$8,500,000 EAST SIDE UNION HIGH ... - cdiacdocs.sto.ca.govcdiacdocs.sto.ca.gov/2005-0530.pdf · NEW...

NEW ISSUE DTC BOOK-ENTRY ONLY CUSIP NO. 27528 l 4G5

RATING See "RATING" herein S&P Rating: "SP-1+"

In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the Notes is excluded from gross income for federal income tax purposes, 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, such interest is taken into account in determining certain income and earnings, and the Notes are "qualified tax-exempt obligations" within the meaning of section 265(b )( 3) of the Internal Revenue Code of J 986. Jn the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See "TAX MATTERS" herein.

$8,500,000 EAST SIDE UNION HIGH SCHOOL DISTRICT

(SANTA CLARA COUNTY, CALIFORNIA)

2005 TAX AND REVENUE ANTICIPATION NOTES (BANK QUALIFIED)

Dated: Date of Delivery Due: October 25, 2006

The East Side lJnion High School District 2005 Tax and Revenue Anticipation Notes (the "Notes") are being issued to finance seasonal cash flow requirements of the East Side Union High School District (the "District"} during the fiscal year ending June 30, 2006 (the "Fiscal Year"). The Notes will be initially issued in book-entry form only through the book-entry system of The Depository Trust Company, New York, New York ("DTC"). See "THE NOTES-DTC Book-entry Only" herein.

The Notes, in accordance with California Jaw, represent the general obligation of the District, but are payable solely from taxes, income, revenue, cash receipts, and other moneys received by or accruing to the General Fund of the District during the Fiscal Year and Legall)' available for the payment of the Notes. The Notes are equally and ratably secured by a pledge of an amount equal to the aggregate principal amount of the Notes, together with an amount sufficient to pay the interest thereon, from the Unrestricted Revenues (defined herein) to be received by the District in the months during the Fiscal Year as described herein (the "Pledged Revenues"). The Notes, to the extent not paid from Pledged Revenues, are payable only from any other taxes, income, revenues, cash receipts and moneys of the District lawfully available therefor.

The Notes are legal investments for commercial banks in California and are eligible to secure deposits of public moneys in the State of California.

THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT INTENDED TO BE A SUMMARY OF ALL FACTORS RELEVANT TO AN INVESTMENT IN THE NOTES. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION

The Notes will he dated October 25, 2005, and will mature on October 25, 2006. The rate of interest and the offering price for the Notes is set forth below. Principal of and interest on the Notes will be paid at maturity by wire transfer to DTC, which in turn is required to remit such principal and interest to the DTC Participants for subsequent disbursement to the Beneficial Owners of the Notes. The Notes are not subject to redemption prior to maturity.

AMOUNT

$8,500,000

MATURITY SCHEDULE

MATURITY

October 25, 2006

COJ)PON INTEREST RATE

4.25%

REOFFERJNG YIELD

NRO

The Notes are offered when, as and if issued by the District and received by the underwriter, subject to approval as to their legality by Quint & Thimmig LLP, San Francisco, California, Bond Counsel. It is anticipated that the Notes, in definitive form, will be available for delivery through the facilities of DTC in New York, New York on or about October 25, 2005.

This Official Statement is Dated October 12, 2005

NO DEALER, BROKER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED BY THE DISTRICT TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DISTRICT. THIS OFFICIAL STATEMENT DOES NOT CONSTJTU1'E AN OFFER 70 SEU NOR THE SOLJC/TATJON OF AN OFFER TO BUY NOR SHAU THERE BE ANY SALE OF THE NOTES BY A PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFER, SOLJC/TAT/ON OR SALE.

THIS OFFICIAL STATEMENT JS NOT TO BE CONSTRUED AS A CONTRACT WITH THE PURCHASERS OF THE NOTES. STATEMENTS CONTAINED IN THIS OFFICIAL STATEMENT WHICH INVOLVE ESTIMATES, PROJECTIONS, FORECASTS OR MATTERS OF OPINION, WHETHER OR NOT EXPRESSLY SO DESCRIBED HEREIN, ARE INTENDED SOLELY AS SUCH AND ARE NOT TO BE CONSTRUED AS REPRESENTATIONS OF FACT.

THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM SOURCES WHICH ARE BELIEVED TO BE RELIABLE, BUT NO INFORMATION JS GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND ANY INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT JS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE UNDERWRITER. THE INFORMATION AND EXPRESSIONS OF OPINION HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE AND NEITHER DELIVERY OF THFS OFFICIAL STATEMENT NOR ANY SALE MADE HEREUNDER SHAU, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE DISTRICT SINCE THE DATE HEREOF.

THIS OFFICIAL STATEMENT IS SUBMFTTED WITH RESPECT TO THE SALE OF THE NOTES REFERRED TO HEREIN AND MAY NOT BE REPRODUCED OR USED, IN WHOLE OR IN PART, FOR ANY OTHER PURPOSE, UNLESS AUTHORIZED IN WRITING BY THE DISTRICT. ALL SUMMARIES OF THE DOCUMENTS AND LAWS ARE MADE SUBJECT TO THE PROVISIONS THEREFOR AND DO NOT PURPORT TO BE COMPLETE STATEMENTS OF ANY OR ALL SUCH PROVISIONS.

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE DISTRICT AND THE TERMS OF THE OFFERING, INCLUDING THE MER/TS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY !>TATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFICIAL STATEMENT.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SEU THE NOTES TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS, BANKS OR OTHERS AT PRICES LOWER OR HIGHER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

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(SANT A CLARA COUNTY, CALIFORNIA) 2005 TAX AND REVENUE ANTICIPATION NOTES

DISTRICT BOARD OF TRUSTEES

J. Manuel Herrera, President George Shirakawa Jr .• Vice-President

Patricia Martinez-Roach, Clerk Craig A. Mann, Member

Lan Nguyen, Member

DISTRICT ADMINISTRATION

Bob Nunez, Interim Superintendent Alan Garofa1o, Chief Operations Officer

Ric Abetay, Chief Safety Security and Student Services Officer Jerry Kurr, Financial Consultant

East Side Union High School District 830 N. Capitol Avenue

San Jose, California 95133 (408) 929-7351

FINANCIAL ADVISOR

Government Financial Strategies inc. 1228 "N" Street, Suite Thirteen

Sacramento, California 95814-5609 (916)444-5100

BOND COUNSEL

Quint & Thimmig LLP One Embarcadero Center, Suite 2420

San Francisco, California 94 J 11 (415) 765-1550

PAYING AGENT

Santa Clara County Director of Finance 70 West Hedding Street

San Jose, California 951 lO (408) 299-2541

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(SANTA CLARA COUNTY, CALIFORNIA) 2005 TAX AND REVENUE ANTICIPATION NOTES

TABLE OF CONTENTS

INTRODUCTORY ST A TEMENT ........................................................................................................................................................... I General ................................................................................................................................................................................................... 1 Professionals Involved .......................................................................................................................................................................... 2 Other Information .................................................................................................................................................................................. 2

THENOTES ............................................................................................................................................................................................... 3 Authority for Issuance ........................................................................................................................................................................... 3 Purpose of Issue ..................................................................................................................................................................................... 3 Bank Qualified Obligations .................................................................................................................................................................. 3 Description of the Notes ....................................................................................................................................................................... 3 DTC Book-Entry Only .......................................................................................................................................................................... 3 Security for The Notes and Available Sources of Repayment ........................................................................................................... 5 Bankruptcy Risks .................................................................................................................................................................................. 5 Investment of Operating Funds, Note Proceeds, and Repayment Funds ........................................................................................... 6

SANTA CLARA COUNTY INVESTME1'"T POOL ............................................................................................................................... 7 THE DISTRJCT .......................................................................................................................................................................................... 9

General Information .............................................................................................................................................................................. 9 The Board of Trustees and Key Administrative Personnel ................................................................................................................ 9 Enrollment.. ........................................................................................................................................................................................... 9 Employee Relations .............................................................................................................................................................................. 9 Pension Plans ....................................................................................................................................................................................... IO Revenue Limitations ........................................................................................................................................................................... 10 Financial Statements and District Budgets ........................................................................................................................................ 10 Short Term Borrowings ...................................................................................................................................................................... 12 Capitalized and Bonded Lease Obligation ........................................................................................................................................ 13 Long Term Borrowings ...................................................................................................................................................................... 13 Alternate Liquidity .............................................................................................................................................................................. 13 Monthly Cash Flow ............................................................................................................................................................................. 14

TAXATION AND APPROPRIATIONS ................................................................................................................................................ 17 Ad Valorem Property Taxation .......................................................................................................................................................... 17 Unitary Property .................................................................................................................................................................................. 17 Santa Clara County Tax L.oss Reserve Fund ..................................................................................................................................... 17

STATE FUNDING OF PUBLIC EDUCATION .................................................................................................................................... 19 Sources of Revenue for Public Education ................................. , ....................................................................................................... 19 2005-06 State Budget... ....................................................................................................................................................................... 21 Future Budgets .................................................................................................................................................................................... 21 Distribution of Revenue for Public Education .................................................................................................................................. 21

CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES & EXPENDITURES ................. 24 TAXMATTERS ....................................................................................................................................................................................... 26 LEGAL MATTERS .................................................................................................................................................................................. 27

Legal Opinion ...................................................................................................................................................................................... 27 Absence of Litigation .................................................... , ..................................................................................................................... 27 L.egality for Investment .. , ............................................... , .................................................................................................................... 27

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RA TINGS .................................................................................................................................................................................................. 28 FINANCIAL ADVISOR .......................................................................................................................................................................... 28 INDEPENDENT AUDITORS ................................................................................................................................................................. 28 UNDERWR1TING AND INITIAL OFFER1NG PR1CE ....................................................................................................................... 28 CONTINUING DISCLOSURE ............................................................................................................................................................... 29 ADDITIONAL INFORMATION ............................................................................................................................................................ 29

APPENDIX A-EXCERPTS FROM THE GENERAL PURPOSE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2004

APPENDIX B-FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX C-FORM OF OPINION OF BOND COUNSEL

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OFFICIAL STATEMENT


(SANTA CLARA COUNTY, CALIFORNIA) 2005 TAX AND REVENUE ANTICIPATION NOTES

INTRODUCTORY STATEMENT

The purpose of this Official Statement, which includes the Cover Page and attached Appendices, is to provide certain infonnation concerning the sale and delivery of the East Side Union High School District 2005 Tax and Revenue Anticipation Notes (the "Notes") issued in the aggregate principal amount of $8,500,000.

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, which includes the Cover Page and Appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Notes to potential investors is made only by means of this entire Official Statement.

This Official Statement has been prepared under the direction of the East Side Union High School District (the .. District" or ·•school District") in order to furnish infonnation with respect to the sale and delivery of the Notes. At the request of the District, the Notes have been authorized pursuant to a resolution (the "Resolution") of the Board of Supervisors (the "County Board") of the County of Santa Clara (the "County") adopted on May 3, 2005, on the behalf of the District.

The Notes wi11 be issued in fu11 conformity with the Constitution and laws of the State of California (the "State"), including Article 7.6, Chapter 4, Part I, Division 2, Title 5 (commencing with Section 53850) of the State of California Government Code (the "Law"), and under such statute the Notes represents the general ob1igation of the District, but are payable solely from taxes, income. revenue. cash receipts and other moneys of the District attrihutab]e to the fiscal year commencing on July l, 2005, and ending on June 30, 2006, (the "Fiscal Year") and legally available therefor .

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The proceeds of the Notes will be used for current genera] fund expenditures of the District, including but not limited to current expenses, capita1 expenditures and the discharge of other obligations or indebtedness of the District. The Notes are not subject to redemption prior to their stated maturity date.

Professiona1s Involved

Government Financial Strategies inc., Sacramento, California has acted as Financial Advisor with respect to the sale and delivery of the Notes. See "FINANCIAL ADVISOR" herein. All proceedings in connection with the issuance of the Notes are subject to the approving legal opinion of Quint & Thimmig LLP, Bond Counsel, San Francisco. California.

Other Information

This Official Statement may be considered current only as of the dated date affixed to the Cover Page hereto, and the information contained herein is subject to change. Brief descriptions of the Notes, the security for the Notes and the District are included in this Official Statement together with summaries of certain provisions of the Resolution. Such descriptions do not purport to be comprehensive or definitive. All references made herein to the authorizing Resolution adopted by the County Board on May 3. 2005, are qualified in their entirety by reference to such document, and references herein to the Notes are qualified in their entirety by reference to the fonn thereof delivered to the purchaser.

Information concerning this Official Statement, the Notes, the Districts or any other infonnation re1ating to the sale and delivery of the Notes, including the Resolution and audited financial statements of the District, are available for public inspection and may be obtained by contacting the District at the address and telephone number set forth on page "iii" of this Official Statement, or by contacting the District's Financial Advisor, Government Financial Strategies inc., 1228 "N" Street, Suite Thirteen, Sacramento, California 95814-5609, telephone (916) 444-5100, facsimile telephone (916) 444-5109.

[The remainder of this page intentionally left blank.)

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THE NOTES

Authority for Issuance

The Notes are issued under the authority of the Law and pursuant to the Resolution.

Purpose of Issue

Issuance of the Notes will provide moneys to meet the District1s Fiscal Year 2005-06 General Fund expenditures, including but not limited to current expenses, capital expenditures and the discharge of other obligations or indebtedness of the District.

Borrowing is necessary during the Fiscal Year 2005-06 because the District's General Fund expenditures are expected to occur in relatively level amounts throughout the Fiscal Year while receipts are expected to follow an uneven pattern, primarily as a result of an uneven pattern of State and federal apportionments and secured property tax installment payments. Receipts from these three sources account for a significant portion of the District's total annual revenues. As a resu1t, the District's General Fund cash balance is projected to be sufficientJy diminished during a ponion of the Fiscal Year 2005-06 to require the issuance of the Notes. The Notes are intended to minimize the likelihood of a cash deficit position occurring within the General Fund during the Fiscal Year 2005-06.

Bank Qualified Obligations

The County, on behalf of the District, has designated the Notes as "qualified tax-exempt obligations" within the meaning of Section 265(b )(3) of the Internal Revenue Code of 1986, as amended.

Description of the Notes

The Notes are being issued as fully registered Notes, without coupons, and when delivered will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). OTC will act as securities depository for the Notes. Individual purchases of the Notes will be made in book-entry form only and only in authorized denominations of $1,000 principal amount or any integral multiple thereof. So long as Cede & Co. is the registered owner of the Notes, principal, premium, if any, and interest on the Notes will be payable to Cede & Co., as nominee for OTC, which is obligated to remit such amounts to the Direct or Indirect Participant\, as hereinafter defined. for subsequent disbursement to the Beneficial Owners of the Notes. See "THE NOTES-DTC Book-Entry Only" herein.

The Notes will be dated October 25. 2005, and will mature on October 25, 2006. Principal of and the final interest payment on the Notes will be paid, at maturity, at the rate of interest stated on the Cover Page hereof. Interest on the Notes is computed on the basis of a 360-day year consisting of twelve 30-day months. The Notes will not be subject to redemption prior to their stated maturity date.

DTC Book-Entry Only

The following information concerning DTC and DTC's book~enrry-only system has been obtained from DTC. The District takes no re.\ponsibility for the accuracy or completeness thereof There can be no assurance that DTC will abide by its procedures or that such procedures will not be changed from time to time.

The following description includes the procedures and record~keeping with respect to beneficial ownership interest in each Note, payment of principal and interest, other payments with respect to each Note to Direct Participants or Beneficial Owners, confinnation and transfer of beneficial ownership interests in such Notes with other related transactions by and between DTC, the Participants, and the Beneficial Owners. However, DTC, the Participants, and the Beneficial Owners should not rely on the following with respect to such matters, but should instead confirm the same with DTC or the Direct Participants, as the case may be.

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The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for each Note (in this section, referred to as the "Securities"). The Securities wi1l be issued as fully-registered securities in the name of Cede & Co, (DTC's partnership nominee). One fully-registered Security certificate will be issued for the Notes and will be deposited with DTC.

DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a •'clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that its 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 bookentry transfers and pledges between Direct Participant~' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC, and EMCC are also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the OTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest ranking: AAA. The Rules applicable to DTC and its Direct and Indirect Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at

www.dtcc.com.

Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security (the .. 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, but Beneficia1 Owners are expected to receive written confirmations providing details of the transaction, as weU as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Participants acting on behalf of the Beneficial Owners. Beneficial Owners wilJ not receive Securities representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.

To facilitate subsequent transfers, all Securities deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of Securities with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. OTC has no knowledge of the acrual Beneficial Owners of the Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Participants wi11 remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to the Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices, if any, will be sent to Cede & Co. If less than all of the Securities within an issue are being redeemed, DTC's practice is to detennine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. will consent or vote with respect to Securities. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possib1e after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting right<, to those Direct Participants to whose accounts the Securities are credited on the record date identified in a listing attached to

the Omnibus Proxy.

Principal and interest payments on the Securities will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the payable date in accordance with their respective holdings shown on DTC1s records unless DTC has reason to believe that it wiU not receive payment on the payable date. Payments by Participants to the 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 wiU be the responsibility of such participant and not of DTC, the County Treasurer, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the District or the County Treasurer, disbursement of such payments to Direct Participants wiJl be the

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http://www.dtcc.com

responsibility of DTC, and disbursement of such payments to the Beneficia] Owners wi11 be the responsibility of the Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Securities at any time by giving reasonable notice to the District or the County Treasurer. Under such circumstances, in the event that a successor securities depository is not obtained, Security certificates will be required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry transfers through DTC, (or a successor securities depository). In that event, Security certificates wil1 be printed and delivered.

A.ccording to DTC. the foregoing information with respect to DTC has been provided to the Industry for informational purposes only and is not intended to serve as a representation, warranty, or contract modification of any kind.

Security for The Notes and Available Sources of Repayment

The Notes and the interest thereon are a general obligation of the District, but are payable solely from taxes, income, revenues, cash receipts and other moneys received by the District during Fiscal Year 2005-06 and legally available for the payment of current expenses and other obligations of the District (the "Unrestricted Revenues"). Certain Unrestricted Revenues to be received by the District have been specifica11y pledged, as hereinafter described, to the total repayment of the Notes and the interest thereon.

As security for the timely payment of the Notes and the interest thereon, the Resolution requires the County, on the behalf of the District, to transfer the Pledged Revenues, as defined below, during the months such moneys are received, to special Note repayment fund designated the "East Side Union High School District 2005 Tax and Revenue Anticipation Note Repayment Fund". The County has committed to deposit in the Repayment Fund (i) an amount equal to one half of the aggregate principal amount of the Notes from the Unrestricted Revenues to be received by the District in the month ending April 30, 2006, and (ii) an amount equal to one half of the aggregate principal amount of the Notes, together with an amount sufficient to pay the interest thereon, from the Unrestricted Revenues to be received by the District in the month ending May 31, 2006, together, if necessary, with an amount sufficient (net of anticipated earnings on the moneys in the District's Repayment Fund) to satisfy and to make up any deficiency therein. The amounts pledged by the County for deposit into the Repayment Fund from the Unrestricted Revenues are referred to as "Pledged Revenues". The principal of the Notes and the interest thereon will constitute a first lien and charge against, and will be payable from, the District's Pledged Revenues and to the extent not so paid will be paid from any other money of the District lawfu1ly available for such purpose.

In the event that there have been insufficient Unrestricted Revenues received by the District by the third business day prior to the end of any month in which a deposit is required to be made to pennit the deposit into the District's Repayment Fund of the full amount of the Pledged Revenues required to be deposited with respect to such month. then the amount of any deficiency in the Repayment Fund will be satisfied and made up from any other moneys of the District lawfully available for the payment of the principal of the Notes and the interest thereon (a11 as provided in Sections 53856 and 53857 of the Government Code) (the "Other Pledged Moneys"), on such date or thereafter on a daily basis, when and as such Pledged Revenues and Other Pledged Moneys are received by the District.

On the maturity date of the Notes, the Paying Agent will apply moneys in the Repayment Fund to pay the principal of and the interest on the Notes, as required. Until the Notes and a1l interest thereon are paid or until provision has been made for the payment of the Notes at maturity with interest to maturity, the moneys in the Repayment Fund will be applied only for the purpose for which such Repayment Fund has been L-reated, although they may be invested in legal investments, as permitted by the Government Code of the State of California, subject to the limitations contained in the Resolution. See "THE NOTESInvestment of Operating Funds, Note Proceeds, and Repayment Funds" herein. Any moneys in the District's Repayment Fund after payment of all amounts due, or after provision for such payment has been made, will be transferred to the General Fund of the District.

Bankruptcy Risks

The opinion of Bond Counsel with respect to the Notes, attached hereto as "APPENDIX C", is qualified by reference to bankruptcy, insolvency and other laws relating to or affecting creditors' rights. Bankruptcy of the County or the District could affect the security of the owners of Notes. the ability of an owner to be paid in a timely manner, or both.

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In connection with the 1994 bankruptcy petition of Orange County, California, the U.S. Bankruptcy Court originally held that the lien securing temporary notes issued by Orange County under the same statutory authority as the Notes did not attach to revenues received by Orange County after the filing of its bankruptcy petition, and therefore that the county was not required following bankruptcy to set aside the revenues it had pledged under the resolution providing for the issuance of its notes. The U.S. District Court reversed the Bankruptcy Court and that decision was appealed. While awaiting a decision from the U. S. Court of Appeals for the Ninth Circuit on the appeal, the parties settled their disputes. Accordingly, it is unclear whether the District could be required following filing of a bankruptcy petition to set aside funds as required by its note resolution.

Because the Treasurer of the County, acting as Paying Agent, is in possession of the taxes and other revenues that the District has agreed to set aside to pay the Notes, and will deposit and invest these funds in the County1s pooled investment fund, should the District or the County go into bankruptcy, a court might hold that the owners of such Note do not have a valid lien on the funds set aside for payment thereof. In that case, unless the owners could .. trace" the funds, the owners may be mere1y unsecured creditors of the bankrupt County or District. There can be no assurance that the owners could successfully so .. trace" the pledged

taxes and other revenues.

If the County were to file for bankruptcy, the District may be unable to order payment of the Notes from moneys held by the County in the fund set aside for such payment If the District were to file for bankruptcy, the Treasurer may be enjoined from applying set-aside funds to payment of the Notes, or from setting aside any further moneys of the District for such payment.

Investment of Operating Funds Note Proceeds, and Repayment Funds

Upon delivery of the Notes, the Treasurer of the County (who is also the Director of Finance, collectively, the "Treasurer") will deposit Note proceeds into the District's Note Proceeds Fund within the County Pool. Substantial1y all of the proceeds of the Notes will remain in the Santa Clara County Investment Pool (the ••pool") until spent as needed to meet cash flow requirements of that District or invested by the District pursuant to the Resolution. The Resolution permits Note Proceeds and moneys in the District's Repayment Fund to be invested in any investments permitted to the District by the Government Code of the State of California, and certain guaranteed investment contracts, provided that any such investments mature on or before the maturity date of the Notes. The Treasurer wi11 invest the Note Proceeds and Repayment Fund on1y in securities or investment agreements that meet Standard & Poor's criteria for investments.

[The remainder of this page intentional1y left blank.J

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SANTA CLARA COUNTY INVESTMENT POOL

This section provides a general description of the County's Investment Pool. The information has been adapted from material prepared by the County for inclusion in this Official Statement. The District makes no representation as to the accuracy or completeness of such information. Further information may be obtained by contacting the County of Santa Clara, Department of Finance, County Government Center, East Wing, 70 West Hedding Street, San Jose, California 95110, Telephone (408) 299-5200, Facsimile Telephone (408) 289-8629.

State law requires that all moneys of the County, school districts, and certain special districts be held in the County Treasury by che Treasurer. The County Treasurer has the authority to implement and oversee the investment of funds held in the Pool in accordance with CaHfomia Government Code Section 53600 et seq. The moneys on deposit are predominantly derived from local government revenues consisting of property taxes, State and federal funding and other fees and charges. The Treasurer accepts funds only from agencies located within the County.

As of June 30, 2005, the Pool had approximately 55% of its assets invested in U.S. Treasury securities and federal agencies. Approximately 36% of the Poors assets were invested in highly liquid short-term money market instruments (certificates of deposit, bankers acceptances, and/or commercial paper). The County Pool had no funds invested in inverse floaters (a fonn of derivative), nor did the County have any reverse repurchases in hs portfolio position. The composition of the Pool is set forth in the following table.

Santa Clara County Investment Pool Composition of Portfolio

As of June 30, 2005

Type Federal Agency Treasury Notes Commercial Papers Medium Tenn Notes Time Deposit Local Agency Investment Fund

Source: County of Santa Clara, Department of Finance

Total:

Cost (millions) $ 1,780.8 $ 50.3 $ 1,103.7 $ 259.9 $ 100.0 $ 40.0 $ 3,334.6

% of Total 53.4%

l.5% 33.]%

7.8% 3.0% 1.2%

100.0%

As of June 30, 2005, the cost of commingled investments exceeded market value by $9,93 l,064, or 0.30%. The weighted average maturity of the investment portfolio was 289 days, with a weighted average yield to maturity of 2.98%. The maturity distribution of the Pool's portfo}jo as of June 30, 2005 is set forth in the following table .

. 7.

Santa Clara County Investment Pool Portfolio Liquidity

As of March 31, 2005

Term to Maturity % of Total Cash Equivalent 6% I - 30 days 16% 31 - 90 days 15% 91 180 days 19% 181-365days 30% 366 - 730 days 12% 731 days -5 years !%

Total: 100%

Source: County of Santa Clara, Department of Finance

[The remainder of this page intentionally left blank.]

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THE DISTRICT

General Information

The District was established in 1949, and provides secondary education to the residents of the portion of east San Jose that extends from the Milpitas border on the north to the Coyote Narrows on the south, and from the Diablo Mountain Range on the east to the Guadalupe River on the west. The total area served by the District is approximately 142 square miles and has a population of approximately 390,000. The District operates IO comprehensive high schools (grades 9-12), and 5 continuation schools. The District employs approximately l ,199 certificated employees, and approximately 717 classified employees.

The District has been very successful in obtaining community support. In March of 2002, the District passed a $298 million general obligation bond measure. The District also receives substantial technical, and financial support from the private sector. The David and Lucille Packard, Noyce, Hewlett, and Sun Microsystem Foundations have contributed significant amounts of funds to drive major education initiatives. Sun Microsystems, 3Com, Pacific Be11, Nove1l, RFI, NASA, TCI, Cable Connector Warehouse, Applied Materials, Adobe Systems, and Anixter have invested over $2 million in the wiring of East Side schools to enable students and teachers to have access to the internet. The District has also been successful in obtaining grants fur student, family and school support. More information on the District may be found athttp://www.esuhsd.org/.

The Board of Trustees and Key Administrative Personnel

The District Board governs all activities related to public elementary and secondary education within the jurisdiction of the District. The District Board receives funding from local, State and federal government sources and must comply with the concomitant requirements of these funding source entities. The District Board consists of five members. Each District Board member is elected by the public for a four-year term of office and staggered elections for the District Board are held every two years. The Superintendent of the District is appointed by the District Board and reports to the District Board. The Superintendent is responsible for managing the District's day-to-day operations and supervising the work of other key District administrators. The current members of the District Board, and key administrative personnel are set forth on page "iii" of this Official Statement.

Enrollment

Student enroJlment of a public school district in California determines to a large extent what the school district will receive in terms of funding for program, facilities and staff needs. Average daily attendance ("ADA") is a measurement of the enrollment of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apponionments of state funds are made to school districts. See "STATE FUNDING OF PUBLIC EDUCATION" herein. Set forth in the exhibit below is the ADA (9-12 ADA excluding adult education and ROP) for the District for previous fiscal years.

P-2 ADA

* Estimated. Source: District

Employee Relations

P-2 Average Daily Attendance East Side Union High School District

2001-02 2002-03 2003-04 2004-05 2005-06*

California law provides that employees of public school districts of the State are to be divided into appropriate bargaining units that then are to be represented by an exclusive bargaining agent.

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http://www.esuhsd.org/

The District has three recognized primary bargaining units for its employees. The East Side Teacher's Association ("ESTA"), the American Federation of Teachers, Local #957 ("AFT"), and the California School Employees Association, Local# 187 ("CSEA"), The District is currently in negotiations with each of the bargaining units for the 2005-06 fiscal year.

Pension Plans

All fu11-time employees of the District are eligible to participate under defined benefit retirement plans maintained by agencies of the State. Certificated employees are eligible to participate in the cost-sharing multiple-employer State Teachers' Retirement System ("STRS"). Classified employees are eligible to participate in the multiple-employer Public Employees' Retirement Fund of the Public Employees' Retirement System ("PERS"), which acts as a common investment and administrative agent for participating public entities within the State.

STRS operates under the State of California Education Code sections commonly known as the State Teachers' Retirement Law. Membership is mandatory for all certificated employees of California public schools meeting the eligibility requirements. STRS provides retirement, disability and death benefits based on an employee's years of service, age and final compensation. Employees vest after five years of service and may receive retirement benefits at age fifty-five.

All full-time classified employees of the District participate in PERS. which provides retirement, disability and death benefits based on an employee's years of service, age and final compensation. Employees vest after five years of service and may receive retirement benefits at age fifty. These benefit provisions and all other requirements are established by State statute and District resolution. For a more complete description of the District's pension plan and annual contribution requirements. see "APPENDIX A" attached hereto.

Revenue Limitations

The California Constitution, Article XVI, Section 8, requires that from all State revenues there will first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education. California school districts receive a significant portion of their general purpose operating income from State appropriations. As a result, decreases in State revenues may affect appropriations made by the Legislature to school districts.

On the average, California school districts receive most of their income under a formula known as the State Revenue Limit. Annual State apportionm~nts of basi.c; and equalization aid to school districts for general operating purposes are computed up to a revenue limit per unit of average daily attendance ("ADA"). Such apportionments will, generally speaking, amount to the difference between a district's revenue limit and the District's local property tax allocation.

Revenue limit calculations are adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among all districts of the same type (i.e., elementary. high school, and unified school district,;). California school districts have operated under general purpose revenue limitations since Fiscal Year 1973~74. For a further discussion of State Revenue Limits, see "STA TE FUNDING OF PUBLIC EDUCATION-Distribution of Revenue for Public Education" herein.

Financial Statements and District Budgets

Figures presented in summarized form herein have been gathered from the District's general purpose fmancial statements. Portions of the audited financial statements of the District for the Fiscal Year ending June 30, 2004, have been included in the appendix to this Official Statement. See "APPENDIX A" herein. Audited general purpose financial statements for all prior fiscal years are on file with the District and available for public inspection during normal business hours. Copies of general purpose financial statements relating to any year are available to prospective investors and or their representatives upon request by contacting the District or by contacting the District's Financial Advisor at the address and telephone number set forth on page "iii" of this Official Statement.

The District's General Fund finances the legally authorized activities of the District for which restricted funds are not provided, General Fund revenues are derived from such sources as federal and State school apportionments, taxes, use of money and property, and aid from other governmental agencies.

- IO -

The District is required by provisions of the State of California Education Code to maintain a balanced budget each year, where the sum of expenditures plus the ending fund balance cannot exceed revenues plus the carry-over fund ba]ance from the previous year. The State of California Department of Education imposes a uniform budgeting format for school district,;.

The fiscal year for all school districts is July I to June 30. The same calendar applies to the budgets of county offices of education, except that their budgeL"i and reports go to the Superintendent of Public Instruction for review. The State budget, too, is extremely important since school districts depend on it for almost a11 their revenue. There is a very close timing in the summer between final approval of the State budget, school finance legislation, and the adoption of local district budgets. In some years, the State budget is not approved by the dead1ine, which forces school districts to begin the new fiscal year with only estimates of the amount of money they wHl actual1y receive.

The school district budgeting process Involves continuous planning and evaluation. Within the deadlines, school district-; work out their own schedules for considering \Vhether or not to hire or replace staff, negotiating contracts with a11 employees, reviewing programs, and assessing the need to repair existing or acquire ne\v facilities. Decisions depend on the critical estimates of enro11ment, fixed costs, commitments in contracts with employees as we11 as best guesses about how much money will be avai]able for e1ementary and secondary education.

The timing of some decisions is forced by legal dead1ines. For example, preliminary layoff notices to teachers must be delivered in March, with final notices in May. This necessitates projecting enrollments and determining staffing needs long before a school district wi1l know either their final financial positions for the current year or their income for the next one.

The governing board must submit a budget to the County Superintendent by July 1, and a publicized opportunity for public participation in the budget process is required by Jaw. There are two options for budget adoption. Districts may adopt their budget,; by July I and then revise and readopt them by September 8 after a public hearing. Alternatively. school districts may decide. by the previous October 31, to hold public hearings before adopting their budgets by Joly I. School districts choosing this option revise their revenues and expenditures after the State budget act is adopted, without a second public hearing. All school districts must perform a criteria and standards review before budget adoption. And, those school districts on the alternative schedule for adoption must repeat the review before their revision only if the July l budget was disapproved. Recent legislation requires criteria and standards for stringent review of school districts' finances, focusing primarily on predictions of average daily attendance, operating deficit, and reserves. It tel1s when and how outside committees, or an appointed trustee in emergency situations, must work with school districts. This oversight is part of an effort to reduce the number of districts in financial trouble and to increase the responsible use of tax dol1ars.

The County Superintendents monitor aU school districts' budgets, ongoing financial obligations and multi-year contracts. They have specific powers for recommending actions to revise budgets. They are not, however, authorized to abrogate existing co11ective bargaining agreements. School districts must review their financial position for the periods ending October 31 and January 31 in order to certify their abi1ities to meet commitments through the rest of the school year.

Each school district is required by the State of California Education Code to file these two interim reports each year by not later than December 15 and March 15. The county offices of education must then, within 30 days, evaluate the interim reports and forward their comments to the State of California Department of Education and the State Controller1s Office. Included in the report is a certification by the president of the governing board of each school district which classifies the school district according to its abi1ity to meet hs financial obligations. The certifications are grouped into three categories: A Positive Certification, which designates that the schoo1 district will be able to meet its financial obligations for the remainder of the fiscal year and subsequent two fisca1 years; a Qualified Certification, which means that the school district may not be able to meet its financial obligations for the remainder of the fiscal year or the next two fiscal years, based upon current projections; and a Negative Certification, which signifies that the school district will not be ab]e to meet its financia1 obligations for the remainder of the fiscal year or the next fisca] year, based upon current projection. The District submitted Negative Cenifications for its First and Second Interim Report fi1ings for fiscal year 2004-05, and submitted a Qualified Certification for it, Third (nterim report

The fol1owing illustration sets forth certaln General Fund information for the District

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BEGINNING BALANCE

REVENUES Revenue Limit Sources Federal Revenues Other State Revenues Other Local Revenues

TOT AL REVENUES

EXPENDITURES Certificated Salaries Cla'isified Salaries Employee Benefits Books and Supplies Services & Other Operating Exp Capital Outlay Other Outgo Direct support/indirect cost

TOT AL EXPENDITURES

FlNANCING SOURCES (USES)

NET CHANGE

ENDING BALANCE

General Fund Activity East Side Union High School District

For The Fiscal Years Indicated

2001-02 Audited

$5,886,798

$125,374,643 $12,764,316 $43,933,307 $11,948,744

$194,021,010

$98,880,567 $28.220,591 $29,554,880

$9,027,309 $18,006,578

$54,801 $7,056,437

$0

$190,801,163

($1,121,548)

$2,098,299

$7,985,099

2002-03 Audited

$7,985,099

5128,967,691 $12,168,046 $35,510, 119 $15,559,721

$192,205,577

$100,499,693 $29,114,205 $34,092,873 $8,026,418

$16,760,220 $100,500

$7,208,632 $0

$195 ,802,541

$4,313,476

$716,512

$8,701,611

2003-04 Audited

$8,701,611

$132,876,166 $13,578,631 $29,810,142 $13,377 ,894

$189,642,833

$96,567 ,567 $28,555,054 $37,143,066

$6,983,102 $15,495,813 $1,143,967

$11,835,789 $0

$197,724,358

$536,317

($7,545,208)

$!, 156,403

Source: East Side Union High School District

Short Tew Borrowings

2004-05 2005-06 Unaudited Actuals Adopted Budget

$1,156,403 $3,387,616

$141,326,073 $144,194,007 $12,099,987 $17,178,481 $30,457,423 $35,477,585 $10,540,974 $11,046,635

$194,424,458 $207 ,896, 708

$98,421,895 $97,581,384 $27,377,810 $27 ,524,492 $39,376,586 $42,847,759

$5,733,090 $10,755,510 $15,230,661 $16,153,076

$109,024 $5,875 S 10,835,370 $11,005,438

$9

$197,084,435 $205,873,534

$4,891,190 ($1,027 ,382)

$2,231,213 $995,792

$3,387,616 $4,383,408

The District has in the past issued short-term tax and revenue anticipation notes. Proceeds from the issuance of notes by the District during previous fiscal years have been used to reduce interfund dependency and to provide the District with greater overall efficiency in the management of its funds. The District has never defaulted on any of its short term borrowings. Set forth below is the history of the short term borrowing program of the District.

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Date of ]ssuance

July 2, 1996 July 2, 1997 July 2, 1998 July I, 1999 July 6, 2000 July 3, 2001 July 2, 2002 July I, 2003

June 30, 2004

Recent History Of The East Side Union High School District

Short Tenn Cash-Flow Financing Program

Amount of Notes

$7,500,000 $11,000,000 $12,500,000 $12,500,000 $17 ,800,000 $12,700,000

$9,500,000 $11,000,000 $ I 0,500,000

Capitalized and Bonded I.ease ObliL?ation

Moody's I S&P Rating

nla SP-I+ SP-I+ SP-I+ SP-I+ SP-I+ SP-I+ SP-I+ SP-I+

The District has made use of various capita] and bonded lease arrangements in the past under agreements which provide for title of items and equipment being leased to pass to the District upon expiration of the lease period. The District has promised to annually appropriate the amounts necessary to make all future lease payments from available revenues. All lease and capitalized lease obligations of the School District as of June 30, 2004, are set forth in "APPENDIX A" attached hereto.

Long Term Borrowings

As of June 30, 2004, the District had $210,030,099 of general obligation bonds outstanding. On March 5, 2002. the District's voters approved a general obligation bond authorization of $298,000,000 (the "2002 Authorization"). On July 9, 2002, the District issued $30,000,000 of general obligation bonds from the 2002 Authorization. On July 24, 2002, the District issued $30,000.000 of general obligation bonds from a voter approved a general obligation bond authorization of $80.000,000 (the "1999 Authorization"). On January 29, 2003, the District issued $36,795,000 of general obligation refunding bonds. On April 3, 2003, the District issued $30,000,000 of general obligation bonds from the 2002 Authorization. Also on April 3, 2003, the District issued $24,500,000 of general obligation bonds from the 1999 Authorization, this represented the final authorization of the 1999 Authorization. The District's outstanding general obligation bonds are insured, and carry an '"BBB+" Standard & Poor1s underlying rating. The District has never defaulted on any of its long-term borrowings,

A1ternate Liquidity

In the event of a "worst case" cash shortfall in the General Fund, the District maintains the ability, subject to approval by the District Board, to borrow alternate sources of funds to meet short term contingencies. Any transfer between funds, generally, is repaid to the account of origination prior to the close of the fiscal year. On June 30, 2005, the District is projecting an alternate source of funds, in aggregate. as set forth and itemized below.

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Fund Special Reserve County School Facilities Capita] Facilities

Monthly Cash Flow

Alternate Liquidity

Balance as of June 30, 2005

$ 6,228,978 16,400,774 7,815,705

$ 30,445,457

Projected Balance as of June 30, 2006

$ 4,631,098 6,510,048 4,450,436

$ 15.591.582

The District has prepared for use in this Official Statement the following cash flow statements that show unaudited actual cash receipts and disbursements for Fiscal Year 2004-05, and projected cash receipts and disbursements for Fiscal Y car 2005-06.

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EAST SIDE UNION HIGH SCHOOL DISTRICT ACTUAL MONTHLY CASH FLOW OF THE GENERAL FUND

FISCAL YEAR 2004-05

JUL AUG SEP OCT NOV DEC JAN FEB ~AR APR MAY JIJN TOTAL

BTIGlNNING CASH $5,602,381 $16,837 ,644 $14,022,190 $4,814,294 $5,543,393 $7,317,139 $16.690,657 $[9,099,967 $17.495,258 $18,169,784 $20,576,284 $9,075.343 $5,602,381

RECEIPTS Property Tax fl 168,242 0 9,562,317 9,527,108 24,104,569 1,801,316 2.699,363 7,800,000 17,823,890 980,100 12,854.377 $87.321,282 State Aid 2,154,178 9,220,114 5,055,241 5,055,241 5,055,241 0 10.ll0,482 7,040,116 3,520,058 3,520,058 3,520,058 (988,901) $53,261,886 Other 47,848 54,987 61,362 611,552 6!,024 60,446 291,500 59,299 58.275 20.026 58,457 (90,871) $742,905 Federal Revenues 2,259,696 107,594 144.551 38,!26 1,469,818 62,036 2,()()3,483 2,424,358 420,730 578,160 1,733,925 857,512 $12,099,989 Other State Revenues 2,571,383 1,341,494 881,802 2.441,515 1,126,263 952,022 3,221,116 1,708,520 8.398,497 1,856,620 3,203,475 3,1 (4,125 $30,Rl6,832 Other Local Revenues I ,R00,759 856,593 635,130 412.199 401,580 366,351 1,710,123 1.439,857 1,147,351 655,433 261,668 853,930 $10,540,974 lnterfund Tra1rnfers In 0 0 0 924,86() 0 0 0 0 0 0 0 5,884,564 $6,809,424 Other Receipts (543,603) l,487,165 711,364 570,490 (84.148) 506,744 604,826 305.474 194,352 (136,328) 926,541 (4,832,830) ($289,953) TRANs 2004 10,594,816 0 0 0 0 0 0 () 0 0 0 0 $10,594,816

TOTAL RECEIPTS $18,885,077 $13,236,189 $7,489,450 $19,065,300 $ l 7.556,886 $26.052,168 $19,742,846 $15,676,987 521.539,263 $24,317,859 $10,684,224 $17,651,906 $211,898,155

DISBURSEMENTS Certificated Salaries 583,393 2,759.053 8,236,786 8,622.857 8,790,843 8,541 ,456 8,480.037 9.074.510 8,615,441 8,600,969 8,783,344 17,333,205 $98,421,894 Classified Salaries 1,538,445 2.435,946 2,205,553 2,258,653 2.409,734 2,285,269 2.142,88Q 2,318,294 2,107,356 2,256,755 2,411,011 3,007,903 $27 ,377 ,8{)8 Employee Benefits 2.503.436 1.920,909 3,253,832 3,367,509 3,337,002 3,337,314 3,226,674 3,310,856 3.414,739 3,365,877 3,358,899 4,979,538 $39,376,585 SuppliesJServices 725,990 1,629,104 2,355,784 2,695.322 733.639 1,597 ,.358 2,284,899 921,817 1,786,957 1,335,608 1,042,779 3,854.493 $20,963,750 Capital Outlays 0 0 [) 875 () 0 0 0 () 0 0 !08,149 $109,024 Other Outgo 4,423 J,238,406 586,953 1,310,629 513,331 890.636 1,313,758 896,949 1.426,305 737,919 769,370 1,146.691 $10.835.370 1nterfund Transfers Out 0 0 0 0 0 0 0 0 3,100,000 0 0 I ,918,234 $5,018,234 All Other Financing Uses 0 0 0 0 0 0 0 0 0 0 () 0 $0 Other Disbursements 2,294,127 6,068.225 58,438 80,356 (l,409) 26,617 (114,721) 759,270 413.939 364,231 307,262 ( 19,334,288) ($9,077,953) TRAN~ 2004 0 0 0 0 0 0 0 0 0 5,250Jl00 5,512,500 0 $10,762,500

TOTAL DISBURSEMENTS '$7,649,814 $16,051,643 $16,697,346 $18,336,201 $15,783,140 $16,678,650 $17,333,536 $17,281,696 $20,864,737 $21,911,.l59 $22,185,\65 $13,013,925 $203,787,212

NET CHANGE CASH $11,235,263 ($2,815,454) ($9,207,896) $729,099 $1.773.746 $9,373,518 $2,409.310 ($1,604,709) $674.526 $2,406,500 ($11,500,941) $4,637,981 $8,110,943

ENDING CASH $16,837,644 $14,022,!90 $4,814,294 $5,543,39] $7,317,139 $16,690,657 $19,099,967 $17,495,258 $18,169,784 $20,576,284 $9,075,343 $13,713,324 $13,713,324

SOURCE: East Side

2004 NOTE REPAYMENT FUND Beginning Balance $0 $0 $0 so $() so $0 $() $0 $0 $5,250,000 $ I 0, 762,500 $0

Receipt~ 0 0 0 0 0 0 0 0 0 5,250,000 5,512,500 0 $10,762,500

Disbursements {) {) () )) () 0 0 0 0 0 0 0 $0 Endin.B...!!_alance _ $0 $0 $0 so $0 $0 $0 $0 so $5,250,000 $_10,7§1,_500 $\{),762,500 $10,762,500

EAST SIDE UNION HIGH SCHOOL DISTRICT PROJECTED MONTHLY CASH FLOW OF THE GENERAL FUND

FISCAL YEAR 2005-06

JUL AUG SEP OCT NOV DEC JAN FEB ~-- ~

MAR APR MAY JUN TOTAL

BEGINNING CASH $13,713,324 $5,203,461 $6,609,707 ~I $4,793,822 Sl,886,822 $ I 2,924,822 $13,893,822 $ I 2,566,679 $16,894,679 $20,777.322 $9,009.517 $13,713,324

RECEIPTS Property Tax 729,112 180,000 0 9,560.000 9,527,0!l{J 24.l00,000 1,801,(X)() 2,700,000 7,800,000 17,800,000 1)80,000 11.637,862 $86,814,974 State Aid 0 10,000,000 5,055,000 5,055,000 5,055,()00 0 !0,000.000 7,000,000 3.520,000 3,."i20,000 3,520.000 4,038,578 $56,763,578 Other 56,556 63,185 63,000 63,000 63,000 63,()00 63,000 63.000 63,000 63.000 63,000 (71,286) $615,455 Federal Revenues 3,578,044 108,000 144,000 38,000 ! ,469,000 62.000 2,()(J(),OOO 2,420,000 420,000 578,000 1,200,000 82,956 $12,100,000 Other State Revenues 1,783,357 \,3()(),000 882,000 2.440.000 1,126,000 952,000 3,220,000 1,700,000 8,390,000 2.566,643 3,200,000 3,240,000 $30,800,000 Other Local Revenues 947,964 856,000 1,035,000 412.000 401,00() 366,000 1.710.000 1,439,857 1,140,000 655,000 430,445 1.345.179 $10,738.445 lnterfund Transfers In 0 0 0 II 0 0 0 0 0 0 0 5,500,000 $5,500,000 Other Receipts \,434,632 185,630 20,854 500.000 0 500,000 600,000 300,000 195,000 0 900,000 5,201.624 $9,837.740 TRANs 2005 0 0 0 8,604,805 0 0 0 0 0 0 0 0 $8.604,805

TOTAL RECEIPTS $8.529,665 $12,692,815 $7,199,854 $26,672,805 $17,641,(X)() $26,043,000 $19,394,000 $15,622.857 $21,528,(IOO $25.182,643 $10,293,445 $30,974,913 $221,774,997

111SHURSEMENTS Certificated Salaries 482,728 1,837,858 8,403,569 8,600,000 8,800,000 8,500,000 8,500,000 9,100,000 8.600,000 8,6()0.000 8,800,000 17,900,380 $98.124,535 Classified Salaries 1,348,645 1,958,617 2,061,802 2,300,000 2,450.000 2,300,000 2.200,000 2,350,000 2,250,000 2,300,000 2,500,000 3.116,605 $27.135,66<;1 Employee Benefits t,880,611 1,366,793 3.679,902 4,100,000 3.900,000 3.900.000 3,900,000 3,9()(),000 3,9Cl0,(X)() 3,900,000 3,900,000 4,636,842 $42,964,150 Supplies/Services 16,706 831,072 1,756,921 2,690,000 800,000 1,600,000 2,500,000 950,000 1,800,000 1,600,000 l,600,()()0 3,387,192 $19,531,891 Capital Outlays 0 0 0 0 0 0 0 0 0 0 0 0 $0 Other Outgo 94,749 241,545 516,491 1.320,000 600,000 600,000 1,320,000 600,000 600,000 600,000 600,000 1,387,145 $8,479,930 Interfund Transfers Out 0 0 () 0 0 2,100,000 0 0 0 0 0 5,310.964 $7,410,964 All Other Financing Uses 0 0 0 0 0 () 0 0 0 0 0 0 $0 Other Disbursements 13,216,087 5,050,684 179,859 80,000 (2,000) 5,000 l,000 50,000 50,000 50,000 50,()(JU (9,880,000) $8,854,630 TRANs 2()()5 0 0 0 0 0 0 {) 0 0 4,250,000 4,611.250 0 $8.861,250

TOTAL DISBURSEMENTS $17,039,528 $! 1,286,569 $16,598,544 $19.090,000 $16,548.()00 S\9,005,000 $18,425,()()() $16,950,000 $17 ,200,000 $21-100,000 $22,061,250 $25,859,128 $22\,363,019

NET CHANGE CASH ($8,509,863) $1.406.246 ($9,398,690) $7,582,805 SJ,{)93,000 $7,038,000 $969,000 ($1,327,143) $4,328,000 SJ.882,643 ($11,767.8051 $5,115,785 $411,978

DRAWS ON OTHER FUNDS $0 $0 $2,788,983 ($2,788,983) $0 $11 $0 $0 ~I $0 $0 $0 $0

ENDING CASH $5,201,461 $6.609,707 $0 $4,793,822 $5,886,822 SI 2,924,822 $13,893,822 $12,566,679 $ l 6,894,679 $20.777 ,322 $9,009,517 $14,l25,302 $!4,l25,302

SOURCE; East Side Union High School District.

2005 NOTE REPAYMENT FUND Beginning Balance $0 $0 $0 $0 $0 $0 $0 $0 $[) $0 $4,250,000 $8,861,250

~----$()

Receipts I) 0 0 0 0 0 0 0 0 4,250,000 4,611,250 0 $8,861,250 Disbursements 0 0 0 0 0 0 () () {) 0 () 0 $0

Ending Balance so _!l)_ --- so_ -- $0 $0 $0 $0 $0 ~) $4,250,000 $8,861,250 $8,86L,250 $~61.250 --~-

TAXATION AND APPROPRIATIONS

Ad Valorem Property Taxation

The District utilizes the services of the County for the assessment and collection of taxes for District purposes, except for public utility property that is assessed by the State Board of Equalization.

For a description of how properties are presently assessed, see "CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING DISTRlCT REVENUES & EXPENDITURES." The State Constitution and sections of various State statutes provide exemptions from ad valorem property taxation for certain <:lasses of property such as churches, co11eges, nonprofit hospitals, charitable institutions and for severely handicapped individuals.

The State Constitution exempts from ad valorem property taxation $7 ,000 of full va]ue of owner occupied dwellings, and requires the Legislature to reimburse each local government for revenue Jost as a result of the exemption.

Unitary Property

Some amount of property tax revenue of the District is derived from utility property that 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 genera1ly based on the distribution of taxes in the prior year.

Recent changes in the California electric utility industry structure and in the way in which components of the industry are regulated, including the sale of electric generation assets to largely unregulated. nonutility companies, may affect how utility assets are assessed in the future, and which local agencies are to receive the property taxes. Neither District is able to predict the impact of these changes on its utility property tax revenues, or whether future legislation or litigation may affect the State's methods of assessing utility property and allocating tax revenues to local taxing agencies, including the District.

Because the District is not a basic aid district, taxes lost through any reduction in assessed valuation will be compensated by the State as equalization aid under the State's school financing formula. See "STATE FUNDING OF EDUCATION-Sources of Revenue for Public Education" herein.

Santa Clara County Tax Loss Reserve Fund

As an alternative method of property tax allocation for the County, the County Board approved implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan"). pursuant to sections 4701 through 4717 of the State's Revenue & Taxation Code. This action of the County Board came pursuant to the endorsement of the Teeter Plan by the taxing districts of the County. The Teeter Plan guarantees distribution of 100% of the general taxes and special assessments levied to the taxing entities within the County, with the County retaining all penalties and interest penalties affixed upon delinquent properties and redemptions of subsequent co11ections. The purpose of utilizing the Teeter Plan is to simplify the tax-levying and tax-apportioning process and to provide increased flexibility in the use of available cash resources.

The County Treasurer's cash position is protected by a special fund, known as the "Tax Loss Reserve Fund," which accumulates moneys from interest and penalty collections. Amount<; exceeding the amount required to be maintained in the tax loss reserve fund may be credited to the County's general fund. Amounts required to be maintained in the tax loss reserve fund may be drawn on to the extent of the amount of uncollected taxes credited to each agency in advance of receipt.

A county electing to utilize the Teeter Plan may elect to discontinue its. use for any tax levying agency if the rate of secured tax

delinquencies in any fiscal year exceeds 3% of the total of all taxes Jevied on the secured roll of that agency. Otherwise, the Teeter Plan is to remain in effect unless the County Board orders its discontinuance or unless, prior to the commencement of any fiscal year, the County Board receives a petition for its discontinuance joined in by resolutions adopted by at least two-thirds of the participating revenue districts in the County, in which event the County Board is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. If the Teeter Plan is discontinued subsequent to its implementation,

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only those secured property taxes actually coHected would be allocated to political subdivisions, including the District; however. the District would realize the benefit of interest and penalties collected from delinquent taxpayers, pursuant to law.

[The remainder of this page intentionally left blaak. J

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STATE FUNDING OF PUBLIC EDUCATION

Sources of Revenue for Public Education

The State's public education system is supported primarily from State revenues, mostly sales and income taxes. These are supplemented with local property taxes, federal money and miscellaneous funds from such diverse local sources as developer fees, contributions from businesses, individuals, and organizations.

Jn recent years, approximately 60% of all money for public education came from the State budget. and about 24% from local property taxes. The State Legislature and the State Governor determine the total from both sources annually. The process begins with the release of the Governor's proposed budget by January 10 each year and concludes with the adoption of the State1s budget, which is required to be adopted by June 15 each year (although this deadline is rarely met). The property tax amount, established by the Legislature in a 1978 fonnula following the passage of Proposition 13, has been slowly increasing, and the State's share has decreased sJightJy.

Statewide, about 8.6% of schoo1 district'i' revenues come from the federal government, and about 6% come from local miscellaneous sources. The latter category includes such small items as food sales, money for debt repayment, interest on reserves and, in some cases, such larger items as developer fees and parcel taxes. Many school districts seek grants or contributions, sometimes channeled through private foundations established to solicit donations from local families and

businesses.

Those few school districts that still have unused school buildings or sites can lease or sell them for miscellaneous income. Since January 1987, school districts have been able to levy a fee on new residential or commercial development within their boundaries to finance the construction or renovation of school facilities.

A significant number of school districts have secured the required two-thirds approval from local voters to levy special taxes on parcels or residences. A significant number of others have won voter approval, with either a two-thirds vote or a 55o/o majority, to sell general obligation bonds or to establish special taxing districts for the construction of schools. Use of such taxes is restricted by law.

The final revenue source is the California State Lottery. Approved by voters in late t 984, the lottery generates approximately l .6% of total school revenues. The revenues may be spent for instructional but not capital purposes.

No other source of general purpose revenue is currently permitted for schools. Proposition 13 eliminated the possibility of raising additional property taxes for general school support, and the courts have declared that fees may not be charged for school-related activities other than for busing services.

Proposition 98/111. On November 8, 1988, voters of the State approved Proposition 98. a combined initiative constitutional amendment and statute called the .. Classroom Instru<.:tiona] Improvement and Accountability Act". Proposition 98 changed State funding of public education below the university level and the operation of the State's appropriations limit, primarily by guaranteeing K-14 schools a minimum share of General Fund revenues. Under Proposition 98 (as modified by Proposition 11 L which was enacted on June 5, 1990, hereinafter defined as "Proposition 98/111"), K-14 schools are guaranteed the greater of (a) the percentage of General Fund revenues appropriated for school district1, in Fiscal Year 1986-87 ("Test 1"); (b) the amount of State and local proceeds of taxes appropriated to K-14 schools in the prior year, adjusted for changes in the cost of living (measured as in Article XIII B by reference to State per capita personal income) and enrollment ("Test 2"), or (c) a third test, whi(;h would replace Test 2 in any year in which the percentage growth in State per capita personal income is greater than the percentage growth on per capita General Fund revenues plus one-half of one percent ("Test 3").

Under Test 3, schools would receive the amount of State and local proceeds of taxes appropriated to K-14 schools in the prior year adjusted for changes in enrollment and per capita General Fund revenues. plus an additional small adjustment factor. If Test 3 is used in any year, the difference between Test 3 and Test 2 would become a "credit., to schools which would be the basis of payments in future years when per capita General Fund revenue growth exceeds per capita personal income growth. Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98, determined the K-14 schools1 funding guarantee under Test 1 to be 40.3% of the General Fund tax revenues, based on 1986-87 appropriations. However, that percentage has been adjusted to 34% to account for a subsequent redirection of local property taxes, since such redirection directly affects the share of General Fund revenues to schools.

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Proposition 98/111 permits the Legislature by two-thirds vote of both houses, with the Governor's concurrence, to suspend the K-14 schools' minimum funding formula for a one-year period. In the fall of 1989, the Legislature and the Governor utilized this provision to avoid having 40.3% of revenues generated by a special supplemental sales tax enacted for earthquake relief go to K-14 schools. Proposition 98 also contains provisions transferring certain State tax revenues in excess of the Article XIITB limit to K-14 schools.

Since Proposition 98/I l l is unclear in some details, there can be no assurance that the Legislature or a court might not interpret it to require a different percentage of General Fund revenues to be allocated to K-14 districts or to apply the relevant percentage to the State1s budget in a different way. Proposition 98/111 may place increasing pressure on the State1s budget in future years, potentially reducing resources available for other State programs, especially to the extent that the Article XIIIB spending limit would restrain the State's ability to fund these other programs by raising taxes.

Proposition 98/11 l also changes how tax revenues in excess of the State's appropriations limit are distributed. Any excess State t.ax revenues up to a specified amount would, instead of being returned to taxpayers. be transferred to K-14 districts. Such transfer would be excluded from the appropriations limits for K-14 districts and the K-14 schools' appropriations limits for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to schools is four percent of the minimum State spending for education mandated by Proposition 98/111, as described above.

California Teachers' Association v. Gould: During several years in the early 1990s, the State realized less tax receipts than it had previously budgeted. As a result, in each of those years, public education received more in funding than its minimum entitlement under Proposition 98. The State Legislature characterized the over funded amounts as "loans" to be repaid from the Proposition 98 entitlement in future years. The aggregate amount of these loans is approximately $1.76 billion. The validity of the loan characterization and repayment mechanism was challenged by the California Teachers' Association (CTA), which sought to void the obligation to repay the loan amounts.

On April 26. 1994, a Sacramento County superior court entered a judgment that K-14 districts are not obHgated to repay the interyear loans. The decision was appealed by the State, and pending appeal CTA and the State reached a settlement which became final on April 12, 1996. Pursuant to the settlement agreement, no new inter-year loans will be created; the existing loans are required to be repaid over an eight year period, with K-14 schools contributing $825 million from funds allocated to education under Proposition 98, and the State contributing the balance of $938 million. The final Proposition 98 funding levels for the years in dispute will be certified, and the schools' contribution will be counted toward the Proposition 98 guarantee in future years.

Proposition 39: On November 7, 2000, California voters approved an amendment (commonly known as Proposition 39) to the California Constitution. This amendment (I) allows school facilities bond measures to be approved by 55 percent (rather than two-thirds) of the voters in ]ocal 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, including the District, community college districts, and county offie,"es of education. As noted above, the California Constitution previously limited property taxes to 1 percent of the value of property. Property taxes may only exceed this limit to pay for(]) any local government debts approved by the voters prior to July I, 1978 or (2) bonds to buy or improve real property that receive two-thirds voter approval after July I, 1978.

The 55 percent vote requirement would apply 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 1oca1 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 a high school or elementary school district), or $25 (for a community college district), per $100,000 of taxable property value. These requirements are not part of this proposition and can be changed with a majority vote of both houses of the Legislature and approval by the Governor.

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2005-06 State Budget

On July 11, 2005, the Governor signed the 2005-06 Budget Act (the "2005-06 Budget"). The following infonnation is an excerpt from the Legislative Analyst's budget analysis: The 2005-06 budget reflects an improving state fiscal picture brought about by better than expected growth in General Fund revenues. The new spending plan funds the Proposition 42 transfer to transportation, and includes significant increases in both K-12 and higher education. The new budget does not use any of the remaining $3.7 billion in deficit-financing bonds authorized by Proposition 57 in March 2004, and it prepays a $1.2 billion loan due to local governments in 2006-07.

The 2005-06 Budget authorizes total general fund spending in 2005-06 of $90 billion (excluding expenditures of federal funds and bond funds). representing an increase of 10% from 2004-05. Genera) Fund revenues and transfers are projected to increas:e by 5.62% - from 580 billion to $84.5 billion - while expenditures are proposed to grow by 9.75%- from $82 billion to $90 billion.

The 2005-06 Budget provides for total Proposition 98 funding of $50 billion ($44.6 billion of which is specified for K-12 education), an increase of 6.1 % over 2004-05. Proposition 98 per-pupil spending will increase to $7,402, which is $379 (or 5.4%) above the 2004-05 Budget level.

Specific K-12 Funding includes:

• Cost-of-living adjustments-SU billion and growth - $328 million. The 2005-06 Budget fully funds COLAs. Specifica11y, it provides $1.7 billion for a 4.23o/o COLA. The budget also provides $328 million to fund growth for the limit and categorical programs.

• Deficit Factor Reduction - $401 million. To balance the 2003-04 State Budget, the state reduced revenue limits by not providing a COLA (of 1.8%) and reducing revenue limits by 1.2% from the 2002-03 level. The 2004-05 State Budget provided $270 million to restore part of these reductions. The 2005-06 Budget provides an additional $401 million for this purpose.

• Williams Settlement Facility Funding - $183.5 Million. This money will fund expansion of the class si1,e reduction program for additional classes for deciles I, 2, and 3 schools.

The 2005-06 Budget provides a funding level of $10,325 per pupil. This level of per-pupil funding represents an increase of 3.87% from the $9,940 per pupil in 2004-05.

Future Budgets

The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfal1 of revenue and cash, and could impair the State's ability to fund schools as budgeted. Continued State budget shortfalls in future fiscal years could have an adverse financial impact on the District.

Distribution of Revenue for Public Education

The largest part of each school district's revenue is for the general operating expenses of education, meaning salaries. benefits, supplies, textbooks and regular maintenance. Each school district also receives some State and federal money for special programs, special cost<;, or categories of children with particular educational needs, called "categorical aid." This special support goes into a school district1s General Fund, but its expenditure is restricted to the purpose for which it is granted. About seventyfive percent (75%) of the total money generated for education is for genera] purposes, and about twenty-five percent (25%) is for categorical aid. The complex a11ocation system is adjusted somewhat by the Legislature almost every year, with unpredictable effectli on individual school districts.

Revenue Limits. The revenue limit was first instituted in 1973-74 to provide a mechanism to calculate the amount of genera] purpose revenue a school district, community college district or county board of education is entitled to receive from State and

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local sources. Prior to 1973-74, taxpayers in districts with low property values per pupil would have paid higher tax rates than taxpayers in districts with high property values per pupil to achieve the same level of funding.

The calculation of the amount of state aid a school district is entitled to recelve each year is basically a five step process.

First, the prior year base revenue limit (prior to any deficit) per ADA is established, with recalculations as are necessary for adjustments for equalization or other factors. Second, the adjusted prior yeat base revenue limit per ADA is inflated according to formulas based on the implicit price deflator for government goods and services and the Statewide average revenue limit per ADA for the school districts. Third, the current year's base revenue limit per ADA for each school district is multiplied by such school district's ADA for the greater of either the current or prior year. Fourth, revenue limit add-ons and deductions are calculated for each school district if such school district qualifies for the add-ons or deductions. Add-ons include the necessary small school adjustments, meals for needy pupils, and supplemental instruction programs. Finally, local property tax revenues are deducted from the revenue limit to arrive at the amount of state aid based on the revenue limit each school district is entitled for the current year.

In the past several years the formula for establishing revenue limits for a school district included, among other things, adjusnnents for declining enrollments and for increases to the length of the school year or day, in addition to COLAs.

Components Of Revenue Limits For School Districts

Base Revenue Limit, + COLAs (if any),

+ Meals for Needy Pupils, + Summer School,

+ Longer Day and Year Adjustments, + or - Other adjustments (including deficit factor).

The State Revenue Limit is calculated three times a year for each school district, community college district and county board of education. The first calculation is performed for the February 20th First Principal Apponionment, the second calculation for the June 25th Second Principal Apportionment. and the final calculation for the end of the year Annual Apportionment. Calculations are reviewed by the county and submitted to the State Department of Education with respect to school districts and to the Chancel1or of the California Community Colleges with respect to community college districts, which, respectively, reviews the calculations for accuracy. calculates the amount of state aid owed to such school district or community college district, as the case may be, and notifies the State Controller of the amount, who then distributes the state aid.

Growing school districts with high revenue limits do not receive the full amount for each new student. They are limited to 105% of the statewide average for each additional srudent since 1982-83. School districts that receive their revenue limit income entirely from property taxes are called "'basic aid" school districts. They are permitted to keep a11 their property tax money (even if it exceeds their revenue limit). As guaranteed in the California Constitution, the State must apportion $120 per pupil However, based on the 2003-04 Budget Proposal, the categorical aid (see be]ow) that districts receive counts toward this requirement.

Categorical Aid. Revenue limit income is the measure most often used to calculate how much school districts have to spend. However, all school district,;; also receive categorical aid, in widely varying amounts. Special programs, more than fifty of them, are funded through federal and State taxes. Usually, regulations are attached to make sure that the money is spent on the special purpose for which it is granted.

There are a number of major federal and State categorical aid programs. Some a1locations come automatically to school districts, whi1e others require an application. Some are based on the characteristics of the children or families in a particular school district, such as gifted and talented, non-English speaking, migrant, low income or individuals with exceptional needs. Others are for specific activities or expenses, such as transportation, textbooks or childcare. Each year a large amount is allocated directly to the State Teachers1 Retirement System (STRS) fund. For the past several years, supplemental grants have been directed to equalizing school district,;;' income from revenue limits plus specific categoricals. Most of the federal funds flow through the California Department of Education, which retains a certain percentage for administration.

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ln terms of dollars and the number of children served, the largest categorical aid program is Special Education for the Handicapped. According to court decisions and federal and California law, school districts are responsible for the appropriate education of each handicapped child from age 3 to 21 \Vho lives within their boundaries. The allocations do not cover the cost of educating them. School districts are required to contribute a certain amount of general purpose funds for Special Education, and many spend much more. This is known as "encroachment."

School Facilities. The combination of growing enrollments and aging facilities makes funding support for school districts which need to build or make major renovations to school buildings critical. The income from developer fees on residential or commercial property is restricted.

Local elections for general obligation bonds or for special tax districts require a two-thirds vote, or in some cases, a 55% majority. In addition, voter approved general obligation bond moneys may only be used for purchase or improvement of real property, while Mello-Roos taxes can be used for this as well as for ongoing maintenance or purchase of needed equipment. A majority of voters has regularly approved state bond measures for the construction or reconstruction of schools.

Lottery and Miscellaneous Income. The California lottery provides on the average approximately 2% of a school district's budget. Every three months the Lottery Commission distributes 34% of lottery proceeds to public education institutions, the minimum according to the lottery law. Every K-14 school district receives the same amount of lottery funds per pupil from the State, which may be spent for any instructional purpose, excluding capital projects.

The rest of the misceUaneous income which school districts receive is also valuable because it is under the direct control of the school district. The amounts, however, are very small.

NEITHER THE STATE, OR ANY OF ITS DEPARTMENTS OR OFFICES, HA VE ENTERED INTO ANY CONTRACTUAL COMMITMENT WITH THE DISTRICT, THE UNDERWRITER OR THE OWNERS OF THE BONDS TO PROVIDE OR UPDATE INFORMATION CONCERNING THE STATE TREASURER'S INFORMATION, STATE BUDGET INFORMATION OR INFORMATION CONCERNING THE STATE'S FINANCES TO THE DISTRICT OR THE OWNERS OF THE BONDS. ALTHOUGH THEY BELIEVE THAT THE INFORMATION PROVIDED BY THE ABOVE-LISTED SOURCES IS RELIABLE, NEITHER THE DISTRICT NOR THE UNDERWRITER ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OF SUCH INFORMATION AS SET FORTH HEREIN OR INCORPORATED BY REFERENCE HEREIN.


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CONSTITIJTIONAL & STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES & EXPENDITURES

Article XIIJA. ln an election held on June 6, I 978, the voters of the State approved an initiative amendment to the State Constitution. The amendment added Article XIIIA to the State Constitution, commonly known as Proposition 13, which limits the taxing powers of California public agencies. Except as described in the following paragraph, Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed one percent of the "full cash value" which is defined as 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 has occurred after the 1975 assessment," subject to exceptions for certain circumstances of transfer or reconstruction. The "full cash value" is subject to annual adjustments to reflect increases not to exceed two percent per year, or decreases in the consumer price index or comparable local data, or to reflect reduction in property value caused by damage, destruction or other factors.

Article XIIIA requires a vote of two-thirds of the qualified electorate to impose special taxes, and except as described in the following sentence, prohibits the imposition of any additional ad valorem, sales or transaction tax on real property. As amended by Proposition 46, on June 3, 1986, Article XIIIA exempts from the one percent tax limitation ad valorem taxes required to pay debt service on indebtedness approved by the voters prior to July 1, 1978, or on bonded indebtedness approved by two-thirds of those voting thereon, after July l, 1978, the proceeds of which are applied to the acquisition or improvement of real property. In addition, Proposition 39, which was approved by the state's voters on November 7, 2000, permits bonded indebtedness to be 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, if approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Finally, Article XIII A requires the approval of twothirds of all members of the Legislature to change any State laws for the purpose of increasing tax revenues.

Article XlllB. In a special election held on November 6, I 979, the voters of the State approved an initiative constitutional amendment. This amendment added Article XIIIB to the State Constitution. Article XIIIB limits the annual appropriations of the State and of any city, county, school district. special district. authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the government entity. The "base year" for establishing such appropriation limit is the 1978-79 fiscal year and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies.

Appropriations subject to Article XIIIB include generally the proceeds of taxes levied by the State or by any other entity of local government, exclusive of certain State subventions, refunds or taxes, benefit payments from retirement. unemployment insurance and disability insurance funds. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to an entity of government from (1) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (2) the investment of tax revenues. Article XIIIB includes a requirement that if an entity's revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. State law provides that in the event a school district's appropriations will exceed its limit, the district will assume from the State a portion of the State1s appropriations limit.

Article Xll/C and Article XJl!D. On November 5, 1996, the voters of the State approved Proposition 218, the so-called "Right to Vote on Taxes Act." Proposition 218 added Articles XlllC and XIIID to the State Constitution, 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. 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 except as allowed by Article XlllA; and prohibits any local agency from imposing. extending or increasing any special tax beyond its maximum authorized rate ,vithout a two-thirds vote. Article XIIID also 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 XlllA, Section 4,

Article XTIIC also provides that the initiative power sha11 not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. The State Constitution and the laws of the State impose a mandatory, statutory duty on each county treasurer/tax collector to levy a property tax sufficient to pay debt service on a school district's bonds coming due in each year. The initiative power cannot be used to reduce or repeal the authority and obligation of each County to levy such taxes which are pledged as security for the payment of a school district's bonds or to otherwise interfere with performance of the mandatory. statutory duty of the District and each County with respect to such taxes which are pledged as security for the payment of a school district's bonds. Legislation adopted in 1997 provides that Article XlllC will not be construed to mean that

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any owner or beneficial owner of a municipal security assumes the risk of or consents to any initiative measure which would constitute an impairment of contractual right~ under the contracts clause of the U.S. Constitution.

Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by the District.

The interpretation and application of Proposition 218 wi11 ultimately be determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination.

Possible Future Actions. Article XIIIA, Article XIIIB and Propositions 98, I 11. and 218 were each adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiative measures could be adopted, further affecting K-14 school distrlcts' revenues or such districts' ability to expend revenues. There is no assurance that the California electorate or Legislature will not at some future time approve additional limitations which could reduce property or other tax revenues and adversely affect the revenues of the District or require additional expenditures.


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TAX MATTERS

In the opinion of Quint & Thimmig LLP. San Francisco, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the Notes is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individual~ and corporations, provided, 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, and the Notes are "qualified tax-exempt obligations" within the meaning of section 265(b)(3) of the Internal Revenue Code of 1986 (the "Code") such that, in the case of certain financial institutions (within the meaning of section 265(b)(5) of the Code), a deduction for federal income tax purposes is allowed for 80 percent of that portion of such financia1 institution's interest expense allocable to interest

payable on the Notes.

The opinions set forth in the preceding paragraph are subject to the condition that the District comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Notes in order that such interest 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 such interest in gross income for federal income tax purposes to be retroactive to the date of issuance of the Notes.

In the further opinion of Bond Counsel, interest on the Notes is exempt from California personal income taxes.

Owners of the Notes should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the Notes may have federal or state t.ax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Notes other than as expressly described above.

Purchasers should be aware that the Internal Revenue Service has issued Notice 94-84 which may have federal income tax consequences with respect to the Notes. This Notice provides generally that. in the case of short-term tax-exempt obligations {such as the Notes), the Service is studying whether interest payable at maturity on the obligations should, or should not, be included in stated redemption price at maturity, for purposes of the rule that original issue discount represents the excess of stated redemption price at maturity over issue price.

Notice 94-84 states that until the Internal Revenue Service provides further guidance, taxpayers may treat stated interest on certain short-term obligations, such as the Notes. either as includible in stated redemption price at maturity or as not included in stated redemption price at maturity. A taxpayer, however, must treat stated interest payable at maturity on all short-term tax.exempt bonds in a consistent manner. A short~term tax-exempt bond is defined as a tax-exempt bond with a term that is not more than I year from the date of issue.

Purchasers of the Notes are cautioned that the opinion of Bond Counsel does not identify the amount of interest that is excluded from gross income for federal income tax purposes.

Purchasers of the Notes should consult their tax advisors regarding effects of Notice 94-84 upon individual tax circumstances.


- 26 -

LEGAL MA TIERS

Le£al Opinion

The validity of the Notes and certain other legal matters are subject in each case to the approving opinion of Quint & Thimmig LLP, Bond Counsel, A complete copy of the proposed form of Bond Counsel opinion is set forth in "APPENDIX C - FORM OF OPINION OF BOND COUNSEL" to this Official Statement. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Officia1 Statement.

Absence of Litigation

No litigation is pending with service of process having been accomplished, or to the knowledge of the District, threatened against the District concerning the validity of the Note, and a Certificate of the District to that effect will be furnished to the initial purchaser or purchasers at the time of the original delivery of the Notes. The District is not aware of any litigation pending or threatened against the District questioning its political existence, contesting its ability to receive or accrue for the General Fund taxes, income, revenues, cash receipts and other moneys, or contesting its ability to issue and retire the Notes.

Legality for Investment

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

[The remainder of this page intentiona1ly left blank.)

- 27 -

RATINGS

Standard & Poor's Ratings Group (A Division of the McGraw-Hill Companies, Inc.) has assigned the Notes the rating affixed to and made a part of the Cover Page hereof. The District furnished Standard & Poor's certain information and materials concerning the Notes and the District. Generally, Standard & Poor's bases its rating on such information and materials and also on such investigations. studies and assumptions that it may undertake independently. There is no assurance that either such rating will continue for any given period of time or that it may not be suspended, lowered or withdrawn entirely by Standard & Poor's if, in its judgment, circumstances so warrant. Any such downward change in or withdrawal of the rating may have an adverse material effect on the secondary market price of the Notes. Any explanation of the significance of the rating may be obtained only from Standard & Poor's Ratings Group. Inc., Public Finance Department, 25 Broadway, 21st Floor, New York, New York 10004, telephone: (212) 208-8000.

FlNANCIAL ADVISOR

Government Financial Strategies inc., has been employed by the District to perform financial advisory services in relation to the sale and delivery of the Notes. Government Financial Strategies inc., in its capacity as Financial Advisor, has read and participated in drafting certain portions of this Official Statement. Government Financial Strategies inc. has not, however. independently verified nor confirmed all of the information contained within this Official Statement. Government Financial Strategies inc. will not participate in the underwriting of the Notes. All fees charged by Government Financial Strategies inc. are based on an hourly fee arrangement. Fees charged by Government Financial Strategies inc. are not contingent upon the sale of the Notes.

INDEPENDENT AUDITORS

The genera] purpose financial statements of the District as of June 30, 2004, and for the fiscal year then ending, have been audited by Vavrinek, Trine, Day & Co .. Certified Public Accountants, San Jose, California. Excerpts from the financial statements of the District as of and for the year ending June 30, 2004, are set forth in "APPENDIX A" attached hereto. Complete copies of past and current financial statements may be obtained from the District. See "THE DISTRICT -Financial Statements and District

Budgets" herein.

UNDERWRITING AND INITIAL OFFERING PRICE

The Notes were sold to Wachovia Bank, N.A., (the "Underwriter"), pursuant to a note purchase agreement by and among the District, the County, and the Underwriter, for an amount equal to the principal amount of the Notes, plus a premium of $104,805, for a total purchase price of $8,604,805 at a True Interest Cost (TIC) to the District of 2.958374%

The Underwriter has certified to the District and to Bond Counsel the initial price at which the Notes have been reoffered to the general public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers), and at which at least ten percent (10%) of the Notes were sold. The reoffering price or corresponding yie]d to maturity is as set forth on the Cover Page hereof. The initial offering price stated on the Cover Page to this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Notes to certain dealers (inc]uding dealers depositing Notes into investment trusts). dealer banks, banks acting as agents and others at prices lower than said public

offering prices.

- 28 -

CONTINUING DISCLOSURE

The District has covenanted for the benefit of the owners of the Notes to give notice of the occurrence of certain enumerated events, if material. See "APPENDIX B-FORM OF CONTINUING DISCLOSURE CERTIFICATE" herein. Notices of material events wi11 be fi]ed by the issuing District with each Nationally Recognized Municipal Securities Information Repository or the Municipal Securities Rulemaking Board, and with the State Information Depository, if any. This <;ovenant of the District has been made to assist the purchasing underwriter of the Notes in complying with S.E.C. Rule 15c2-12(b)(5). The District has never failed to comply in all material respectli with regard to said Rule to provide annual reports or notices of material events.

ADDITIONAL INFORMATION

Additional information concerning the District, the Notes or any other matters concerning the sale and delivery of the Notes may be obtained from the District by contacting the District at the address and telephone number set forth on page "'iii" of this Official Statement, or by contacting the Districts' Financial Advisor, Government Financial Strategies inc., 1228 "N" Street, Suite Thirteen, Sacramento, California 95814-5609, telephone (916) 444-5100, facsimile telephone (916) 444-5109.

All of the preceding summaries of the Resolution, other applicable legislation, agreements and other document't are made subject to the provisions of such documents respectively, and do not purport to be complete statements of any or a11 of such provisions. Reference is hereby made to documents on file with the District for further information in connection with the District and the Notes. Further, this Official Statement does not constitute a contract with the purchasers of either Note, and any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized.

The execution and delivery of this Official Statement by the District has been duly authorized by its governing Board, and this Official Statement may be signed in counterpart.

EAST SIDE UNION HIGH SCHOOL DISTRICT

By: ~'~~~~~~~~~~~~~~-Roberto Nunez Interim Superintendent

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[THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX A

EXCERPTS FROM THE GENERAL PURPOSE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2004

EAST SIDE UNION IDGH SCHOOL DISTRICT

ANNUAL FINANCIAL REPORT

JUNE 30, 2004

ftl Vavrinek, Trine, Day & Co., LLP Certilied Public Accountants & Consultants

INDEPENDENT AUDITORS' REPORT

Board of Trustees East Side Union High School District San Jose, California

VALUE THE DIFFERENCE

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fimd, and the aggregate remaining fund information of East Side Union High School District (the District), as of and for the year ended June 30, 2004, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and Standards and Procedures for Audits of California K-1 2 Local Educational Agencies, prescribed by the State Controller. Those standards require that we plan and perform the

. audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the East Side Union High School District, as of June 30, 2004, and the respective changes in financial positions and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated October 15, 2004, on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions oflaws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

3880 So1.1!h Bascom Avenue Suite 215 San Jose, CA 95124 Tel: 408.558.0770 Fax: 408558.0765 www.vtdcpa.com

FRESNO • LAGUNA HILLS " PALO ALTO • PLEASANTON • RANCHO CUCAMONGA • SAN JOSE

http://www.vtdcpa.com

The required supplementary information, such as management's discussion and analysis on pages 3 through 11 and budgetary comparison information on pages 46 and 47, are not a required part of the basic financial statements, but are supplementary information required by the Governmental Accounting Standards Board (GASB), We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information, However, we did not audit the information and express no opinion on it

Our audit was conducted for the purpose of fonning an opinion on the financial statements that collectively comprise the District's basic financial statements. The other supplementary information listed in the table of contents, including the Schedule of Expenditures of Federal awards which is required by U.S. Office of Management and Budget Circular A-133, Audits of State, Local Governments, and Non-Profit Organizations, are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been sul:,jected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The nonmajor governmental funds combining balance sheet and combining statement of revenues, expenditures and changes in fund balance have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we express no opinion on them.

San Jose, California October 15, 2004

2


MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2004

This section of East Side Union High School District's (District) annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, 2004. Please read it io conjtmction with the District's financial statements, which immediately follow this section.

OVERVIEW OF THE FINANCIAL STATEMENTS

The Financial Statements

The financial statements presented hereio include all of the activities of the East Side Union High School District (the District) and its component tmits using the integrated approach as prescribed by GASB Statement Ntm1ber 34 (The Statement).

The Government-Wide Fioancial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accotmting. They present governmental activities and business-type activities separately. These statements include all assets of the District as well as all liabilities (including long-term debt). Additionally, certain eliminations have occurred as prescribed by the statement in _ regards to interfund activity, payables and receivables.

The Fund Financial Statements include statements for each of the three categories of activities: governmental, proprietary, and fiduciary.

The Governmental Activities are prepared using the current financial resources measurement focus and the modified accrual basis of accounting.

The Proprietary Activities are prepared using the economic resources measurement focus and the accrual basis of accounting.

The Fiduciary Activities are agency funds, which only report a balance sheet and do not have a measurement focus.

Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach.

The Primary unit of the government is the East Side Union High School District.

3


MANAGEMENT'S DISCUSSION AND ANALYSIS J1JNE 30, 2004

FINANCIAL HIGHLIGHTS OF THE PAST YEAR

Revenue decreased slightly due to grants not funded and one-time revenues. The following caused the slight decrease of $2.9 million compared to last year:

:.- In fiscal year 2002-03, the District had received $1.2 million for hnmediate Intervention/Under performing Schools (]IUSP), which was not funded in 2003--04. Another program that was not funded was California School Information Services (CSIS).

:.- Expenditures increased by $5 .9 million due to increases in employee benefits and also due to the change in accounting methodology on recording of transfers to Charter Schools for In-Lieu of Property Taxes.

REPORTING 11IE DISTRICT AS A WHOLE

The Statement of Net Assets and the Statement of Activities

The Statement of Net Assets and the Statement of Activities report infonnation about the District as a whole and about its activities. These statements include all assets and liabilities of the District using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid.

These two statements report the District's net assets and changes in them. Net assets are the difference between assets and liabilities, one way to measure the District's financial health, or financial position. Over time, increases or decreases in the District's net assets are one indicator of whether its financial health is improving or deteriorating. Other factors to consider are changes in the District's property tax base and the condition of the District's facilities.

The relationship between revenues and expenses is the District's operating results. Since the Board's responsibility is to provide services to our students and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District The quality of the education and the safety of our schools will likely be an important component in this evaluation.

In the Statement of Net Assets and the Statement of Activities, we separate the District activities as follows:

Governmental activities - Most of the District's services are reported in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development activities, and the on-going effort to improve and maintain buildings and sites. Property taxes, state income taxes, user fees, interest income, federal, state and local grants, as well as general obligation bonds, finance these activities.

Business-type activities - The District charges fees to help it cover the costs of certain services it provides. The District's food services are included here.

4



REPORTING THE DISTRICT'S MOST SIGNIFICANT FUNDS

Fund Financial Statements

The fund financial statements provide detailed information about the most significant funds - not the District as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. Department of Education.

Governmental funds - Most of the District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The differences ofresults in the governmental fund_ financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement.

Proprietary funds - When the District charges users for the services it provides, whether to outside customers or to other departments within the District, these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Assets and the Statement of Activities. In fact, the District's enterprise funds are the same as the business-type activities we report in the government-wide statements but provide more detail and additional information, such as cash flows, for proprietary funds. We use internal service funds (the other component of proprietary funds) to report activities that provide supplies and services for the District's other programs and activities - such as the District's SelfInsurance Fund. The internal service funds are reported with governmental activities in the government-wide financial statements.

THE DISTRICT AS TRUSTEE

Reporting the District's Fiduciary Responsibilities

The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities and scholarships. The District's fiduciary activities are reported in separate Statements of Fiduciary Net Assets. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes.

5



THE DISTRICT AS A WHOLE

Net Assets

The District's net assets were $64.3 and $40.5 million for the fiscal years ended June 30, 2004 and 2003. There was a $2.8 million unrestricted deficit as of June 30, 2004. Restricted net assets are reported separately to show legal constraints from debt covenants and enabling legislation that limit the School Board's ability to use those net assets for day-to-day operations. Our analysis below focuses on the net assets (Table I) and change in net assets (Table 2) of the District's governmental activities.

Current and other assets $ Capital assets

Total Assets Current liabilities Long-term debt

Total Liabilities Net assets

Invested in capital assets, net ofrelated debt

Restricted Unrestricted

Total Net Assets $

Changes in Net Assets

Table 1

Governmental Activities

2004 2003

145,098,319 $ 189,204,688

170,537,199 136,885,024 315,635,518 326,089, 712

34,011,718 36,261,468

217,291,236 249,290,131 251,302,954 2852511599

30,691,558 13,114,368 36,478,154 22,841,070 (2,83 7, 148) 4,582,675 64,332,564 $ 40,538,113

$

$

Business-Type Activities

2004 696,576 $

300,758 997,334 997,334

997,334

$

2003 600,936

320;968 921904 921,904

921904

The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 13. Table 2 takes the information from the Statement and rearranges them slightly so you can see our total revenues for the year.

6



Table 2


2004 2003

Revenues Program revenues

Charges for services $ 1,784,246 $ 8,969,387

Operating grants and contnlJutions 58,110,946 62,827,680

Capital grants and contributions 15,422,117 19,815,927

General revenues: State and federal sources 33,830,106 37,080,720

Taxes 118,527,107 106,377,644

Other general revenues 18,231,486 28,038,895

Total Revenues 245,906,008 263,110,253

Expenses Instruction related 143,340,192 145,309,233

Student support services 18,239,197 16,877,690

Administration 12,170,264 23,495,408

Maintenance and operations 18,838,563 40,681,729

Other outgo 11,524,347 7,663,939

Other 17,998,997 7,526,032

Total Expenses 222,111,560 241,554,031

Change in Net Assets $ 23,794,448 $ 21,556,222



2004 2003

$ 2,702,125 $ 2,774,282 2,596,591 1,804,095

5,298,716 4,578,377...

5,298,716 4,578,377 5,298,716 4,578,377

$ $

As reported in the Statement of Activities on page 13, the cost of all of our governmental activities this year was $222.1 million. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $146.8 million because the cost was paid by those who benefited from the programs ($1.8 million) or by other governments and organizations who subsidized certain programs with grants and contributions ($73.5 million). We paid for the remaining "public benefit" portion of our governmental activities with $146.8 million in taxes, and the remaining in State and Federal fimds and with other revenues, like interest and general entitlements.

7



In Table 3, we have presented the net cost of each of the District's six largest functions - regular program instruction and instruction related services, pupil services, maintenance and operations, administration and interest and other. As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits they believe are provided by that function.

Instruction and related services Pupil services General administration Maintenance and operations Interest Other

Totals

THE DISTRICT'S FUNDS

Table3

Total Governmental Cost

of Services $ 92,334, 103

12,895,323 6,534,176

17,226,201 9,627,81(; 8,176,632

$ 146,794,251

As the District completed this year, our governmental funds reported a combined fund balance of $112.3 million, which is a decrease of $36.4 million from last year.

The primary reasons for these decreases are: a. Our General Fund is our principal operating fund. The fund balance in the General Fund decreased $7 .5

million to $1.2 million. This decrease is due to: I. Decreased State and Local revenues. 2. Increased employee benefit costs. 3. Increase in special education unfunded mandates.

b. Our special revenue funds remained fairly stable from the prior year showing a net increase of approximately $68K.

c. The Building fund showed a decrease of approximately $27. 7 million.

General Fund Budgetary Highlights

Over the course of the year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on June, 2004. (A schedule showing the District's original and final budget amounts compared with amounts actually paid and received is provided in our annual report on page 46).

)- Significant revenue revisions made to the 2003-04 Budget were due to additions to Federal and State grants.

)- Budgeted expenditures increased by $10.7 million due primarily to increase in benefits costs and additions to Federal and State grants.

8



CAPITAL ASSET & DEBT ADMINISTRATION

Capital Assets

At Jtme 30, 2004, the District had $170.5 million in a broad range of capital assets, including land, buildings, and furniture and equipment. This amount represents a net increase (including additions, deductions and depreciation) of just under $31.5 million, or 23 percent, from last year.

Table4

Governmental

Activities

2004 2003

Land $ 5,206,087 $ 5,206,087

Construction in progress 105,606,287 81,700,412

Buildings and improvements 112,121,408 102,085,897

Furniture and Equipment 10,915,238 10,303,453

Total Assets 233,849,020 199,295,849

Less Accumulated Depreciation 63,311,821 60,256,164

Totals $ 170,537,199 $ 139,039,685

$

Business Activities

2004

490,256 490,256 189,498

$

2003

464,577 464,577 143,610

$ 300,758 $ 320,967

Several capital projects are planned for the 2004-05 year. We anticipate capital additions to be approximately $100 million for the 2004-05 year. We present more detailed information about our capital assets in Note 4 to the financial statements.

Long-Term Debt

At the end of this year, the District had $210.0 million in bonds outstanding versus $240.6 million last year, a decrease of 13 percent. Those bonds consisted of current interest and capital appreciation bonds. Please refer to Note 8 to the financial statements for further detail.

9



Table 5

General obligation bonds

Capital Leases Retiree Incentive Accumulated vacation - net

Totals

$

$

2004 2003 Governmental Governmental

Activities Activities 210,030,099 $ 240,622, 187

1,062,911 670,088

4,212,037 5,379,706

1,986,189 2,618,150

217,291,236 $ 249,290,131

The District's general obligation bond rating continues to be "AAA." The State limits the amount of general obligation debt that District's can issue to 2.5 percent of the assessed value of all taxable property within the District's boundaries. The District's outstanding general obligation debt of $210.0 million is significantly below the statutorily - imposed limit.

Other obligations include compensated absences payable and other long-term debt. We present more detailed information regarding our long-term liabilities in Note 8 of the financial statements.

SIGNIFICANT ACCOMPLISHMENTS OF FISCAL YEAR 2003-04 ARE NOTED BELOW:

Projects completed included pool renovation and streetscape at Oak Grove, cogeneration system at Independence, fire alarm upgrade at Silver Creek, track and field at Mt. Pleasant, baseball field relocated at Piedmont Hills, and smart start building at Overfelt.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES

In considering the District Budget for the 2004-2005 year, the District Board and management used the following criteria: The key assumptions in our revenue forecast are:

1. Revenue Limit income. 2. Interest earnings will decrease slightly due to an anticipated reduction in market interest rates. 3. Developer fee collections are based on our estimate of new housing units to be constructed. 4. Federal income will remain approximately the same. 5. State income will decrease by 16 percent due to the ending of grants.

10



Expenditures are based on the following forecasts:

Staffing Ratio Grades nine through twelve 30:1

The new items specifically addressed in the budget are:

Enrollment 24,741

Due to the past trend in deficit spending, it has been necessary for the District to make major budget reductions for 2004-05. Since 90% of the Unrestricted General Fund expenditures are for personnel, it is impossible to make major budget reductions without reducing staff. For 2004-05 school years, the staffing ratio was inereased from 28: 1 to 30: l, resulting in a reduction of 43 classroom-teaching positions. In addition, the District implemented a large-scale classified layoff resulting in the elimination of23.3 unrestricted general fund classified positions.

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, students, and investors and ereditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need any additional financial information, contact the Chief Financial Officer, Business Services, at East Side Union High School District, 830 North Capitol Avenue, San Jose, California.

11


STATEMENT OF NET ASSETS JUNE 30, 2004

Governmental Bnsiness-type

Assets Activities Activities Total

Deposits and investments $ 120,758,529 $ 100 $ 120,758,629

Receivables 23,378,813 615,956 23,994,769

Due from other funds 751,026 751,026

Stores inventories 209,951 80,520 290,471

Capital assets 233,849,020 490,256 234,339,276

Less: Accumulated depreciation (63,311,821) (189,498) (63,501,319)

Total assets $ 315,635,518 $ 997,334 $ 316,632,852

Liabilities

Overdrafts $ 1,453,895 $ 245,702 $ 1,699,597

Accounts payable 25,220,403 606 25,221,009

Due to other funds 751,026 751,026

Deferred revenue 6,846,899 6,846,899_

Other current liabilities 490,521 490,521

Current portion oflong-term obligations 8,205,522 8,205,522

NoncWTent portion of long-tenn obligations 209,085,714 209,085,714

Total liabilities 251,302,954 997,334 252,300,288

Net Assets Invested in capital assets, net ofrelated debt 30,691,558 30,691,558

Restricted for:

Legally restricted 3,412,122 3,412,122

Debt service 7,214,159 7,214,159

Special revenue 954,968 954,968

Capital projects 24,896,905 24,896,905

Unrestricted (2,837,148) (2,837,148)

Total net assets $ 64,332,564 $ $ 64,332,564

The accompanying notes are an integral part of these financial statements.

12


STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2004

Functions!Programs Governmental activities: Instruction lnstruction related activities:

Supervision of instruction lnstructional library, media and technology School site administration

Pupil services: Home-to-school transportation Food services All other pupil services

General administration: Data processing All other general administration

Plant services Facility acquisition and construction Ancillary services Community services Enterprise services Interest on long-term debt Other outgo Depreciation (unallocated)

Total governmental-type activities Business-type activities

Food services Total District

Program Revenues Charges for Operating Capital Services and Grants and Grants and

Expenses Sales Contributions Contributions

$Jl0,7!2,924 $ 260,716 $ 22,694,817 $ 15,422,117

12,230,267 2,409,161

17,987,840

3,003,228 35,749

15,200,220

3,018,987 9,151,277

18,170,236 668,327

1,888,637 445,656

2,981,231 9,627,816

11,524,347 3,055,657

222,111,560

5,298,716 $227,410,276

167,219 8

75,664

901,779

30,849

199,498 37,266

110,537 710

1,784,246

2,702,125 $ 4,486,371

8,736,424 47,186

3,601,938

1,508,521 2

2,902,723

297,728 5,138,862

698,067 766,492

65,012

11,653,174

58,110,946

2,596,591 $ 60,707,537

General revenues and subventions: Property taxes, levied for general purposes Property taxes, levied for debt service Taxes levied for other specific purposes

15,422,117

$ 15,422,117

Federal and State aid not restricted to specific purposes Interest and investment earnings Transfers Miscellaneous

Subtotal, general revenues Change in net assets

Net assets - beginning Prior Period Adjustment Net assets - ending


13

Net (Expenses) Revennes and Changes in Net Assets

Bnsiness-Governmental Type

Activities Activities Total

$ (72,335,274) $ $ (72,335,274)

(3,326,624) (3,326,624) (2,361,967) (2,361,967)

(14,310,238) (14,310,238)

(592,928) (592,928) (35,747) (35,747)

( 12,266,648) (12,266,648)

(2, 721,259) (2,721,259) (3,812,917) (3,812,917)

(17,434,903) (17,434,903) 208,702 208,702

(1,822,915) (1,822,915) (445,656) (445,656)

(2,981,231) (2,981,231) (9,627,816) (9,627,816)

128,827 128,827 (3,055,657) (3,055,657)

(146,794,251) (146,794,251)

(146,794,251) ( 146, 794,251)

104,017,388 104,017,388 14,195,403 14,195,403

314,316 314,316 33,830,106 33,830,106 15,422,783 15,422,783

149,743 149,743 2,658,960 2,658,960

170,5 88,699 170,588,699 23,794,448 23,794,448 39,401,163 39,401,163

1,136,953 1,136,953 $ 64,332,564 $ $ 64,332,564

13


GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2004

Special Reserve General Non-Capital Building

Fund Fnnd Fund ASSETS

Deposits and investments $ 8,652,116 $ 13,489,186 $ 63,979,777 Receivables 19,323,829 947,211 339,131 Due from other funds 751,026 11,850,000 Stores inventories 209,951

Total assets $ 28,936,922 $ 14,436,397 $ 76,168,908

LIABILIT1ES AND FUND BALANCES

Liabilities: Overdrafts $ $ $

Accmmts payable 18,832,643 4,921,539 Due to other funds 3,100,000 8,750,000 Deferred revenue 5,847,876

Total liabilities 27,780,519 8,750,000 4,921,539 Fnnd Balances:

Reserved for: Stores inventories 209,951 Other reservations 3,202,171

Unreserved: Designated 1,426,595 4,631,905 Undesignated, reported in:

General fund (3,682,314) Special revenue funds 1,054,492 Debt service funds Capital projects funds 71,247,369

Total fund balance 1,156,403 5,686,397 71,247,369 Total Liabilities and Fnnd Balances $ 28,936,922 $ 14,436,397 $ 76,168,908


14

County School Facilities

Fund

$ 19,144,053 66,795

$ 19,210,848

$

19,210,848 19,210,848

Non Major Governmental

$

$

$

Fnnds

15,167,145

1,872,244

17,039,389

1,017,417

526,959

469,281 2,013,657

954,968 8,384,707

5,686,057 15,025,732

Total Governmental

$

$

$

Funds

120,432,277

22,549,210 12,601,026

209,951

155,792,464

1,017,417

24,281,141 11,850,000 6,317,157

43,465,715

209,951 3,202,171

6,058,500

(3,682,314) 2,009,460 8,384,707

96,144,274 112,326,749

$ 19,210,848 $ 17,039,389 $ 155,792,464

14


GOVERNMENTAL FUNDS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS

JUNE 30, 2004

Amounts Reported for Governmental Activities in the Statement of Net Assets are Different Because:

Total Fund Balance - Governmental Funds

Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds.

The cost of capital assets is Accumulated depreciation is

In the governmental funds, the receipt of the special education mandate settlement is reported as revenue in the year received. On the statement of net assets, the settlement amount is recorded as a receivable and payment received in the current year reduces the receivable amount.

Bond issuance premiums from the sale of bonds is a revenue source in the governmental funds, but it should be recorded as deferred revenue and amortized to operations in the government-wide statements.

In governmental funds, unmatured interest on long-term debt is recognized in the period when it is due. On the government-wide statements, unmatured interest on long-term debt is recognized when it is incurred.

An internal service fund is used by the District's management to charge the costs of the workers' compensation insurance program to the individual funds. The assets and liabilities of the internal service fund are included with governmental activities.

Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported as Jiabilities in the funds.

Long-term liabilities at year end consist of:

Bonds payable Capital leases payable Retiree incentive Compensated absences (vacations)

Total Net Assets - Governmental Activities


15

$233,849,020 (63,311,821)

210,030,099 1,062,911 4,212,037

$ 112,326,749

170,537,199

-791,503

(529,742)

(640,806)

(861,103)

1,986,189 (217,291,236) $ 64,332,564

This page left blank intentionally.


GOVERNMENTAL FUNDS STATEMEN.T OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED JUNE 30, 2004

Special Reserve General Non-Capital Building

Fund Fund Fund

REVENUES Revenue limit sources $ 132,876, 164 $ $ F edera] sources 13,578,631 Other state sources 29,810,142 Other local sources 13,377,894 1,552,316 13,201,007

Total Revenues 189,642,831 1,552,316 13,201,007

EXPENDITURES Instruction l 05,369,043 Instruction related activities:

Supervision of instruction 11,184,336 Instructional library, media and technology 2,409,161 Schoo] site administration 15,405,015

Pupil Services: Home-to school transportation 3,003,228 Food services 35,749 All other pupil services 15,028,234

General administration: Data processing 3,018,987 All other general administration 9,234,412

Plant services 17,010,449 275,141 Facility acquisition and c°:nstruction

"

1,718,483 33,392,415 Ancillary services 1,888,637 Community services 445,656 Other outgo 11,524,347

Debt service Principal 448,619 25,000,000 Interest and other

Total Expenditures 197,724,356 58,667,556

Excess (deficiency) of revenues over expenditures (8,081,525) 1,552,316 (45,466,549)

Other Financing Sources (Uses): Transfers in 1,200,000 17,719,805 Other sources 841,442 Transfers out (1,505,125) (18,919,805)

Net Financing Sources (Uses) 536,317 (18,919,805) 17,719,805

NET CHANGE IN FUND BALANCES (7,545,208) (17,367,489) (27,746,744)

Fund Balance • Beginning 8,701,611 23,053,886 98,994,113 Fund Balance · Ending $ 1,156,403 $ 5;686,397 $ 71,247,369


16

County School Nonmajor Total Facilities Governmental Governmental

Fond Funds Funds

$ $ 5,792,745 $ 138,668,909 955,098 14,533,729

15,422,117 2,863,557 48,095,816 223,743 16,915,922 45,270,882

15,645,860 26,527,322 246,569,336

5,343,881 110,712,924

1,045,931 12,230,267 2,409,161

2,582,825 17,987,840

3,003,228 35,749

171,986 15,200,220

3,018,987 548,826 9,783,238 884,646 18,170,236 110,600 35,221,498

1,888,637 445,656

11,524,347

7,275,002 32,723,621 8,091,765 8,091,765

26,055,462 282,447,374

15,645,860 471,860 (35,878,038)

843,180 19,762,985 841,442

(730,000) (21,154,930)

113,180 (550,503)

15,645,860 585,040 (36,428,541)

3,564,988 14,440,692 148,755,290

$ 19,210,848 $ 15,025,732 $ 112,326,749

16


RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE DISTRICT-WIDE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2004

Total Net Change in Fund Balances - Governmental Funds Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: _

Capital outlays to puxchase or build capital assets are reported in governmental funds

as expenditures, however. for governmenta] activities, those costs are shown in the

statement of net assets and allocated over their estimated useful lives as annual depreciation expenses in the statements of activities.

This is the amount by which capita) outlays exceed depreciation in the period.

Depreciation expense

Capital outlays

In the statement of activities, certain operating expenses ~ compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resouxces used ( essentially, the amounts actually paid). Vacation used was more than the amounts earned by $631,961.

Bond premium proceeds received from issuance of bonds are a revenue source in the

governmental funds, but they increase long-term liabilities in the statement of net assets and do not affect the statement of activities.

In the governmental funds, the receipt of the special education settlement is reported as revenue in the year received. On the statement of net assets, the anxnmt is recorded as a

receivable and payment received in the current year reduces the receivable amount.

Proceeds from capital leases is a revenue source in the governmental funds, but it increases liabilities in the statement of net assets.

Accretion of interest on capital appreciation bonds is recorded as an expense in the government-wide statement of activities, but is not recorded in the governmental fimds.

Repayment of the long-tenn debt is an expenditures in the governmental funds, but it reduces long-term liabilities in the statement of net assets and does not affect the statement of

activities. Debt repayment for the year were as follows: Genera} Obligation Bonds

Capital Leases

Retiree Incentive

Interest on long-tenn debt in the statement of activities differs from the amount

reported in the governmental funds because interest is recorded as an expenditure in the funds when it is due, and thus requires the use of cw-rent financial resources. ]n

the statement of activities, however, interest expense is recognized as the interest accrues, regardless of when it is due. The additional interest reported in the statement of activities is the net iesult of these two factors.

An internal service fund is used by the District's management to charge the costs of the unemployment compensation insurance program to the individual funds. The net

loss of the internal service fund is reported with the government-Wide activities.

Change in Net Assets - Government-Wide Activities


17

$(3,055,657)

34,553,171

32,655,000

448,619

1,167,669

$ (36,428,541)

31,497,514

631,961

(529,742)

(82,775)

(841,442)

(2,062,912)

34,271,288

(640,806)

(2,020,097)

$ 23,794,448


PROPRIETARY FUNDS STATEMENTS OF NET ASSETS JUNE 30, 2004

Governmental Business-Type Activities -

Activities- Internal Enterprise Fund Service Fund

ASSETS Current Assets

Deposits and investments $ 100 $ 326,252

Receivables 615,956 38,100

Stores inventories 80,520

Total Current Assets 696,576 364,352

Noncurrent Assets Furniture and equipment (net) 300,758

Total Assets 997,334 364,352

LIABILITIES Current Liabilities

Overdrafts 245,702 436,478

Accounts payable 606 298,456

Due to other funds 751,026

Claim Liabilities 490,521

Total Current Liabilities 997,334 1,225,455

NET ASSETS Invested in capital assets, net ofrelated debt 300,758

Unrestricted (300,758) (861,103)

Total Net Assets $ $ (861,103)


18


PROPRIETARY FUNDS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS FOR IBE YEAR ENDED JUNE 30, 2004

OPERATING REVENUES Federal Grants State Grants Local and intermediate sources

Total Operating Revenues

OPERATING EXPENSES Payroll costs Supplies and materials Facility rental Other operating cost

Total Operating Expenses Operating Income (Loss)

NONO PERA TING REVENUES (EXPENSES) Interest income Transfers In

Total Nonoperating Revenues (Expenses)

Change in net assets Total Net Assets - Beginning Total Net Assets - Eodiog


Enterprise Fund

$ 1,949,778

134,739

2,702,125 4,786,642

2,898,373

1,817,416 30,608

552,320 5,298,717

(512,075)

5 512,070

512,075

$


19

$

$

Governmental Activities -Internal

Service Fund

2,979,764 2,979,764

1,128 52,575

5,826,033 5,879,736

(2,899,972)

879,875

879,875 (2,020,097) 1,158,994 (861,103)


PROPRIETARY FUNDS STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2004

Governmental Business- Activities -

Type Activities- Jnternal Enterprise Fund Service Fund

CASH FLOWS FROM OPERA TING ACTIVITIES Cash received from user charges, grants and transfers $ 5,353,324 $ 4,518,873

Cash payments for insurance claims (5, 146,471)

Cash payments to suppliers for goods and services (5,223,286) (12,659) Net increase (decrease) in cash and cash equivalents 130,038 (640,257) Cash and cash equivalents - Beginning (129,938) 966,509 Cash and cash equivalents - Ending $ 100 $ 326,252

RECONCJLIATION OF OPERATING

(LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

Change in net assets $ $ (2,020,097) Changes in assets and liabilities:

Receivables 4,204 659,234 Inventories 30,193 Capital assets 20,210 Accrued liabilities 232,335 720,606 Due to other fund (156,904)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 130,038 $ (640,257)


20


FIDUCIARY FUNDS STATEMENTS OF NET ASSETS JUNE 30, 2004

ASSETS Deposits and investments

Total assets

LIABILITIES Accounts payable Due to student groups

Total liabilities

NET ASSETS Unreserved

Total Net Assets


21

Other Private-Purpose . Agency

Trust Funds

$ 107,082 $ 3,067,821 $ 107,082 $ 3,067,821

$ 6,957 $

3,067,821 ___ 6..:.,_95_7_ $ 3,067,821

100,125 $ 100,125


F1DUCIARY FUNDS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FOR THE YEAR ENDED JUNE 30, 2004

ADDITIONS Private donations

DEDUCTIONS

Change in Net Assets Net Assets - Beginning Net Assets - Ending


22

Other PrivatePurpose

Trust $ 98,625

$

4,500

94,125

6,000

100,125


NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004

NOTE 1 · SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Reporting Entity

The East Side Union High School District was organized in 1949 under the laws of the State of California. The District operates under a locally-elected five-member Board form of government and provides educational services to grades 9 -12 as mandated by the State and/or Federal agencies. The District operates 11 high schools, 2 adult education sites, three independent study programs, and five continuation schools.

A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. For the District, this includes general operations, food service, and student related activities of the District. The District determined that there are no potential component units that meet the criteria for inclusion within the reporting entity.

Joint Powers Agencies and Public Entity Risk Pools The District is associated with two public entity risk pools. These organizations do not meet the criteria for inclusion as component units of the District. Summariz.!,d audited financial information is presented in Note 13 to the financial statements. These organizations are:

Northern California Regional Liability Excess Fund JP A (Nor-Cal ReLiEF) Santa Clara County Schools Insurance Group (SCCSIG)

Basis of Presentation - Fund Accounting

The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary.

Governmental Fonds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major governmental funds:

Major Governmental Funds

General Fund The general fund accounts for all financial resources except those required to be accounted for in another fund. The general fund balance is available to the District for any purpose provided it is expended or transferred according to the general Jaws of California.

Special Reserve Fund The Special Reserve Fund for Other Than Capital Outlay Projects is used primarily to provide for the accumulation of General Fund moneys for general operating purposes other than for capital outlay.

23

EAST SIDE UNION IIlGH SCHOOL DISTRICT


County School Facilities Fund The county school facilities fund is a capital projects fund that received state funding to he used for the acquisition, construction, or improvement of major capital facilities.

Building Fund The Building Fund exists primarily to account separately for proceeds from sale of bonds and acquisition of major governmental capital facilities and buildings.

Other Non-Major Governmental Funds

Special Revenue Funds The Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. The district maintains the following special revenue funds:

Adult Education Fund The Adult Education Fund is used to account for resources committed to adult education programs maintained by the District.

Child Development Fund The Child Development Fund is used to account for resources committed to child development programs maintained by the District.

Deferred Maintenance Fund The Deferred Maintenance Fund is used for the purpose of major repair or replacement of District property.

Debt Service Funds The Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest, and related costs. The District maintains the following debt service funds:

Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used to account for the accumulation of resources for, and the repayment of, district bonds, interest, and related costs.

Capital Projects Funds The Capital Projects Funds are used to account for the acquisition and/or construction of all major governmental general fixed assets. The District maintains the following capital projects funds:

Capital Facilities Fund The Capital Facilities Fund is used to account for resources received from developer impact fees assessed under provisions of the California Environmental Quality Act (CEQA).

State School Building Lease-Purchase Fund The State School Building Lease-Purchase Fund is used primarily to account for State apportionments provided for construction and reconstruction of school facilities (Education Code Sections 17070-17080).

Proprietary Funds Proprietary fund reporting focuses on the determination of operating income, changes in net assets, financial position, and cash flows. The District applies all GASB pronouncements, as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Proprietary funds are classified as enterprise or internal service. The District has the following proprietary funds:

24

EAST SIDE UNION ffiGH SCHOOL DISTRICT


Enterprise Fund Enterprise funds may be used to account for any activity for which a fee is charged to external users for goods or services. The only enterprise fund of the District accounts for the financial transactions related to the Food Service Operations of the District.

Internal Service Fnnd Internal service funds may be used to account for any activity for which goods or services are provided to other funds of the District in return for a fee to cover the cost of operations. The District operates a dental and vision insurance program that is accounted for in an internal service fund.

Fiduciary Funds Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into four classifications: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds.

Trust funds are used to account for the assets held by the District under a trust agreement for individuals, private organizations, or other governments and are therefore not available to support the District's own programs. The District's trust fund is the Student Scholarship Fund. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The District's agency fund accounts for student body activities (ASB).

Basis of Accounting - Measurement Focus

Government-Wide Financial Statements The government-wide statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements, but differs from the manner in which governmental fund financial statements are prepared.

The government-wide statement of activities presents a comparison between expenses, both direct and indirect, and program revenues for each segment of the business-type activities of the District and for each goverrunental program. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District.

Net assets should be reported as restricted when constraints placed on net asset use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net assets restricted for other activities result from special revenue funds and the restrictions on their net asset use.

Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental and enterprise fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Nonmajor funds are aggregated and presented in a single column. The internal service fund is presented in a single column on the face of the proprietary fund statements.

25



Governmental Funds All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner ifi which the governmental activities of the government-wide statements are prepared. Governmental fund financial statements therefore include reconciliations with brief explanations to better identify the relationship between the goverrunent-wide statements and governmental funds statements.

Proprietary Funds Proprietary funds are accounted for using a flow of economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the statement of net assets. The statement of changes in fund net assets presents increases (revenues) and decreases (expenses) in net total assets. The statement of cash flows provides information about how the District finances and meets the cash flow needs of its proprietary fund.

Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting.

Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in wlrich each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, available means expected to be received within 90 days of fiscal year-end.

Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in wlrich all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized.

Under the modified accrual basis, the following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources.

Deferred Revenue Deferred revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed from the combined balance sheet and revenue is recognized. ·

Certain grants received before the eligibility requirements are met are recorded as deferred revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as deferred revenue.

ExpensesfExpenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in wlrich the related fund liability is incurred, if measurable. The fair value of donated commodities used during the year is

26



reported in the operating statement as an expense with a like amount reported as donated commodities revenue. Unused donated commodities are reported as part of stores inventory. Principal and interest on general long-term debt, which has not matured, are recognized when paid in the governmental funds. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds.

Cash and Cash Eqnivalents

The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows.

Investments

Investments held at June 30, 2004, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost.

Prepaid Expenditures

Prepaid expenditures ( expenses) represent amounts paid in advance of receiving goods or services. The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditures when paid.

Stores Inventory

Inventories consist of expendable food and supplies held for consumption and unused donated commodities. Inventories are stated at cost, on the weighted average basis. The costs of inventory items are recorded as expenditures in the governmental type funds and expenses in the proprietary type funds when used.

Capital Assets and Depreciation

The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. In general, capital assets are long-lived assets of the District as a whole. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. lmprovements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred.

When purchased, such assets are recorded as expenditures in the governmental funds and capitalized. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated.

Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation basis for proprietary fund capital assets are the same as those used for the general capital assets.

Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings and improvements, 20 to 50 years; equipment, 2 to IO years.

27



lnterfund Balances

On fund fmancial statements, receivables and payables resulting from short-term interftmd loans are classified as "interfund receivables/payables." These amounts are eliminated in the governmental and business-type activities columns of the statement of net assets, except for the net residual amounts due between governmental and business-type activities, which are presented as internal balances.

Compensated Absences

Accumulated unpaid vacation beneftts are accrued as a liability as the benefits area earned. The entire compensated absence liability is reported on the government-wide financial statements. For governmental funds, the current portion of llllpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. The non-current portion of the liability is reflected as a component of general longterm debt.

Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; howevet, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. Howevet, credit for llllused sick leave is applicable to all classified school membetS who retire after January 1, 1999. At retirement, each member wi11 receive .004 year of service credit for each day of unused sick leave.

Accrued Liabilities and Long-Term Obligations

All payables, accrued liabilities, and long-term obligaticms are reported in the government-wide financial statements, and all payables, accrued liabilities, and long-term obligations payable from the enterprise fund are reported on the enterprise fund financial statements.

In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely mannet and in full from current financial resources are reported as obligations of the fllllds.

However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and long-term Joans are recognized as a liability on the fund financial statements when due.

Fund Balance Reserves and Designations

The District reserves those portions of fund equity which are legally segregated for a specific future use or which do not represent available expendable resources and thetefore are not available for appropriation or expenditure. Unreserved fund balance indicates that portion of fund equity which is available for appropriation in future periods. Fund equity reserves have been established for revolving cash accounts, stores inventories, prepaid expenditures (expenses), and legally restricted grants and entitlements.

28



Designations offund balances consist of that portion of the fund balance that has been designated (set aside) by the governing board to provide for specific purposes or uses. Fund equity designations have been established for economic uncertainties, unrealized gains of investments and cash in county treasury, and other purposes.

Net Assets

Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available.

Operating Revenues and Expenses

Operating revenues are those revenues that are generated directly from the primary activity of the proprietary _ funds. For the District, these revenues are food service sales. Operating expenses are necessary costs incurred to provide the good or service that is the primary activity of the fund.

lnterfuud Activity

Transfers between governmental and business-type activities on the government-wide statements are reported in the same manner as genera) revenues.

Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/ expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented on the fmancial statements.

Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Budgetary Data

The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July I of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account.

29

EAST SIDE UNION IIlGH SCHOOL DISTRICT


The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for.

Property Tax

Secured property taxes attach as an enforceable lien on property as of January I. Taxes are payable in two installments on November I and February I and become delinquent on December JO and April JO, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Santa Clara bills aod collects the taxes on behalf of the District. Local property tax revenues are recorded when received.

New Accounting Pronouncement

For the fiscal year ended June 30, 2004, the District has implemented Governmental Accounting Standards Board (GASB) Statement No. 39, "Determining Whether Certain Organiz.ations Are Component Units", ao amendment of GASB Statement No. 14. This statement provides additional guidance to determine whether certain organizations for which the primary government is not financially accountable should be reported as component units based on the nature aod significance of their relationship with the primary government. The adoption of this statement had no impact on the District's fmaocial statements.

NOTE 2 -DEPOSITS AND INVESTMENTS

Policies and Practices

The District is considered to be an involuntary participant in an external investment pool since the District is required to deposit all receipts aod collections of monies with their county treasurer (Education Code Section 41001). In addition, the District is authorized to maintain deposits with certain financial institutions that are federally insured up to $100,000.

The District is also authorized to make direct investments in local agency bonds, notes, or warrants within the state; U.S. Treaswy instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; aod collateralized mortgage obligations.

30

EAST SIDE UNION IBGH SCHOOL DISTRICT


Cash

Cash at June 30; 2004, is presented below and categorized separately to give an indication of the level of risk assessment with each deposit:

Cash on hand and in banks Cash with fiscal agent

Total

Cash on hand and in banks Cash in revolving fund Cash with fiscal agent

*These categories are as follows:

Governmental Carrying Amount

$ 2,500

$ 2,500

Bank Balance - Category * I 3 Total

$ 725,100 $2,692,235 $ 3,417,335 100,000 226,252 326,252

$ 825,100 $2,918,487 $ 3,743,587

Proprietary Fiduciary Carrying Carrying Amount Amount Total

$ $3,067,821 $ 3,067,821 100 2,600

326,252 326,252 $ 326,352 $3,067,821 $ 3,396,673

Category 1: Insured or collateralized with securities held by the District or by its agent in the District's name.

Category 3: Uncollateralized. This includes any bank balance that is collateralized with securities held by the pledging financial institution, or by its trust department or agent but not in the District's name.

Investments

The District's investments are categorized to give an indication of the level of risk assumed by the District at year-end. Category I includes investments that are insured or registered or for which the securities are held by the District or its agent in the District's name. Category 2 includes uninsured and unregistered investments for which the counterparzy' s trust department or agent in the District's name holds the securities. Category 3 includes uninsured and unregistered investments for which the securities are held by the financial institution's trust department or agent but no in the district's name. Deposits with the Couoty Treasury and investments in the State Treasurer's Investment Pool are not categorized because they do not represent securities, which exist in physical or book entry form. The Local Agency Investment Fund (LAIF) is an external investment pool sponsored by the State of California authorized under Section 16429.1,2, and 3 of California Government Code. The fund is a voluntary program created by statute as an investment alternative for California local governments and special districts and is administered by California State Treasurer. The deposits with county treasury and State pool's investments are valued using the amortized cost method (which approximates fair value). The frur values were provided by the couoty and State treasures for their respective pools.

31



The investments at June 30, 2004 had reported and fair values and were categorized as follows:

Reported in Reported in Fair Governmental Proprietary

Value Funds Fund Uncategorized:

Deposits with county treasurer $ 119,961,898 $ 120,429, 777 $ Less: Deficit cash (1,691,490) (1,017,417) (682,180)

$ 118,270,408 $ 119,412,360 $ (682,180)

NOTE 3 - RECEIVABLES

Reported in Fiduciary

Funds

$ 107,082

$ 107,082

Receivables at June 30, 2004, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full.

Special Reserve County School General Other Building Facilities

Federal Government Categorical aid $ 4,088,476 $ $ $

State Government Apportionment 5,587,896 Categorical aid 3,954,557 Lottery 1,488,860

Local Government Interest 55,348 74,292 303,766 64,295

Other Local Sources 4,148,692 872,919 35,365 2,500 Total $19,323,829 $ 947,211 $ 339,131 $ 66,795

Nonmajor Funds Total Pro~ietary

Federal Government Categorical aid $ 383,214 $ 4,471,690 $ 563,586

State Government Apportionment 5,587,896 Categorical aid 313,096 4,267,653 52,370 Lottery 109,658 1,598,518

Local Government Interest 93,300 591,001

Other Local Sources 972,976 6,032,452 38,100 Total $ 1,872,244 $ 22,549,210 $ 654,056

32


NOTES TO F1NANCIAL STATEMENTS JUNE 30, 2004

NOTE 4 - CAP IT AL ASSETS

Capital asset activity for the fiscal year ended June 30, 2004, was as follows:

Balance June 30, 2003 Additions

Governmental Activities Capital Assets not being depreciated:

Land $ 5,206,087 $ Construction in Progress 81,700,412 23,905,875 Total Capital Assets not being depreciated 86,906,499 23,905,875

Capital Assets being depreciated: Buildings 99,689,886 7,164,966 Site Improvement 2,396,011 2,870,545

Equipment 10,303,453 611,785 Total Capital Assets being depreciated 112,389,350 10,647,296 Total Capital Assets 199,295,849 34,553,171

Less Accumulated Depreciation: Buildings 51,963,764 2,295,985 Site Improvement 95,840 210,662 Equipment 8,196,560 549,010

Total Accumulated Depreciation 60,256,164 3,055,657 Governmental Activities Capital

Assets, Net $ 139,039,685 $31,497,514

Business-Type Activities Furniture and Equipment $ 464,577 $ 25,679 Less Accumulated Depreciation 143,610 45,888


Capital Assets, Net $ 320,967 $ (20,209)

33

- Balance Deductions June 30, 2004

$ $ 5,206,087 105,606,287 110,812,374

106,854,852 5,266,556

10,915,238 123,036,646 233,849,020

54,259,749 306,502

8,745,570 63,311,821

$ $170,537,199

$ $ 490,256 189,498

$ $ 300,758

EAST SIDE UNION filGH SCHOOL DISTRICT


NOTE 5 - INTERFUND TRANSACTIONS

lnterfund Receivables/Payables (Due To/Due From)

Interfund receivable and payable balances at June 30, 2004, between major and nonmajor governmental funds, nonmajor enterprise funds, internal service funds, and fiduciary funds are as follows:

Due To Special Reserve

General Other Proprietary Total

a tt General $ $ $ 751,026 $ 751,026

(1)

Building 3,100,000 8,750,000 11,850,000 ::> Q

Total $3,100,000 $ 8,750,000 $ 751,026 $12,601,026

All balances resulted from the time lag between the date that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made.

34



Operating Transfers

Interfund transfers for the year ended June 30, 2004, consisted of the following:

Transfer from Special Reserve Nonmajor

Transfer To General Other Governmental General $ $ 1,200,000 Building 17,719,805 Nonmajor governmental 113,180 Enterprise 512,070 Internal service 879,875

Total $1,505,125 $ 18,919,805

The General fund transferred to the Child Development for support The General fund transferred to the Cafeteria Enterprise fund for support The General fund transferred to the Internal Service fund for support The Special Reserve - Other fund transferred to the General fund for support

$

$

The Special Reserve - Other fund transferred to the Building fund for bond projects The Capital Facilities fund transferred to the Deferred Maintenance fund for support

Total

730,000

730,000

Total $ 1,200,000

17,719,805 843,180 512,070 879,875

$ 21,154,930

$ ll3,l80 512,070 879,875

1,200,000 17,719,805

730,000 $ 21,154,930

lnterfund transfers are used to (I) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations.

NOTE6-ACCOUNTSPAYABLE

Accounts payable at June 30, 2004, consisted of the following:

Nonrnajor General Building Governrnental Total Proprietary

Vendor payables $ 1,672,342 $4,919,512 $ 9,763 $ 6,601,617 $ 34 State apportionment 2,465,157 2,465,157 Salaries and benefits 13,742,499 1,393 203,485 13,947,377 298,422 Other significant payables 57,435 634 313,198 371,267 Other 895,210 513 895,723

Total $18,832,643 $4,921,539 $ 526,959 $24,281,141 $ 298,456

35



NOTE 7 - DEFERRED REVENUE

Deferred revenue at June 30, 2004, consists of the following:

General Nonmajor

Governmental $ 121

1&8,329 2&0,831

· Federal financial assistance State categorical aid Other local

Total

NOTE 8 - LONG-TERM LIABILITIES

Long-Term Debt Snmmary

$ 1,976,457 2,070,661 1,800,758

$ 5,847,876 $ 469,281

The changes in the District's long-term obligations during the year consisted of the following:

Balance Balance July I, 2003 Additions Deductions June 30, 2004

General obligation bonds $240,622,187 $ 99,222,912 $ 129,815,000 $210,030,099 Capital Leases 670,088 841,442 448,619 1,062,911 Retiree Incentive 5,379,706 1,167,669 4,212,037 Accumulated vacation - net 2,618,150 631,961 1,986,189

$ 249,290,131 $100,064,354 $ 132,063,249 $217,291,236

36

Total $ 1,976,578

2,258,990 2,081,589

$ 6,317,157

Duein One Year

$4,765,000 280,288

1,174,045 1,986,189

$8,205,522


NOTES TO F1NANCIAL ST A TEMENTS JUNE 30, 2004

Bonded Debt

·n,e outstanding general obligation bonded debt is as follows:

Maturity Interest Original

Issue Title Date Rate Issne

Current Interest Bond

1991B 2011 3.8%-6.8% $ 10,000,000

1991E 2024 4.0%-6.5% 20,000,000

1991F 2009 4.5%-7.0% 21,500,000

l 999 Refunding 2010 3.7o/o-4.8% 20,900,000

2002A 2027 3.3o/o-5.8% 30,000,000

1999B 2027 3.8o/o-6.6% 30,000,000

2003 Refunding 2022 3.0%-4.6% 36,795,000

1999C 2024 3.1%-5.0% 24,500,000

2003 Refunding 2025 2.0%-5.3% 97,160,000

Bond Anticipation 2004 1.1% 25,000,000

Sub-Total 315,855,000

Capital Appreciation

1991 Series F 20Jl 4.9% 2,999,956

1999 Series A 2025 5.3%-6.5% 25,499,993

Sub-Total 28,499,949

Total General Obligation Bonds $ 344,354,949

Debt Service Reqnirements to Maturity

The bonds mature through 2029 as follows:

Fiscal Year 2005 2006 2007 2008 2009

2010-2014 2015-2019 2020-2024 2025-2029

subtotal

Accretion to date Total

37

Bonds

Outstanding

July 1, 2003

$ 5,140,000

18,545,000

20,250,000

17,200,000

30,000,000

30,000,000

36,795,000

24,500,000

25,000,000

207,430,000

3,429,435

29,762,752

33,192,187 $240,622,187

Principal $ 4,765,000

5,510,000 5,970,000 7,230,000 5,710,000

40,495,566 48,485,579 54,902,321 30,206,483

203,274,949

6,755,150 $ 210,030,099

Bonds Accreted/ Out,;tanding

Issued Redeemed June 30, 2004

$ $ 205,000 $ 4,935,000

18,545,000

20,250,000

755,000 16,445,000

30,000,000

30,000,000

700,000 36,095,000

24,5_00,000 97,160,000 4,360,000 92,800,000

25,000,000

97,160,000 129,815,000 174,775,000

169,260 3,598,695 1,893,652 31,656,404

2,062,912 35,255,099 $ 99,222,912 $129,815,000 $210,030,099

Interest to Maturity

$ 8,023,997 7,556,588 7,403,358 7,223,063 6,979,190

38,541,004 37,045,455 34,126,933

9,453,781 $ 156,353,369

Total $ 12,788,997

13,066,588 13,373,358 14,453,063 12,689,190 79,036,570 85,531,034 89,029,254 39,660,264

$ 359,628,318



Accumulated Unpaid Employee Vacation

The long-term portion of accumulated unpaid employee vacation for the District at June 30, 2004, amounted to $1,986,189

Capital Leases

The District's liability on lease agreements with options to purchase are summarized below:

Balance, July 1, 2002 Additions Payments Balance, June 30, 2003

The capital leases have minimum lease payments as follows:

Year Ending June 30,

2005 2006 2007 2008 2009 Total

Less: Amount Representing Interest Present Value of Minimum Lease Payments

38

Capital Leases

$ 670,088 841,442 448,619

$ 1,062,911

Lease Payment

$ 367,539 353,277 325,526 236,325

33,337 1,316,004

253,092 $ l,062,912



NOTE 9 - FUND BALANCES

Fund balances are composed of the following elements:

Reserved Revolving cash Stores inventory Restricted programs

Total Reserved Unreserved

Designated Economic wicertainties Other designation

Total Designated Undesignated

Total Unreserved Total

Reserved Revolving cash Stores inventory Restricted programs

Total Reserved Unreserved

Designated Economic uncertainties Other designation

Total Designated Undesignated

Total Unreserved Total

General

$ 2,500 209,951

3,199,671 3,412,122

484,872 941,723

1,426,595 (3,682,314) (2,255,719)

.$ 1,156,403

39

Special Reserve Other

$

4,631,905

4,631,905 1,054,492 5,686,397

$ 5,686,397

Nonmajor Governmental

$

15,025,732 15,025,732

$15,025,732

County School

Building Facilities

$ $

71,247,369 19,210,848 71,247,369 19,210,848

$ 71,247,369 $19,210,848

Fiduciary Total Funds

$ 2,500 $

209,951 3,199,671 3,412,122

5,116,777 941,723

6,058,500 102,856,127 100,125 108,914,627 100,125

$ 112,326,749 $ 100,125

EAST SIDE UNlON IDGH SCHOOL DISTRICT


NOTE 10. RISK MANAGEMENT

Property and Liability

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees and natural disasters. During fiscal year ending June 30, 2004, the District contracted with Northern California Regional Liability Excess Fund for property and liability insurance coverage. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year.

Workers' Compensation

For fiscal year 2004, the District participated in the Santa Clara County Schools Insurance Group, an insurance purchasing pool. The intent of the Santa Clara County Schools Insurance Group is to achieve the benefit of a reduced premium for the District by virtue of its grouping and representation with other participants in the Santa Clara Courity Schools Insurance Group. The workers' compensation experience of the participating districts is calculated as ooe experience and a common premium rate is applied to all districts in the Santa Clara County. -Schools Insurance Group. Each participant pays its workers 'compensation premium based on its individual rate. A participant will then either receive money from or be required to contribute to the "equity-pooling fund." This "equity pooling" arrangement insures that each participant shares equally in the overall performance of the Santa Clara County Schools Insurance Group. Participation in the Santa Clara County Schools Insurance Group is limited to districts that can meet the Santa Clara County Schools Insurance Group selection criteria.

Coverage provided by Santa Clara County Schools Insurance Group and Northern California Regional Liability Excess Fund for property and liability and workers' compensation is as follows:

Insurance Program I Company Name Type of Coverage Limits

Workers' Compensation Program Santa Clara County Schools Insurance Group Workers' Compensation $ 200,000,000

Property and Liability Program Northern California Regional Liability Excess Fund Property and Liability $ 10,000,000

Claims Liabilities

The District records an estimated liability for indemnity torts and other claims against the District. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred, but not reported based on historical experience.

40

EAST SIDE UNION ffiGH SCHOOL DISTRICT


Unpaid Claims Liabilities

The Internal Service flllld establishes a liability for both reported and lll!reported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District from July I, 2002 to Jlll!e 30, 2004:

Liability Balance, June 30, 2002 Claims and changes in estimates Claims payments

Liability Balance, Jlll!e 30, 2003 Claims and changes in estimates Claims payments

Liability Balance, June 30, 2004 Deficit in assets available to pay claims at June 30, 2004

NOTE 11 - EMPLOYEE RETIREMENT SYSTEMS

$

$

Dental & Vision

446,162 3,696,!02

(3,696, !02) 446,162

4,746,839 (4,702,480)

490,521 (370,5~2)

Qualified employees are covered under multiple-employer contributory retirement plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System (STRS) and classified employees are members of the Public Employees' Retirement System (PERS).

STRS

Piao Description

The District contributes to the California State Teachers' Retirement System (STRS); a cost-sharing multipleernployer public employee retirement system defmed benefit pension plan adnrinistered by STRS. The plan provides retirement and disability benefits and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the SIRS annual financial report may be obtained from SIRS, 7667 Folsom Blvd., Sacramento, CA 95826.

Funding Policy

Active plan members are required to contribute 8.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by STRS Teachers' Retirement Board. The required employer contribution rate for fiscal year 2003-2004 was 8.25 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to STRS for the fiscal years ending June 30, 2004, 2003, and 2002, were $8,274,929, $8,494,158, and $7,573,479, respectively, and equal 100 percent of the required contributions for each year.

41



PERS

Plan Description

The District contributes to lhe School Employer Pool under lhe California Public Employees' Retirement System (CalPERS); a cost-sharing multiple-employer public employee retirement system defined benefit pension plan adminfatered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Laws. CalPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS' annual financial report may be obtained from the Ca!PERS Executive Office, 400 P Street, Sacramento, CA 95814.

Funding Policy

Active plan members are required to contribute 7 .0 percent of their salary and the District is required to contnbute an actuarially detennined rate. The actuarial methods and assumptions used for determining the rate are those _ adopted by the CalPERS Board of Administration. The required employer contnbution rate for fiscal year 2003-2004 was 10.42 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contnbutions to Ca!PERS for the fiscal years ending June 30, 2004, 2003, and 2002, were $2,947 ,922, $817,200, and $1,856,959, respectively, and equal I 00 percent of the required contributions for each year.

Social Security

As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (STRS or PERS) must be covered by social security or an alternative plan. The District has elected to use the Social Security as its alternative plan. Contributions made by the District and an employee vest immediately. The District contnbutes 6.2 percent of an employee's gross earnings. An employee is required to contribute 6.2 percent of his or her gross earnings to the pension plan.

On Behalf Payments

The State of California makes contributions to STRS and PERS on behalf of the District. These payments consist of State General Fund contributions to STRS in the amount of $2,255, 772 (2.28 percent of salaries subject to STRS). No contributions were made for PERS for the year ended June 30, 2004. Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures, however, guidance received from the California Department of Education advises local educational agencies not to record these arnonnts in the Annual Financial and Budget Report. These amounts also have not been recorded in these financial statements.

42



NOTE 12 - COMMITMENTS AND CONTINGENCIES

Grants

The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the general fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, 2004.

Litigation

The District is involved in various litigation arising from the normal course of business. In the opinion of management and legal co1D1sel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30, 2004.

Construction Commitments

As of June 30, 2004, the District had the following commitments with respect to the unfinished capital projects:

Remaining Expected Construction Date of

CAPITAL PROJECT Commitment Completion Andrew Hill High $ 14,380,000 J1D1-07 James Lick High 9,300,000 Jun-08 W .C. Overfelt High 13,700,000 Dec-07 Piedmont Hills High 1,107,000 Dec-OS Oak Grove High 3,969,000 Dec-06 Education Center 4,574,000 Jun-09 Silver Creek High 9,579,000 Dec-07 Yerba Buena High 7,240,000 Jun-06 Independence High 370,000 Jun-05 Santa Teresa High 7,274,000 Jan-07

$ 71,493,000 ·

43


NOTES TO F1NANCIAL STATEMENTS JUNE 30, 2004

NOTE 13 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS AND JOINT POWER AUTHORITIES

The District is a member of the Santa Clara County Schools Insurance Group and the School Liability Fund public entity risk pools (JP As). The District pays an annual premium to each entity for its health,-workers' compensation, and property liability coverage. The relationships between the District, the pools, and the JP A's are such that they are not component units of the District for financial reporting purposes.

These entities have budgeting and financial reporting requirements independent of member units and their rmancial statements are not presented in these fmancial statements; however, fund transactions between the entities and the District are included in these statements. Audited financial statements are available from the respective entities.

A. Entity

B. Purpose

C. Participants

D. Governing Board

E. Condensed Audited Finmcial Information Follows

Assets Liabilities

Fund Equity

Revenues Expenses

Net Increase (Decrease) in Fund Equity

F. Pavments for the Current Year

*Latest information available

Santa Clara County Schools Insurance Group

Operate a common risk management and insurance program for member school districts

School district offices

One representative from each member district

June 30, 2003* $ 19,487,298

9,814,880 $ 9,672,418

22,049,404 25,028,012

$ (2,978,608)

$ 24,897

Northern California Regional Liability Excess FundJPA

To operate and maintain-~ self-insurance program for liability and property damage

School district!county school offices

One representative from each member district

June 30, 2003 • $ 27,149,663

18,878,610 $ 8,271,053

23,319,977 21,888,273

$ 1,431,704

$ 867,626

None of the JP A's had long-term debt outstanding at June 30,2004. The District's share of year-end assets, liabilities, or fund equity has not been calculated.

44

EAST SIDE UNJON HIGH SCHOOL DISTRICT


NOTE 14 - SUBSEQUENT EVENTS

The District issued $50,000,000 of General Obligation Bonds dated July 2004. The bonds mature on August I, 2028, and yield 4 to 5 percent interest. The bonds were sold to finance the construction and modernization of certain sites of the District.

NOTE IS-RELATED PARTY TRANSACTIONS

In 2003, the District entered into an employment agreement with an officer of the district, which included an advance for personal housing. The note bears interest at 2 percent and interest is payable monthly with a maturity at fifteen, twenty, twenty-five or thirty years chosen at the option of the officer. The balance on the loan as of hme 30, 2004 was $372,919.

NOTE 1~ RESTATEMENT OF BEGINNING FUND BALANCE- DISTRICT-WIDE

GASB 34 was implemented in the prior year, requiring the District's capital assets and accumulated depreciation to be stated on the District-Wide Statement of Net Assets. The District was also required to state the long-term debt on the District-Wide Statement of Net Assets. Additionally, Special Education Mandate Reimbursements non-current receivables were to be recorded on the District's financial statements. The District did not record some items related to capital assets such as land. The District also did not record the mandated receivables nor calculated accretion value of Capital Appreciation Bonds. As a result, the opening balance was understated by $1,136,953. A prior period adjustment has been made in the current year to correctly state the beginning balance on the Statement of Net Assets. The adjustment does not affect the Governmental Funds statements or the District's available reserves.

45

REQUIRED SUPPLEMENTARY INFORMATION


GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2004

Favorable (Unfavorable)

Budgeted Amounts Variance

(GAAP Basis) Actual Final Original Final (GAAP Basis) to Actual

REVENUES

Revenue limit solfI'Ces $ 127,827,285 $ 133,517,486 $132,876,164 $ (641,322)

Federal sources 11,830,758 17,355,236 13,578,631 (3,776,605)

Other state sources 30,188,278 33,057,904 29,810,142 (3,247,762)

Other local sources 13,273,1 JO 15,500,679 13,377,894 (2, I 22, 785)

Total Revenues I 83,119,431 199,431,305 I 89,642,831 (9,788,474)

EXPENDITURES

Instruction 105,990,189 112,434,371 105,369,043 7,065,328

Instruction related activities:

Supervision of instruction 8,401,821 13,929,336 11,184,336 2,745,QQ()

Instructional library, media, and technology 2,440,770 2,523,574 2,409,161 114,413

School site administration 13,660,949 15,105,963 15,405,015 (299,052)

Pupil services:

Home-to-school transportation 2,747,551 2,954,668 3,003,228 (48,560)

Food services 16,572 28,228 35,749 (7,521)

AU other pupil services 14,292,932 15,410,021 15,028,234 381,787

General administration:

Data processing 2,660,853 3,034,357 3,018,987 15,370

AB other general administration 10,879,252 9,180,890 9,234,412 (53,522)

Plant services 18,048,674 17,657,884 17,010,449 647,435

Facility acquisition and construction 238,645 1.=,536 1,718,483 (495,947)

Ancillary services 1,664,181 1,756,874 1,888,637 (131,763)

Community services 426,864 424,761 445,656 (20,895)

Other outgo 6,190,348 12,766,400 11,524,347 1,242,053

Debt service

Jnterest 448,619 (448,619)

Total Expenditures 187,659,601 208,429,863 197, 724,356 10,705,507

Excess (Deficiency) of RevenuesOVer Expenditures (4,540,170) (8,998,558) (8,081,525) 917,033

Other Financing Sources (Uses):

Transfers in 2,600,000 2,775,000 1,200,000 (1,575,000)

Other sources 841,442 841,442

Transfers out ( 1, 136,990) (1,711,990) (1,505,125) 206,865

Net Financing Sources (Uses) 1,463,010 1,063,010 536,317 (526,693)

NET CHANGE IN FUND BALANCES (3,077,160) (7 ,935,548) (7,545,208) 390,340

Fund Balance - Beginning 8,701,611 8,701,611 8,701,611

Fund Balance - Ending $ 5,624,451 $ 766,063 $ 1,156,403 $ 390,340


46


MAJOR SPECIAL REVENUE FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2004

Budgeted Amounts (GAAP Basis) Actual

Favorable (Unfavorable)

Variance Final

to Aetna! Original Final {GAAP Basis) ~,---~~~~~~~-~---

REVENUES Other local sources

EXPENDITURES Other Financing Sources (Uses):

Transfers out

NET CHANGE IN FUND BALANCES Fond Balance - Beginning Fund Balance - Ending

$ 441,467 $ 441,467 $ 1,552,316 $ 1,110,849

441,467 23,053,886

$ 23,495,353

(18,919,805) (18,919,805) -----(18,478,338) 23,053,886

$ 4,575,548

(17,367,489) 1,110,849 --~~-23,053,886

$ 5,686,397 $ 1,110,849


47

APPENDIXB

FORM OF CONTINUING DISCLOSURE CERTIFICATE

APPENDIX B

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the "Disclosure Certificate") is executed and delivered bv the EAST SIDE UNION HIGH SCHOOL DISTRICT (the "District") in connection with the ;;suance by the Board of Supervisors of Santa Clara County (the "Board") in the name of the District of $8,500,000 East Side Union High School District (Santa Clara County, California) 2005 Tax and Revenue Anticipation Notes (the "Notes"). The Notes are being issued pursuant to a resolution adopted by the Board of Trustees of the District on April 14, 2005, and a resolution adopted by the Board on May 3, 2005 (collectively, 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 Notes and in order to assist the Participating Underwriters in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Dissemination Agent" shall mean the District, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section 3(a) of this Disclosure Certificate.

"National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule.

"Participating Underwriter" shall mean any of the original underwriters of the Notes required to comply with the Rule in connection with offering of the Notes.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Reporting of Significant Events.

{a) Pursuant to the provisions of this Section 3, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Notes, if material:

(i) Principal and interest payment delinquencies. (ii) Non-payment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the securities. (xi) Rating changes.

Appendix B Page 1

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall as soon as possible determine if such event would be material under applicable Federal securities law.

(c) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly file a notice of such occurrence ,vith each National Repository or with the Municipal Securities Rulemaking Board and with each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Notes pursuant to the Resolution.

Section 4. 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 Notes. If such termination occurs prior to the final maturity of the Notes, the District shall give notice of such termination in the same manner as for a Listed Event under Section 3(c).

Section 5. 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. The initial Dissemination Agent shall be the District.

Section 6. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Section 3(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 Notes, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Notes, 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 Notes, or (ii) does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Notes.

Section 7. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any 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 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 notice of occurrence of a Listed Event.

Section 8. Default. In the event of a failure of the District to comply with any prov1s10n of this Disclosure Certificate any holder or beneficial owner of the Notes may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Resolution, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.

Section 9. 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

Appendix B Page2

District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's 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 Notes.

Section 10. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriters and holders and beneficial owners from time to time of the Notes, and shall create no rights in any other person or entity.

Date: [Closing Date] EAST SIDE UNION HIGH SCHOOL DISTRICT

BY~~~~~~~~~~~~~~-Name _______________ ~

Title-----------------

Appendix B Page3

APPENDIXC

FORM OF OPINION OF BOND COUNSEL

APPENDIX C

FORM OF FINAL OPINION OF BOND COUNSEL

[Letterhead of Quint & Thimmig LLP)

Board of Trustees East Side Union High School District 830 North Capitol Avenue San Jose, California 95133-1398

[Closing Date]

OPINION: $8,500,000 East Side Union High School District (Santa Clara County, California) 2005 Tax and Revenue Anticipation Notes

Members of the Board of Trustees:

We have acted as bond counsel to the East Side Union High School District (the "District") in connection with the issuance by the Board of Supervisors of Santa Clara County (the "Board") of $8,500,000 principal amount of East Side Union High School District (Santa Clara County, California) 2005 Tax and Revenue Anticipation Notes, dated October 25, 2005 (the "Notes"), pursuant to Article 7.6 (commencing with section 53850), Chapter 4, Part 1, Division 2, Title 5 of the California Government Code, a resolution adopted by the Board of Trustees of the District on April 14, 2005 (the "District Resolution"), and a resolution adopted by the Board on May 3, 2005 (the "Board Resolution" and, collectively, the "Resolutions"). 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 Board contained in the Board Resolution and of the District in the District Resolution and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify such facts by independent investigation.

Based upon our examination, we are of the opinion, as of the date hereof, that:

1. The District is duly created and validly existing as a school district with the power to perform its obligations under the District Resolution, to cause the Board to issue the Notes in its name and to perform its obligations under the Board Resolution and the Notes.

2. The District Resolution has been duly adopted by the District. The Board Resolution has been duly adopted by the Board and creates a valid first lien on the funds pledged under the Board Resolution for the security of the Notes.

3. The Notes have been duly authorized, issued and delivered by the Board and are valid and binding general obligations of the District enforceable in accordance with their terms.

4. The interest on the Notes 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 Notes are "qualified tax-exempt obligations" within the meaning of section 265(b)(3) of the Internal Revenue Code of 1986

Appendix C Page 1

(the "Code"), and, in the case of certain financial institutions (within the meaning of section 265(b)(5) of the Code), a deduction is allowed for eighty percent (80%) of that portion of such financial institutions' interest expense allocable to interest payable on the Notes. The opinions set forth in the preceding sentences are subject to the condition that the District comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Notes 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 Notes in gross income for federal income tax purposes to be retroactive to the date of issuance of the Notes. We express no opinion regarding other federal tax consequences arising with respect to the Notes.

5. The interest on the Notes is exempt from personal income taxation imposed by the State of California.

The rights of the owners of the Notes and the enforceability thereof may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and their enforcement may be subject to the exercise of judicial discretion in accordance with general principles of equity.

Respectfully submitted,

Appendix C Page2

[THIS PAGE INTENTIONALLY LEFT BLANK]

1228 N Street, Suite 13 Sacramento, CA 95814

(916) 444-5100

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