the child nutrition program did not completedocumentation.

RecommendationImplement procedures to ensure that all employees charged to federal programs are documented inaccordance with OMB Circular A-87. Provide training to employees to ensure procedures areunderstood and followed. Implement review procedures to ensure documentation is completedcorrectly and timely.

LEA's ResponseSouth Bay Union School District has implemented procedures for personnel activity reports andsemi-annual certifications timekeeping requirements. Included in the internal procedures is the timelinefor supervisors and categorical staff to ensure procedures are understood and followed.

D. State Award Findings and Questioned Costs

None

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SOUTH BAY UNION SCHOOL DISTRICTSUMMARY SCHEDULE OF PRIOR AUDIT FINDINGSFOR THE YEAR ENDED JUNE 30, 2015

Management's ExplanationFinding/Recommendation Current Status If Not Implemented

Finding 2014-001 (50000)Allowable Costs/Cost PrinciplesDocumentation of Employee Time and Effort

In review of employees charged to the Title II TeacherQuality, Title III and Medi-Cal programs we noted that thedistrict was unable to provide periodic or monthlycertifications of actual effort expended in accordance withOMB Circular A-87 for six employees charged to theprograms.

We recommended the district implement procedures toensure that all employees charged to federal programs aredocumented in accordance with OMB Circular A-87. Inaddition, we recommended the district provide training toemployees to ensure procedures are understood andfollowed as well as implementing review procedures to Beingensure documentation is completed correctly and timely. Implemented See Current Year Finding

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APPENDIX C

GENERAL INFORMATION ABOUT THE CITY OF IMPERIAL BEACH AND SAN DIEGO COUNTY

The following information concerning the City of Imperial Beach (the “City”) and San

Diego County (the “County”) is included only for the purpose of supplying general information regarding the area of the District. The Bonds 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 or any of its political subdivisions (other than the District) is liable therefor.

General

The County. The County is the southern-most county in California. The County covers

an area of approximately 4,280 square miles, about the size of the state of Connecticut. The County is bordered by the Pacific Ocean to the west, Orange and Riverside Counties to the north, Imperial County to the east, and the State of Baja California, Mexico to the south. The County includes 70 miles of the Pacific Ocean coastline, the Anza-Borrego Desert, which forms the eastern third of the county, the Laguna Mountains, the San Diego Bay, one of the world’s largest natural deep-water harbors, and the San Diego International Airport.

The City. The City is the most southwesterly city in the continental United States, and is

flanked by the Pacific Ocean and South San Diego Bay. Population

The following sets forth the population estimates for the City, the County and the State as of January 1 for the years 2012 to 2016.

CITY OF IMPERIAL BEACH, SAN DIEGO COUNTY AND STATE OF CALIFORNIA

Estimated Population

Year (January 1)

City of Imperial Beach

San Diego County

State of California

2012 26,750 3,153,951 37,881,357 2013 26,993 3,194,778 38,239,207 2014 27,114 3,230,278 38,567,459 2015 27,290 3,263,848 38,907,642 2016 27,434 3,288,612 39,255,883

Source: State of California Department of Finance, Demographic Research Unit.

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Employment and Industry

The District is included in the San Diego-Carlsbad Metropolitan Statistical Area (“MSA”), which includes the entire County. The unemployment rate in the County was 4.2% in May 2016, down from a revised 4.5% in April 2016, and below the year-ago estimate of 5.0%. This compares with an unadjusted unemployment rate of 4.7% for California and 4.5% 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 2011 through 2015.

SAN DIEGO-CARLSBAD METROPOLITAN STATISTICAL AREA

(San Diego County) Civilian Labor Force, Employment and Unemployment

(Annual Averages) March 2015 Benchmark

2011 2012 2013 2014 2015

Civilian Labor Force (1) 1,524,600 1,542,800 1,547,000 1,549,800 1,563,800 Employment 1,367,200 1,402,000 1,425,900 1,450,300 1,482,500 Unemployment 157,300 140,800 121,100 99,500 81,300 Unemployment Rate 10.3% 9.1% 7.8% 6.4% 5.2% Wage and Salary Employment: (2) Agriculture 9,800 9,800 9,800 9,400 9,100 Mining and Logging 400 400 400 400 400 Construction 55,200 57,000 60,900 63,800 69,500 Manufacturing 96,000 97,800 99,000 101,600 105,300 Wholesale Trade 41,500 43,500 43,900 43,700 44,000 Retail Trade 133,400 137,200 141,300 144,300 146,800 Transportation, Warehousing and Utilities 26,100 27,300 27,200 27,000 28,200 Information 24,200 24,500 24,300 24,400 23,900 Finance and Insurance 41,800 43,700 43,900 42,100 43,600 Real Estate and Rental and Leasing 25,700 26,100 26,900 27,300 27,700 Professional and Business Services 207,700 213,900 221,600 224,900 230,900 Educational and Health Services 167,900 174,500 181,000 186,000 193,200 Leisure and Hospitality 155,600 161,700 168,600 177,000 184,000 Other Services 47,700 49,200 49,300 52,000 53,000 Federal Government 46,700 46,800 46,500 45,800 46,000 State Government 42,900 42,600 43,100 44,100 45,600 Local Government 139,300 138,500 139,900 142,000 144,300 Total, All Industries (3) 1,261,800 1,294,300 1,327,500 1,355,900 1,395,500

(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.

(3) Totals may not add due to rounding. Source: State of California Employment Development Department.

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The largest manufacturing and non-manufacturing employers in the County are shown

below, in alphabetical order.

SAN DIEGO COUNTY Largest Employers

Employer Name Location Industry

32nd St Naval Station San Diego Federal Government-National Security Barona Resort & Casino Lakeside Casinos Coronado Naval Amphibious Base Coronado Military Bases General Dynamics NASSCO San Diego Ship Builders & Repairers (Mfrs) Kaiser Foundation Hospitals San Diego Hospitals Kaiser Permanente San Diego Clinics Kaiser Permanente Palomar Escondido Health Services Kaiser Permanente Sn Diego Med San Diego Foundation-Educ Philanthropic Research Kyocera Communications Inc. San Diego Communications Marine Corps Recruit Depot San Diego Military Bases Merchants Building Maintenance San Diego Janitor Service Palomar Pomerado Health Rehab Escondido Rehabilitation Services San Diego County Sheriff Santee Police Departments San Diego Naval Medical Center San Diego Medical Centers Scripps Clinic La Jolla Clinics Scripps Research Institute La Jolla Laboratories-Research & Development Sea World San Diego San Diego Aquariums-Public Sharp Grossmont Brier Patch La Mesa Rehabilitation Services Sharp Grossmont Hospital La Mesa Hospitals Sharp Mary Birch Hosp-Women San Diego Hospitals Sharp Memorial Hospital San Diego Hospitals Solar Turbines Inc. San Diego Turbines-Manufacturers Sony Electronics Inc. San Diego Electronic Equipment & Supplies-Retail Tyco Health Care San Diego Manufacturers UTC Aerospace Systems Chula Vista Aircraft Components-Manufacturers

Source: State of California Employment Development Department, America's Labor Market Information System (ALMIS) Employer Database, 2016 1st Edition.

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Effective Buying Income “Effective Buying Income” is defined as personal income less personal tax and nontax

payments, a number often referred to as “disposable” or “after-tax” income. Personal income is the aggregate of wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor's income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as “disposable personal income.”

CITY OF IMPERIAL BEACH AND COUNTY OF SAN DIEGO

Effective Buying Income 2011 through 2015

Year

Area

Total Effective Buying Income (000’s Omitted)

Median Household Effective

Buying Income

2011 Imperial Beach $406,098 $36,942 San Diego County 70,602,550 48,111 California 814,578,458 47,062 United States 6,438,704,664 41,253





Source: The Nielsen Company (US), Inc.

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Commerce Summaries of historic taxable sales within the City and the County during the past five

years in which data is available are shown in the following tables. Annual figures are not yet available for 2014 or 2015.

Total taxable sales during the first three quarters of calendar year 2014 in the City were

reported to be $63,121,000, a 13.38% increase over the total taxable sales of the $55,670,000 reported during the first three quarters of calendar year 2013.

CITY OF IMPERIAL BEACH

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 2009 255 $59,456 344 $64,238 2010 263 64,779 354 68,976 2011 248 66,691 333 70,228 2012 243 70,183 328 73,778 2013 273 70,307 353 73,980 Source: California State Board of Equalization, Taxable Sales in California (Sales & Use Tax).

Total taxable sales during the first three quarters of calendar year 2014 in the County

were reported to be $38.7 billion, a 4.8% increase over the total taxable sales of $37 billion reported during the first three quarters of calendar year 2013.

SAN DIEGO COUNTY 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

2009 52,808 $27,958,518 80,595 $39,728,657 2010 55,462 29,475,489 83,194 41,623,636 2011 56,723 31,985,292 83,971 45,090,382 2012 55,699 34,153,236 82,293 47,947,035 2013 58,466 35,948,594 85,143 50,297,331 Source: California State Board of Equalization, Taxable Sales in California (Sales & Use Tax).

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Construction Activity

Provided below are the building permits and valuations for the City and the County during the past five years in which data is available.

CITY OF IMPERIAL BEACH Building Permit Valuation

(Valuation in Thousands of Dollars) Calendar Years 2011 through 2015

2011 2012 2013 2014 2015 Permit Valuation New Single-family $336.8 $1,587.5 $3,887.4 $5,148.9 $1,598.4 New Multi-family 420.0 1,888.5 0.0 2,851.3 1,963.6 Res. Alterations/Additions 1,808.6 1,530.7 2,091.1 2,840.4 3,610.3 Total Residential 2,565.4 5,006.7 5,978.5 10,840.6 7,172.3 New Commercial 13,913.1 517.4 81.1 270.0 477.7 New Industrial 0.0 0.0 0.0 0.0 0.0 New Other 0.0 0.0 16.6 66.8 420.6 Com. Alterations/Additions 1,516.9 3,374.0 732.5 487.3 633.6 Total Nonresidential 15,430.0 3,891.4 830.2 824.1 1531.9 New Dwelling Units Single Family 2 5 19 24 7 Multiple Family 4 30 0 26 13 TOTAL 6 35 19 50 20 Source: Construction Industry Research Board, Building Permit Summary.

SAN DIEGO COUNTY Building Activity and Permit Valuation (Valuation in Thousands of Dollars) Calendar Years 2011 through 2015

2011 2012 2013 2014 2015 Permit Valuation: New Single-family $711,514.7 $773,429.6 $936,634.3 $860,232.6 $1,069,272.9 New Multi-family 375,732.6 613,538.9 878,179.2 611,730.7 1,028,733.2 Res. Alterations/Additions 335,344.7 222,813.5 245,435.7 346,889.7 349,035.7 Total Residential 1,422,592.0 1,609,782.0 2,060,249.3 1,818,853.0 2,447,041.8 New Commercial 252,659.0 595,236.6 652,509.8 881,182.3 521,789.4 New Industrial 3,636.1 24,224.3 20,783.9 9,160.0 77,376.7 New Other 21,025.5 36,851.1 67,963.4 233,997.8 493,579.9 Com. Alterations/Additions 684,283.0 647,051.4 696,140.0 796,287.2 769,756.1 Total Nonresidential 961,603.6 1,303,363.4 1,437,397.1 1,920,627.3 1,862,502.1 New Dwelling Units Single Family 2,242 2,100 2,539 2,276 3,136 Multiple Family 3,038 4,319 5,803 4,327 6,869 TOTAL 5,280 6,419 8,342 6,603 10,005

Source: Construction Industry Research Board, Building Permit Summary.

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Transportation Surface, sea and air transportation facilities serve County residents and businesses.

Interstate 5 parallels the coast from Mexico to the Los Angeles Area and points north. Interstate 15 runs inland, leading the Riverside-San Bernardino, Las Vegas, and Salt Lake City. Interstate 8 runs eastward through the southern United States.

San Diego's International Airport (Lindbergh Field) is located approximately one mile

west of the downtown area at the edge of San Diego Bay. The facilities are owned and maintained by the San Diego Unified Port District and are leased to commercial airlines and other tenants. The airport is California's third most active commercial airport, served by 20 major airlines. In addition to San Diego International Airport, there are several general aviation airports located in the County.

Public transit in the metropolitan area is provided by the Metropolitan Transit

Development Board. The San Diego Trolley, developed by the Metropolitan Transit Development Board beginning in 1979, has been expanded. A total of 17.6 miles were added to the original 108 miles;; construction was completed in 1990.

San Diego is the terminus of the Santa Fe Railway's main line from Los Angeles.

Amtrak passenger service is available at San Diego, with stops at Solana Beach and Oceanside in the North County.

San Diego's harbor is one of the world's largest natural harbors. The Port of San Diego

is administered by the San Diego Unified Port District, which includes the cities of San Diego, National City, Chula Vista, Imperial Beach and Coronado.

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APPENDIX D

PROPOSED FORMS OF OPINIONS OF BOND COUNSEL

[2008 Election, Series B Bonds]

[LETTERHEAD OF JONES HALL]

_________, 2016

Board of Trustees South Bay Union School District 601 Elm Avenue Imperial Beach, California 91932

OPINION: $___________ South Bay Union School District

(San Diego County, California) General Obligation Bonds, 2008 Election, Series B


We have acted as bond counsel to the South Bay Union School District (the “District”) in

connection with the issuance by the District of $_____________ principal amount of South Bay Union School District (San Diego County, California) General Obligation Bonds, 2008 Election, Series B, dated the date hereof (the “Bonds”), under the provisions of Article 4.5 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing at Section 53506, and a resolution of the Board of Trustees of the District (the “Board”) adopted on July 21, 2016 (the “Resolution”). We have examined the law and such certified proceedings and other papers as we deemed necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of

the District contained in the Resolution and in the certified proceedings and other certifications furnished to us, without undertaking to verify such facts by independent investigation.

Based upon our examination, we are of the opinion, under existing law, as follows: 1. The District is a duly created and validly existing school district with the power to

issue the Bonds and to perform its obligations under the Resolution and the Bonds. 2. The Resolution has been duly adopted by the Board and constitutes a valid and

binding obligation of the District enforceable against the District in accordance with its terms.

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3. The Bonds have been duly authorized, executed and issued by the District, and are valid and binding general obligations of the District.

4. The Board of Supervisors of San Diego County is obligated under the laws of the

State of California to cause to be levied a tax without limit as to rate or amount upon the taxable property in the District for the payment when due of the principal of and interest on the Bonds.

5. Interest on the Bonds is excluded from gross income for federal income tax

purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings. The opinions set forth in the preceding sentence are subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986 which must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted in the documents relating to the Bonds to comply with each of such requirements;; and the District has full legal authority to make and comply with such covenants. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. We express no opinion regarding other federal tax consequences arising with respect to the ownership, sale or disposition of the Bonds, or the amount, accrual or receipt of interest on the Bonds.

6. The interest on the Bonds is exempt from personal income taxation imposed by

the State of California. The rights of the owners of the Bonds and the enforceability of the Bonds and the

Resolution may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases.

Respectfully submitted, A Professional Law Corporation

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PROPOSED FORMS OF OPINIONS OF BOND COUNSEL (Continued)

[2012 Election, Series B Bonds]

[LETTERHEAD OF JONES HALL]

_________, 2016

Board of Trustees South Bay Union School District 601 Elm Avenue Imperial Beach, California 91932

OPINION: $___________ South Bay Union School District

(San Diego County, California) General Obligation Bonds, 2012 Election, Series B (GO Reauthorization Bonds®)


We have acted as bond counsel to the South Bay Union School District (the “District”) in

connection with the issuance by the District of $_____________ principal amount of South Bay Union School District (San Diego County, California) General Obligation Bonds, 2012 Election, Series B (GO Reauthorization Bonds®), dated the date hereof (the “Bonds”), under the provisions of Article 4.5 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing at Section 53506, and a resolution of the Board of Trustees of the District (the “Board”) adopted on July 21, 2016 (the “Resolution”). We have examined the law and such certified proceedings and other papers as we deemed necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of

the District contained in the Resolution and in the certified proceedings and other certifications furnished to us, without undertaking to verify such facts by independent investigation.

Based upon our examination, we are of the opinion, under existing law, as follows: 1. The District is a duly created and validly existing school district with the power to

issue the Bonds and to perform its obligations under the Resolution and the Bonds. 2. The Resolution has been duly adopted by the Board and constitutes a valid and

binding obligation of the District enforceable against the District in accordance with its terms.

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3. The Bonds have been duly authorized, executed and issued by the District, and are valid and binding general obligations of the District.

4. The Board of Supervisors of San Diego County is obligated under the laws of the

State of California to cause to be levied a tax without limit as to rate or amount upon the taxable property in the District for the payment when due of the principal of and interest on the Bonds.

5. Interest on the Bonds is excluded from gross income for federal income tax

purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings. The opinions set forth in the preceding sentence are subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986 which must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted in the documents relating to the Bonds to comply with each of such requirements;; and the District has full legal authority to make and comply with such covenants. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. We express no opinion regarding other federal tax consequences arising with respect to the ownership, sale or disposition of the Bonds, or the amount, accrual or receipt of interest on the Bonds.

6. The interest on the Bonds is exempt from personal income taxation imposed by

the State of California. The rights of the owners of the Bonds and the enforceability of the Bonds and the

Resolution may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases.

Respectfully submitted, A Professional Law Corporation

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APPENDIX E

FORM OF CONTINUING DISCLOSURE CERTIFICATE

$________ SOUTH BAY UNION SCHOOL DISTRICT

(San Diego County, California) General Obligation Bonds, 2008 Election, Series B

$________ SOUTH BAY UNION SCHOOL DISTRICT


(GO Reauthorization Bonds®)

CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (this “Disclosure Certificate”) is executed and delivered by the South Bay Union School District (the “District”) in connection with the execution and delivery of the captioned bonds (together, the “Bonds”). The Bonds are being executed and delivered pursuant to two separate resolutions adopted by the Board of Trustees of the District on July 21, 2016 (the “Resolution”). The District covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being

executed and delivered by the District for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth in the Bond Resolution,

which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms have the following meanings:

“Annual Report” means any Annual Report provided by the District under and as

described in Sections 3 and 4. “Annual Report Date” means the date that is nine months after the end of the District’s

fiscal year (currently March 31 based on the District’s fiscal year end of June 30). “Dissemination Agent” means Dale Scott & Company Inc. 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” means any of the events listed in Section 5(a). “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.

“Participating Underwriter” means the original purchaser of the Bonds, required to

comply with the Rule in connection with offering of the Bonds. “Rule” means 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.

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Section 3. Provision of Annual Reports. (a) The District shall, or shall cause the Dissemination Agent to provide, not later than

nine months after the end of the District’s fiscal year (which currently would be March 31), commencing no later than March 31, 2017 with the report for the 2015-16 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. 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 in a timely manner (or cause the Dissemination

Agent to provide in a timely manner) an Annual Report by the Annual Report Date, the District shall provide (or cause the Dissemination Agent to provide) in a timely manner to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A.

(c) With respect to the 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 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 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.

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(b) Unless otherwise provided in the audited financial statements filed on or before the Annual Report Date, the following information with respect to the most recently completed fiscal year:

(i) assessed valuation of taxable properties in the District for the most

recently completed fiscal year;; (ii) assessed valuation of properties of the top twenty taxpayers for the most

recently completed 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 only if the District’s general obligation bond tax levy is not included in the County of San Diego Teeter Plan;; 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 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) Pursuant to the provisions of this Section, the District shall give, or cause to be

given, notice of the occurrence of any of the following events with respect to the Bonds:

(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 status of the security.

(7) Modifications to rights of security holders, if material.

(8) Bond calls, if material, and tender offers.

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(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 District.

(13) The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, 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 subsections (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 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 Bonds.

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 Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(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 such Agent, with or without appointing a successor Dissemination Agent.

Section 9. Amendment;; Waiver. Notwithstanding any other provision hereof, the District

may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or

5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;;

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(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 Bonds, 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 Bonds in the manner provided in the Bond Resolution for amendments to the Bond Resolution with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

If the annual financial information or operating data to be provided in the Annual Report

is amended under 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 9. Additional Information. Nothing in this Disclosure Certificate prevents 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 10. Default. If the District fails to comply with any provision of this Disclosure

Certificate, any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Bond Resolution, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The

Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the District agrees to indemnify and save the Dissemination Agent, its officers,

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directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of

the District, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

Date: ____________, 2016 SOUTH BAY UNION SCHOOL DISTRICT

By:

Chief Business Official

Dissemination agent acceptance of duties: DALE SCOTT & CO., INC. By:

Managing Principal

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EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Obligor: South Bay Union School District

Name of Bond Issue: $_____________ South Bay Union School District (San Diego County, California) General Obligation Bonds, 2008 Election, Series B

$_____________ South Bay Union School District (San Diego County, California) General Obligation Bonds, 2012 Election, Series B (GO Reauthorization Bonds®)

Date of Issuance: ____________, 2016

NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Bonds as required by Section 15 of the resolution adopted by the Board of Trustees of the District authorizing the issuance of the Bonds. The District anticipates that the Annual Report will be filed by _____________.

Dated:

DISSEMINATION AGENT By:

Authorized Officer

Cc: South Bay Union School District

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APPENDIX F

DTC AND THE BOOK-ENTRY ONLY SYSTEM

The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC 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.

Neither the District nor the Paying Agent take any responsibility for the information

contained in this Section. No assurances can be given that DTC, DTC Participants or Indirect Participants will

distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) Bonds representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" of DTC to be followed in dealing with DTC Participants are on file with DTC.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities

depository for the securities (in this Appendix, the “Bonds”). The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond will be issued for each maturity of the Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. If, however, the aggregate principal amount of any maturity exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. 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

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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 contained on this Internet site is not incorporated herein by reference.

3. Purchases of Bonds under the DTC system must be made by or through Direct

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

4. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with

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

5. Conveyance of notices and other communications by DTC to Direct Participants, by

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

6. Redemption notices will be sent to DTC. If less than all of the Bonds within an issue

are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with

respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to District as soon as

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possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and interest payments on the Bonds will be

made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and corresponding detail information from District or Paying Agent on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, Paying Agent, or District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of District or Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as securities depository with respect to

the Bonds at any time by giving reasonable notice to District or Paying Agent. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered.

10. 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, Bond certificates will be printed and delivered to DTC.

11. The information in this section concerning DTC and DTC’s book-entry system has

been obtained from sources that District believes to be reliable, but District takes no responsibility for the accuracy thereof.

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APPENDIX G

SAN DIEGO COUNTY INVESTMENT POOL INVESTMENT POLICY AND MONTHLY REPORT

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((661199)) 553333--66331144

Available online: http://www.sandiego.gov/treasurer/pdf/invpolicy.pdf

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Table of Contents Page I. Scope ................................................................................................................... 4

II. Objectives ............................................................................................................ 5

A. Safety of Principal .......................................................................................... 5

B. Liquidity ......................................................................................................... 6

C. Performance Measurement .......................................................................... 6

III. Delegation of Authority ...................................................................................... 6

IV. Ethics and Conflict of Interest ........................................................................... 7

V. Safekeeping of Securities .................................................................................. 7

VI. Internal Controls ................................................................................................. 7

VII. Reporting ............................................................................................................. 8

VIII. Qualified Dealers. ................................................................................................ 8

IX. Authorized Investments ..................................................................................... 9

A. U.S. Treasuries ............................................................................................ 10

B. U.S. Agencies .............................................................................................. 10

C. Supranationals ............................................................................................ 10

D. Bankers’ Acceptances ................................................................................ 11

E. Commercial Paper (CP) ............................................................................... 11

F. Negotiable Certificates (NCD) ..................................................................... 11

G. Non-Negotiable Time Deposits .................................................................. 11

H. Medium Term Notes/Bonds (MTN) ............................................................. 12

I. Municipal Securities of California Local Agencies .................................. 12

J. Repurchase Agreement .............................................................................. 12

K. Reverse Repurchase Agreement ............................................................... 13

L. Local Agency Investment Fund ................................................................. 13

M. Notes, Bonds, or other Obligations ........................................................... 13

N. Mortgage and Asset-Backed Securities ................................................... 14

O. Mutual Funds ............................................................................................... 14

P. Financial Futures ......................................................................................... 14

Summary Table of the Policy’s Authorized Investments. .............................. 15

X. Maturity and Credit Rating Criteria .................................................................. 16

XI. Policy Review .................................................................................................... 16

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Exhibit 1 - Broker/Dealer Qualification Criteria ......................................................... 17

Exhibit 2 - Broker/Dealer Receipt of Investment Policy. .......................................... 19

Exhibit 3 - California Government Code Section 53601 ........................................... 20

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THE CITY OF SAN DIEGO

CITY TREASURER’S INVESTMENT POLICY POOLED INVESTMENT FUNDS

I. SCOPE

In accordance with the Charter of the City of San Diego, and under authority granted by the City Council, the Treasurer is responsible for investing the unexpended cash in the City Treasury. This investment policy applies to all the investment activities of the City of San Diego, except for the employees’ retirement funds, which are administered separately, the proceeds of certain debt issues which are invested in qualified mutual funds or managed and invested by trustees appointed under indenture agreements, and the assets of trust funds which are placed in the custody of the Funds Commission by Council ordinance. All financial assets of all other funds shall be administered in accordance with the provisions of this policy.

1. Definitions

"CGC" means California Government Code. “Corporation” means a legal entity created under the laws of a state to carry on some business or other authorized activity. Limited liability companies are also considered a corporation under California Government Code §53601. This definition applies to individual securities like corporate notes/bonds. “Cost Value” (aka “Book Value”) means the original cost of the investment, plus accrued interest and amortization or accretion of any premium or discount.

"Credit Risk" means the risk of loss due to the failure of the issuer of a security.

"DVP" means delivery versus payment.

"Leverage" means 1) the use of borrowed funds to increase earnings on existing investments, e.g. reverse repurchase agreement or 2) with structured notes, leveraging can take place when the coupon rate is determined by leveraging an index (e.g. 2 times 3 month LIBOR minus 18%).

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"Market Risk" means the risk of market value fluctuations due to overall changes in the general level of interest rates.

“NRSRO” means Nationally Recognized Statistical Rating Organization, e.g. Moody’s, Standard & Poor’s, and Fitch.

II. OBJECTIVES

A. Safety of principal

Safety of principal is the foremost objective of the City of San Diego. Investment decisions shall seek to minimize net capital losses on a portfolio basis. This policy recognizes that market conditions may warrant the sale of individual securities that would incur market losses in order to protect further capital losses. The intent of this policy is to ensure that capital losses are minimized on a portfolio level rather than on each transaction. The City shall seek to preserve principal by mitigating various types of risk, including credit risk and market risk.

1. Credit risk - Credit or default risk shall be mitigated by investing in

only very safe securities (see Section IX for detailed limitations on credit risk), and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm the City's cash flow.

2. Market risk - Market or interest rate risk shall be mitigated by

establishing two portfolios with target durations based upon the expected short and long-term cash needs of the City. The liquidity portfolio will be structured with an adequate mix of highly liquid securities and maturities to meet major cash outflow requirements for at least the next six months (per CGC §53646). The liquidity portfolio will use the Bank of America Merrill Lynch 3-6 month Treasury Index as a benchmark and seek to maintain a duration of plus or minus 40% of the duration of that benchmark. The core portfolio will use the Bank of America Merrill Lynch 1-3 year Treasury Index as a benchmark and maintain a duration of plus or minus 20% of the duration of that benchmark. It will consist of high quality liquid securities with a maximum maturity of 5 years, will be structured to meet the longer-term cash needs of the City and seek to match or exceed the performance of the index. The use of leverage is strictly limited to the use of reverse repurchase agreements as outlined in Section IX (K). At no time will the use of any such reverse repo, structured product or derivative security violate the maximum security limits or maximum maturity limits as

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stated in this policy.

B. Liquidity

The City Treasurer’s pooled investment fund will be composed of two portfolios (core and liquidity). While both portfolios will invest in liquid securities with an emphasis on the safety of principal, the liquidity portfolio will be designed to ensure that the projected pool expenditure requirements of the City for the next six months can be met with anticipated revenues and a combination of maturing securities, coupon payments and/or highly liquid investments at all times, as required by California Government Code §53646.

C. Performance Measurement

The portfolios shall be designed to attain a market average rate of return through economic cycles.

The performance of the core portfolio shall be measured on a total return basis against the Bank of America Merrill Lynch 1-3 year Treasury Index. It is explicitly recognized herein, however, that in a diversified portfolio managed on a total return basis, realized and unrealized losses are inevitable, and must be considered within the context of the overall investment return. The City Treasurer will coordinate trading activity with the Chief Financial Officer when the realization of portfolio losses will have a significant impact on budgeted interest revenues and will inform Financial Management and the Comptroller’s Office of such losses.

The return for the liquidity portfolio should, on average, equal or exceed the return on the Bank of America Merrill Lynch 3-6 month bill index over a rolling three year period.

III. DELEGATION OF AUTHORITY

The City Council, as permitted under California Government Code §53607, delegates the responsibility to invest or reinvest the funds of the City of San Diego or to sell or exchange securities so purchased, to the City Treasurer.

Within the Office of the City Treasurer, responsibility for the day-to-day investment of City funds is delegated to the Chief Investment Officer. In the absence of the Chief Investment Officer and Investment Officer, the City Treasurer shall take responsibility for the daily investment of City funds.

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IV. ETHICS AND CONFLICT OF INTEREST

In accordance with California Government Code §§1090 et seq., 87100 et seq., 89502(c) and 89503(c) and City of San Diego Administrative Regulation 95.60, officers and employees of the City will refrain from any activity that could conflict with the proper execution of the investment program or that could impair their ability to make impartial investment decisions. All investment personnel shall comply with the reporting requirements of the Political Reform Act, to include the annual filing of Statements of Economic Interest.

Investment staff are prohibited from engaging in trading for their personal account where there would be a perceived conflict of interest, e.g. trading in a broker/bank stock that has a relationship with the City, or would otherwise be in violation of the law or a conflict of interest as stated above. The Investment staff are required to report their personal trading activity concurrently or on a monthly basis and are required to provide a signed statement of all of their personal transactions annually to the City Treasurer.

V. SAFEKEEPING OF SECURITIES

To protect against potential losses caused by collapse of individual securities dealers, all securities owned by the City, including collateral on repurchase agreements, but necessarily excluding securities used as collateral for reverse repurchase agreements, shall be held in safekeeping by the City's custodian bank or a third party bank trust department, acting as agent for the City under the terms of a custody or trustee agreement executed by the bank and by the City. All securities will be received and delivered using standard delivery-versus-payment (DVP) procedures and in accordance with State Code. Any exception to this standard delivery practice, e.g. DVP failure necessitating delivery other than by simultaneous exchange, will require written procedural approval by the City Treasurer.

VI. INTERNAL CONTROL

The City Treasurer has established a system of internal controls to ensure compliance with the policies and procedures of the City of San Diego and the California Government Code. These policies and procedures are reviewed during the year by the Chief Financial Officer. At least annually an independent audit is conducted by a public accounting firm which includes a review of the investment procedures and activities of the Office of the City Treasurer.

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The Investment Advisory Committee, established in March 1990, is charged with the responsibility to review on an on-going basis the investment policy and practices of the City Treasurer and to recommend changes.

VII. REPORTING

The City Treasurer is required to submit a quarterly report of investment activity to the City Council in accordance with California Government Code §53646. The City Treasurer has elected to provide such report consistent with the reporting requirements of California Government Code §53646 on a monthly basis. The report shall be designed with the advice of the Investment Advisory Committee.

VIII. QUALIFIED DEALERS

The City shall transact business with broker/dealers that meet the qualification criteria established by the City Treasurer. In accordance with California Government Code §53601 a bank/dealer must be qualified as a dealer regularly reporting to the New York Federal Reserve Bank in order to conduct repurchase or reverse repurchase agreements with the City. Investment staff shall ensure that broker/dealers who wish to do business with the City meet the City Treasurer's Broker/Dealer Qualification Criteria (Exhibit 1), make markets in securities appropriate to the City's needs, and can provide additional value through competitive execution, timely market information and general research.

Annually, the City Treasurer shall send a copy of the current investment policy to all dealers who have met the qualification criteria and are doing business with the City Treasurer. Investment staff will maintain a qualification matrix and annually review dealers to ensure they are qualified. Confirmation of receipt of this policy shall be considered as evidence that the dealer understands the City's investment policies, and intends to show the City only appropriate investments. A copy of the City Treasurer's standard receipt form is attached (Exhibit 2).

The Investment staff is permitted to deal directly with the issuers of any securities that are authorized for purchase under Section IX of this policy and meet all the qualifications of this policy.

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IX. AUTHORIZED INVESTMENTS

In accordance with California Government Code §53600.3 the City Treasurer or the Chief Investment Officer or their designees who are authorized to make investment decisions on behalf of the City and its agencies are trustees and therefore fiduciaries subject to the prudent investor standard:

When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.

Trading is prohibited when cash or liquid securities are not available to pay for the securities being purchased. The taking of short positions, that is, selling securities which the City does not own, is also prohibited.

Investments which exceed 5 years in maturity require that authority be granted by City Council before purchase. Written authority of the City Council must be granted specifically or as part of an investment program no less than three months prior to the date of purchase (CGC §53601).

The City may invest in securities issued by U.S. Government Agencies that contain embedded calls or options as long as those securities are not inverse floaters, range notes, interest only strips that are derived from a pool of mortgages or a security that could result in a zero or negative accretion of interest if held to maturity (CGC §53601.6). The exception to this restriction would be a structured note in the final coupon period that has the same characteristics as any other simple fixed term security. The City may invest up to a maximum of 8% of the cost value of the portfolio at time of purchase in structured notes. These limitations will not apply to investments in shares of beneficial interest issued by diversified management companies as referenced in subparagraph (M) of this section (CGC §53601).

Callable securities (i.e. securities redeemable in part or in full by the issuer prior to the maturity date) shall not exceed 30% of the cost value of the portfolio. Callable securities which have passed their final call date and are no longer callable will not be included when calculating the 30% limit. The City may invest in floating-rate securities whose coupon resets are based upon a single fixed income index which would be representative of an eligible investment (e.g. LIBOR, T-bill, prime, 2 year CMT), provided that the security

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is not leveraged (e.g. 2 times an index ) or has a coupon that resets inversely to the underlying index. The City is further governed by the California Government Code, §§ 53600 et seq. A copy of applicable California Government Code provisions is attached as Exhibit 3. Within the context of these limitations, the following investments are authorized, and further limited herein:

A. United States Treasury Bills, Bonds, and Notes, or those for which the full

faith and credit of the United States are pledged for payment of principal and interest. There is no limitation as to the percentage of the portfolio which can be invested in this category.

B. Obligations issued by agencies of the U.S. Government, such as the

Government National Mortgage Association (GNMA), the Federal Farm Credit Bank System (FFCB), the Federal Home Loan Bank System (FHLB), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). No more than 1/3 of the cost value of the total portfolio at time of purchase can be invested in the unsecured debt of any one agency.

C. United States dollar denominated senior unsecured unsubordinated

obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated “AA” or better by an NRSRO and shall not exceed 30% of the cost value of the portfolio at time of purchase. The 30% maximum percentage may be invested entirely in one of the listed names for this investment type. These investments shall be classified as “Supranationals” for reporting purposes.

Investments detailed in D through I below shall have a long-term rating in the “A” rating category or higher and a short-term rating in the highest rating category by at least two NRSRO’s at the time of purchase, unless the full principal and interest accrual of the investment is guaranteed by the Federal Deposit Insurance Incorporation (FDIC) or collateralized in accordance with California Government Code. Investments maturing in one year or less must at least meet the short-term rating requirement if long-term ratings are not available.

Investments detailed in D through I below are additionally restricted as to percentage of the cost value of the portfolio in any one issuer name up to a maximum of 5%. The total cost value invested in any one issuer name will not

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exceed 5% of an issuer's net worth. An additional 5%, or a total of 10%, of the cost value of the portfolio in any one issuer name can be authorized upon written approval of the City Treasurer. For purposes of this Policy, debt issued out of the parent company, any subsidiary or holding company, or at the bank level (if applicable) shall be considered issuance out of the same issuer name.

Any bank, savings association, federal association or federally insured industrial loan company the City deposits money with is required to have an overall rating of not less than “satisfactory” in its most recent evaluation by the appropriate federal financial supervisorial agency of its record of meeting the credit needs of California communities including low and moderate income neighborhoods.

D. Bills of exchange or time drafts drawn on and accepted by a commercial

bank, otherwise known as banker's acceptances. Banker's acceptances purchased may not exceed 180 days to maturity or 40% of the cost value of the portfolio.

E. Commercial paper issued by domestic corporations having assets in

excess of $500,000,000. Purchases of eligible commercial paper may not exceed 270 days to maturity nor represent more than 10% of the outstanding paper of an issuing corporation. Purchases of commercial paper may not exceed 25% of the cost value of the portfolio. The exclusive use of banks, savings and loans and primary dealers mentioned in Section VIII will not pertain to the purchase and sale of commercial paper. No more than 10% of the outstanding commercial paper of any single corporate issuer may be purchased by the City at any time.

F. Negotiable certificates of deposit (“NCD”) issued by a nationally or state-

chartered bank or a state or federal savings institutions, or a state-licensed or federally-licensed branch of a foreign bank ("Yankee"). Purchases of negotiable certificates of deposit may not exceed 30% of the cost value of the portfolio. The City is prohibited from investing its funds in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the City, the City Treasurer, or any person delegated by the City Treasurer to have investment decision making authority also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee, or the supervisory committee of the state or federal credit union issuing the certificate of deposits.

G. Time deposits. The City may invest in non-negotiable time deposits

collateralized in accordance with the California Government Code, in those banks and savings and loan associations which meet the requirements for investment in negotiable certificates of deposit. This category also includes

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non-negotiable certificates placed through a nationally or state chartered commercial bank, savings bank, and savings and loan associations, provided that the full principal and interest accrual is insured by the Federal Deposit Insurance Corporation (FDIC), pursuant to California Government Code §53601.8. These fully FDIC insured certificates of deposit shall have a maximum maturity of 12 months and will be limited to 2% of the portfolio, and the placement agent and individual certificate of deposit issuers are exempt from the credit rating criteria specified in this investment policy. Since time deposits are not liquid, no more than 25% of the cost value of the portfolio may be invested in this category.

H. Medium-term notes/bonds. The City may invest in medium-term notes or

bonds issued by corporations organized and operating within the United States. The issuing corporation must in excess of $500,000,000 in shareholder’s equity. Purchase of medium-term notes/bonds may not exceed 30% of the cost value of the portfolio.

I. Municipal Securities of Local Agencies of California. Pursuant to the California Government Code §53601(e), the City may invest in bonds, notes, warrants, or other evidences of indebtedness of any local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. The City may invest up to a maximum of 20% of the cost value at time of purchase of the pooled portfolio in these securities. No more than 5% of the cost value of the portfolio at time of purchase may be invested in notes issued by any one issuer or in notes insured by any one insurer, except for securities supported by the full faith of the State of California.

J. Repurchase agreements. The City may invest in repurchase agreements

with primary dealers of the Federal Reserve Bank of New York with which the City has entered into a master repurchase agreement. The Public Securities Association standard master repurchase agreement with the document titled “Supplemental Terms and Conditions of the City of San Diego” is the "Master Repurchase Agreement." The maturity of repurchase agreements shall not exceed one year. The market value of securities used as collateral for repurchase agreements shall be initially priced with margin ratios as stated in the Master Repurchase Agreement. Collateral pricing will be monitored at least monthly and margins adjusted no less than quarterly (CGC §53601) by the Investment staff. Margin amounts are to be maintained at 102% (CGC §53601) of the value of the repurchase agreement. In order to conform with provisions of the Federal Bankruptcy Code which provide for the liquidation of securities held as collateral for repurchase agreements, the only securities acceptable as collateral shall be

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certificates of deposit, eligible bankers' acceptances, or securities that are direct obligations of the United States or any agency of the United States. Additionally, all repo collateral must meet the eligibility and investment restrictions of this policy.

K. Reverse repurchase agreements. The City may invest in reverse

repurchase agreements only with primary dealers of the Federal Reserve Bank of New York with which the City has entered into a master repurchase contract as stated in Section IX of the Policy. The City may invest up to a maximum of 20% of the base value of the portfolio in reverse repurchase agreements. In addition, reverse repurchase agreements may only be utilized if the following conditions are met.

1. The security to be sold for the reverse has been owned and fully paid

for by the City for a minimum of 30 days (CGC §53601).

2. The agreement does not exceed 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using the reverse and the final maturity of the same security (i.e., the security being used as collateral).

3. Any security purchased with the proceeds of a reverse repurchase agreement may not exceed 92 days to maturity unless there is a written codicil guaranteeing a minimum earning or spread for the entire life of the security (to maturity) being purchased for reinvestment purposes.

4. For the purposes of this section the “base value” of the pool portfolio of the City is defined as that dollar amount obtained by totaling all cash balances placed in the pool excluding any amounts obtained through selling securities by reverse repurchase agreements or other similar borrowing methods (CGC §53601).

L. Local Agency Investment Fund. The City may invest in the Local Agency

Investment Fund (LAIF) established by the State Treasurer for the benefit of local agencies under §16429.1 of the California Government Code up to the maximum permitted.

M. Notes, bonds, or other obligations which are at all times secured by a valid

first priority security interest in securities of the types listed by CGC §53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by CGC §53652 for the purpose of securing local agency deposits. The securities serving as

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collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank which is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities which the security interest is granted. Securities eligible for investment under this subdivision shall be issued by an issuer rated in a rating category of "AA" or its equivalent or better by a NRSRO and having a rating in the "A" category or higher for the issuer's unsecured debt, as provided by a NRSRO.

N. Any U.S. Government agencies' mortgage pass-through security,

collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate, or consumer receivable-backed bond of a maximum of five years maturity. Securities eligible for investment under this subdivision shall be issued in the public securities market and rated in a rating category of "AAA" or its equivalent by a NRSRO and having a rating in the "A" category or higher for the issuer's unsecured debt, as provided by a NRSRO. Purchase of securities authorized by this subdivision may not exceed 20 percent of the agency's surplus money that may be invested pursuant to this section.

O. Shares of beneficial interest issued by diversified management companies

or mutual funds shall be rated in the highest rating category of at least two of the NRSROs and must have in excess of $500,000,000 in assets under management. The company or mutual fund must retain an investment advisor registered with the SEC with no less than five years experience managing money market mutual funds, or if the fund is not a money market mutual fund, investing in the securities and obligations as authorized by subdivision (A) to (N) inclusive. The total purchase price of this category shall not include commissions and shall not exceed 20% of the cost value of the portfolio, with no more than 5% of the cost value of the portfolio invested in any one fund (CGC §53601).

P. Financial futures. The City may buy financial futures contracts only to

hedge against changes in market conditions for the reinvestment of bond proceeds when deemed appropriate.

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Ineligible Investments. Investments not described herein, including, but not limited to, common

stocks and long-term corporate notes/bonds are prohibited from use in this portfolio.

Summary Table of the Policy’s Authorized Investments8

Maximum Maximum % Maximum

% with Minimum Investment Type Maturity 1 of Portfolio One Issuer Rating 7

U.S. Treasury Obligations (bills, bonds, or notes) 5 years None None None U.S. Agencies 5 years (2) (2) None Supranationals 5 years 30% 30% AA Bankers' Acceptances 6 180 days 40% 10% (3) Commercial Paper 6 270 days 25% 10% P-1 Negotiable Certificates 6 5 years 30% 10% (3) Repurchase Agreements 1 year None None None Reverse Repurchase Agreements 4 92 days 20% None None Local Agency Investment Fund N/A None None None Non-Negotiable Time Deposits 6 5 years 25% 10% (3) Medium Term Notes/Bonds 6 5 years 30% 10% A Municipal Securities of California Local Agencies 6 5 years 20% 10% A Mutual Funds N/A 20% 5% AAA Notes, Bonds, or Other Obligations 5 years None None AA Mortgage and Asset-Backed Securities 5 years 20% None AAA Financial Futures 5 None None None None

1 In the absence of a specified maximum, the maximum is 5 years. 2 No more than one-third of the cost value of the total portfolio at time of purchase can be invested in the unsecured debt of any one agency. 3 Credit and maturity criteria must be in accordance with Section X of the City Treasurer’s Investment Policy. 4 Maximum % of portfolio for Reverse Repurchase Agreements is 20% of base value. 5 Financial futures transactions would be purchased only to hedge against changes in market conditions for the reinvestment of bond proceeds. 6 Investment types with a 10% maximum with one issuer are further restricted per the City Treasurer’s Investment Policy: 5% per issuer and an additional 5% with authorization by the City Treasurer. 7 Minimum credit rating categories include modifications (+/-). 8 The City’s investments are governed by California Government Code, Sections 53600 et seq. Within the investments permitted by the Code, the City seeks to further restrict eligible investments to the guidelines listed above. In the event a discrepancy is found between this policy and the Summary Table above, the more restrictive parameters will take precedence. Percentage holding limits listed in this section apply at the time the security is purchased.

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X. MATURITY AND CREDIT RATING CRITERIA

This rating criteria will apply at the time of purchase. To be eligible for purchase an issuing institution or its debt must meet the minimum rating requirements as described in CGC §§53601 et seq. The City requires that all securities be rated by at least two NRSROs, with at least two qualifying ratings from Moody’s, Standard and Poor’s, or Fitch. If an eligible investment is downgraded after purchase, in a rating category which is below the minimum required, the Chief Investment Officer or Investment Officer will document his/her analysis and recommendation for disposition of the security for review by the City Treasurer.

XI. POLICY REVIEW

The Treasurer shall annually render to the Mayor, the Chief Financial Officer, the City Council, and the Investment Advisory Committee a statement of investment policy. The investment policy will be considered at a regular meeting of the City Council as required by California Government Code §53646.

Exhibit 1: City Treasurer's Broker/Dealer Qualification Criteria Exhibit 2: Receipt form (see Section VIII) Exhibit 3: California Government Code §§53601 et seq.

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Exhibit #1

City Treasurer Broker/Dealer Qualification Criteria

The following criteria is established to guide the City Treasurer Investment staff in their qualification of broker/dealers [the firm]. This criteria is reviewed by the City Treasurer's Investment Advisory Committee as provided for in the City Treasurer's Investment Policy. 1. Any firm entering into a new business relationship to conduct security transactions with the City Treasurer's Office is required to make application and qualify for recommendation by the City Treasurer. 2. Upon application and as requested by the City Treasurer's Investment staff all the firms are required to provide a copy of their most recent published annual report, quarterly reports issued since the last annual report, Financial and Operational Combined Uniform Single (FOCUS) Report, organization chart, any financial information regarding credit lines and debt support provided by the parent firm and any other data required. 3. The City views the relationship of the firm and its representatives to the City as being a long-term mutually beneficial business relationship. We expect the firm and its staff to act with integrity and trust. The firm must ensure that its staff is aware of the City Treasurer's Investment Policy as well as California Government Code sections 53601 and 53635 that govern the securities transactions of the City. 4. The firm is required to have a net capital position in excess of $100 million, be in compliance with the minimum net capital requirements of the SEC's Uniform Net Capital Rule and the New York Stock Exchange Rule 104.20 if applicable to their firm. 5. The firm is required to maintain an active secondary market for the securities sold to the City. 6. Treasurer's staff will conduct on-site visits of the firm as necessary and practical to ensure that the firm and its staff can continue to provide the services the City requires to be delivered in a timely and efficient manner. 7. The firm will be monitored by the Investment staff to ensure that the City is being provided the best execution on trades, capable and knowledgeable sales and support staff, economic and credit research, technical analysis (if available) and credit market support as needed. 8. The firm or parent must have an operating history of profitability and capital requirements consistent with the highest standards and regulatory requirements of the industry and the judgment of the Investment staff.

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9. All securities purchased by the City from the firm will be delivered to the City's Custodian Bank on a "delivery vs. payment" basis (California Government Code). 10. No firm shall be eligible for selection who has made a political contribution within any consecutive 48 month period in an amount exceeding the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board, to any political official or candidate for office with the City. 11. All firms transacting repurchase or reverse repurchase agreements with the City must be a reporting dealer to the Federal Reserve Bank of New York, as required by California Government Code Section 53601, and must have a fully executed Master Repurchase Agreement with Annex I on file with the City Treasurer. 12. All firms must maintain a Moody's and Standard and Poor’s or comparable national or international credit rating service short term rating of A1/P1 and long-term debt rating category of A/a or be a primary dealer of the Federal Reserve Bank of New York to maintain their business relationship with the City. 13. Preference will be given to those firms that can provide the broadest array of investment services to the City. 14. All firms are required to conduct their business with the City in a manner that reflects the highest ethical standards.

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Exhibit #2 City of San Diego Office of the City Treasurer 1200 Third Ave. 16th Floor, Suite 1624 San Diego, CA 92101 Re: Receipt of Investment Policy of the City of San Diego Dated January 1, 2016 We are in receipt of a copy of the referenced Investment Policy of the City of San Diego. We have read and understand the provisions and guidelines of the Policy. We attest that our firm meets the City of San Diego’s requirements shown in Exhibit 1 of their Investment Policy entitled “Broker/Dealer Qualification Criteria.” All salespersons covering the City’s account will be made aware of this Policy, and will be directed to give consideration to its provisions and constraints in selecting investment opportunities to present to the City. We agree to provide the City with a copy of our annual reports as they are published. We agree to provide an electronic or facsimile copy of all trades executed with your office and our firm to the Chief Investment Officer, Investment Assistant, or fax (619) 533-6259, on the trade date. All trade confirmations are to be mailed or e-mailed to our office.

Signed: ______________________________ Name ______________________________ Title ______________________________ Firm ______________________________ Date

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Exhibit 3: California Government Code Section 53601 Print date: 9/29/2014

53601.This section shall apply to a local agency that is a city, a district, or other local agency that does not pool money in deposits or investments with other local agencies, other than local agencies that have the same governing body. However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies. The legislative body of a local agency having moneys in a sinking fund or moneys in its treasury not required for the immediate needs of the local agency may invest any portion of the moneys that it deems wise or expedient in those investments set forth below. A local agency purchasing or obtaining any securities prescribed in this section, in a negotiable, bearer, registered, or nonregistered format, shall require delivery of the securities to the local agency, including those purchased for the agency by financial advisers, consultants, or managers using the agency’s funds, by book entry, physical delivery, or by third-party custodial agreement. The transfer of securities to the counterparty bank’s customer book entry account may be used for book entry delivery. For purposes of this section, “counterparty” means the other party to the transaction. A counterparty bank’s trust department or separate safekeeping department may be used for the physical delivery of the security if the security is held in the name of the local agency. Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement or securities lending agreement authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment: (a) Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency. (b) United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. (c) Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state. (d) Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California. (e) Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a

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revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. (f) Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises. (g) Bankers’ acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers’ acceptances shall not exceed 180 days’ maturity or 40 percent of the agency’s moneys that may be invested pursuant to this section. However, no more than 30 percent of the agency’s moneys may be invested in the bankers’ acceptances of any one commercial bank pursuant to this section. This subdivision does not preclude a municipal utility district from investing moneys in its treasury in a manner authorized by the Municipal Utility District Act (Division 6 (commencing with Section 11501) of the Public Utilities Code). (h) Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2): (1) The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated “A” or higher by an NRSRO. (2) The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. (C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by an NRSRO. Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their moneys in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635. (i) Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposit do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in

22

the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decisionmaking authority in the administrative office manager’s office, budget office, auditor-controller’s office, or treasurer’s office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit. (j) (1) Investments in repurchase agreements or reverse repurchase agreements or securities lending agreements of securities authorized by this section, as long as the agreements are subject to this subdivision, including the delivery requirements specified in this section. (2) Investments in repurchase agreements may be made, on an investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlie a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102 percent no later than the next business day. (3) Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met: (A) The security to be sold using a reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio. (C) The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. (D) Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty using a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. (4) (A) Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the local agency sells securities prior to purchase with a simultaneous agreement to repurchase the security may be made only upon prior approval of the governing body of the local agency and shall be made only with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with a local agency. (B) For purposes of this chapter, “significant banking relationship” means any of the

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following activities of a bank: (i) Involvement in the creation, sale, purchase, or retirement of a local agency’s bonds, warrants, notes, or other evidence of indebtedness. (ii) Financing of a local agency’s activities. (iii) Acceptance of a local agency’s securities or funds as deposits. (5) (A) “Repurchase agreement” means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty bank’s customer book-entry account may be used for book-entry delivery. (B) “Securities,” for purposes of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity. (C) “Reverse repurchase agreement” means a sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase the securities on or before a specified date and includes other comparable agreements. (D) “Securities lending agreement” means an agreement under which a local agency agrees to transfer securities to a borrower who, in turn, agrees to provide collateral to the local agency. During the term of the agreement, both the securities and the collateral are held by a third party. At the conclusion of the agreement, the securities are transferred back to the local agency in return for the collateral. (E) For purposes of this section, the base value of the local agency’s pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements, securities lending agreements, or other similar borrowing methods. (F) For purposes of this section, the spread is the difference between the cost of funds obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds. (k) Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated “A” or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and may not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section. (l) (1) Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (o), inclusive, and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630). However, notwithstanding these restrictions, a counterparty to a reverse repurchase agreement or securities lending agreement is not required to be a primary dealer of the Federal Reserve Bank of New York if the company’s board of directors finds that the counterparty presents a minimal risk of default, and the value of the securities underlying a repurchase agreement or securities lending agreement may be 100 percent of the sales price if the securities are marked to

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market daily. (2) Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.). (3) If investment is in shares issued pursuant to paragraph (1), the company shall have met either of the following criteria: (A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs. (B) Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (o), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000). (4) If investment is in shares issued pursuant to paragraph (2), the company shall have met either of the following criteria: (A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs. (B) Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). (5) The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include commission that the companies may charge and shall not exceed 20 percent of the agency’s moneys that may be invested pursuant to this section. However, no more than 10 percent of the agency’s funds may be invested in shares of beneficial interest of any one mutual fund pursuant to paragraph (1). (m) Moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of a local agency, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or agreement of the local agency providing for the issuance. (n) Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted. (o) A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer

25

receivable passthrough certificate, or consumer receivable-backed bond of a maximum of five years’ maturity. Securities eligible for investment under this subdivision shall be issued by an issuer having an “A” or higher rating for the issuer’s debt as provided by an NRSRO and rated in a rating category of “AA” or its equivalent or better by an NRSRO. Purchase of securities authorized by this subdivision may not exceed 20 percent of the agency’s surplus moneys that may be invested pursuant to this section. (p) Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (o), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria: (1) The adviser is registered or exempt from registration with the Securities and Exchange Commission. (2) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o), inclusive. (3) The adviser has assets under management in excess of five hundred million dollars ($500,000,000). (Amended by Stats. 2011, Ch. 382, Sec. 3. Effective January 1, 2012.)

53601.1. The authority of a local agency to invest funds pursuant to Section 53601 includes, in addition thereto, authority to invest in financial futures or financial option contracts in any of the investment categories enumerated in that section. (Added by Stats. 1983, Ch. 534, Sec. 3.)

53601.2. As used in this article, “corporation” includes a limited liability company. (Added by Stats. 2004, Ch. 118, Sec. 18. Effective January 1, 2005.)

53601.5. The purchase by a local agency of any investment authorized pursuant to Section 53601 or 53601.1, not purchased directly from the issuer, shall be purchased either from an institution licensed by the state as a broker-dealer, as defined in Section 25004 of the Corporations Code, or from a member of a federally regulated securities exchange, from a national or state-chartered bank, from a savings association or federal association (as defined by Section 5102 of the Financial Code) or from a brokerage firm designated as a primary government dealer by the Federal Reserve bank. (Amended by Stats. 2001, Ch. 57, Sec. 2. Effective January 1, 2002.)

53601.6. (a) A local agency shall not invest any funds pursuant to this article or pursuant to

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Article 2 (commencing with Section 53630) in inverse floaters, range notes, or mortgage-derived, interest-only strips. (b) A local agency shall not invest any funds pursuant to this article or pursuant to Article 2 (commencing with Section 53630) in any security that could result in zero interest accrual if held to maturity. However, a local agency may hold prohibited instruments until their maturity dates. The limitation in this subdivision shall not apply to local agency investments in shares of beneficial interest issued by diversified management companies registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.) that are authorized for investment pursuant to subdivision (l) of Section 53601. (Amended by Stats. 2009, Ch. 332, Sec. 68.1. Effective January 1, 2010.)

53601.8. Notwithstanding Section 53601 or any other provision of this code, a local agency that has the authority under law to invest funds, at its discretion, may invest a portion of its surplus funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of deposits. The following conditions shall apply: (a) The local agency shall choose a nationally or state chartered commercial bank, savings bank, savings and loan association, or credit union in this state to invest the funds, which shall be known as the “selected” depository institution. (b) The selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States and are within the network used by the private sector entity for this purpose. (c) Any private sector entity used by a selected depository institution to help place its local agency deposits shall maintain policies and procedures requiring both of the following: (1) The full amount of each deposit placed pursuant to subdivision (b) and the interest that may accrue on each such deposit shall at all times be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. (2) Every depository institution where funds are placed shall be capitalized at a level that is sufficient, and be otherwise eligible, to receive such deposits pursuant to regulations of the Federal Deposit Insurance Corporation or the National Credit Union Administration, as applicable. (d) The selected depository institution shall serve as a custodian for each such deposit. (e) On the same date that the local agency’s funds are placed pursuant to subdivision (b) by the private sector entity, the selected depository institution shall receive an amount of insured deposits from other financial institutions that, in total, are equal to, or greater than, the full amount of the principal that the local agency initially deposited through the selected depository institution pursuant to subdivision (b). (f) Notwithstanding subdivisions (a) to (e), inclusive, a credit union shall not act as a selected depository institution under this section or Section 53635.8 unless both of the following conditions are satisfied: (1) The credit union offers federal depository insurance through the National Credit

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Union Administration. (2) The credit union is in possession of written guidance or other written communication from the National Credit Union Administration authorizing participation of federally insured credit unions in one or more deposit placement services and affirming that the moneys held by those credit unions while participating in a deposit placement service will at all times be insured by the federal government. (g) It is the intent of the Legislature that this section shall not restrict competition among private sector entities that provide placement services pursuant to this section. (h) The deposits placed pursuant to this section and Section 53635.8 shall not, in total, exceed 30 percent of the agency’s funds that may be invested for this purpose. (i) Purchases of certificates of deposit pursuant to this section, Section 53635.8, and subdivision (i) of Section 53601 shall not, in total, exceed 30 percent of the agency’s funds that may be invested for this purpose. (j) Excluding purchases of certificates of deposit pursuant to this section, no more than 10 percent of the agency’s funds that may be invested for this purpose may be submitted, pursuant to subdivision (b), to any one private sector entity that assists in the placement of deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States, for the local agency’s account. (k) This section shall remain in effect only until January 1, 2017, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2017, deletes or extends that date. (Amended by Stats. 2013, Ch. 228, Sec. 1. Effective January 1, 2014. Repealed as of January 1, 2017, by its own provisions. See later operative version added by Sec. 2 of Ch. 228.)

53601.8. Notwithstanding Section 53601 or any other provision of this code, a local agency that has the authority under law to invest funds may, at its discretion, invest a portion of its surplus funds in certificates of deposit at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of certificates of deposit, provided that the purchases of certificates of deposit pursuant to this section, Section 53635.8, and subdivision (i) of Section 53601 do not, in total, exceed 30 percent of the agency’s funds that may be invested for this purpose. The following conditions shall apply: (a) The local agency shall choose a nationally or state-chartered commercial bank, savings bank, savings and loan association, or credit union in this state to invest the funds, which shall be known as the “selected” depository institution. (b) The selected depository institution may submit the funds to a private sector entity that assists in the placement of certificates of deposit with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States for the local agency’s account. (c) The full amount of the principal and the interest that may be accrued during the maximum term of each certificate of deposit shall at all times be insured by the

28

Federal Deposit Insurance Corporation or the National Credit Union Administration. (d) The selected depository institution shall serve as a custodian for each certificate of deposit that is issued with the placement service for the local agency’s account. (e) At the same time the local agency’s funds are deposited and the certificates of deposit are issued, the selected depository institution shall receive an amount of deposits from other commercial banks, savings banks, savings and loan associations, or credit unions that, in total, are equal to, or greater than, the full amount of the principal that the local agency initially deposited through the selected depository institution for investment. (f) Notwithstanding subdivisions (a) to (e), inclusive, no credit union may act as a selected depository institution under this section or Section 53635.8 unless both of the following conditions are satisfied: (1) The credit union offers federal depository insurance through the National Credit Union Administration. (2) The credit union is in possession of written guidance or other written communication from the National Credit Union Administration authorizing participation of federally insured credit unions in one or more certificate of deposit placement services and affirming that the moneys held by those credit unions while participating in a deposit placement service will at all times be insured by the federal government. (g) It is the intent of the Legislature that this section shall not restrict competition among private sector entities that provide placement services pursuant to this section. (h) This section shall become operative on January 1, 2017. (Repealed (in Sec. 1) and added by Stats. 2013, Ch. 228, Sec. 2. Effective January 1, 2014. Section operative January 1, 2017, by its own provisions.)

POOLED INVESTMENTS AT MARCH 31, 2016 - SUMMARY & STATISTICS City of San DiegoOffice of the City Treasurer

ASSET ALLOCATION

Assets (000's)Current Par

ValueCurrent Book

Value Market Value Mkt/BookYield to

Maturity

ASSET BACKED SECURITIES 73,536 73,529 73,566 100.05% 0.91%COMMERCIAL PAPER 50,000 49,805 49,939 100.27% 0.67%CORPORATE MTN/BONDS 155,000 154,637 155,628 100.64% 1.17%LOCAL AGENCY INVESTMENT FUND 60,004 60,004 60,004 100.00% 0.37%NEGOTIABLE CD 200,000 200,001 200,105 100.05% 0.68%SUPRANATIONALS 85,000 84,809 85,198 100.46% 1.22%TREASURY NOTES/BONDS 850,000 849,451 852,524 100.36% 0.91%AGENCY NOTES/BONDS 445,000 444,839 445,732 100.20% 0.85%AGENCY DISCOUNT NOTES 290,000 289,161 289,566 100.14% 0.45% Totals (000's): 2,208,541 2,206,236 2,212,262 100.27% 0.83%

Portfolio Breakdown & StatisticsLiquidity Core

Portfolio Size $823,949,279 $1,382,286,445 % of total pool 37.35% 62.65%

Portfolio Duration* 0.31 1.68Index Duration* 0.37 1.89% of index 84.60% 88.98%Weighted Average Days to Maturity 121 713Earned Income Yield 0.526% 0.969%

* Macaulay's Duration for fund 9997 and Effective Duration for fund 9998.

Note: These figures do not include the effects of trades settling over month-end. After the trades settle, Liquidity duration decreases to 0.302 and Coreduration increases to 1.694.

ASSET BACKED SECURITIES

3.33%

COMMERCIAL PAPER2.26%

CORPORATE MTN/BONDS

7.01%

LOCAL AGENCY INVESTMENT

FUND2.72% NEGOTIABLE CD

9.07%

SUPRANATIONALS3.84%

TREASURY NOTES/BONDS

38.50%

AGENCY NOTES/BONDS

20.16%

AGENCY DISCOUNT NOTES

13.11%

Pooled Portfolio Composition by Book Value

Schedule I.a

POOLED INVESTMENTS AT MARCH 31, 2016 - MATURITY DISTRIBUTION City of San DiegoOffice of the City Treasurer

MATURITY DISTRIBUTION

Current Book Value (000's) 0-3 Mos 3-6 Mos 6-9 Mos 9-12 Mos 1-2 Yr 2-3 Yr 3-4 Yr 4-5 Yr Totals (000's)ASSET BACKED SECURITIES 304 21,637 33,090 10,000 8,498 73,529COMMERCIAL PAPER 49,805 49,805CORPORATE MTN/BONDS 10,000 15,000 68,922 60,715 154,637LOCAL AGENCY INVESTMENT FUND 60,004 60,004NEGOTIABLE CD 175,001 25,000 200,001SUPRANATIONALS 59,930 24,879 84,809TREASURY NOTES/BONDS 49,867 549,666 249,918 849,451AGENCY NOTES/BONDS 69,981 49,986 45,000 50,011 129,893 74,977 24,992 444,839AGENCY DISCOUNT NOTES 89,809 149,618 24,890 24,843 289,161

Totals (000's): 229,795 424,410 94,890 140,025 770,118 478,629 59,871 8,498 2,206,236 % of Portfolio 10.42% 19.24% 4.30% 6.35% 34.91% 21.69% 2.71% 0.39% 100.00%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

0-3 Mos 3-6 Mos 6-9 Mos 9-12 Mos 1-2 Yr 2-3 Yr 3-4 Yr 4-5 YrSeries1 229,795 424,410 94,890 140,025 770,118 478,629 59,871 8,498

Boo

k V

alue

(0

00

's)

Maturity DistributionMarch 31, 2016

Schedule I.b

POOLED INVESTMENTS AT MARCH 31, 2016 - HISTORICAL EARNED INCOME YIELDS City of San DiegoOffice of the City Treasurer

Month

Earned Income

Yield

Weighted Avg Days to

Maturity

Mar-15 0.55% 472.39Apr-15 0.59% 484.16May-15 0.56% 459.03Jun-15 0.59% 464.69Jul-15 0.71% 538.44

Aug-15 0.66% 523.73Sep-15 0.69% 514.17Oct-15 0.82% 509.83Nov-15 0.71% 516.77Dec-15 0.72% 503.92Jan-16 0.66% 477.52Feb-16 0.79% 480.58Mar-16 0.80% 492.22

PORTFOLIO - EARNED INCOME YIELD

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

410

420

430

440

450

460

470

480

490

500

510

520

530

540

Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Yie

ld (

%)

Avg

Day

s to

Mat

urit

y

Yield and Weighted Average Days to Maturity Trends

Weighted Avg Days to Maturity Earned Income Yield

Schedule I.c

POOLED INVESTMENTS AT MARCH 31, 2016 - PORTFOLIO POSITION DETAIL City of San DiegoOffice of the City Treasurer

TREASURY NOTES/BONDS

Issuer CUSIP Coupon Rate

Yield to Maturity

Modified Duration

Purchase Date

Maturity Date

Current Par Value Current Book Value

Market Value Market Price

Price Source

US Treasury Note US Treasury 912828C32 0.750 0.888 0.954 3/20/2014 3/15/2017 25,000,000.00 24,898,437.50 25,028,250.00 100.113 SUNGDUS Treasury Note US Treasury 912828J92 0.500 0.563 1.000 3/31/2015 3/31/2017 25,000,000.00 24,968,750.00 24,970,750.00 99.883 SUNGDUS Treasury Note US Treasury 912828C73 0.875 0.915 1.032 4/24/2014 4/15/2017 25,000,000.00 24,970,703.13 25,059,500.00 100.238 SUNGDUS Treasury Note US Treasury 912828WH9 0.875 0.777 1.116 5/23/2014 5/15/2017 25,000,000.00 25,072,265.63 25,059,500.00 100.238 SUNGDUS Treasury Note US Treasury 912828SY7 0.625 0.613 1.162 6/1/2015 5/31/2017 25,000,000.00 25,005,859.38 24,985,250.00 99.941 SUNGDUS Treasury Note US Treasury 912828WP1 0.875 0.900 1.199 6/16/2014 6/15/2017 25,000,000.00 24,981,445.31 25,061,500.00 100.246 SUNGDUS Treasury Note US Treasury 912828XJ4 0.625 0.647 1.245 6/30/2015 6/30/2017 25,000,000.00 24,989,257.81 24,983,500.00 99.934 SUNGDUS Treasury Note US Treasury 912828WT3 0.875 1.023 1.282 8/1/2014 7/15/2017 25,000,000.00 24,892,578.13 25,060,500.00 100.242 SUNGDUS Treasury Note US Treasury 912828XP0 0.625 0.731 1.329 7/31/2015 7/31/2017 25,000,000.00 24,947,265.63 24,978,500.00 99.914 SUNGDUS Treasury Note US Treasury 912828TM2 0.625 0.676 1.412 8/31/2015 8/31/2017 25,000,000.00 24,974,609.38 24,980,500.00 99.922 SUNGDUS Treasury Note US Treasury 912828D98 1.000 1.060 1.448 9/30/2014 9/15/2017 25,000,000.00 24,956,054.69 25,107,500.00 100.430 SUNGDUS Treasury Note US Treasury 912828TS9 0.625 0.657 1.495 9/30/2015 9/30/2017 25,000,000.00 24,984,375.00 24,967,750.00 99.871 SUNGDUS Treasury Note US Treasury 912828F54 0.875 0.923 1.526 10/31/2014 10/15/2017 25,000,000.00 24,964,843.75 25,060,500.00 100.242 SUNGDUS Treasury Note US Treasury 912828TW0 0.750 0.785 1.572 11/5/2015 10/31/2017 25,000,000.00 24,985,354.01 25,008,750.00 100.035 SUNGDUS Treasury Note US Treasury 912828G20 0.875 0.896 1.609 12/1/2014 11/15/2017 25,000,000.00 24,984,375.00 25,062,500.00 100.250 SUNGDUS Treasury Note US Treasury 912828M72 0.875 0.922 1.654 11/30/2015 11/30/2017 25,000,000.00 24,976,562.50 25,061,500.00 100.246 SUNGDUS Treasury Note US Treasury 912828G79 1.000 1.142 1.691 12/24/2014 12/15/2017 25,000,000.00 24,896,484.38 25,111,250.00 100.445 SUNGDUS Treasury Note US Treasury 912828N55 1.000 1.097 1.735 12/31/2015 12/31/2017 25,000,000.00 24,952,148.44 25,120,250.00 100.481 SUNGDUS Treasury Note US Treasury 912828H37 0.875 0.772 1.776 1/30/2015 1/15/2018 25,000,000.00 25,075,195.31 25,063,500.00 100.254 SUNGDUS Treasury Note US Treasury 912828P20 0.750 0.780 1.822 2/1/2016 1/31/2018 25,000,000.00 24,985,866.67 25,008,750.00 100.035 SUNGDUS Treasury Note US Treasury 912828H94 1.000 1.024 1.857 2/27/2015 2/15/2018 25,000,000.00 24,982,421.88 25,118,250.00 100.473 SUNGDUS Treasury Note US Treasury 912828UR9 0.750 0.803 1.905 3/1/2016 2/28/2018 25,000,000.00 24,974,142.32 25,005,750.00 100.023 SUNGDUS Treasury Note US Treasury 912828J68 1.000 0.899 1.941 4/1/2015 3/15/2018 25,000,000.00 25,073,242.19 25,122,000.00 100.488 SUNGDUS Treasury Note US Treasury 912828Q45 0.875 0.792 1.987 3/31/2016 3/31/2018 25,000,000.00 25,041,015.63 25,066,500.00 100.266 SUNGDUS Treasury Note US Treasury 912828XA3 1.000 0.935 2.097 6/1/2015 5/15/2018 25,000,000.00 25,046,875.00 25,117,250.00 100.469 SUNGDUS Treasury Note US Treasury 912828XF2 1.125 0.999 2.178 6/30/2015 6/15/2018 25,000,000.00 25,091,796.88 25,187,500.00 100.750 SUNGDUS Treasury Note US Treasury 912828XK1 0.875 1.066 2.267 7/31/2015 7/15/2018 25,000,000.00 24,861,328.13 25,046,000.00 100.184 SUNGDUS Treasury Note US Treasury 912828K82 1.000 1.008 2.347 8/28/2015 8/15/2018 25,000,000.00 24,994,140.63 25,116,250.00 100.465 SUNGDUS Treasury Note US Treasury 912828L40 1.000 0.914 2.431 10/1/2015 9/15/2018 25,000,000.00 25,062,500.00 25,119,250.00 100.477 SUNGDUS Treasury Note US Treasury 912828L81 0.875 1.027 2.506 10/30/2015 10/15/2018 25,000,000.00 24,898,613.60 25,039,000.00 100.156 SUNGDUS Treasury Note US Treasury 912828M64 1.250 1.250 2.576 11/27/2015 11/15/2018 25,000,000.00 25,010,302.20 25,269,500.00 101.078 SUNGDUS Treasury Note US Treasury 912828N22 1.250 1.330 2.659 12/18/2015 12/15/2018 25,000,000.00 24,943,967.73 25,283,250.00 101.133 SUNGDUS Treasury Note US Treasury 912828N63 1.125 0.978 2.747 2/1/2016 1/15/2019 25,000,000.00 25,119,580.61 25,195,250.00 100.781 SUNGDUS Treasury Note US Treasury 912828P95 1.000 1.151 2.918 3/15/2016 3/15/2019 25,000,000.00 24,888,671.88 25,097,750.00 100.391 SUNGD Total Count 34 0.882 0.910 1.779 850,000,000.00 849,451,030.33 852,523,500.00 100.297

AGENCY NOTES/BONDS


Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Agency NoteFederal Home Loan Mortgage Corporation

3137EADQ9 0.500 0.502 0.118 11/13/2015 5/13/2016 20,000,000.00 19,999,812.21 20,003,400.00 100.017 SUNGD

Agency Note Federal Home Loan Bank 3130A5EJ4 0.250 0.325 0.131 5/22/2015 5/18/2016 25,000,000.00 24,981,450.00 25,001,250.00 100.005 SUNGDAgency Note Federal Home Loan Bank 3130A5FW4 0.400 0.400 0.214 6/2/2015 6/17/2016 25,000,000.00 25,000,000.00 24,999,250.00 99.997 SUNGDAgency Note Federal Home Loan Bank 3130A3P32 0.430 0.435 0.252 7/1/2015 7/1/2016 25,000,000.00 24,998,660.98 25,009,000.00 100.036 SUNGD

Agency NoteFederal National Mortgage Association

3135G0YE7 0.625 0.728 0.405 2/26/2016 8/26/2016 25,000,000.00 24,987,120.37 25,016,250.00 100.065 SUNGD

Agency Note Federal Farm Credit Bank 3133EFUM7 0.543 0.543 0.011 1/4/2016 11/4/2016 25,000,000.00 25,000,000.00 25,010,750.00 100.043 SUNGDAgency Note Federal Home Loan Bank 3130A6R74 0.550 0.550 0.649 11/30/2015 11/25/2016 20,000,000.00 20,000,000.00 20,003,800.00 100.019 SUNGD


3137EADU0 0.500 0.658 0.821 2/1/2016 1/27/2017 25,000,000.00 24,962,488.89 24,972,250.00 99.889 SUNGD


3137EADT3 0.875 0.698 0.889 3/2/2016 2/22/2017 25,000,000.00 25,048,976.39 25,048,750.00 100.195 SUNGD

Agency Note Federal Farm Credit Bank 3133EEX62 0.800 0.814 1.202 6/25/2015 6/16/2017 15,000,000.00 14,995,950.00 15,009,900.00 100.066 SUNGD

Schedule II



3137EADV8 0.750 0.787 1.281 5/29/2015 7/14/2017 25,000,000.00 24,980,500.00 25,009,000.00 100.036 SUNGD


3137EADX4 1.000 1.052 1.691 12/11/2015 12/15/2017 25,000,000.00 24,974,250.00 25,098,000.00 100.392 SUNGD

Agency Note Federal Farm Credit Bank 3133EEFE5 1.125 1.152 1.697 12/18/2014 12/18/2017 10,000,000.00 9,991,970.00 10,059,000.00 100.590 SUNGD


3134G8C72 1.125 1.125 1.697 12/18/2015 12/18/2017 10,000,000.00 10,000,000.00 10,000,000.00 100.000 BOOK


3135G0TD5 1.000 1.000 1.727 12/31/2012 12/28/2017 10,000,000.00 10,000,000.00 10,002,300.00 100.023 SUNGD


3134G8N88 1.100 1.100 1.887 2/29/2016 2/26/2018 10,000,000.00 10,000,000.00 10,001,400.00 100.014 SUNGD


3135G0J61 0.875 0.973 1.979 3/4/2016 3/28/2018 25,000,000.00 24,950,000.00 25,042,500.00 100.170 USERP


3134G62E2 1.250 1.277 2.119 5/26/2015 5/25/2018 10,000,000.00 9,992,000.00 10,000,400.00 100.004 SUNGD


3135G0H30 1.450 1.450 2.591 11/23/2015 11/23/2018 10,000,000.00 10,000,000.00 10,000,000.00 100.000 BOOK


3135G0H63 1.375 1.396 2.774 1/8/2016 1/28/2019 25,000,000.00 24,984,500.00 25,325,750.00 101.303 SUNGD

Agency Note Federal Home Loan Bank 3130A6YH4 1.600 1.600 2.769 1/29/2016 1/29/2019 10,000,000.00 10,000,000.00 10,006,000.00 100.060 SUNGD


3135G0H89 1.300 1.300 2.855 2/26/2016 2/26/2019 10,000,000.00 10,000,000.00 10,000,000.00 100.000 BOOK


3134G8T41 1.500 1.500 2.939 3/29/2016 3/29/2019 10,000,000.00 10,000,000.00 10,014,700.00 100.147 SUNGD


3137EADZ9 1.125 1.136 2.981 3/21/2016 4/15/2019 25,000,000.00 24,991,750.00 25,098,250.00 100.393 USERP

Total Count 24 0.823 0.846 1.285 445,000,000.00 444,839,428.84 445,731,900.00 100.164

AGENCY DISCOUNT NOTES


Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Agency Discount NoteFederal National Mortgage Association

313588VH5 0.300 0.301 0.022 9/8/2015 4/8/2016 25,000,000.00 24,955,625.00 24,999,000.00 99.996 SUNGD

Agency Discount Note Federal Farm Credit Bank 313312WK2 0.320 0.321 0.093 9/30/2015 5/4/2016 25,000,000.00 24,951,777.78 24,994,000.00 99.976 SUNGD


313588XR1 0.240 0.240 0.175 10/21/2015 6/3/2016 15,000,000.00 14,977,400.00 14,991,900.00 99.946 SUNGD

Agency Discount Note Federal Farm Credit Bank 313312YJ3 0.600 0.602 0.222 12/22/2015 6/20/2016 25,000,000.00 24,924,583.33 24,982,750.00 99.931 SUNGD


313588YV1 0.260 0.260 0.252 10/20/2015 7/1/2016 25,000,000.00 24,953,958.33 24,977,250.00 99.909 SUNGD

Agency Discount Note Federal Home Loan Bank 313384ZK8 0.560 0.562 0.290 1/15/2016 7/15/2016 25,000,000.00 24,929,222.22 24,973,750.00 99.895 SUNGD

Agency Discount NoteFederal Home Loan Mortgage Corporation

313396ZZ9 0.500 0.501 0.329 1/13/2016 7/29/2016 25,000,000.00 24,931,250.00 24,970,250.00 99.881 SUNGD

Agency Discount Note Federal Farm Credit Bank 313312B74 0.340 0.341 0.367 10/26/2015 8/12/2016 25,000,000.00 24,931,291.67 24,963,000.00 99.852 SUNGD


313588F34 0.440 0.441 0.444 2/25/2016 9/9/2016 25,000,000.00 24,939,805.56 24,953,000.00 99.812 SUNGD

Agency Discount NoteFederal Home Loan Mortgage Corporation

313396G98 0.490 0.491 0.482 3/10/2016 9/23/2016 25,000,000.00 24,932,965.28 24,949,000.00 99.796 SUNGD

Agency Discount Note Federal Farm Credit Bank 313312P95 0.630 0.633 0.635 3/11/2016 11/18/2016 25,000,000.00 24,889,750.00 24,924,500.00 99.698 SUNGD

Agency Discount Note Federal Farm Credit Bank 313313BP2 0.670 0.674 0.857 3/7/2016 2/7/2017 25,000,000.00 24,843,201.39 24,887,250.00 99.549 SUNGD

Total Count 12 0.453 0.454 0.353 290,000,000.00 289,160,830.56 289,565,650.00 99.850

Schedule II


SUPRANATIONALS Issuer CUSIP Coupon

RateYield to

MaturityModified Duration

Purchase Date

Maturity Date



Price Source

SupranationalsInter-American Development Bank

4581X0CQ9 1.125 1.163 2.381 8/28/2015 8/28/2018 25,000,000.00 24,972,000.00 25,055,250.00 100.221 SUNGD

SupranationalsIntl Bank of Reconstruction & Development 459058ER0 1.000 1.058 2.474 10/7/2015 10/5/2018 25,000,000.00 24,957,500.00 25,079,250.00 100.317 SUNGD

SupranationalsIntl Bank of Reconstruction & Development 45905UVC5 1.350 1.350 2.853 2/26/2016 2/26/2019 10,000,000.00 10,000,000.00 10,002,400.00 100.024 SUNGD

SupranationalsIntl Bank of Reconstruction & Development 459058EV1 1.250 1.392 3.255 1/28/2016 7/26/2019 25,000,000.00 24,879,250.00 25,060,750.00 100.243 SUNGD

Total Count 4 1.151 1.221 2.721 85,000,000.00 84,808,750.00 85,197,650.00 100.233

LOCAL AGENCY INVESTMENT FUND


Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Local Agency Investment Fund

California State Pool 0.370 0.370 0.003 3/31/2003 4/1/2016 60,004,171.85 60,004,171.85 60,004,171.85 100.000 BOOK

Total Count 1 0.370 0.370 0.003 60,004,171.85 60,004,171.85 60,004,171.85 100.000

ASSET BACKED SECURITIES


Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Asset Backed SecurityToyota Auto Rec Owners Trust

89190AAB6 0.510 0.515 0.455 10/15/2014 2/15/2017 303,929.07 303,623.57 303,874.36 99.982 USERP

Asset Backed Security BMW Vehicle Owners Trust 09658UAB5 0.530 0.533 0.566 10/15/2014 4/25/2017 131,127.67 130,958.67 131,080.46 99.964 USERP

Asset Backed SecurityHonda Auto Receivables Owners Trust

43814KAB7 0.700 0.704 0.621 1/28/2015 6/15/2017 2,380,041.32 2,379,780.32 2,379,374.91 99.972 USERP


89236WAB4 0.710 0.711 0.663 3/4/2015 7/17/2017 2,700,148.15 2,700,100.65 2,698,960.08 99.956 USERP

Asset Backed SecurityHonda Auto Receivables Owners Trust

43813NAB2 0.690 0.695 0.721 5/20/2015 8/21/2017 10,949,048.22 10,948,209.62 10,940,179.49 99.919 USERP


89237CAB7 0.770 0.775 0.828 6/17/2015 11/15/2017 5,478,682.91 5,478,244.81 5,475,669.63 99.945 USERP

Asset Backed SecurityHarley-Davidson Motorcycle Trust

41284AAB4 0.490 0.493 1.037 4/16/2014 4/15/2018 428,278.21 427,939.71 428,089.77 99.956 USERP

Asset Backed SecurityNissan Auto Receivables 2015-B

65475WAB4 0.830 0.835 1.160 7/22/2015 7/16/2018 12,915,114.09 12,914,102.94 12,904,782.00 99.920 USERP


89237KAB9 1.030 1.036 1.164 3/2/2016 7/16/2018 4,750,000.00 4,749,631.88 4,750,760.00 100.016 USERP

Asset Backed SecurityNissan Auto Receivables 2015-C

65478AAB9 0.870 0.875 1.325 10/14/2015 11/15/2018 10,000,000.00 9,999,237.00 9,985,600.00 99.856 USERP

Asset Backed Security Chase Issuance Trust 161571GJ7 1.150 1.157 1.405 1/27/2014 1/15/2019 5,000,000.00 4,999,095.50 5,008,550.00 100.171 USERP

Asset Backed Security Chase Issuance Trust 161571GW8 0.686 0.686 1.533 4/29/2015 4/15/2019 10,000,000.00 10,000,000.00 9,989,600.00 99.896 USERP

Asset Backed Security Chase Issuance Trust 161571HA5 1.620 1.631 2.137 7/29/2015 7/15/2020 8,500,000.00 8,497,679.50 8,569,530.00 100.818 USERP

Total Count 13 0.904 0.909 1.233 73,536,369.64 73,528,604.17 73,566,050.70 100.040

Schedule II


COMMERCIAL PAPER Issuer CUSIP Coupon Rate

Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Commercial Paper Toyota Motor Credit Corp. 89233GG18 0.570 0.572 0.252 10/29/2015 7/1/2016 25,000,000.00 24,902,625.00 24,969,666.67 99.879 SUNGD

Commercial PaperGeneral Electric Capital Treasury Services

36164JG16 0.760 0.763 0.252 12/29/2015 7/1/2016 25,000,000.00 24,902,361.11 24,969,666.67 99.879 SUNGD

Total Count 2 0.665 0.668 0.252 50,000,000.00 49,804,986.11 49,939,333.34 99.879 NEGOTIABLE CD Issuer CUSIP Coupon

RateYield to

MaturityModified Duration

Purchase Date

Maturity Date



Price Source

Negotiable CD Skandi Enskilda Bank NY 83051H6G6 0.540 0.540 0.252 9/21/2015 7/1/2016 25,000,000.00 25,000,000.00 25,006,941.03 100.028 SUNGD

Negotiable CDToronto-Dominion Bank NY

89113EA48 0.600 0.600 0.252 9/22/2015 7/1/2016 25,000,000.00 25,000,000.00 25,010,761.83 100.043 SUNGD

Negotiable CD Bank of Nova Scotia U.S. 06417GAV0 0.540 0.540 0.252 11/12/2015 7/1/2016 25,000,000.00 25,000,000.00 25,006,962.44 100.028 SUNGD

Negotiable CDSvenska Handelsbanken NY

86958DG55 0.590 0.585 0.252 11/18/2015 7/1/2016 25,000,000.00 25,000,781.85 25,010,150.74 100.041 SUNGD

Negotiable CD Royal Bank of Canada NY 78009NYJ9 0.815 0.815 0.252 12/17/2015 7/1/2016 25,000,000.00 25,000,000.00 25,024,504.99 100.098 SUNGDNegotiable CD Rabobank Nederland NY 21684BC77 0.780 0.780 0.252 12/21/2015 7/1/2016 25,000,000.00 25,000,000.00 25,022,276.51 100.089 SUNGDNegotiable CD Swedbank NY 87019UDK2 0.750 0.750 0.290 1/13/2016 7/15/2016 25,000,000.00 25,000,000.00 25,023,474.40 100.094 SUNGDNegotiable CD Wells Fargo Bank NA 94988ESY5 0.870 0.870 0.517 3/29/2016 10/7/2016 25,000,000.00 25,000,000.00 25,000,000.00 100.000 USERP

Total Count 8 0.686 0.685 0.290 200,000,000.00 200,000,781.85 200,105,071.94 100.053

CORPORATE MTN/BONDS


Yield to Maturity

Modified Duration

Purchase Date

Maturity Date



Price Source

Medium Term Note Wells Fargo Bank NA 94988J2K2 0.783 0.783 0.172 9/2/2015 6/2/2016 10,000,000.00 10,000,000.00 10,002,900.00 100.029 SUNGDMedium Term Note US Bank N.A. 90331HMD2 0.848 0.848 0.832 1/30/2014 1/30/2017 15,000,000.00 15,000,000.00 15,006,600.00 100.044 SUNGDMedium Term Note Apple Inc. 037833BB5 0.900 0.935 1.107 5/13/2015 5/12/2017 5,000,000.00 4,996,550.00 5,007,750.00 100.155 SUNGDMedium Term Note PepsiCo Inc. 713448CV8 0.870 0.870 1.289 7/17/2015 7/17/2017 10,000,000.00 10,000,000.00 10,011,500.00 100.115 SUNGDMedium Term Note Home Depot Inc.. 437076BJ0 1.004 1.004 1.449 9/15/2015 9/15/2017 5,000,000.00 5,000,000.00 5,017,500.00 100.350 SUNGDMedium Term Note PepsiCo Inc. 713448DB1 1.000 1.107 1.518 10/14/2015 10/13/2017 5,000,000.00 4,989,450.00 5,009,400.00 100.188 SUNGDMedium Term Note Oracle Corp. 68389XAN5 1.200 1.312 1.521 5/8/2014 10/15/2017 10,000,000.00 9,962,500.00 10,058,400.00 100.584 SUNGDMedium Term Note Johnson & Johnson 478160BL7 1.125 1.152 1.622 11/21/2014 11/21/2017 5,000,000.00 4,996,050.00 5,028,350.00 100.567 SUNGDMedium Term Note Berkshire Hathaway Fin 084664CD1 0.921 0.921 1.771 1/15/2015 1/12/2018 7,000,000.00 7,000,000.00 6,999,650.00 99.995 SUNGDMedium Term Note Wells Fargo Bank NA 94988J5B9 1.358 1.358 1.785 1/29/2016 1/22/2018 7,000,000.00 7,000,000.00 7,020,720.00 100.296 SUNGDMedium Term Note US Bank N.A. 90331HMV2 1.198 1.198 1.807 1/29/2016 1/29/2018 5,000,000.00 5,000,000.00 5,000,700.00 100.014 SUNGD

Medium Term NoteInternational Business Machines Corp.

459200HK0 1.250 1.345 1.834 2/8/2013 2/8/2018 5,000,000.00 4,977,100.00 5,025,100.00 100.502 SUNGD

Medium Term Note Cisco Systems Inc. 17275RAZ5 1.236 1.236 1.868 2/29/2016 2/21/2018 5,000,000.00 5,000,000.00 5,013,100.00 100.262 SUNGDMedium Term Note Wal-Mart Stores Inc. 931142DF7 1.125 1.253 2.000 6/8/2015 4/11/2018 10,000,000.00 9,964,290.00 10,075,200.00 100.752 SUNGDMedium Term Note Texas Instruments Inc. 882508AV6 1.000 1.193 2.059 5/8/2013 5/1/2018 5,000,000.00 4,953,500.00 4,997,400.00 99.948 SUNGDMedium Term Note Apple Inc. 037833AJ9 1.000 1.461 2.064 6/4/2014 5/3/2018 10,000,000.00 9,825,200.00 10,020,600.00 100.206 SUNGDMedium Term Note Merck & Co Inc. 58933YAG0 1.300 1.348 2.098 5/20/2013 5/18/2018 5,000,000.00 4,988,450.00 5,040,750.00 100.815 SUNGDMedium Term Note Cisco Systems Inc. 17275RAU6 1.650 1.656 2.165 6/17/2015 6/15/2018 5,000,000.00 4,999,150.00 5,070,450.00 101.409 SUNGDMedium Term Note The Walt Disney Co. 25468PDD5 1.500 1.529 2.424 9/17/2015 9/17/2018 6,000,000.00 5,994,900.00 6,082,260.00 101.371 SUNGDMedium Term Note Microsoft Corp. 594918BF0 1.300 1.334 2.541 11/3/2015 11/3/2018 10,000,000.00 9,990,000.00 10,097,200.00 100.972 USERPMedium Term Note Apple Inc. 037833BR0 1.438 1.438 2.832 2/23/2016 2/22/2019 5,000,000.00 5,000,000.00 5,044,350.00 100.887 SUNGDMedium Term Note Cisco Systems Inc. 17275RAQ5 1.135 1.135 2.886 3/3/2014 3/1/2019 5,000,000.00 5,000,000.00 4,998,400.00 99.968 SUNGD Total Count 22 1.107 1.172 1.703 155,000,000.00 154,637,140.00 155,628,280.00 100.405

2,208,540,541.49 2,206,235,723.71 2,212,261,607.83Grand Total

Schedule II

MONTHLY INVESTMENT REPORT - APPENDIX City of San DiegoOffice of the City Treasurer

GLOSSARY OF INVESTMENT TERMS

ASSET BACKED SECURITIES: Securities, such as bonds or notes, collateralized by receivables such as credit card or auto loans.

LOCAL AGENCY INVESTMENT FUND (LAIF): An investment pool sponsored by the State of California and administered/managed by the State Treasurer’s Office. Local government units, with consent of the local governing body of that agency, may voluntarily deposit surplus funds for the purpose of investment.

U. S. GOVERNMENT AGENCY SECURITIES: Debt securities issued by U. S. Government sponsored enterprises and federally related institutions. These government agencies include: Federal Home Loan Banks (FHLB); Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac"); Federal National Mortgage Association (FNMA, or "Fannie Mae"); Federal Farm Credit Banks (FFCB); and Tennessee Valley Authority (TVA).

BOOK VALUE: The original cost of the investment, plus accrued interest and amortization of any premium or discount.

MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold.

U.S. TREASURY SECURITIES: Securities issued by the U. S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all other securities in the U.S. and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds.

CERTIFICATE OF DEPOSIT (CD or NCD): A deposit of funds at a bank for a specified period of time that earns interest at a specified rate. Commonly known as "CDs" or "negotiable CDs."

MATURITY: The date upon which the principal or stated value of an investment becomes due and payable.

WEIGHTED AVERAGE DAYS TO MATURITY: The weighted average of the remaining term to maturity of all of the assets in an investment pool or securities portfolio, as expressed in days.

COUPON: The annual rate at which a bond pays interest.

PAR VALUE: The amount of principal which must be paid at maturity. Also referred to as the face amount of a bond, normally quoted in $1.000 increments per bond.

YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) EARNED INCOME YIELD is the annual income from an investment divided by the current market value. (b) YIELD TO MATURITY is the rate of return earned on an investment considering all cash flows and timing factors: interest earnings, discounts, and premiums above par.

CUSIP: The number identifying all stocks and registered bonds, using the Committee on Uniform Securities Identification Procedures (CUSIP).

REPURCHASE AGREEMENT (RP OR REPO): The purchase of securities, on a temporary basis, with the seller's simultaneous agreement to repurchase the securities at a later date at a specified price that includes interest for the buyer's holding period. In essence, this is a collateralized investment whereby the security "buyer" lends the "seller" money for the period of the agreement.

DURATION: The weighted average time to maturity of a bond where the weights are the present values of future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates.

SUPRANATIONAL: An entity formed by two or more central governments through international treaties, for the purpose of promoting economic development for member countries. Two examples of supranational institutions are the International Bank for Reconstruction and Development (World Bank) and the Inter-American Development Bank.

For additional glossary terms, previous Investment Reports, and City Investment Policy, please visit the Office of the City Treasurer's website at: http://www.sandiego.gov/treasurer/investments/

Appendix

H-1

APPENDIX H

TABLE OF ACCRETED VALUES

preliminaryofficial!statement!dated!july25,!2016 ·...

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