COLTON JOINT UNIFIED SCHOOL DISTRICT (San · PDF filecolton joint unified school district (san bernardino and riverside counties, california),

NEW ISSUE—BOOK-ENTRY ONLY Ratings: Moody’s: “Aa3” (Insured) “Aa3” (Underlying)

Standard & Poor’s: “AAA” (Insured) “A+”(Underlying)

(See “MISCELLANEOUS — Ratings” herein.)

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. See “TAX MATTERS” herein with respect to tax consequences relating to the Bonds.

$41,938,348.45 COLTON JOINT UNIFIED SCHOOL DISTRICT

(San Bernardino and Riverside Counties, California) Election of 2008 General Obligation Bonds, Series B

Dated: Date of Delivery Due: August 1, as shown herein

This cover page is not a summary of this issue; it is only a reference to the information contained in this Official Statement. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision.

The Colton Joint Unified School District (San Bernardino and Riverside Counties, California) Election of 2008 General Obligation Bonds, Series B (the “Bonds”) are issued by the Colton Joint Unified School District (the “District”) (i) to finance specific school facility construction, repair and improvement projects approved by the voters of the District, and (ii) to pay costs of issuance of the Bonds. The Bonds are being issued under the laws of the State of California (the “State”) and pursuant to a resolution of the Board of Education of the District.

The Bonds are payable from ad valorem taxes to be levied within the District pursuant to the California Constitution and other State law. The Board of Supervisors of the County of San Bernardino, California (“San Bernardino County”) and the Board of Supervisors of the County of Riverside, California (“Riverside County”) are empowered and obligated to levy ad valorem taxes upon all property subject to taxation by the District that is located within such county, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates), for the payment of principal, Maturity Value and Conversion Value of and interest on the Bonds, all as more fully described herein. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS” herein.

The Bonds will be issued as current interest bonds (the “Current Interest Bonds”), capital appreciation bonds (the “Capital Appreciation Bonds”) and convertible capital appreciation bonds (the “Convertible Capital Appreciation Bonds”). Interest on the Current Interest Bonds accrues from the date of their delivery and is payable semiannually on February 1 and August 1 of each year, commencing February 1, 2011. The Capital Appreciation Bonds will not bear current interest but will accrete interest from the date of delivery, compounded semiannually on February 1 and August 1 of each year, commencing on February 1, 2011. The Convertible Capital Appreciation Bonds will accrete interest from the date of delivery, compounded semiannually on February 1 and August 1 of each year, commencing on February 1, 2011, to the date on which the Convertible Capital Appreciation Bonds convert to current interest bonds (the “Conversion Date”) and will bear interest from such Conversion Date on the Accreted Value thereof as of the Conversion Date (the “Conversion Value”), payable semiannually on February 1 and August 1 of each year, commencing on the February 1 or August 1 immediately succeeding the Conversion Date. The Bonds are issuable in denominations of $5,000 principal, Maturity Value or Conversion Value, as applicable, or any integral multiple thereof as shown on the inside front cover hereof.

The Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Individual purchases of the Bonds will be made in book-entry form only. Purchasers will not receive physical delivery of the Bonds purchased by them. See “THE BONDS – Form and Registration” herein. Payments of principal, Maturity Value and Conversion Value of and interest on the Bonds will be made by the Paying Agent, initially U.S. Bank National Association, to DTC for subsequent disbursement to DTC Participants, who will remit such payments to the beneficial owners of the Bonds. See “THE BONDS – Payment of Principal and Interest” herein.

The Bonds are subject to optional and mandatory sinking fund redemption prior to maturity as described herein. See “THE BONDS — Redemption” herein.

The scheduled payment of principal, Maturity Value and Conversion Value of and interest on the Bonds when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by Assured Guaranty Municipal Corp. See “MUNICIPAL BOND INSURANCE” herein.

The Bonds will be offered when, as and if issued by the District and received by the Underwriters, subject to the approval of legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, Bond Counsel. Certain legal matters will be passed upon for the District by Orrick, Herrington & Sutcliffe LLP, Irvine, California, as Disclosure Counsel to the District; and for the Underwriters by Fulbright & Jaworski L.L.P., Los Angeles, California. It is anticipated that the Bonds, in definitive form, will be available for delivery through the facilities of DTC in New York, New York, on or about September 14, 2010.

RBC Capital Markets

Dated: August 31, 2010

MATURITY SCHEDULEBASE CUSIP1: 197036

$41,938,348.45COLTON JOINT UNIFIED SCHOOL DISTRICT

(San Bernardino and Riverside Counties, California)Election of 2008 General Obligation Bonds, Series B

$6,710,000 Current Interest Bonds

Maturity(August 1)

PrincipalAmount

InterestRate Yield*

CUSIPNumber1

2046 $6,710,000 5.000% 4.850% JP2_____________* Yield to the par call date of August 1, 2020.

$28,051,198.75 Capital Appreciation Bonds

$6,217,234.70 Capital Appreciation Serial Bonds

Maturity(August 1)

Principal(Denominational)

AmountAccretion

RateReoffering

YieldMaturity

ValueCUSIP

Number1

2013 $ 10,722.60 12.000% 1.430% $ 15,000 HE92014 22,267.00 12.000 1.760 35,000 HF62015 33,973.20 12.000 2.290 60,000 HG42016 45,353.70 12.000 2.620 90,000 HH22017 51,577.50 12.000 2.990 115,000 HJ82018 59,874.00 12.000 3.250 150,000 HK52019 63,945.00 12.000 3.610 180,000 HL32020 113,821.20 12.000 3.960 360,000 HM12021 157,578.40 12.000 4.340 560,000 HN92023 51,264.70 12.000 4.870 230,000 HQ22024 94,225.75 12.000 5.070 475,000 HR02025 129,764.25 12.000 5.370 735,000 HS82026 161,048.00 12.000 5.580 1,025,000 HT62027 432,042.75 6.750 5.690 1,325,000 HU32028 598,514.20 5.770 5.770 1,655,000 HV12029 668,847.95 5.900 5.900 2,005,000 HW92030 741,893.60 5.950 5.950 2,380,000 HX72031 802,447.00 6.040 6.040 2,780,000 HY52032 858,321.90 6.120 6.120 3,210,000 HZ22033 907,664.40 6.200 6.200 3,670,000 JA52034 212,087.60 6.240 6.240 920,000 JB3

$4,533,806.70 Capital Appreciation Term Bonds due August 1, 2037Accretion Rate 6.330% – Reoffering Yield 6.330% – $24,210,000 Maturity Value – CUSIP Number1 – JE7

$10,976,800.55 Capital Appreciation Term Bonds due August 1, 2042Accretion Rate 6.410% – Reoffering Yield 6.410% – $82,045,000 Maturity Value – CUSIP Number1 – JK3

$6,323,356.80 Capital Appreciation Term Bonds due August 1, 2045Accretion Rate 6.490% – Reoffering Yield 6.490% – $58,680,000 Maturity Value – CUSIP Number1 – JN7

$7,177,149.70 Convertible Capital Appreciation Bonds

$7,177,149.70 Convertible Capital Appreciation Term Bonds due August 1, 2035Accretion Rate to Conversion Date 5.800% – Conversion Date August 1, 2021 – $13,370,000 Conversion Value

Interest Rate from Conversion Date 5.800%Reoffering Yield 5.800% – CUSIP Number1 – JC1

1 Copyright 2010, American Bankers Association. CUSIP data herein is provided by Standard and Poor’s, CUSIP Service Bureau, a division ofThe McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIPService. CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriters take any responsibility forthe accuracy of such CUSIP numbers.

This Official Statement does not constitute an offering of any security other than the originaloffering of the Bonds by the District. No dealer, broker, salesperson or other person has been authorizedby the District to give any information or to make any representations other than as contained in thisOfficial Statement, and if given or made, such other information or representation not so authorizedshould not be relied upon as having been given or authorized by the District.

The Bonds are exempted from registration under the Securities Act of 1933, as amended,pursuant to Section 3(a)2 thereof. This Official Statement does not constitute an offer to sell or asolicitation of an offer to buy Bonds in any state in which such offer or solicitation is not authorized or inwhich the person making such offer or solicitation is not qualified to do so, or to any person to whom it isunlawful to make such offer or solicitation.

The information set forth herein other than that furnished by the District, although obtained fromsources which are believed to be reliable, is not guaranteed as to accuracy or completeness, and is not tobe construed as a representation by the District. The information and expressions of opinions herein aresubject to change without notice and neither delivery of this Official Statement nor any sale madehereunder shall, under any circumstances, create any implication that there has been no change in theaffairs of the District since the date hereof. This Official Statement is submitted in connection with thesale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any otherpurpose.

The Underwriters have provided the following sentence for inclusion in this Official Statement:The Underwriters have reviewed the information in this Official Statement in accordance with, and as apart of, their responsibilities to investors under the federal securities laws as applied to the facts andcircumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness ofsuch information.

Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.)(“AGM”) makes no representation regarding the Bonds or the advisability of investing in the Bonds. Inaddition, AGM has not independently verified, makes no representation regarding, and does not acceptany responsibility for the accuracy or completeness of this Official Statement or any information ordisclosure contained herein, or omitted herefrom, other than with respect to the accuracy of theinformation regarding AGM supplied by AGM and presented under the heading “MUNICIPAL BONDINSURANCE” and in Appendix I – “SPECIMEN MUNICIPAL BOND INSURANCE POLICY.”

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOTOR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OFTHE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPENMARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.THE UNDERWRITERS MAY OFFER AND SELL THE BONDS TO CERTAIN SECURITIESDEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THANTHE PUBLIC OFFERING PRICES STATED ON THE INSIDE FRONT COVER PAGE HEREOFAND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THEUNDERWRITERS.

COLTON JOINT UNIFIED SCHOOL DISTRICT(SAN BERNARDINO AND RIVERSIDE COUNTIES, CALIFORNIA)

BOARD OF EDUCATION

Mel Albiso, PresidentFrank A. Ibarra, Vice President

David R. Zamora, ClerkRobert D. Armenta, Jr., Member

Patt Haro, Member, MemberKent Taylor, Member

Marge Mendoza-Ware, Member

DISTRICT ADMINISTRATORS

James A. Downs, SuperintendentJaime R. Ayala, Assistant Superintendent, Business Services Division

PROFESSIONAL SERVICES

Bond Counsel

Stradling Yocca Carlson & Rauth, a Professional CorporationSan Francisco, California

Disclosure Counsel

Orrick, Herrington & Sutcliffe LLPIrvine, California

Financial Advisor

C.M. de Crinis & Co., Inc.Sherman Oaks, California

Paying Agent

U.S. Bank National AssociationLos Angeles, California

TABLE OF CONTENTS

Page

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

General ...........................................................................................................................................1

The District .....................................................................................................................................1

THE BONDS ...............................................................................................................................................2

Authority for Issuance; Purpose......................................................................................................2

Form and Registration.....................................................................................................................2

Payment of Principal and Interest ...................................................................................................2

Redemption.....................................................................................................................................4

Defeasance of Bonds.......................................................................................................................7

Application and Investment of Bond Proceeds...............................................................................7

Estimated Sources and Uses of Funds ............................................................................................8

Debt Service....................................................................................................................................9

Outstanding General Obligation Bonds; Aggregate Debt Service................................................10

SECURITY AND SOURCE OF PAYMENT FOR THE BONDS ...........................................................11

General .........................................................................................................................................11

Property Taxation System.............................................................................................................11

Assessed Valuation of Property Within the District .....................................................................12

Tax Rates ......................................................................................................................................17

Tax Charges and Delinquencies....................................................................................................19

Direct and Overlapping Debt ........................................................................................................20

MUNICIPAL BOND INSURANCE .........................................................................................................22

The Insurance Policy.....................................................................................................................22

Assured Guaranty Municipal Corp. (Formerly Known as Financial Security AssuranceInc.) ..................................................................................................................................22

TAX MATTERS........................................................................................................................................24

OTHER LEGAL MATTERS.....................................................................................................................25

Legal Opinion ...............................................................................................................................25

Legality for Investment in California ...........................................................................................25

Continuing Disclosure ..................................................................................................................26

No Litigation.................................................................................................................................26

MISCELLANEOUS ..................................................................................................................................26

Ratings .........................................................................................................................................26

Professionals Involved in the Offering .........................................................................................27

TABLE OF CONTENTS(continued)

Page

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Underwriting.................................................................................................................................27

APPENDIX A INFORMATION RELATING TO THE DISTRICT’S OPERATIONS ANDBUDGET ....................................................................................................................................A-1

APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEARENDED JUNE 30, 2009 .............................................................................................................B-1

APPENDIX C PROPOSED FORM OF OPINION OF BOND COUNSEL ...........................................C-1

APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE .........................................D-1

APPENDIX E SUMMARY OF COUNTY OF SAN BERNARDINO INVESTMENT POLICIESAND PRACTICES AND DESCRIPTION OF INVESTMENT POOL.....................................E-1

APPENDIX F COUNTY INVESTMENT POLICY ............................................................................... F-1

APPENDIX G BOOK-ENTRY ONLY SYSTEM ..................................................................................G-1

APPENDIX H TABLE OF ACCRETED VALUES ...............................................................................H-1

APPENDIX I SPECIMEN MUNICIPAL BOND INSURANCE POLICY ............................................. I-1



INTRODUCTION

General

This Official Statement, which includes the cover page and appendices hereto, is provided tofurnish information in connection with the sale of $41,938,348.45 aggregate principal amount of ColtonJoint Unified School District (San Bernardino and Riverside Counties, California) Election of 2008General Obligation Bonds, Series B (the “Bonds” or “2008B Bonds”), consisting of current interest bonds(the “Current Interest Bonds”), capital appreciation bonds (the “Capital Appreciation Bonds”) andconvertible capital appreciation bonds (the “Convertible Capital Appreciation Bonds”), to be offered bythe Colton Joint Unified School District (the “District”).

This Official Statement speaks only as of its date, and the information contained herein is subjectto change. The District has no obligation to update the information in this Official Statement, except asrequired by the Continuing Disclosure Certificate to be executed by the District. See “OTHER LEGALMATTERS – Continuing Disclosure.”

The purpose of this Official Statement is to supply information to prospective buyers of theBonds. Quotations from and summaries and explanations of the Bonds, the resolution of the Board ofEducation of the District providing for the issuance and payment of the Bonds and the constitutionalprovisions, statutes and other documents described herein, do not purport to be complete, and reference ishereby made to said documents, constitutional provisions and statutes for the complete provisions thereof.Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated,are intended as such and not as representations of fact. This Official Statement is not to be construed as acontract or agreement between the District and the purchasers or owners of any of the Bonds.

Copies of documents referred to herein and information concerning the Bonds are available fromthe District by contacting: Colton Joint Unified School District, 1212 Valencia Drive, Colton, CA 92324,Attention: Assistant Superintendent of Business Services. The District may impose a charge for copying,handling and mailing such requested documents.

The District

The District has operated as a joint unified school district since July 1966 and is comprised of anarea of approximately 48 square miles in the County of San Bernardino (“San Bernardino County”) andthe County of Riverside (“Riverside County” and together with San Bernardino County, the “Counties”).The District operates 19 elementary schools, four middle schools, two comprehensive high schools, onecontinuation school, one alternative high school, an adult education program and a child developmentcenter. The District projects that enrollment for fiscal year 2010-11 will be approximately 23,597students. For additional information about the District, see Appendix A – “INFORMATION RELATINGTO THE DISTRICT’S OPERATIONS AND BUDGET.”

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THE BONDS

Authority for Issuance; Purpose

The Bonds are issued under the provisions of Article 4.5 of Chapter 3 of Part 1 of Division 2 ofTitle 5 of the California Government Code and Article XIIIA of the California Constitution and pursuantto a resolution adopted by the Board of Education of the District on August 19, 2010 (the “Resolution”).

At an election held on November 4, 2008, the District received authorization under a ballotmeasure to issue bonds of the District in an aggregate principal amount not to exceed $225 million tofinance specific school facility construction, repair and improvement projects (the “2008 Authorization”),summarized as follows: build middle and high schools, improve libraries, science and computer labs,repair restrooms, increase security, after-school program and joint-use space, drop-off zone safety, andacquire, construct, repair equipment, sites and facilities. The measure required approval by at least 55% ofthe votes cast by eligible voters within the District, and received a favorable vote of approximately 73%.On October 27, 2009, the District issued $48,999,050.25 aggregate initial principal amount of its Electionof 2008 General Obligation Bonds, Series A (the “2008A Bonds”), as the District’s first series under the2008 Authorization. The Bonds represent the second series of bonds to be issued under the 2008Authorization and will be issued to finance authorized projects. Upon issuance of the Bonds,$134,062,601.30 of bonds will remain authorized but unissued under the 2008 Authorization.

Form and Registration

The Bonds will be issued in fully registered form only, without coupons, in denominations of$5,000 principal, Maturity Value or Conversion Value, as applicable, or any integral multiple thereof. TheBonds will initially be registered in the name of Cede & Co., as nominee of The Depository TrustCompany (“DTC”), New York, New York. DTC will act as security depository of the Bonds. Purchasesof Bonds under the DTC book-entry system must be made by or through a DTC participant, andownership interests in Bonds will be recorded as entries on the books of said participants. Except in theevent that use of this book-entry system is discontinued for the Bonds, beneficial owners will not receivephysical certificates representing their ownership interests. In the event that the book-entry only systemdescribed below is no longer used with respect to the Bonds, the Bonds will be registered in accordancewith the Resolution. See Appendix G – “BOOK-ENTRY ONLY SYSTEM.”

Payment of Principal and Interest

The Bonds will be issued in book-entry form only, and will be initially issued and registered inthe name of Cede & Co., as nominee for DTC. Purchasers will not receive certificates representing theirinterest in the Bonds.

Interest on the Current Interest Bonds accrues from the date of delivery thereof (the “Date ofDelivery”), and is payable semiannually on February 1 and August 1 (each a “Interest Payment Date”) ofeach year, commencing February 1, 2011. Interest on the Current Interest Bonds shall be computed on thebasis of a 360-day year of 12 30-day months. Each Current Interest Bond shall bear interest from theInterest Payment Date next preceding the date of authentication thereof unless it is authenticated as of aday during the period from the 16th day of the month next preceding any Interest Payment Date to thatInterest Payment Date, inclusive, in which event it shall bear interest from such Interest Payment Date, orunless it is authenticated on or before January 15, 2011, in which event it shall bear interest from its dateof delivery. The Current Interest Bonds are issuable in denominations of $5,000 principal amount or anyintegral multiple thereof. The Current Interest Bonds mature on August 1, in the years and amounts setforth on the inside front cover page hereof.

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The Capital Appreciation Bonds are payable only at maturity, and will not pay interest on acurrent basis. The Capital Appreciation Bonds accrete in value from the Date of Delivery at the accretionrates per annum set forth on the inside front cover hereof, compounded semiannually on February 1 andAugust 1 of each year, commencing on February 1, 2011. The Maturity Value of a Capital AppreciationBond is its Accreted Value at its maturity date (“Maturity Value”). Interest with respect to each CapitalAppreciation Bond is represented by the amount each Capital Appreciation Bond accretes in value fromits initial principal amount on the Date of Delivery (the “Denominational Amount”) to the date for whichAccreted Value is calculated. The Accreted Value (the “Accreted Value”) of a Capital Appreciation Bondis calculated by discounting on a 30-day month, 360-day year basis its Maturity Value on the basis of aconstant interest rate (the “Accretion Rate”) compounded semiannually on February 1 and August 1, ofeach year to the date for which an Accreted Value is calculated, and if the date for which Accreted Valueis calculated is between February 1 and August 1, by pro-rating the Accreted Values to the closest prior orsubsequent February 1 and August 1. See the maturity schedule on the inside front cover page hereof andthe Tables of Accreted Values shown in Appendix H hereto.

Prior to the date on which the Convertible Capital Appreciation Bonds convert to current interestbonds set forth on the inside front cover page hereof (the “Conversion Date”), the Convertible CapitalAppreciation Bonds will not bear current interest but will accrete interest from the date of deliverythereof, compounded semiannually on February 1 and August 1 of each year, commencing on February 1,2011, at the applicable Accretion Rate set forth on the inside front cover page hereof to the ConversionDate, assuming that in any such semiannual period the sum of such compounded accreted interest and theinitial principal amount thereof (such sum being herein called the “Accreted Value”) increases in equaldaily amounts on the basis of a 360-day year consisting of 12, 30-day months. No payment will be madeto the Owners of the Convertible Capital Appreciation Bonds on the Conversion Date. After theConversion Date, interest on the Convertible Capital Appreciation Bonds will accrue on the ConversionValue thereof from the Conversion Date, and will be payable semiannually on February 1 and August 1(each a “Interest Payment Date”) of each year, commencing on the February 1 or August 1 immediatelysucceeding the Conversion Date. The Accreted Value of a Convertible Capital Appreciation Bond as ofthe Conversion Date is its “Conversion Value.” See the maturity schedule on the inside front cover pagehereof and the Tables of Accreted Values shown in Appendix H hereto.

After the Conversion Date, each Convertible Capital Appreciation Bonds shall bear interest fromthe Interest Payment Date next preceding the date of authentication thereof unless it is authenticated as ofa day during the period from the 16th day of the month next preceding any Interest Payment Date to thatInterest Payment Date, inclusive, in which event it shall bear interest from such Interest Payment Date, orit is authenticated on or before 15th day of the month next preceding the first Interest Payment Dateimmediately succeeding the Conversion Date, in which event it shall bear interest from the ConversionDate.

The principal of the Current Interest Bonds, the Maturity Value of the Capital AppreciationBonds and the Conversion Value of the Convertible Capital Appreciation Bonds shall be payable inlawful money of the United States of America to the registered owner thereof (the “Owner” or“Bondowner”), upon the surrender thereof at the designated corporate trust office of the U.S. BankNational Association, as the initial authenticating agent, bond registrar, transfer agent and paying agentwith respect to the Bonds (the “Paying Agent”). The interest on the Current Interest Bonds and, after theConversion Date, the Convertible Capital Appreciation Bonds shall be payable in lawful money of theUnited States of America to the person whose name appears on the bond registration books of the PayingAgent as the registered owner thereof as of the close of business on the 15th day of the month nextpreceding any Interest Payment Date (a “Record Date”), such interest to be paid by check or draft mailedon such Interest Payment Date to such registered owner at such registered owner’s address as it appearson such registration books or at such address as the registered owner may have filed with the Paying

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Agent for that purpose. The interest payments on the Current Interest Bonds and, after the ConversionDate, the Convertible Capital Appreciation Bonds shall be made in immediately available funds (e.g., bywire transfer) to any registered owner of at least $1,000,000 of outstanding Current Interest Bonds orConversion Value of Convertible Capital Appreciation Bonds, as applicable, who shall have requested inwriting such method of payment of interest on the Current Interest Bonds or Convertible CapitalAppreciation Bonds, as applicable.

So long as all outstanding Bonds are held in book-entry form and registered in the name of asecurities depository or its nominee, all payments of interest, Conversion Value, Maturity Value, principaland premium, if any, on the Bonds and all notices with respect to such Bonds shall be made and given tosuch securities depository or its nominee and not to beneficial owners. So long as the Bonds are held byCede & Co., as nominee of DTC, payment shall be made by wire transfer. See Appendix G – “BOOK-ENTRY ONLY SYSTEM.”

Redemption

Optional Redemption. The Current Interest Bonds are subject to redemption prior to theirrespective stated maturity date, at the option of the District, from any source of available funds, as awhole or in part on any date on or after August 1, 2020, at a redemption price equal to the principalamount of the Current Interest Bonds called for redemption, together with interest accrued thereon to thedate fixed for redemption, without premium.

The Capital Appreciation Bonds are not subject to optional redemption prior to maturity.

The Convertible Capital Appreciation Bonds are subject to redemption prior to their respectivestated maturity dates, at the option of the District, from any source of available funds, as a whole or inpart on any date on or after August 1, 2026, at a redemption price equal to the Conversion Value of theConvertible Capital Appreciation Bonds called for redemption, together with interest accrued thereon tothe date fixed for redemption, without premium.

Mandatory Sinking Fund Redemption. The $4,533,806.70 Capital Appreciation Term Bondsmaturing on August 1, 2037, are subject to redemption prior to maturity from mandatory sinking fundpayments on August 1 of each year, on and after August 1, 2036, at a redemption price equal to theAccreted Value thereof as of the date fixed for redemption, without premium. The Accreted Valuerepresented by such Bonds to be so redeemed and the dates therefor and the final payment date is asindicated in the following table:

Redemption Date(August 1)

Accreted Valueto be Redeemed

2036 $11,387,709.602037† 12,090,000.00

____________________† Maturity.

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The $10,976,800.55 Capital Appreciation Term Bonds maturing on August 1, 2042, are subject toredemption prior to maturity from mandatory sinking fund payments on August 1 of each year, on andafter August 1, 2038, at a redemption price equal to the Accreted Value thereof as of the date fixed forredemption, without premium. The Accreted Value represented by such Bonds to be so redeemed and thedates therefor and the final payment date is as indicated in the following table:



2038 $12,835,214.002039 13,625,610.752040 14,464,430.402041 15,354,891.752042† 16,295,000.00

____________________† Maturity.

The $6,323,356.80 Capital Appreciation Term Bonds maturing on August 1, 2045, are subject toredemption prior to maturity from mandatory sinking fund payments on August 1 of each year, on andafter August 1, 2043, at a redemption price equal to the Accreted Value thereof as of the date fixed forredemption, without premium. The Accreted Value represented by such Bonds to be so redeemed and thedates therefor and the final payment date is as indicated in the following table:



2043 $17,293,572.002044 18,349,627.202045† 19,470,000.00

____________________† Maturity.

The $7,177,149.70 Convertible Capital Appreciation Term Bonds maturing on August 1, 2035,are subject to redemption prior to maturity from mandatory sinking fund payments on August 1 of eachyear, on and after August 1, 2034, at a redemption price equal to the Conversion Value thereof, togetherwith accrued interest to the date fixed for redemption, without premium. The Conversion Valuerepresented by such Bonds to be so redeemed and the dates therefor and the final payment date is asindicated in the following table:


Conversion Valueto be Redeemed

2034 $ 3,235,000.002035† 10,135,000.00

____________________† Maturity.

The Conversion Value to be redeemed in each year shown above will be reduced on a pro ratabasis, in integral multiples of $5,000, by any portion of such Convertible Capital Appreciation TermBonds optionally redeemed prior to the mandatory sinking fund redemption date.

Selection of Bonds for Redemption. Whenever provision is made for redemption of Bonds andless than all Bonds are to be redeemed, the Paying Agent, upon written instruction from the District, willselect Bonds for redemption as so directed and if not directed, in inverse order of maturity. Within a

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maturity, the Paying Agent will select Bonds for redemption by lot. Redemption by lot shall be in suchmanner as the Paying Agent will determine. The portion of any Current Interest Bond to be redeemed inpart will be in denominations of $5,000 principal amount. The portion of any Convertible CapitalAppreciation Bond to be redeemed in part will be in integral multiples of the Accreted Value per $5,000Conversion Value thereof.

Notice of Redemption. Notice of redemption of any Bond will be given at least 30 days, but notmore than 45 days, prior to the redemption date (i) by registered or certified mail, postage prepaid, to therespective Owners of Bonds designated for redemption, at the addresses appearing on the bondregistration books, (ii) by registered or certified mail, postage prepaid, telephonically confirmed facsimiletransmission or overnight delivery service, to the securities depository for the Bonds (initially, DTC), (iii)by registered or certified mail, postage prepaid or overnight delivery service, to one information service(Financial Information, Inc.’s Financial Daily Called Bond Service; Mergent, Inc.’s Called BondDepartment; or Standard & Poor’s J.J. Kenny Information Services’ Called Bond Service), and (iv) asmay be further required in accordance with the Continuing Disclosure Certificate. See Appendix D –“FORM OF CONTINUING DISCLOSURE CERTIFICATE.”

Each notice of redemption will contain the following information: (i) the Bonds or designatedportions thereof (in the case of redemption of the Bonds in part but not in whole) which are to beredeemed, (ii) the date of redemption, (iii) the place or places where the redemption will be made,including the name and address of the Paying Agent, (iv) the redemption price, (v) the CUSIP numbers (ifany) assigned to the Bonds to be redeemed, (vi) the bond numbers of the Bonds to be redeemed in wholeor in part and, in the case of any Bond to be redeemed in part only, the principal amount, ConversionValue or Accreted Value of such Bond to be redeemed, and (vii) the original issue date, interest rate orAccretion Rate and stated maturity date of each Bond to be redeemed in whole or in part. The Resolutionprovides that such redemption notice shall further state that on the specified date there shall become dueand payable upon each Bond or portion thereof being redeemed at the redemption price thereof, togetherwith the interest accrued or accreted to the redemption date, and that from and after such date, interestwith respect thereto shall cease to accrue or accrete.

The Resolution provides that neither failure to receive or failure to publish any redemption noticenor any defect in any such redemption notice so given will affect the sufficiency of the proceedings forthe redemption of the affected Bonds.

Partial Redemption of Bonds. Upon the surrender of any Bond redeemed in part only, the PayingAgent will execute and deliver to the Owner thereof a new Bond or Bonds of like tenor and maturity andof authorized denominations equal in principal amount to the unredeemed portion of the Bondsurrendered. Such partial redemption is valid upon payment of the amount required to be paid to suchOwner, and the County and the District will be released and discharged thereupon from all liability to theextent of such payment.

Effect of Notice of Redemption. When notice of redemption has been given as described above,and the moneys for the redemption (including the interest to the applicable date of redemption) have beenset aside in the interest and sinking fund of the District within the San Bernardino County treasury (the“Debt Service Fund”), the Bonds to be redeemed will become due and payable on such date ofredemption. The Resolution provides that, if on such redemption date, money for the redemption of all theBonds to be redeemed as described above, together with interest accrued or accreted to such redemptiondate, shall be held by the Paying Agent so as to be available therefor on such redemption date, and ifnotice of redemption thereof shall have been given as described above, then from and after suchredemption date, interest with respect to the Bonds to be redeemed shall cease to accrue or accrete and

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become payable. All money held by or on behalf of the Paying Agent for the redemption of Bonds shallbe held in trust for the account of the Owners of the Bonds so to be redeemed.

Defeasance of Bonds

The Resolution provides that the District may defease all or any portion of the outstandingmaturities of the Bonds prior to maturity in the following ways: (i) by irrevocably depositing with anindependent escrow agent selected by the District an amount of cash which together with amounts then ondeposit in the Debt Service Fund is sufficient to pay all Bonds outstanding and designated for defeasance,including all principal, Maturity Value, Conversion Value and interest and premium, if any; or (ii) byirrevocably depositing with an independent escrow agent selected by the District noncallable GovernmentObligations (defined below) together with cash, if required, in such amount as will, in the opinion of anindependent certified public accountant, together with interest to accrue thereon and moneys then ondeposit in the Debt Service Fund together with the interest to accrue thereon, be fully sufficient to pay anddischarge all Bonds outstanding and designated for defeasance (including all principal, Maturity Value,Conversion Value and interest represented thereby and redemption premiums, if any) at or before theirmaturity date. The Resolution provides that if either of the above provisions is met, then, notwithstandingthat any of such Bonds shall not have been surrendered for payment, all obligations of the District withrespect to all such designated outstanding Bonds shall cease and terminate, except only the obligation ofthe Paying Agent or an independent escrow agent selected by the District to pay or cause to be paid fromfunds deposited pursuant to clause (i) or (ii) above, to the Owners of such designated Bonds not sosurrendered and paid all sums due with respect thereto.

The Resolution provides that, for purposes of these defeasance provisions, the term “GovernmentObligations” means direct and general obligations of the United States of America (which may consist ofobligations of the Resolution Funding Corporation that constitute interest strips), or obligations that areunconditionally guaranteed as to principal and interest by the United States of America, or “prerefunded”municipal obligations rated in the highest rating category by Moody’s Investors Services, Inc.(“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”). The Resolution provides that, in the case ofdirect and general obligations of the United States of America, Government Obligations shall includeevidences of direct ownership of proportionate interests in future interest or principal payments of suchobligations, and provides that investments in such proportionate interests must be limited tocircumstances where (i) a bank or trust company acts as custodian and holds the underlying United Statesobligations; (ii) the owner of the investment is the real party in interest and has the right to proceeddirectly and individually against the obligor of the underlying United States obligations; and (iii) theunderlying United States obligations are held in a special account, segregated from the custodian’sgeneral assets, and are not available to satisfy any claim of the custodian, any person claiming through thecustodian, or any person to whom the custodian may be obligated; provided that such obligations arerated or assessed “AAA” by S&P or “Aaa” by Moody’s.

Application and Investment of Bond Proceeds

The proceeds from the sale of the Bonds, to the extent of the principal amount thereof, will bedeposited in the San Bernardino County treasury to the credit of the building fund of the District (the“Building Fund”) and shall be accounted for separately from all other District and San Bernardino Countyfunds. Such proceeds shall be applied solely for the purposes for which the Bonds were authorized. Anypremium or accrued interest received by the District will be deposited in the Debt Service Fund of theDistrict in the San Bernardino County treasury. Interest and earnings on each fund will accrue to thatfund.

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All funds held by the San Bernardino County treasurer in the Building Fund are expected to beinvested on behalf of the District by San Bernardino County in such investments as are authorized bySection 53601 and following of the California Government Code, consistent with the investment policy ofthe County. See Appendix E – “SUMMARY OF COUNTY OF SAN BERNARDINO INVESTMENTPOLICIES AND PRACTICES AND DESCRIPTION OF INVESTMENT POOL.” See also Appendix F– “COUNTY INVESTMENT POLICY.” The District may direct that certain investments in the BuildingFund be deposited with a state or national bank or trust company located within the State or with theFederal Reserve Bank of San Francisco or any branch thereof within the State, or with any FederalReserve bank or with any state or national bank located in any city designated as a reserve city by theBoard of Governors of the Federal Reserve System in accordance with Sections 41015 and 41016 of theCalifornia Education Code.

Estimated Sources and Uses of Funds

The proceeds of the Bonds are expected to be applied as follows:

COLTON JOINT UNIFIED SCHOOL DISTRICT(San Bernardino and Riverside Counties, California)Election of 2008 General Obligation Bonds, Series B

Estimated Sources and Uses of Funds

Sources of Funds:

Par Amount of Bonds $41,938,348.45Plus Net Original Issue Premium 1,401,404.55

Total Sources of Funds $43,339,753.00

Uses of Funds:Deposit to Building Fund $41,938,348.45Costs of Issuance(1) 1,398,035.22Deposit to Debt Service Fund(2) 3,369.33

Total Uses of Funds $43,339,753.00

_________________(1) Includes underwriters’ discount, Bond Counsel, Disclosure Counsel, Financial Advisor and other consultant fees, bond insurance

premium, rating agency fees, initial Paying Agent fees, printing fees and other miscellaneous fees and expenses.(2) Consists of the portion of the premium received by the District.

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Debt Service

Debt service on the Bonds, assuming no early redemptions, is as shown in the following table.

COLTON JOINT UNIFIED SCHOOL DISTRICT(San Bernardino and Riverside Counties, California)Election of 2008 General Obligation Bonds, Series B

Debt Service

Current Interest Bonds Capital Appreciation Bonds Convertible Capital Appreciation Bonds

YearEnding

August 1 PrincipalCurrentInterest Principal

Interest Paid atMaturity Principal

CurrentInterest

Interest Paidat Maturity

Annual DebtService

-- -- --2011 -- $ 295,426.39 -- -- -- -- -- $ 295,426.392012 -- 335,500.00 -- -- -- -- -- 335,500.002013 -- 335,500.00 $ 10,722.60 $ 4,277.40 -- -- -- 350,500.002014 -- 335,500.00 22,267.00 12,733.00 -- -- -- 370,500.002015 -- 335,500.00 33,973.20 26,026.80 -- -- -- 395,500.002016 -- 335,500.00 45,353.70 44,646.30 -- -- -- 425,500.002017 -- 335,500.00 51,577.50 63,422.50 -- -- -- 450,500.002018 -- 335,500.00 59,874.00 90,126.00 -- -- -- 485,500.002019 -- 335,500.00 63,945.00 116,055.00 -- -- -- 515,500.002020 -- 335,500.00 113,821.20 246,178.80 -- -- -- 695,500.002021 -- 335,500.00 157,578.40 402,421.60 -- -- -- 895,500.002022 -- 335,500.00 -- -- -- $ 775,460.00 -- 1,110,960.002023 -- 335,500.00 51,264.70 178,735.30 -- 775,460.00 -- 1,340,960.002024 -- 335,500.00 94,225.75 380,774.25 -- 775,460.00 -- 1,585,960.002025 -- 335,500.00 129,764.25 605,235.75 -- 775,460.00 -- 1,845,960.002026 -- 335,500.00 161,048.00 863,952.00 -- 775,460.00 -- 2,135,960.002027 -- 335,500.00 432,042.75 892,957.25 -- 775,460.00 -- 2,435,960.002028 -- 335,500.00 598,514.20 1,056,485.80 -- 775,460.00 -- 2,765,960.002029 -- 335,500.00 668,847.95 1,336,152.05 -- 775,460.00 -- 3,115,960.002030 -- 335,500.00 741,893.60 1,638,106.40 -- 775,460.00 -- 3,490,960.002031 -- 335,500.00 802,447.00 1,977,553.00 -- 775,460.00 -- 3,890,960.002032 -- 335,500.00 858,321.90 2,351,678.10 -- 775,460.00 -- 4,320,960.002033 -- 335,500.00 907,664.40 2,762,335.60 -- 775,460.00 -- 4,780,960.002034 -- 335,500.00 212,087.60 707,912.40 $1,736,580.35 775,460.00 $1,498,419.65 5,265,960.002035 -- 335,500.00 -- -- 5,440,569.35 587,830.00 4,694,430.65 11,058,330.002036 -- 335,500.00 2,269,712.40 9,117,997.20 -- -- -- 11,723,209.602037 -- 335,500.00 2,264,094.30 9,825,905.70 -- -- -- 12,425,500.002038 -- 335,500.00 2,210,210.80 10,625,003.20 -- -- -- 13,170,714.002039 -- 335,500.00 2,202,852.35 11,422,758.40 -- -- -- 13,961,110.752040 -- 335,500.00 2,195,493.90 12,268,936.50 -- -- -- 14,799,930.402041 -- 335,500.00 2,188,135.45 13,166,756.30 -- -- -- 15,690,391.752042 -- 335,500.00 2,180,108.05 14,114,891.95 -- -- -- 16,630,500.002043 -- 335,500.00 2,117,484.00 15,176,088.00 -- -- -- 17,629,072.002044 -- 335,500.00 2,107,785.60 16,241,841.60 -- -- -- 18,685,127.202045 -- 335,500.00 2,098,087.20 17,371,912.80 -- -- -- 19,805,500.002046 $6,710,000.00 335,500.00 -- -- -- -- -- 7,045,500.00

Total: $6,710,000.00 $12,037,926.39 $28,051,198.75 $145,089,856.95 $7,177,149.70 $10,668,810.00 $6,192,850.30 $215,927,792.09

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Outstanding General Obligation Bonds; Aggregate Debt Service

In addition to the Bonds, the District has outstanding four additional series of general obligations,each of which is secured by ad valorem taxes upon all property subject to taxation by the District. Debtservice on all of the District’s outstanding general obligation bonds, including the Bonds, assuming noearly redemptions, is as shown in the following table.

COLTON JOINT UNIFIED SCHOOL DISTRICT(San Bernardino and Riverside Counties, California)General Obligation Bonds - Aggregate Debt Service

YearEnding

August 1, 2001A Bonds 2001B Bonds 2001C Bonds(1) 2008A Bonds 2008B Bonds

Total Annual DebtService

2011 $2,396,800.00 $ 955,717.50 $2,813,331.25 $2,726,406.26 $ 295,426.39 $ 9,187,681.402012 2,389,100.00 1,055,717.50 3,415,625.00 2,731,406.26 335,500.00 9,927,348.762013 2,381,350.00 1,156,717.50 3,323,325.00 2,776,406.26 350,500.00 9,988,298.762014 2,371,037.50 1,268,517.50 3,231,737.50 2,881,406.26 370,500.00 10,123,198.762015 2,371,537.50 1,370,517.50 3,116,400.00 3,051,406.26 395,500.00 10,305,361.262016 2,364,037.50 1,482,037.50 3,019,537.50 3,226,406.26 425,500.00 10,517,518.762017 2,389,037.50 1,562,812.50 2,881,362.50 3,421,406.26 450,500.00 10,705,118.762018 2,339,325.00 1,723,281.26 2,847,531.25 3,621,406.26 485,500.00 11,017,043.772019 2,331,500.00 1,849,356.26 2,698,306.25 3,836,406.26 515,500.00 11,231,068.772020 2,324,825.00 1,970,281.26 2,576,050.00 3,916,406.26 695,500.00 11,483,062.522021 2,314,025.00 2,102,018.76 2,469,712.50 3,994,206.26 895,500.00 11,775,462.522022 2,309,100.00 2,233,518.76 2,344,425.00 4,074,456.26 1,110,960.00 12,072,460.022023 2,434,500.00 2,237,250.00 2,089,256.25 4,155,056.26 1,340,960.00 12,257,022.512024 2,560,225.00 2,242,500.00 1,959,600.00 4,236,750.00 1,585,960.00 12,585,035.002025 2,683,587.50 2,258,250.00 1,837,175.00 4,328,231.26 1,845,960.00 12,953,203.762026 2,824,050.00 2,258,750.00 1,677,900.00 4,408,425.00 2,135,960.00 13,305,085.002027 - 5,229,500.00 4,459,656.25 4,502,331.26 2,435,960.00 16,627,447.512028 - 5,375,000.00 1,575,000.00 4,588,606.26 2,765,960.00 14,304,566.262029 - 2,600,000.00 1,425,000.00 4,676,981.26 3,115,960.00 11,817,941.262030 - - 4,200,000.00 4,771,650.00 3,490,960.00 12,462,610.002031 - - 6,800,000.00 4,866,537.50 3,890,960.00 15,557,497.502032 - - 6,800,000.00 4,965,837.50 4,320,960.00 16,086,797.502033 - - 6,800,000.00 5,063,475.00 4,780,960.00 16,644,435.002034 - - 6,800,000.00 5,168,643.76 5,265,960.00 17,234,603.762035 - - 6,800,000.00 - 11,058,330.00 17,858,330.002036 - - 6,795,000.00 - 11,723,209.60 18,518,209.602037 - - 6,795,000.00 - 12,425,500.00 19,220,500.002038 - - 6,795,000.00 - 13,170,714.00 19,965,714.002039 - - - - 13,961,110.75 13,961,110.752040 - - - - 14,799,930.40 14,799,930.402041 - - - - 15,690,391.75 15,690,391.752042 - - - - 16,630,500.00 16,630,500.002043 - - - - 17,629,072.00 17,629,072.002044 - - - - 18,685,127.20 18,685,127.202045 - - - - 19,805,500.00 19,805,500.002046 - - - - 7,045,500.00 7,045,500.00

Total: $38,784,037.50 $40,931,743.80 $108,345,931.25 $95,990,250.18 $215,927,792.09 $499,979,754.82

_________________(1) The 2001C Bonds mature on February 1; the annual debt service in this table is shown based on a year ending August 1.

On September 25, 2001, the voters of the District approved $102,000,000 principal amount ofbonds (the “2001 Authorization”). On April 10, 2002, the District issued $28,700,000 aggregate initialprincipal amount of its 2001 General Obligation Bonds, Series A (the “2001A Bonds”) as the District’s

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first series under the 2001 Authorization. On July 14, 2004, the District issued $23,177,726 aggregateinitial principal amount of its 2001 General Obligation Bonds, Series B (the “2001B Bonds”) as theDistrict’s second series under the 2001 Authorization. On January 11, 2006, the District issued$50,122,151 aggregate initial principal amount of its 2001 General Obligation Bonds, Series C (the“2001C Bonds”) as the District’s third and final series under the 2001 Authorization. At an election heldon November 4, 2008, the District received authorization to issue $225,000,000 principal amount ofbonds (the “2008 Authorization”). On October 27, 2009, the District issued $48,999,050.25 aggregateinitial principal amount of its Election of 2008 General Obligation Bonds, Series A (the “2008A Bonds”)as the District’s first series under the 2008 Authorization. See also Appendix A – “INFORMATIONRELATING TO THE DISTRICT’S OPERATIONS AND BUDGET – DISTRICT FINANCIALMATTERS – District Debt Structure – General Obligation Bonds.”

SECURITY AND SOURCE OF PAYMENT FOR THE BONDS

General

In order to provide sufficient funds for repayment of principal and interest when due on a schooldistrict’s bonds, the board of supervisors of the county, the superintendent of schools of which hasjurisdiction over such school district, is empowered and is obligated to levy ad valorem taxes upon allproperty subject to taxation by such school district, without limitation as to rate or amount (except as tocertain personal property which is taxable at limited rates). Such taxes are in addition to other taxes leviedupon property within the school district. In the case of a school district, like the District, lying in two ormore counties, the assessor of each of the counties in which the district lies, must annually certify to theboard of supervisors of each of the counties in which any portion of the school district is situated, theassessed value of all taxable property in the county situated in the school district, and the ad valorem taxmust be levied according to the ratio which the assessed value of the property in the school district in anycounty bears to the total assessed value of the property in the school district. Each board of supervisorsmust levy upon the property of the school district within its own county the rate of tax that will besufficient to raise not less than the amount needed to pay the interest and any portion of the principal ofthe bonds that is to become due during the year.

Accordingly, each of the Board of Supervisors of San Bernardino County and the Board ofSupervisors of Riverside County must levy upon the property of the District within its own county therate of tax that will be sufficient to provide sufficient funds for repayment of principal, Maturity Value,Conversion Value and interest when due on the Bonds according the ratio which the assessed value of theproperty in the District in its own county bears to the total assessed value of the property in the District.When collected, the tax revenues will be deposited by both counties in the District’s Debt Service Fund,which is required to be maintained by San Bernardino County as the county, the superintendent of schoolsof which has jurisdiction over the District, and to be used solely for the payment of bonds of the District.See Appendix E – “SUMMARY OF COUNTY OF SAN BERNARDINO INVESTMENT POLICIESAND PRACTICES AND DESCRIPTION OF INVESTMENT POOL.” See also Appendix F –“COUNTY INVESTMENT POLICY.”

Property Taxation System

Property tax revenues result from the application of the appropriate tax rate to the total assessedvalue of taxable property in the District. School districts receive property taxes for payment of voter-approved bonds as well as for general operating purposes.

Local property taxation is the responsibility of various county officers. School districts whoseboundaries extend into more than one county are treated for property tax purposes as separate

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jurisdictions in each county in which they are located. For each school district located in a county, thecounty assessor computes the value of locally assessed taxable property. Based on the assessed value ofproperty and the scheduled debt service on outstanding bonds in each year, the county auditor-controllercomputes the rate of tax necessary to pay such debt service, and presents the tax rolls (including rates oftax for all taxing jurisdictions in the county) to the county board of supervisors for approval. The countytax collector prepares and mails tax bills to taxpayers and collects the taxes. In addition, the treasurer ofthe county, the superintendent of schools of which has jurisdiction over the school district, holds schooldistrict funds, including taxes collected for payment of school bonds, and is charged with payment ofprincipal, Maturity Value, Conversion Value and interest on the bonds when due, as ex officio treasurer ofthe school district.

Assessed Valuation of Property Within the District

Taxable property located in the District has a 2009-10 assessed value of $7,997,945,881 (beforeredevelopment increment). (See assessed valuation tables below for the District’s 2010-11 assessedvaluation, the Riverside County portion of which is a preliminary number and subject to change.) Allproperty (real, personal and intangible) is taxable unless an exemption is granted by the CaliforniaConstitution or United States law. Under the State Constitution, exempt classes of property includehousehold and personal effects, intangible personal property (such as bank accounts, stocks and bonds),business inventories, and property used for religious, hospital, scientific and charitable purposes. TheState Legislature may create additional exemptions for personal property, but not for real property. Mosttaxable property is assessed by the assessor of the county in which the property is located. Some specialclasses of property are assessed by the State Board of Equalization, as described below under the heading,State-Assessed Property.

Taxes are levied for each fiscal year on taxable real and personal property assessed as of thepreceding January 1, at which time the lien attaches. The assessed value is required to be adjusted duringthe course of the year when property changes ownership or new construction is completed. State law alsoaffords an appeal procedure to taxpayers who disagree with the assessed value of any property. Whennecessitated by changes in assessed value during the course of a year, a supplemental assessment isprepared so that taxes can be levied on the new assessed value before the next regular assessment roll iscompleted.

State-Assessed Property. Under the Constitution, the State Board of Equalization assessesproperty of State-regulated transportation and communications utilities, including railways, telephone andtelegraph companies, and companies transmitting or selling gas or electricity. The Board of Equalizationalso is required to assess pipelines, flumes, canals and aqueducts lying within two or more counties. Thevalue of property assessed by the Board of Equalization is allocated by a formula to local jurisdictions inthe county, including school districts, and taxed by the local county tax officials in the same manner as forlocally assessed property. Taxes on privately owned railway cars, however, are levied and collecteddirectly by the Board of Equalization. Property used in the generation of electricity by a company thatdoes not also transmit or sell that electricity is taxed locally instead of by the Board of Equalization. Thus,the reorganization of regulated utilities and the transfer of electricity-generating property to non-utilitycompanies, as often occurred under electric power deregulation in California, affects how those assets areassessed, and which local agencies benefit from the property taxes derived. In general, the transfer ofState-assessed property located in the District to non-utility companies will increase the assessed value ofproperty in the District, since the property’s value will no longer be divided among all taxing jurisdictionsin the applicable county. The transfer of property located and taxed in the District to a State-assessedutility will have the opposite effect: generally reducing the assessed value in the District, as the value isshared among the other jurisdictions in the applicable county. The District is unable to predict futuretransfers of State-assessed property in the District and the Counties, the impact of such transfers on its

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utility property tax revenues, or whether future legislation or litigation may affect ownership of utilityassets, the State’s methods of assessing utility property, or the method by which tax revenues of utilityproperty is allocated to local taxing agencies, including the District.

Locally taxed property is classified either as “secured” or “unsecured,” and is listed accordinglyon separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containingState-assessed property and property (real or personal) for which there is a lien on real property sufficient,in the opinion of the county assessor, to secure payment of the taxes. All other property is “unsecured,”and is assessed on the “unsecured roll.” Secured property assessed by the State Board of Equalization iscommonly identified for taxation purposes as “utility” property.

Under California law, a city or county can create a redevelopment agency in territory within oneor more school districts. Upon formation of a “project area” of a redevelopment agency, most property taxrevenues attributable to the growth in assessed value of taxable property within the project area (known as“tax increment”) belong to the redevelopment agency, causing a loss of tax revenues to other local taxingagencies, including school districts, from that time forward. However, taxes collected for payment of debtservice on school bonds are not affected or diverted by the operation of a redevelopment agency projectarea. Moreover, some school districts have negotiated “pass-through agreements” with their localredevelopment agencies, entitling the district to receive a portion of the tax increment revenue that wouldotherwise belong to the redevelopment agency (provided such revenue is not pledged and needed to paydebt service on redevelopment agency tax-increment bonds). In some cases the pass-through is mandatedby statute. See APPENDIX A – “INFORMATION RELATING TO THE DISTRICT’S OPERATIONSAND BUDGET—DISTRICT FINANCIAL MATTERS—Tax Increment Revenues.” There are 14 projectareas established within the territory of the District.

Shown in the following tables are the assessed valuations of the various classes of property in theDistrict in recent years.

COLTON JOINT UNIFIED SCHOOL DISTRICT(San Bernardino and Riverside Counties, California)

Assessed ValuationsFiscal Years 2004-05 through 2010-11

County of San Bernardino Portion

Fiscal Year Local Secured Utility Unsecured

Total BeforeRedevelopment

Increment

Total AfterRedevelopment

Increment(1)

2004-05 $ 4,634,807,481 $ 36,265,754 $ 444,876,592 $ 5,115,949,827 $ 2,588,202,6482005-06 5,369,659,011 25,115,241 510,416,377 5,905,190,629 2,895,741,0382006-07 6,292,592,394 22,441,645 508,259,896 6,823,293,935 3,251,087,6192007-08 7,490,571,139 14,200,411 584,091,064 8,088,862,614 3,714,486,6872008-09 7,925,532,929 14,115,537 627,479,297 8,567,127,763 3,945,441,5722009-10 7,209,867,555 13,866,914 670,347,398 7,894,081,867 3,598,181,9842010-11 6,938,201,224 14,469,517 653,596,977 7,606,267,718 3,418,832,011

___________________(1) Special (voter-approved) ad valorem property taxes collected for payment of debt service on school district bonds are based on assessed

valuation before reduction for redevelopment increment and such special ad valorem property taxes are not affected or diverted by theoperation of a redevelopment agency project area.

Source: Fiscal years 2004-05 through 2009-10 California Municipal Statistics, Inc.; Fiscal year 2010-11 County of San Bernardino.

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County of Riverside Portion



Increment


Increment(1)

2004-05 $ 74,173,533 - $ 248,597 $ 74,422,130 $ 74,422,1302005-06 85,841,193 - 205,079 86,046,272 86,046,2722006-07 99,662,436 - 227,239 99,889,675 99,889,6752007-08 109,917,458 - 202,186 110,119,644 110,119,6442008-09 112,309,846 - 205,330 112,515,176 112,515,1762009-10 103,659,278 - 204,736 103,864,014 103,864,0142010-11(2) 100,971,237 - 207,465 101,178,702 101,178,702



(2) Riverside County has reported that, although no changes are expected, the Riverside County portion of the District’s 2010-11 assessedvaluation is preliminary and subject to change.

Source: Fiscal years 2004-05 through 2009-10 California Municipal Statistics, Inc.; Fiscal year 2010-11 County of Riverside.

Total District



Increment


Increment(1)

2004-05 $ 4,708,981,014 $ 36,265,754 $ 445,125,189 $ 5,190,371,957 $ 2,662,624,7782005-06 5,455,500,204 25,115,241 510,621,456 5,991,236,901 2,981,787,3102006-07 6,392,254,830 22,441,645 508,487,135 6,923,183,610 3,350,977,2942007-08 7,600,488,597 14,200,411 584,293,250 8,198,982,258 3,824,606,3312008-09 8,037,842,775 14,115,537 627,684,627 8,679,642,939 4,057,956,7482009-10 7,313,526,833 13,866,914 670,552,134 7,997,945,881 3,702,045,9982010-11(2) 7,039,172,461 14,469,517 653,804,442 7,707,446,420 3,429,257,481



(2) Riverside County has reported that, although no changes are expected, the Riverside County portion of the District’s 2010-11 assessedvaluation is preliminary and subject to change.

Source: Fiscal years 2004-05 through 2009-10 California Municipal Statistics, Inc.; Fiscal year 2010-11 County of San Bernardino and Countyof Riverside

Assessments may be adjusted during the course of the year when real property changes ownershipor new construction is completed. Assessments may also be appealed by taxpayers seeking a reduction asa result of economic and other factors beyond the District’s control, such as a general market decline inland values, reclassification of property to a class exempt from taxation, whether by ownership or use(such as exemptions for property owned by State and local agencies and property used for qualifiededucational, hospital, charitable or religious purposes), or the complete or partial destruction of taxableproperty caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc.When necessitated by changes in assessed value in the course of a year, taxes are pro-rated for eachportion of the tax year.

Bonding Capacity. As a unified school district, the District may issue bonds in an amount up to2.50% of the assessed valuation of taxable property within its boundaries. Based on the District’s 2010-11assessed valuation, the Riverside County portion of which is a preliminary number and subject to change,the District’s fiscal year 2010-11 gross bonding capacity (also commonly referred to as the “bondinglimit” or “debt limit”) is approximately $192.68 million and its net bonding capacity is approximately$52.58 million (taking into account current outstanding debt before issuance of the Bonds). Refunding

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bonds may be issued without regard to this limitation; however, once issued, the outstanding principal ofany refunding bonds is included when calculating the District’s bonding capacity.

Assessed Valuation by Land Use. The following table gives a distribution of taxable propertylocated in the District on the 2009-10 tax roll by principal purpose for which the land is used, and theassessed valuation and number of parcels for each use.


Assessed Valuation and Parcels by Land Use

Non-Residential:2009-10

Assessed Valuation(1)% ofTotal

No. ofParcels

% ofTotal

Agricultural $ 9,514,369 0.13% 28 0.09%Commercial 698,069,354 9.54 680 2.18Professional/Office 359,994,147 4.92 262 0.84Industrial 1,431,689,177 19.58 594 1.90Recreational 12,044,433 0.16 20 0.06Government/Social/Institutional 48,817,276 0.67 143 0.46Miscellaneous 23,388,779 0.32 184 0.59

Subtotal Non-Residential $2,583,517,535 35.33% 1,911 6.12%

Residential:Single Family Residence $3,460,783,458 47.32% 21,854 70.03%Condominium/Townhouse 112,712,949 1.54 1,084 3.47Mobile Home 64,826,983 0.89 1,499 4.80Mobile Home Park 49,078,842 0.67 31 0.102-4 Residential Units 158,454,718 2.17 849 2.725+ Residential Units/Apartments 306,841,459 4.20 137 0.44Miscellaneous 9,015,093 0.12 72 0.23

Subtotal Residential $4,161,713,502 56.90% 25,526 81.80%

Vacant Parcels $ 568,295,796 7.77% 3,769 12.08%

TOTAL $7,313,526,833 100.00% 31,206 100.00%

____________________(1) Fiscal year 2009-10 local secured assessed valuation, excluding tax-exempt property; Fiscal year 2010-11 information not yet available.Source: California Municipal Statistics, Inc.

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Assessed Valuation of Single-Family Homes. The following table shows the assessed valuationof single-family homes in the District for fiscal year 2009-10.


Assessed Valuation of Single Family Homes

Per Parcel 2009-10 Assessed Valuation of Single Family Homes

No. of Parcels2009-10 Assessed

ValuationAverage Assessed

ValuationMedian Assessed

Valuation

Single Family Residential 21,853 $3,460,783,458 $158,367 $151,578

2009-10Assessed Valuation

No. ofParcels(1) % of Total

Cumulative% of Total Total Valuation % of Total

Cumulative %of Total

$0 - $24,999 638 2.920% 2.920% $ 9,908,505 0.286 0.286$25,000 - $49,999 1,594 7.294 10.214 58,976,651 1.704 1.990$50,000 - $74,999 1,693 7.747 17.961 106,650,683 3.082 5.072$75,000 - $99,999 1,802 8.246 26.207 157,332,466 4.546 9.618

$100,000 - $124,999 2,364 10.818 37.025 266,472,659 7.700 17.318$125,000 - $149,999 2,621 11.994 49.018 358,892,719 10.370 27.688$150,000 - $174,999 2,782 12.731 61.749 451,134,038 13.036 40.724$175,000 - $199,999 2,297 10.511 72.260 428,385,301 12.378 53.102$200,000 - $224,999 1,880 8.603 80.863 396,493,903 11.457 64.559$225,000 - $249,999 1,334 6.104 86.967 315,692,732 9.122 73.681$250,000 - $274,999 1,038 4.750 91.717 272,052,845 7.861 81.542$275,000 - $299,999 650 2.974 94.692 185,944,200 5.373 86.915$300,000 - $324,999 429 1.963 96.655 132,595,462 3.831 90.746$325,000 - $349,999 188 0.860 97.515 63,064,261 1.822 92.569$350,000 - $374,999 147 0.673 98.188 52,852,880 1.527 94.096$375,000 - $399,999 64 0.293 98.481 24,723,001 0.714 94.810$400,000 - $424,999 85 0.389 98.870 34,960,856 1.010 95.820$425,000 - $449,999 54 0.247 99.117 23,486,755 0.679 96.499$450,000 - $474,999 20 0.092 99.208 9,191,580 0.266 96.765$475,000 - $499,999 22 0.101 99.309 10,646,979 0.308 97.072$500,000 and greater 151 0.691 100.000 101,324,982 2.928 100.000

Total 21,853 100.000% $3,460,783,458 100.000%

(1) Fiscal year 2009-10 improved single family residential parcels; Fiscal year 2010-11 information not yet available. Excludescondominiums and parcels with multiple family units.

___________________Source: California Municipal Statistics, Inc.

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Largest Taxpayers in District. The twenty taxpayers with the greatest combined ownership oftaxable property in the District on the 2009-10 tax roll, and the assessed valuation of all property ownedby those taxpayers in all taxing jurisdictions within the District, are shown below.


Largest 2009-10 Local Secured Taxpayers

Property OwnerPrimary

Land Use2009-10

Assessed ValuePercent of

Total(1)

1. Rancon Realty Fund IV & V Office Building $ 126,396,121 1.73%2. Oakmont El Rivino LLC Planned Industrial Development 93,840,000 1.283. UST-CB Partners LP Industrial 82,699,391 1.134. SP4 Agua Mansa LP Industrial 78,290,100 1.075. Cal East Kline Ranch LP Industrial 73,300,000 1.006. California Portland Cement Co. Industrial 73,272,834 1.007. EAG Properties LLC Industrial 71,000,000 0.978. Francisco Street LP Industrial 61,000,000 0.839. Enterprise Distribution Center LLC Industrial 56,074,232 0.7710. Prologis-MacQuarie U.S. LLC Industrial 52,298,271 0.7211. Granite Sierra Park LP Industrial 51,090,923 0.7012. Wanvog Investments LLC Industrial 42,238,198 0.5813. Headlands Realty Corp. Industrial 40,575,995 0.5514. AMB Institutional Alliance Fund III Industrial 39,500,000 0.5415. Deutsche Bank National Trust Co. Single Family Homes 34,474,905 0.4716. North Waterford Apartments Apartments 33,932,168 0.4617. Fedex Ground Package System Inc. Industrial 31,241,841 0.4318. Roadway Express Inc. Industrial 30,362,223 0.4219. Caleast Franzman LP Industrial 29,994,008 0.4120. Wal-Mart Real Estate Business Trust Commercial Stores 29,693,370 0.41

$1,131,274,580 15.47%

____________________(1) Fiscal year 2009-10 Local Secured Assessed Valuation: $7,313,526,833. Fiscal year 2010-11 largest local secured taxpayer information

not yet available.Source: California Municipal Statistics, Inc.

Tax Rates

The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed1% of the full cash value of the property, and State law requires the full 1% tax to be levied. The levy ofspecial ad valorem property taxes in excess of the 1% levy is permitted as necessary to provide for debtservice payments on school bonds and other voter-approved indebtedness.

The rate of tax necessary to pay fixed debt service on the Bonds in a given year depends on theassessed value of taxable property in that year. (The rate of tax imposed on unsecured property forrepayment of the Bonds is based on the prior year’s secured property tax rate.) Economic and otherfactors beyond the District’s control, such as a general market decline in land values, reclassification ofproperty to a class exempt from taxation, whether by ownership or use (such as exemptions for propertyowned by State and local agencies and property used for qualified educational, hospital, charitable orreligious purposes), or the complete or partial destruction of taxable property caused by natural ormanmade disaster, such as earthquake, flood, fire, toxic dumping, etc., could cause a reduction in theassessed value of taxable property within the District and necessitate a corresponding increase in theannual tax rate to be levied to pay the principal of and interest on the Bonds. Issuance of additionalauthorized bonds in the future might also cause the tax rate to increase.

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Typical Tax Rate Area. The following tables show ad valorem property tax rates for the lastseveral years in four typical Tax Rate Areas of the District (TRA 2-000, TRA 10-032, TRA 16-001, TRA64-027) over the five year period from 2005-06 through 2009-10.


Typical Total Tax Rates per $100 of Assessed ValuationFiscal Years 2005-2006 Through 2009-10

TRA 2-000: Within the City of Colton(1)

2005-06 2006-07 2007-08 2008-09 2009-10

General Tax Rate $1.0000 $1.0000 $1.0000 $1.0000 $1.0000Colton Joint Unified School District .0427 .0753 .0806 .0688 .0985San Bernardino Community College District .0166 .0195 .0127 .0393 .0280

San Bernardino Valley Municipal Water District .1600 .1550 .1650 .1650 .1650

Total Tax Rate 1.2193 1.2498 1.2583 1.2731 $1.2915

TRA 10-032: Within the City of Fontana(2)

2005-06 2006-07 2007-08 2008-09 2009-10



Total Tax Rate 1.2193 1.2498 1.2583 1.2731 $1.2915

TRA 16-001: Within the City of Grand Terrace(3)

2005-06 2006-07 2007-08 2008-09 2009-10



Total Tax Rate 1.2193 1.2498 1.2583 1.2731 $1.2915

TRA 64-027: Within Unincorporated Area(4)

2005-06 2006-07 2007-08 2008-09 2009-10



Total Tax Rate 1.2193 1.2498 1.2583 1.2731 $1.2915

_________________(1) TRA 2-000 comprises approximately 4.66% of the total fiscal year 2009-10 assessed value of the District; Fiscal year 2010-11 information not

yet available.(2) TRA 10-032 comprises approximately 7.61% of the total fiscal year 2009-10 assessed value of the District; Fiscal year 2010-11 information

not yet available.(3) TRA 16-001 comprises approximately 8.85% of the total fiscal year 2009-10 assessed value of the District; Fiscal year 2010-11 information

not yet available.(4) TRA 64-027 comprises approximately 5.85% of the total fiscal year 2009-10 assessed value of the District; Fiscal year 2010-11 information

not yet available.Source: California Municipal Statistics, Inc.

In accordance with the law which permitted the Bonds to be approved by a 55% popular vote,bonds approved by the District’s voters at the November 4, 2008 election may not be issued unless theDistrict projects that repayment of all outstanding bonds approved at the election will require a tax rate nogreater than $60.00 per $100,000 of assessed value. Based on the assessed value of taxable property in theDistrict at the time of issuance of the Bonds, the District projects that the maximum tax rate required to

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repay the Bonds and all other outstanding bonds approved at the November 4, 2008 election will bewithin that legal limit. The tax-rate test applies only when new bonds are issued, and is not a legallimitation upon the authority of the applicable county board of supervisors to levy taxes at such rate asmay be necessary to pay debt service on the Bonds in each year.

Tax Charges and Delinquencies

A school district’s share of the 1% countywide tax is based on the actual allocation of propertytax revenues to each taxing jurisdiction in the county in fiscal year 1978-79, as adjusted according to acomplicated statutory scheme enacted since that time. Revenues derived from special ad valorem taxesfor voter-approved indebtedness, including the Bonds, are reserved to the taxing jurisdiction thatapproved and issued the debt, and may only be used to repay that debt.

The county tax collector prepares the property tax bills. Property taxes on the regular securedassessment roll are due in two equal installments: the first installment is due on November 1, andbecomes delinquent after December 10. The second installment is due on February 1 and becomesdelinquent after April 10. If taxes are not paid by the delinquent date, a 10% penalty attaches and a $10cost is added to unpaid second installments. If taxes remain unpaid by June 30, the tax is deemed to be indefault, and a $15 state redemption fee applies. Interest then begins to accrue at the rate of 1.5% permonth. The property owner has the right to redeem the property by paying the taxes, accrued penalties,and costs within five years of the date the property went into default. If the property is not redeemedwithin five years, it is subject to sale at a public auction by the county tax collector.

Property taxes on the unsecured roll are due in one payment on the lien date, January 1, andbecome delinquent after August 31. A 10% penalty attaches to delinquent taxes on property on theunsecured roll, and an additional penalty of 1.5% per month begins to accrue on November 1. There arealso fees charged for delinquent unsecured property tax bills. To collect unpaid taxes, the county taxcollector may obtain a judgment lien upon and cause the sale of all property owned by the taxpayer in thecounty, and may seize and sell personal property, improvements and possessory interests of the taxpayer.The county tax collector may also bring a civil suit against the taxpayer for payment.

The date on which taxes on supplemental assessments are due depends on when the supplementaltax bill is mailed.

As provided below, the Counties utilize the Alternative Method of Distribution of Tax Levies andCollections and of Tax Sale Proceeds (the “Teeter Plan”) for assessment, levy and distribution of propertytaxes. This method guarantees distribution of 100% of the assessments levied to the taxing entity, with theCounties retaining all penalties and interest. As a result, the Counties do not provide delinquencyinformation with respect to the real property tax charges within the District.

Teeter Plan. The Counties have implemented an alternative method for the distribution ofsecured property taxes to local agencies, known as the “Teeter Plan.” The Teeter Plan provisions are nowset forth in Sections 4701 to 4717 of the California Revenue and Taxation Code. Upon adoption andimplementation of this method by a county board of supervisors, local agencies for which the county actsas “bank” and certain other public agencies and taxing areas located in the county receive annually thefull amount of their share of property taxes on the secured roll, including delinquent property taxes whichhave yet to be collected. While a county benefits from the penalties associated with these delinquent taxeswhen they are paid, the Teeter Plan provides participating local agencies with stable cash flow and theelimination of collection risk.

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To implement a Teeter Plan, the board of supervisors of a county generally must elect to do so byJuly 15 of the fiscal year in which it is to apply. As a separate election, a county may elect to have theTeeter Plan procedures also apply to assessments on the secured roll. The Teeter Plan was effectivebeginning in fiscal year 1996-97 for the County of San Bernardino and was adopted in the County ofRiverside in 1993. The Counties’ Teeter Plan applies to the District and to the Bonds.

The ad valorem property tax to be levied to pay the interest on and principal of the Bonds issubject to the Teeter Plan, beginning in 2009-10. The District will receive 100% of the ad valoremproperty tax levied to pay the Bonds irrespective of actual delinquencies in the collection of the tax by theCounties.

Upon making a Teeter Plan election, a county must initially provide a participating local agencywith 95% of the estimated amount of the then accumulated tax delinquencies (excluding penalties) forthat agency. In the case of the initial year distribution of special taxes and assessments (if a county haselected to include assessments), 100% of the special tax delinquencies (excluding penalties) are to beapportioned to the participating local agency which levied the special tax. After the initial distribution,each participating local agency receives annually 100% of the secured property tax levies to which it isotherwise entitled, regardless of whether the county has actually collected the levies.

If any tax or assessment which was distributed to a Teeter Plan participant is subsequentlychanged by correction, cancellation or refund, a pro rata adjustment for the amount of the change is madeon the records of the tax collector and auditor of the county. Such adjustment for a decrease in the tax orassessment is treated by the Counties as an interest-free offset against future advances of tax levies underthe Teeter Plan.

Once adopted, a county’s Teeter Plan will remain in effect in perpetuity unless the board ofsupervisors orders its discontinuance or unless prior to the commencement of a fiscal year a petition fordiscontinuance is received and joined in by resolutions of the governing bodies of not less than two-thirdsof the participating districts in the county. An electing county may, however, opt to discontinue the TeeterPlan with respect to any levying agency in the county if the board of supervisors, by action taken not laterthan July 15 of a fiscal year, elects to discontinue the procedure with respect to such levying agency andthe rate of secured tax delinquencies in that agency in any year exceeds 3% of the total of all taxes andassessments levied on the secured roll by that agency. The Counties have never discontinued the TeeterPlan with respect to any levying agency.

Direct and Overlapping Debt

Set forth below is a schedule of direct and overlapping debt prepared by California MunicipalStatistics Inc. and effective July 1, 2010 for debt issued as of June 29, 2010. The table is included forgeneral information purposes only. The District has not reviewed this table for completeness or accuracyand makes no representations in connection therewith. The first column in the table names each publicagency which has outstanding debt as of the date of the schedule and whose territory overlaps the Districtin whole or in part. Column two shows the percentage of each overlapping agency’s assessed valuelocated within the boundaries of the District. This percentage, multiplied by the total outstanding debt ofeach overlapping agency (which is not shown in the table) produces the amount shown in column three,which is the apportionment of each overlapping agency’s outstanding debt to taxable property in theDistrict. The schedule generally includes long-term obligations sold in the public credit markets by publicagencies whose boundaries overlap the boundaries of the District. Such long-term obligations generallyare not payable from revenues of the District (except as indicated) nor are they necessarily obligationssecured by land within the District. In many cases, long-term obligations issued by a public agency arepayable only from the general fund or other revenues of such public agency.

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COLTON JOINT UNIFIED SCHOOL DISTRICT(San Bernardino and Riverside Counties, California)Statement Of Direct And Overlapping Bonded Debt

As of July 1, 2010

2009-10 Assessed Valuation: $7,997,945,881Redevelopment Incremental Valuation: 4,295,899,883Adjusted Assessed Valuation: $3,702,045,998

DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 7/1/10Metropolitan Water District 0.005% $ 13,211San Bernardino Community College District 9.538 41,387,264Colton Joint Unified School District 100.000 141,318,927 (1)

Colton Joint Unified School District Community Facilities District No. 2 100.000 4,325,000Agua Mansa Industrial Growth Association Community Facilities District No. 2002-1 45.569 5,743,972City of Colton Community Facilities Districts 100.000 7,834,814City of Fontana Community Facilities Districts 100.000 40,315,000City of Colton 1915 Act Bonds 100.000 250,000

TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $241,188,188

DIRECT AND OVERLAPPING GENERAL FUND DEBT:San Bernardino County General Fund Obligations 3.035% $21,819,981San Bernardino County Pension Obligations 3.035 19,677,744San Bernardino County Flood Control District General Fund Obligations 3.035 3,481,449Riverside County General Fund Obligations 0.068 500,771Riverside County Pension Obligations 0.068 255,068Riverside County Board of Education Certificates of Participation 0.068 4,923Colton Joint Unified School District Certificates of Participation 100.000 6,335,000City of Colton Certificates of Participation 81.759 10,465,152City of Colton Pension Obligations 81.759 24,641,672City of Fontana Certificates of Participation 7.039 3,925,650City of Grand Terrace Certificates of Participation 100.000 2,380,000Other City General Fund Obligations Various 770,052

TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $94,257,462Less: Riverside County self-supporting bonds 10,283

TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $94,247,179

GROSS COMBINED TOTAL DEBT $335,445,650(2)

NET COMBINED TOTAL DEBT $335,435,367

(1) Excludes the Bonds to be sold.(2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease

obligations.

Ratios to 2009-10 Assessed Valuation:Direct Debt ($141,318,927) .....................................................1.77%Total Direct and Overlapping Tax and Assessment Debt .........3.02%

Ratios to Adjusted Assessed Valuation:Combined Direct Debt ($147,653,927)....................................3.99%Gross Combined Total Debt .....................................................9.06%Net Combined Total Debt.........................................................9.06%

STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/10: $0__________________Source: California Municipal Statistics, Inc.

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MUNICIPAL BOND INSURANCE

The Insurance Policy

Concurrently with the issuance of the Bonds, Assured Guaranty Municipal Corp. (formerlyknown as Financial Security Assurance Inc.) (“AGM” or the “Insurer”) will issue its municipal bondinsurance policy (the “Insurance Policy”) for the Bonds. The Insurance Policy guarantees the scheduledpayment of principal, Maturity Value and Conversion Value of and interest on the Bonds when due as setforth in the form of the Insurance Policy included as Appendix I to this Official Statement.

The Insurance Policy is not covered by any insurance security or guaranty fund established underNew York, California, Connecticut or Florida insurance law.

Assured Guaranty Municipal Corp. (Formerly Known as Financial Security Assurance Inc.)

AGM is a New York domiciled financial guaranty insurance company and a wholly ownedsubsidiary of Assured Guaranty Municipal Holdings Inc. (“Holdings”). Holdings is an indirect subsidiaryof Assured Guaranty Ltd. (“AGL”), a Bermuda-based holding company whose shares are publicly tradedand are listed on the New York Stock Exchange under the symbol “AGO”. AGL, through its operatingsubsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructureand structured finance markets. No shareholder of AGL, Holdings or AGM is liable for the obligations ofAGM.

Effective November 9, 2009, Financial Security Assurance Inc. changed its name to AssuredGuaranty Municipal Corp.

AGM’s financial strength is rated “AAA” (negative outlook) by Standard and Poor’s RatingsServices, a Standard & Poor’s Financial Services LLC business (“S&P”) and “Aa3” (negative outlook) byMoody’s Investors Service, Inc. (“Moody’s”). On February 24, 2010, Fitch, Inc. (“Fitch”), at the requestof AGL, withdrew its “AA” (Negative Outlook) insurer financial strength rating of AGM at the thencurrent rating level. Each rating of AGM should be evaluated independently. An explanation of thesignificance of the above ratings may be obtained from the applicable rating agency. The above ratingsare not recommendations to buy, sell or hold any security, and such ratings are subject to revision orwithdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in itssole discretion. Any downward revision or withdrawal of any of the above ratings may have an adverseeffect on the market price of any security guaranteed by AGM. AGM does not guarantee the market priceof the securities it insures, nor does it guarantee that the ratings on such securities will not be revised orwithdrawn.

Current Financial Strength Ratings. On May 17, 2010, S&P published a Research Update inwhich it affirmed its “AAA” counterparty credit and financial strength ratings on AGM. At the sametime, S&P continued its negative outlook on AGM. Reference is made to the Research Update, a copy ofwhich is available at www.standardandpoors.com, for the complete text of S&P’s comments.

In a press release dated February 24, 2010, Fitch announced that, at the request of AGL, it hadwithdrawn the “AA” (Negative Outlook) insurer financial strength rating of AGM at the then currentrating level. Reference is made to the press release, a copy of which is available atwww.fitchratings.com, for the complete text of Fitch’s comments.

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On December 18, 2009, Moody’s issued a press release stating that it had affirmed the “Aa3”insurance financial strength rating of AGM, with a negative outlook. Reference is made to the pressrelease, a copy of which is available at www.moodys.com, for the complete text of Moody’s comments.

There can be no assurance as to any further ratings action that Moody’s or S&P may take withrespect to AGM.

For more information regarding AGM’s financial strength ratings and the risks relating thereto,see AGL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed byAGL with the SEC on March 1, 2010, AGL’s Quarterly Report on Form 10-Q for the quarterly periodended March 31, 2010, which was filed by AGL with the SEC on May 10, 2010, and AGL’s QuarterlyReport on Form 10-Q for the quarterly period ended June 30, 2010, which was filed by AGL with theSEC on August 9, 2010.

Capitalization of AGM. At June 30, 2010, AGM’s consolidated policyholders’ surplus andcontingency reserves were approximately $2,264,680,337 and its total net unearned premium reserve wasapproximately $2,259,557,420, in each case, in accordance with statutory accounting principles.

Incorporation of Certain Documents by Reference. Portions of the following documents filedby AGL with the SEC that relate to AGM are incorporated by reference into this Official Statement andshall be deemed to be a part hereof:

the Annual Report on Form 10-K for the fiscal year ended December 31, 2009(which was filed by AGL with the SEC on March 1, 2010);

the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010(which was filed by AGL with the SEC on May 10, 2010); and

the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010(which was filed by AGL with the SEC on August 9, 2010).

All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuantto Section 13(a), 13(c) or 15(d) of the Securities Exchange Act, as amended, after the filing of the lastdocument referred to above and before the termination of the offering of the Bonds shall be deemedincorporated by reference into this Official Statement and to be a part hereof from the respective dates offiling such documents. Copies of materials incorporated by reference are available over the internet at theSEC’s website at http://www.sec.gov, at AGL’s website at http://www.assuredguaranty.com, or will beprovided upon request to Assured Guaranty Municipal Corp. (formerly known as Financial SecurityAssurance Inc.): 31 West 52nd Street, New York, New York 10019, Attention: CommunicationsDepartment (telephone (212) 826-0100).

Any information regarding AGM included herein under the caption “MUNICIPAL BONDINSURANCE – Assured Guaranty Municipal Corp. (formerly known as Financial Security AssuranceInc.)” or included in a document incorporated by reference herein (collectively, the “AGM Information”)shall be modified or superseded to the extent that any subsequently included AGM Information (eitherdirectly or through incorporation by reference) modifies or supersedes such previously included AGMInformation. Any AGM Information so modified or superseded shall not constitute a part of this OfficialStatement, except as so modified or superseded.

AGM makes no representation regarding the Bonds or the advisability of investing in the Bonds.In addition, AGM has not independently verified, makes no representation regarding, and does not accept

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any responsibility for the accuracy or completeness of this Official Statement or any information ordisclosure contained herein, or omitted herefrom, other than with respect to the accuracy of theinformation regarding AGM supplied by AGM and presented under the heading “MUNICIPAL BONDINSURANCE.”

TAX MATTERS

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco,California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, andassuming the accuracy of certain representations and compliance with certain covenants and requirementsdescribed herein, interest on the Bonds is excluded from gross income for federal income tax purposesand is not an item of tax preference for purposes of calculating the federal alternative minimum taximposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds isexempt from State of California personal income tax. Bond Counsel notes that, with respect tocorporations, interest on the Bonds is not included as an adjustment in the calculation of alternativeminimum taxable income.

The difference between the issue price of a Bond (the first price at which a substantial amount ofthe Bonds of the same series and maturity is to be sold to the public) and the stated redemption price atmaturity with respect to such Bond constitutes original issue discount. Original issue discount accruesunder a constant yield method, and original issue discount will accrue to a Bond Owner before receipt ofcash attributable to such excludable income. The amount of original issue discount deemed received bythe Bond Owner will increase the Bond Owner’s basis in the Bond. In the opinion of Bond Counsel, theamount of original issue discount that accrues to the Owner of the Bond is excluded from the grossincome of such Owner for federal income tax purposes, is not an item of tax preference for purposes ofthe federal alternative minimum tax imposed on individuals and corporations, and is exempt from State ofCalifornia personal income tax.

Bond Counsel’s opinion as to the exclusion from gross income of interest (and original issuediscount) on the Bonds is based upon certain representations of fact and certifications made by theDistrict and others and is subject to the condition that the District complies with all requirements of theInternal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to theissuance of the Bonds to assure that interest (and original issue discount) on the Bonds will not becomeincludable in gross income for federal income tax purposes. Failure to comply with such requirements ofthe Code might cause the interest (and original issue discount) on the Bonds to be included in grossincome for federal income tax purposes retroactive to the date of issuance of the Bonds. The District hascovenanted to comply with all such requirements.

The amount by which a Bond Owner’s original basis for determining loss on sale or exchange inthe applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on anearlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 ofthe Code; such amortizable Bond premium reduces the Bond Owner’s basis in the applicable Bond (andthe amount of tax-exempt interest received), and is not deductible for federal income tax purposes. Thebasis reduction as a result of the amortization of Bond premium may result in a Bond Owner realizing ataxable gain when a Bond is sold by the Owner for an amount equal to or less (under certaincircumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consulttheir own tax advisors as to the treatment, computation and collateral consequences of amortizable Bondpremium.

The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing oftax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be

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selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as aresult of such an audit of the Bonds (or by an audit of similar bonds). No assurance can be given that inthe course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change theCode (or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adverselyaffects the exclusion from gross income of interest on the Bonds or their market value.

It is possible that subsequent to the issuance of the Bonds there might be federal, state, or localstatutory changes (or judicial or regulatory interpretations of federal, state, or local law) that affect thefederal, state, or local tax treatment of the Bonds or the market value of the Bonds. No assurance can begiven that subsequent to the issuance of the Bonds such changes or interpretations will not occur.

Bond Counsel’s opinions may be affected by actions taken (or not taken) or events occurring (ornot occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform anyperson, whether any such actions or events are taken or do occur. The Resolution and the Tax Certificaterelating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of bondcounsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on theexclusion from gross income of interest (and original issue discount) on the Bonds for federal income taxpurposes with respect to any Bond if any such action is taken or omitted based upon the advice of counselother than Stradling Yocca Carlson & Rauth.

Although Bond Counsel has rendered an opinion that interest (and original issue discount) on theBonds is excluded from gross income for federal income tax purposes provided that the District continuesto comply with certain requirements of the Code, the ownership of the Bonds and the accrual or receipt ofinterest (and original issue discount) with respect to the Bonds may otherwise affect the tax liability ofcertain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly,before purchasing any of the Bonds, all potential purchasers should consult their tax advisors with respectto collateral tax consequences relating to the Bonds.

A copy of the proposed form of opinion of Bond Counsel for the Bonds is attached hereto asAppendix C.

OTHER LEGAL MATTERS

Legal Opinion

The validity of the Bonds and certain other legal matters are subject to the approving opinion ofStradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, Bond Counsel.Bond Counsel expects to deliver an opinion with respect to the Bonds at the time of issuance of the Bondssubstantially in the form set forth in Appendix C hereto. Bond Counsel undertakes no responsibility forthe accuracy, completeness or fairness of this Official Statement.

Legality for Investment in California

Under provisions of the California Financial Code, the Bonds are legal investments forcommercial banks in California to the extent that the Bonds, in the informed opinion of the bank, areprudent for the investment of funds of depositors, and, under provisions of the California GovernmentCode, are eligible securities for deposit of public monies in the State.

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Continuing Disclosure

The District has covenanted for the benefit of the holders and beneficial owners of the Bonds toprovide certain financial information and operating data relating to the District (the “Annual Report”) bynot later than eight months following the end of the District’s fiscal year (currently ending June 30),commencing with the report for the 2009-10 fiscal year (which is due no later than March 1, 2011) and toprovide notices of the occurrence of certain enumerated events, if material. The Annual Report will befiled by U.S. Bank National Association, as dissemination agent (the “Dissemination Agent”) on behalf ofthe District with the Municipal Securities Rulemaking Board through its Electronic Municipal MarketAccess System, or such other electronic system designated by the Municipal Securities RulemakingBoard (the “EMMA System”). The notices of material events will be filed by the Dissemination Agent onbehalf of the District with the Municipal Securities Rulemaking Board through the EMMA System. Thespecific nature of the information to be contained in the Annual Report or the notices of material events issummarized in Appendix D – “FORM OF CONTINUING DISCLOSURE CERTIFICATE.” Thesecovenants have been made in order to assist the Underwriters in complying with Securities and ExchangeCommission Rule 15c2-12(b)(5) (the “Rule”). For the past five fiscal years, the District has failed to fileannual reports in a timely manner as required by its undertakings entered into in connection with theissuance of its 2001A Bonds, 2001B Bonds, 2001C Bonds and 2008A Bonds, has failed to file certainportions of its annual reports, as required by its undertaking entered into in connection with the deliveryof its Certificates of Participation (Colton Joint Unified School District) Series 2001, and has failed toprovide notices of material events as required by such undertakings. The District has since filed all suchannual reports or portions of such annual reports and is current with respect to all filings and noticesrequired by its previous undertakings.

No Litigation

No litigation is pending or threatened concerning or contesting the validity of the Bonds or theDistrict’s ability to receive ad valorem taxes and to collect other revenues, or contesting the District’sability to issue and retire the Bonds. The District is not aware of any litigation pending or threatenedquestioning the political existence of the District or contesting the title to their offices of District officerswho will execute the Bonds or District officials who will sign certifications relating to the Bonds, or thepowers of those offices. A certificate (or certificates) to that effect will be furnished to the Underwriters atthe time of the original delivery of the Bonds.

The District is occasionally subject to other lawsuits and claims. Currently, no such lawsuits orclaims are pending or threatened against the District.

MISCELLANEOUS

Ratings

Moody’s and S&P are expected to assign their respective insured municipal bond ratings of“Aa3” (negative outlook) and “AAA” (negative outlook) to the Bonds with the understanding that, upondelivery of the Bonds the Insurance Policy will be delivered by the Insurer. These ratings reflect theserating agencies’ views of the credit worthiness of the Insurer. Moody’s and S&P have also assigned theirrespective underlying ratings of “Aa3” and “A+” to the Bonds. Rating agencies generally base theirratings on their own investigations, studies and assumptions. The ratings reflect only the view of therating agency furnishing the same, and any explanation of the significance of such ratings should beobtained only from the rating agency providing the same. Such ratings are not a recommendation to buy,sell or hold the Bonds There is no assurance that any ratings will continue for any given period of time orthat they will not be revised downward or withdrawn entirely by the rating agency providing the same, if,

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in the judgment of such rating agency, circumstances so warrant. Any such downward revision orwithdrawal of a rating may have an adverse effect on the market price of the Bonds.

The insured municipal bond ratings are expected to be assigned solely as a result of the issuanceof the Insurance Policy and would reflect only the rating agencies’ views of the claims-paying ability andfinancial strength of the Insurer. See “MUNICIPAL BOND INSURANCE.” Neither the District nor theUnderwriters have made any independent investigation of the claims-paying ability of the Insurer and norepresentation is made that any insured rating of the Bonds based upon the purchase of the InsurancePolicy will remain the same as or higher than, as applicable, the same rating agency’s underlying rating ofthe Bonds described above, which did not take bond insurance into account. The existence of theInsurance Policy will not, of itself, negatively affect such underlying ratings. Without regard to any bondinsurance, the Bonds are payable from the proceeds of an ad valorem tax approved by the voters of theDistrict pursuant to all applicable laws and constitutional requirements, and required to be levied by theCounties on property within the District in an amount sufficient for the timely payment of principal,Maturity Value and Conversion Value of and interest on the Bonds. See “SECURITY AND SOURCEOF PAYMENT FOR THE BONDS.” However any downward revision or withdrawal of any rating ofthe Insurer may have an adverse effect on the market price or marketability of the Bonds.

Professionals Involved in the Offering

Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, is actingas Bond Counsel to the District with respect to the Bonds, and will receive compensation from theDistrict contingent upon the sale and delivery of the Bonds. Certain legal matters will be passed on for theDistrict by Orrick, Herrington & Sutcliffe LLP, Irvine, California, as Disclosure Counsel to the District;and for the Underwriters by Fulbright & Jaworski L.L.P., Los Angeles, California. C.M. de Crinis & Co.,Inc., Sherman Oaks, California, serves as the District’s Financial Advisor. Payment of the fees andexpenses of Disclosure Counsel and the Financial Advisor are also contingent upon the issuance anddelivery of the Bonds. From time to time, Disclosure Counsel represents the Underwriters on mattersunrelated to the Bonds.

Underwriting

The Bonds are being purchased for reoffering to the public by Piper Jaffray & Co., on behalf ofitself, RBC Capital Markets Corporation and E. J. De La Rosa & Co., Inc. (the “Underwriters”), pursuantto the terms of a bond purchase agreement executed on August 31, 2010, by and between theUnderwriters and the District (the “Purchase Agreement”). The Underwriters have agreed to purchase theBonds at a price of $41,941,717.78 (consisting of the aggregate principal amount thereof, $41,938,348.45,plus net original issue premium of $1,401,404.55, less Underwriters’ discount of $318,431.27 and lesscosts of issuance (including bond insurance premium) the Underwriters have agreed to pay in the amountof $1,079,603.95. The Purchase Agreement provides that the Underwriters will purchase all of the Bonds,subject to certain terms and conditions set forth in the Purchase Agreement, including the approval ofcertain legal matters by counsel.

The Underwriters may offer and sell the Bonds to certain dealers and others at prices lower thanthe public offering prices shown on the inside front cover page of this Official Statement. The offeringprices may be changed from time to time by the Underwriters.

Piper Jaffray & Co., (“Piper”) has entered into an agreement (the “Distribution Agreement”) withAdvisors Asset Management, Inc. (“AAM”) for the distribution of certain municipal securities offeringsallocated to Piper at the original offering prices. Under the Distribution Agreement, if applicable to theBonds, Piper will share with AAM a portion of the fee or commission, exclusive of management fees,paid to Piper.

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The District has duly authorized the delivery of this Official Statement.

COLTON JOINT UNIFIED SCHOOLDISTRICT

By: /s/ James A. DownsJames A. Downs, Superintendent

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APPENDIX A

INFORMATION RELATING TO THE DISTRICT’S OPERATIONS AND BUDGET

The information in this appendix concerning the operations of the Colton Joint Unified SchoolDistrict (the “District”), the District’s finances, and State of California (the “State”) funding ofeducation, is provided as supplementary information only, and it should not be inferred from theinclusion of this information in this Official Statement that the principal of or interest on the Bonds ispayable from the General Fund of the District or from State revenues. The Bonds are payable from theproceeds of an ad valorem tax approved by the voters of the District pursuant to all applicable laws andConstitutional requirements and required to be levied by the County of San Bernardino and the County ofRiverside on property within the District in an amount sufficient for the timely payment of principal andinterest on the Bonds. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS” in the frontportion of this Official Statement.

THE DISTRICT

Introduction

The District has operated as a joint unified school district since July 1966 and is comprised of anarea of approximately 48 square miles in the County of San Bernardino (“San Bernardino County”) andthe County of Riverside (“Riverside County” and together with San Bernardino County, the “Counties”).The District operates 19 elementary schools, four middle schools, two comprehensive high schools, onecontinuation school, one alternative high school, an adult education program and a child developmentcenter. The District projects that enrollment for fiscal year 2010-11 will be approximately 23,597students.

Board of Education

The governing board of the District is the Board of Education of the Colton Joint Unified SchoolDistrict (the “Board”). The Board consists of seven members who are elected at large to overlapping four-year terms at elections held every two years. If a vacancy arises during any term, the vacancy is filled byan appointment by the majority vote of the remaining board members and if there is no majority by aspecial election. Each December, the Board elects a President, a Vice President and a Clerk to serve one-year terms. The name, office and the month and year of the expiration of the current term of each memberof the Board is described below.


Board of Education

Name Office Term Expires

Mel Albiso President December, 2010Frank A. Ibarra Vice President December, 2012David R. Zamora Clerk December, 2010Robert D. Armenta, Jr. Member December, 2010Patt Haro Member December, 2012Kent Taylor Member December, 2012Marge Mendoza-Ware Member December, 2010

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Superintendent and Administrative Personnel

The Superintendent of the District is appointed by the Board and reports to the Board. TheSuperintendent is responsible for management of the District’s day-to-day operations and supervises thework of other key District administrators. Information concerning the Superintendent and certain otherkey administrative personnel is set forth below.

James A. Downs, Superintendent. Mr. Downs has served as Superintendent of the District sinceJuly, 2007. Mr. Downs began his career in education over thirty-five years ago as a middle school bandteacher in Artesia, California. Since then he has served as an assistant principal and principal at thesecondary level for ten years and as an adjunct professor at National University and the University of LaVerne. Prior to serving as Superintendent, Mr. Downs was the Assistant Superintendent for HumanResources, the Director of Personnel and Employee/Employer Relations and the Director ofAdministrative Services for a total of twelve years within the District. Mr. Downs holds a Bachelor ofArts degree from California State University, Long Beach and a Master of Arts degree in Education fromAzusa Pacific University.

Jaime R. Ayala, Assistant Superintendent, Business Services Division. Jaime R. Ayala hasserved as Assistant Superintendent of the District since 2008. Prior to his current position, Mr. Ayalaserved for over four years as the Director of Fiscal Services at the Yucaipa-Calimesa Joint Unified SchoolDistrict and for over seven years as an Accountant and Fiscal Analyst for the San Bernardino CountyOffice of Education. Mr. Ayala’s professional background includes eight years in management levelpositions with a major bank and over fifteen years in public accounting. Mr. Ayala holds a Bachelor ofArts degree in Economics from California State University, San Bernardino and he holds a CaliforniaCertified Public Accounting license.

DISTRICT FINANCIAL MATTERS

State Funding of Education; State Budget Process

General. As is true for all school districts in California, the District’s operating income consistsprimarily of two components: a State portion funded from the State’s general fund and a local portionderived from the District’s share of the countywide property tax. In addition, school districts may beeligible for other special categorical funding from State and federal government programs. The Districtreceives approximately 80% of its general fund revenues from State funds, budgeted at approximately$138 million in fiscal year 2010-11. As a result, decreases in State revenues, or in State legislativeappropriations made to fund education, may significantly affect District operations.

Under Proposition 98, a constitutional and statutory amendment adopted by the State’s voters in1988 and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of theConstitution), a minimum level of funding is guaranteed to school districts, community college districts,and other State agencies that provide direct elementary and secondary instructional programs. Recentyears have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporatetaxes, making it increasingly difficult for the State to meet its Proposition 98 funding mandate, whichnormally commands about 45% of all State general fund revenues, while providing for other fixed Statecosts and priority programs and services. Because education funding constitutes such a large part of theState’s general fund expenditures, it is generally at the center of annual budget negotiations andadjustments.

Adoption of Annual State Budget. According to the State Constitution, the Governor mustpropose a budget to the State Legislature no later than January 10 of each year, and a final budget must be

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adopted by a two-thirds vote of each house of the Legislature no later than June 15, although this deadlineis routinely breached. The budget becomes law upon the signature of the Governor, who may vetospecific items of expenditure. School district budgets must generally be adopted by July 1, and revised bythe school board within 45 days after the Governor signs the budget act to reflect any changes in budgetedrevenues and expenditures made necessary by the adopted State budget. The Governor signed theamended 2009-10 Budget Act on July 29, 2009. The State budget approval has occurred as late asSeptember 24, 2008 for the fiscal year 2008-09 State Budget. As of the date hereof, no State budget hasbeen approved for fiscal year 2010-11.

When the State budget is not adopted on time, basic appropriations and the categorical fundingportion of each school district’s State funding are affected differently. Under the rule of White v. Davis(also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is noconstitutional mandate for appropriations to school districts without an adopted budget or emergencyappropriation, and funds for State programs cannot be disbursed by the State Controller until that time,unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated bythe Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federallaw (such as payments to State workers at no more than minimum wage). The State Controller hasconsistently stated that basic State funding for schools is continuously appropriated by statute, but thatspecial and categorical funds may not be appropriated without an adopted budget. Should the Legislaturefail to pass a budget or emergency appropriation before the start of any fiscal year, the District mightexperience delays in receiving certain expected revenues. The District is authorized to borrow temporaryfunds to cover its annual cash flow deficits, and as a result of the White v. Davis decision, the Districtmight find it necessary to increase the size or frequency of its cash flow borrowings, or to borrow earlierin the fiscal year. The District does not expect the White v. Davis decision to have any long-term effect onits operating budgets.

Aggregate State Education Funding. The Proposition 98 guaranteed amount for education isbased on prior-year funding, as adjusted through various formulas and tests that take into account Stateproceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and otherfactors. The State’s share of the guaranteed amount is based on State general fund tax proceeds and is notbased on the general fund in total or on the State budget. The local share of the guaranteed amount isfunded from local property taxes. The total guaranteed amount varies from year to year and throughoutthe stages of any given fiscal year’s budget, from the Governor’s initial budget proposal to actualexpenditures to post-year-end revisions, as better information regarding the various factors becomesavailable. Over the long run, the guaranteed amount will increase as enrollment and per capita personalincome grow.

If, at year-end, the guaranteed amount is calculated to be higher than the amount actuallyappropriated in that year, the difference becomes an additional education funding obligation, referred toas “settle-up.” If the amount appropriated is higher than the guaranteed amount in any year, that higherfunding level permanently increases the base guaranteed amount in future years. The Proposition 98guaranteed amount is reduced in years when general fund revenue growth lags personal income growth,and may be suspended for one year at a time by enactment of an urgency statute. In either case, insubsequent years when State general fund revenues grow faster than personal income (or sooner, as theLegislature may determine), the funding level must be restored to the guaranteed amount, the obligationto do so being referred to as “maintenance factor.”

In recent years, the State’s response to fiscal difficulties has had a significant impact onProposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-upamounts when funding has lagged the guaranteed amount. In response, teachers’ unions, the StateSuperintendent and others sued the State or Governor in 1995, 2005 and 2009 to force them to fund

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schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted inover $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down theobligations through additional education funding over time, including the Quality Education InvestmentAct of 2006 (QEIA), have also become part of annual budget negotiations, resulting in repeatedadjustments and deferrals of the settle-up amounts.

The State has also sought to preserve general fund cash while avoiding increases in the baseguaranteed amount through various mechanisms: by treating any excess appropriations as advancesagainst subsequent years’ Proposition 98 minimum funding levels rather than current year increases; bytemporarily deferring apportionments of Proposition 98 funds one fiscal year to the next, by permanentlydeferring the year-end apportionment from June 30 to July 2; by suspending Proposition 98, as the Statedid in 2004 05; and by proposing to amend the Constitution’s definition of the guaranteed amount andsettle-up requirement under certain circumstances. See also “—Fiscal Year 2010-11 Deferrals” below.

Proposition 1A. Beginning in 1992-93, the State has satisfied a portion of its Proposition 98obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, specialdistricts, and redevelopment agencies, to school and college districts through a local Educational RevenueAugmentation Fund (ERAF) in each county. Local agencies, objecting to invasions of their local revenuesby the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, theLegislature proposed an amendment to the State Constitution, which the State’s voters approved asProposition 1A at the November 2004 election.

Proposition 1A is intended to, among other things, stabilize local government revenue sources byrestricting the State’s control over local property taxes. Proposition 1A allows the State to divert up to 8%of local property tax revenues for State purposes (including, but not limited to, funding K 12 education)only if: (i) the Governor declares such action to be necessary due to a State fiscal emergency; (ii) two-thirds of both houses of the Legislature approve the action; (iii) the amount diverted is required by statuteto be repaid within three years; (iv) the State does not owe any repayment to local agencies for pastproperty tax or Vehicle License Fee diversions to local agencies; and (v) such property tax diversions donot occur in more than two of any ten consecutive fiscal years. Because ERAF shifts will be capped andlimited in frequency, school and college districts that receive Proposition 98 funding from the State willbe more directly dependent upon the State’s general fund.

The amended 2009-10 State Budget includes a Proposition 1A diversion of $1.935 billion in localproperty tax revenues from cities, counties and special districts to the State to offset State general fundspending for education and other programs. Such diverted revenues must be repaid, with interest, no laterthan June 30, 2013. The amended 2009-10 State Budget diverts another $1.7 billion in local property taxrevenues from local redevelopment agencies, but this is not covered by Proposition 1A. The CaliforniaRedevelopment Association and two redevelopment agencies filed a lawsuit in October 2009 challengingthe constitutionality of this diversion.

2009-10 State Budget. On September 24, 2008, the Governor signed the State budget for fiscalyear 2008-09, the latest budget approval in State history. It is widely acknowledged that even by the timeof its passage, the budget’s revenue estimates were already too optimistic, in light of continuing weakperformance in the California economy and unprecedented adverse developments in the global andnational financial markets, particularly after September 15, 2008. The Governor declared a fiscalemergency in December 2008, and called three concurrent special legislative sessions in order to addressthe budget deficit then estimated to be $42 billion. In the face of growing negative estimates of State taxreceipts during fiscal year 2008-09, the Governor signed the State’s fiscal year 2009-10 Budget Act onFebruary 20, 2009 (the earliest date on record), essentially as a revised two-year budget settlement forfiscal years 2008-09 and 2009-10. However, after the failure in May 2009 of six revenue and spending

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propositions on the statewide ballot, the passage of which were assumed in the budget bill, work beganagain on a fiscal year 2009-10 budget plan. On July 24, 2009, the Legislature approved a new budgetpackage, which the Governor signed on July 28, 2009. For an accurate view of current Proposition 98funding, one must treat these three recent budgets as a whole, and consider also the significantadjustments that have been left to future budget years.

The amended 2009-10 State Budget consisted of some 30 separate bills; subsequent legislationmay affect final budget totals. Indeed, if the economy worsens, the assumptions in even the amended2009-10 State Budget may prove unsustainable, and further cuts and revisions may be needed. Asdescribed below, until audited fiscal year-end 2008-09 State revenues were known, the State could notdetermine the final fiscal year 2008-09 Proposition 98 funding requirement. The following informationrelating to the funding of elementary and secondary education is adapted from the budget summariesprepared by Legislative Analyst’s Office, the Governor’s office and other sources.

The amended 2009-10 State Budget achieves balance through spending cuts, additional revenuegeneration, borrowing from local governments and others, revenue shifts from redevelopment agencies,and other accounting changes; all of these techniques are also present in the adopted Proposition 98funding plan. Fiscal year 2008-09 Proposition 98 funding for K-12 schools is reduced to $43.1 billion ($9billion less than the level assumed in the adopted 2008-09 State Budget, and $1.6 billion less than theFebruary 2009 amended amount); fiscal year 2009-10 funding is established at $44.6 billion ($3.7 billionless than the February 2009 adopted amount). Over $10.1 billion in mandated Proposition 98 funding isdeferred to future years: the so-called “maintenance factor.” Of budgeted Proposition 98 funding, $1.7billion is shifted to school districts from property taxes and other moneys belonging to redevelopmentagencies. Funding is also delayed in several ways: (i) $2 billion is deferred from the first months offiscal year 2009-10 to December 2009 and January 2010, while $1.8 billion will not be paid until August2010; (ii) mandated settle-up payments of $450 million for prior years under the Quality EducationInvestment Act are also deferred, effectively to fiscal year 2014-15; (iii) cost of living adjustments of over18% are deferred, creating a future obligation of over $6.5 billion; and (iv) categorical funding of $1.6billion intended for fiscal year 2008-09 that had not been funded by June 30, 2009, is treated as fiscal year2009-10 categorical funding, but an equal amount of minimum guarantee funding is eliminated. Forthose districts that would otherwise receive no Proposition 98 minimum guarantee funding from the State,categorical funding is reduced by $80 million. In addition, the Governor vetoed $3.9 million of approvedspending for special education transportation costs.

State savings is also achieved by lifting various mandates and restrictions on local schooldistricts: full flexibility is allowed to spend funding for 42 categorical programs as districts wish through2012-13; class-size reduction in grades K-3 is largely suspended, and the minimum days of instruction arereduced from 180 to 175, through reduced or suspended financial penalties on districts that do not meetexisting requirements; districts are excused from buying new approved instructional materials; proceedsof surplus land sales otherwise restricted to capital improvements are permitted to be used for generalfund expenditures through 2011; the general fund reserve requirement is reduced to one-third of theotherwise applicable percentage (3% of expenditures for a district with average daily attendance of up to30,000), provided this is restored by 2011-12; the routine maintenance reserve requirement of 1% ofgeneral fund expenditures is suspended; and school districts that project they will not meet financialguidelines due to loss of federal stimulus funding in fiscal years 2011-12 and 2012-13 will not have theirbudgets negatively rated as a result.

The District cannot predict how State income or State education funding will vary over the termto maturity of the Bonds, and the District takes no responsibility for informing owners of the Bonds as toactions the State Legislature or Governor may take affecting the current year’s budget after its adoption.Information about the State budget and State spending for education is regularly available at various

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State-maintained websites. Text of proposed and adopted budgets may be found at the website of theDepartment of Finance, www.dof.ca.gov, under the heading “California Budget.” An impartial analysisof the budget is posted by the Office of the Legislative Analyst at www.lao.ca.gov. In addition, variousState of California official statements, many of which contain a summary of the current and past Statebudgets and the impact of those budgets on school districts in the State, may be found at the website ofthe State Treasurer, www.treasurer.ca.gov. The information referred to is prepared by the respectiveState agency maintaining each website and not by the District, and the District can take no responsibilityfor the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness ofinformation posted there, and such information is not incorporated herein by these references.

Proposed 2010-11 State Budget. On January 8, 2010, Governor Schwarzenegger released hisproposed budget for fiscal year 2010-11 (the “2010-11 Proposed State Budget”), which includes cuts ineducation, healthcare, social services and transit in order to address a projected $19.9 billion in budgetshortfalls (which is comprised of a current year shortfall of $6.6 billion, a budget year shortfall of $12.3billion and a reserve of $1 billion). The 2010-11 Proposed State Budget does not include any broad-basedtax increases, but does include a heavy reliance on the increase of the influx of federal funds. Given there-emergence of a current year budget shortfall, the Governor declared a fiscal emergency and called theState Legislature into a special session to make the needed current year budget cuts. The Governor’s2010-11 Proposed State Budget provides the following for K-12 education:

Based on certain assumptions discussed below, the Governor’s 2010-11 Proposed State Budgetincludes the full funding of the Proposition 98 guarantee. However, the Governor is proposing a reductionof approximately 10% in funding for administration, overhead and other non-instruction related spendingby school districts, which is equal to approximately $1.2 billion in cuts for school districts andapproximately $45 million in cuts for county offices of education. Total Proposition 98 expenditures areprojected to be lower than the $50.4 billion amount assumed in the amended 2009-10 State Budget to$49.9 billion in fiscal year 2009-10 reflecting a minimum guarantee that is $567.5 million (or 1.2%)lower. The State General Fund share of the fiscal year 2009-10 Proposition 98 guarantee is also projectedto decrease from $35 billion to $34.7 billion. The Governor’s 2010-11 Proposed State Budget calls for thefunding of the minimum required Proposition 98 guarantee in fiscal year 2010-11 at $50 billion, reflectingan increase of $103 million (or 0.2%) over the revised 2009-10 minimum guarantee. The State GeneralFund share of the fiscal year 2010-11 Proposition 98 guarantee is projected at $36.1 billion in the 2010-11Proposed State Budget.

As part of a compromise to the amended 2009-10 State Budget, the Proposition 98 funding levelfor 2008-09 was certified through legislation at $49.1 billion. The amended 2009-10 State Budget alsoestablished a future funding obligation of $11.2 billion (the “in lieu” maintenance factor) even if it wereto be determined that no maintenance factor was created in fiscal year 2008-09. The amended 2009-10State Budget established a repayment schedule for the “in lieu” maintenance factor beginning in fiscalyear 2010-11. However, revenues in fiscal year 2008-09 were subsequently determined to be significantlylower than was estimated at the time the Proposition 98 funding level was certified, resulting in nomaintenance factor and dropping the Proposition guarantee to $46.8 billion. Absent corrective action, the$2.3 billion overappropriation of the Proposition 98 guarantee in fiscal year 2008-09 and requiredrepayments of the “in lieu” maintenance factor beginning in fiscal year 2010-11, would substantiallyincrease the Proposition 98 guarantee in fiscal years 2009-10 and 2010-11. In the 2010-11 Proposed StateBudget, the Governor proposes to bring the level of appropriations down to the actual level ofexpenditures for fiscal year 2008-09 (reducing the overappropriation to $2.2 billion) and to use a portionof the $2.2 billion overappropriation toward satisfying the outstanding maintenance factor, resulting in areduction in the minimum Proposition 98 guarantee for fiscal years 2009-10 and 2010-11. The “in lieu”maintenance factor payments adopted as part of the amended 2009-10 State Budget were to begin in fiscalyear 2010-11. However, the Governor proposes to delay the start date of these payments to fiscal year

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2012-13. These proposals and various tax reductions and shifts in the Governor’s 2010-11 Proposed StateBudget are projected to result in State budget reductions of $892.6 million in fiscal year 2009-10 and $1.5billion in fiscal year 2010-11.

A few areas of flexibility for schools that have been enacted in past budgets are proposed to becontinued in the Governor’s 2010-11 Proposed State Budget, including categorical flexibility through2012-13, the ability to reduce the school year by five days and relaxed penalties on K-3 Class SizeReduction.

Certain changes to current state law (intended to provide additional flexibility to school districtsand allow school districts to protect classroom spending) are a part of the Governor’s 2010-11 ProposedState Budget. One such change would be to give local school districts the flexibility to layoff, assign,reassign, transfer and rehire teachers based on skill and subject matter needs without regard to seniority.Another such change would be to change the teacher layoff notice to 60 days after the State budget isadopted or amended. Current law requires that school districts notify teachers by March 15 of the yearbefore the layoff, well before the State typically adopts its budget and school districts know how muchfunding they will receive. A third proposed change would eliminate provisions in state law that requireteachers who have been laid off to receive first priority for substitute assignments and that thesesubstitutes be paid at the rate they received before they were laid off if certain criteria is met.

The District cannot predict which proposals, if any, contained in the Governor’s 2010-11Proposed State Budget will be adopted by the Legislature and signed by the Governor as part of the final2010-11 State Budget. Additionally, the District cannot predict if any other proposals affecting educationfunding will be proposed before the final 2010-11 State Budget is adopted by the Legislature and signedby the Governor. The complete 2010-11 Proposed State Budget is available from the CaliforniaDepartment of Finance website at www.dof.ca.gov.

LAO Analysis of the 2010-11 Proposed State Budget. On January 12, 2010, the Office of theLegislative Analyst (the “LAO”) released a report entitled “The 2010-11 Budget: Overview of theGovernor’s Budget” (the “2010 LAO Budget Overview”), which provides an analysis by the LAO of the2010-11 Proposed State Budget.

According to the LAO, the Legislature faces significant challenges in balancing the State’sbudget for fiscal year 2010-11. The LAO notes that many of the major expenditure reductions in theProposed 2010-11 State Budget will require significant lead-time for departments to implement. The LAOacknowledges that it is reasonable to assume that the State will secure some additional federal fundingand flexibility, but it recommends that the State Legislature operate on the assumption that federalgovernment relief will total billions of dollars less than the Governor has requested. The LAO furtherrecommends that the Governor and State Legislature consider adopting some of the Governor’s proposedcuts and revenue increases that are presented as options only in the event of insufficient federal relief. TheLAO cautions that the State’s Proposition 98 obligation could be higher than assumed in the 2010-11Proposed State Budget due to constitutional interpretation and the interaction between Proposition 98spending and State General Fund revenues. Further, the LAO notes that a portion of the State’s proposedspending is dependent upon receipt of a waiver from the U.S. Department of Education regardingmaintenance-of-effort requirements under the American Recovery and Reinvestment Act of 2009(“ARRA”).

The 2010 LAO Budget Overview reiterated that the State Legislature should take action no laterthan March 2010 on many of the proposed budgetary measures, explore options beyond those proposedby the Governor, consider the Governor’s “trigger options” notwithstanding any assumed federal relief,

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and consider adoption of multi-year solutions. Further, the LAO recommends that the State Legislatureshould avoid proposed solutions that do not prioritize program reductions.

The 2010 LAO Budget Overview is available on the LAO website at www.lao.ca.gov.Information on the website is not incorporated herein by reference. The 2010 LAO Budget Overviewstates that the economic and revenue forecasts and assessments of the State’s budgetary problems setforth in the 2010-11 Proposed State Budget are generally reasonable, but it notes that the Governor’sestimates of revenues and expenditures are more optimistic than its own.

May Revision to 2010-11 Proposed State Budget. On May 14, 2010, Governor Schwarzeneggerreleased his revision to the 2010-11 Proposed State Budget (the “May Revision”). The May Revisionprojects a budget gap of $19.1 billion (compared to $19.9 billion projected in the 2010-11 Proposed StateBudget). This figure is comprised of a current year shortfall of $7.7 billion, a budget year shortfall of$10.2 billion and a reserve of $1.2 billion. The May Revision addresses the budget deficit through acombination of $12.4 billion in spending reductions, $3.3 billion in alternative funding and funds shiftsand $3.4 billion in federal funds. The May Revision estimates fiscal year 2009-10 revenues and transfersof $86.521 billion, total expenditures of $86.465 billion and a year-end deficit of $5.305 billion, whichincludes a negative $5.361 billion prior-year State General Fund balance, and an allocation of $1.537billion to the reserve for the liquidation of encumbrances. The May Revision projects fiscal year 2010-11revenues and transfers of $91.451 billion, total expenditures of $83.404 billion and a year-end surplus of$2.742 billion (net of the $5.305 billion deficit from fiscal year 2009-10), of which $1.537 billion will bereserved for the liquidation of encumbrances and $1.205 billion will be deposited in a reserve foreconomic uncertainties. The May Revision indicates that the recession is likely over and the State’seconomic outlook is more positive, but due to the depth of the recession, the recovery will be moderateand prolonged as compared to historical standards.

No fiscal year 2009-10 program cuts are proposed for K-12 education in the May Revision. Withrespect to fiscal year 2010-11, the May Revision includes the following for K-12 education:

The May Revision provides for $48.4 billion of Proposition 98 funding for fiscal year 2010-11.This figure incorporates a proposal to eliminate State funding for child care for a savings of $1.45 billionand a corresponding drop in the Proposition 98 guarantee. The May Revision withdraws the Governor’sproposal to cause certain reduced funding to specifically reduce costs related to administration, overheadand other non-instruction related spending by school districts. Instead, the May Revision proposesproviding local district administrators and school boards maximum flexibility to manage the level offunding provided in the May Revision. The May Revision also reduces the proposed cut to county officeof education revenue limits from $45 million to $28.2 million to make the reduction closer in proportionto the proposed cuts to school district revenue limits. The May Revision maintains a total revenue limitreduction of $1.5 billion and a negative cost of living adjustment in fiscal year 2010-11. The MayRevision continues to contain provisions providing for the use of overappropriations of the Proposition 98guarantee in fiscal years 2008-09 and 2009-10 toward satisfying the outstanding maintenance factor fromfiscal year 2007-08. The May Revision continues to propose changes to current state law with respect tothe flexibility to layoff, assign, reassign, transfer and rehire teachers. See “–Proposed 2010-11 StateBudget” above.

The District cannot predict what actions will be taken by the Governor and the State Legislatureto address changing State revenues or the impact such actions will have on State revenues available foreducation. The final 2010-11 State Budget, which requires approval by a two-thirds vote of each house ofthe State Legislature, may differ substantially from the Governor’s original and revised budget proposals.Accordingly, the District cannot predict the impact that such budget proposals will have on its financesand operations. To the extent negatively impacted, the District may need to develop and implement

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different or additional budgetary adjustments to contend with its projected deficit spending over the nexttwo fiscal years. See “—District Budget Process and County Review” below. Additional informationregarding the May Revision is available from the California Department of Finance atwww.ebudget.ca.gov. Such information is not incorporated herein by this reference.

Fiscal Year 2010-11 Deferrals. On March 1, 2010 the Governor signed a bill (and on March 4,2010, subsequently signed a clean-up bill to clarify certain provisions of such bill) to provide additionalcash management flexibility to State fiscal officials (the “Cash Management Bill”). The CashManagement Bill authorizes deferral of certain payments during the 2010-11 fiscal year for schooldistricts (not to exceed $2.5 billion in the aggregate at any one time, and a maximum of three deferralsduring the fiscal year). Deferrals of payments to K-12 schools may be made in July 2010, October 2010and March 2011, for not to exceed 60, 90 and 30 days, respectively, but depending on actual cash flowconditions at the time, the Controller, Treasurer and Director of Finance may either accelerate or delay thedeferrals up to 30 days, or reduce the amounts deferred. On March 31, 2010, in accordance with the CashManagement Bill, the State Controller, State Treasurer and Director of Finance of the State jointlynotified the Legislature and State Department of Education of the expected amounts and timing ofpayment deferrals for the 2010-2011 fiscal year. The declaration indicated that the apportionments forJuly 2010, October 2010 and March 2011 would be deferred by up to 60 days, 90 days and 30 days,respectively. The State has the authority to move a planned deferral to the prior month or to a subsequentmonth upon 30 days written notice by the State Department of Finance to the Legislative BudgetCommittee, except that the State has indicated that the July 2010 deferral would not be moved to June2010. Accordingly, the deferral planned for July 2010 could occur in August 2010, the deferral plannedfor October 2010 could occur in September 2010 or November 2010, and the deferral planned for March2011 could occur in February 2011 or April 2011 (except that the Cash Management Bill provides thatthe deferral planned for March 2011 must be paid prior to April 30). Certain school districts that candemonstrate hardship in procedures specified in the Cash Management Bill, will not be subject to thesedeferrals. In total, the Department of Finance estimates all deferrals authorized under the CashManagement Bill (which includes deferrals to community colleges, social services and other entitiesreceiving State funds in addition to the deferrals to school districts) will improve the State’s cash positionby up to $5.3 billion in certain months, thereby reducing the need for external cash managementborrowing or other measures. The District is authorized to borrow temporary funds to cover its annualcash flow deficits, and as a result of the Cash Management Bill, the District might find it necessary toincrease the size or frequency of its cash flow borrowings in fiscal year 2010-11.

Changes in State Budget. The final 2010-11 State Budget, which requires approval by a two-thirds vote of each house of the State Legislature, may differ substantially from the Governor’s budgetproposals. Accordingly, the District cannot predict the impact that the 2010-11 Proposed State Budget, orsubsequent budgets, will have on its finances and operations. The State Budget will be affected bynational and State economic conditions and other factors.

Future Budgets and Budgetary Actions. The District cannot predict what actions will be taken inthe future by the State Legislature and the Governor to address changing State revenues and expendituresor the impact such actions will have on State revenues available in the current or future years foreducation. The State budget will be affected by national and State economic conditions and other factorsover which the District will have no control. Certain actions could result in a significant shortfall ofrevenue and cash, and could impair the State’s ability to fund schools during fiscal year 2009-10 and infuture fiscal years. Continued State budget shortfalls in fiscal year 2009-10 and future fiscal years couldhave a material adverse financial impact on the District.

Allocation of State Funding to School Districts. Under Education Code Section 42238 andfollowing, each school district is determined to have a target funding level: a “base revenue limit” per

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student multiplied by the district’s student enrollment measured in units of average daily attendance(“A.D.A.”). The base revenue limit is calculated from the district’s prior-year funding level, as adjustedfor a number of factors, such as inflation, special or increased instructional needs and costs, employeeretirement costs, especially low enrollment, increased pupil transportation costs, etc. Generally, theamount of State funding allocated to each school district is the amount needed to reach that district’s baserevenue limit after taking into account certain other revenues, in particular, locally generated propertytaxes. This is referred to as State “equalization aid.” To the extent local tax revenues increase due togrowth in local property assessed valuation, the additional revenue is offset by a decline in the State’scontribution. Enrollment can fluctuate due to factors such as population growth or decline, competitionfrom private, parochial, and public charter schools, inter-district transfers in or out, and other causes.Losses in enrollment will cause a school district to lose operating revenues, without necessarilypermitting the district to make adjustments in fixed operating costs.

The following table sets forth the District’s actual A.D.A., enrollment and base revenue limit perunit of A.D.A. for fiscal years 2006-07 through 2010-11, for kindergarten through grade 12 (“K-12”),including special education.


Average Daily Attendance, Enrollment And Base Revenue LimitFiscal Years 2006-07 Through 2010-11

Fiscal YearAverage DailyAttendance(1) Enrollment

Base Revenue LimitPer Unit of Average Daily

Attendance

2006-07 22,896 24,565 $5,540.642007-08 22,747 24,528 5,792.642008-09(2) 22,772 24,362 6,121.642009-10(3) 22,613 24,253 6,382.642010-11(4) 22,148 23,597 6,358.64

____________________(1) A.D.A. for the second period of attendance, typically in mid-April of each school year.(2) The District had a 7.844% base revenue limit deficit factor in fiscal year 2008-09, resulting in a funded base revenue limit of$5,641.45. A deficit factor is applied to the base revenue limit if provided in the State Budget for a given fiscal year when appropriation offunds in the State Budget for such is not sufficient to pay all claims for State aid. The deficit factor is applied to reduce the allocation ofState aid to the amount appropriated.(3) Figures are estimates. The District had a 18.355% base revenue limit deficit factor and a 4.25% cost of living adjustment in fiscal year2009-10, which resulted in net funding of a negative 7.75% and a funded base revenue limit of $4,958.23, which includes a one time baserevenue limit reduction of $252.83.(4) Figures are projections. The District also expects a 8.355% base revenue limit deficit factor and a negative 0.39% cost of livingadjustment in fiscal year 2010-11, which results in a funded base revenue limit of $4,951.51.Source: The District.

In its 2010-11 budget, the District projects that it will receive approximately $110.8 million inaggregate revenue limit income in fiscal year 2010-11, or approximately 66% of its general fundrevenues. This amount represents a decrease of approximately 1.88% from the $112,960,148 the Districtestimates that it received in 2009-10. State funds for special programs are currently budgeted to be$24,652,082 for 2010-11. The District also expects to receive a small portion of its budget from Statelottery funds, which may not be used for non-instructional purposes, such as the acquisition of realproperty, the construction of facilities, or the financing of research. School districts receive lottery fundsproportional to their total A.D.A. The District’s State lottery revenue is currently budgeted at $2,677,070for fiscal year 2010-11.

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Local Sources of Education Funding

The principal component of local revenues is a school district’s property tax revenues, i.e., eachdistrict’s share of the local one-percent property tax, received pursuant to Sections 75 and following andSections 95 and following of the California Revenue and Taxation Code. Education Code Section42238(h) itemizes the local revenues that are counted towards the base revenue limit before calculatinghow much the State must provide in State aid. The more local property taxes a district receives, the lessState aid it is entitled to; ultimately, a school district whose local property tax revenues exceed its baserevenue limit is entitled to receive no State aid, and receives only its special categorical aid which isdeemed to include the “basic aid” of $120 per student per year guaranteed by Article IX, Section 6 of theConstitution. Such districts are known as “basic aid districts.” Districts that receive some State aid arecommonly referred to as “revenue limit districts.”

The District is not a “basic aid district.” Local property tax revenues account for approximately7.5% of the District’s aggregate revenue limit income, and are budgeted to be $7.7 million, or 4.2% oftotal general fund revenue in fiscal year 2010-11. For a discussion of legal limitations on the ability of theDistrict to raise revenues through local property taxes, see “CONSTITUTIONAL AND STATUTORYLIMITATIONS ON TAXES AND APPROPRIATIONS” below.

Tax Increment Revenues

Under the Community Redevelopment Law of the State of California (being Part 1 of Division 24of the California Health and Safety Code, as amended), a city or county can create a redevelopmentagency in territory within one or more school districts. Upon formation of a “project area” of aredevelopment agency, all property tax revenues attributable to the growth in assessed value of taxableproperty within the project area (known as “tax increment”) belong to the redevelopment agency, causinga loss of tax revenues to other local taxing agencies, including school districts, from that time forward.Taxes collected for payment of debt service on school general obligation bonds are not affected ordiverted by the operation of a redevelopment agency project area. Certain school districts may enter into“pass-through agreements” with their local redevelopment agencies in order to receive a portion of the taxincrement revenue that would otherwise belong to the redevelopment agency, and in some cases the pass-through is mandated by statute. The tax increment revenues allocable to school districts is intended toalleviate any financial burden or detriment associated with additional facilities needed to accommodatethe growth induced by the redevelopment project. There are 14 project areas established within theterritory of the District.

The District is able to receive a portion of the tax increment, either through statutory orcontractual entitlements, collected to finance certain redevelopment projects existing within the District.Currently, the District is receiving payments from several redevelopment projects in Colton, Rialto andSan Bernardino. The tax increment revenues received by the District do not represent yearly fixedpayment amounts but depend on variable formulas, which among other things, depend on the growth inthe assessed valuations in the respective redevelopment projects. For fiscal years 2006-07, 2007-08, 2008-09 and 2009-10 the District received $975,464, $887,510, $1,527,723 and $1,884,288 (unaudited),respectively, in tax increment revenues and projects it will receive $1,277,918 in tax increment revenuesfor fiscal year 2010-11.

Developer Fees

The District collects developer fees to finance essential school facilities within the District. Thefollowing table of developer fee revenues reflects the collection of fees from fiscal years 2004-05 throughfiscal year 2009-10.

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Developer FeesFiscal Years 2004-05 through 2009-10

Year Total Revenues

2004-05 $ 3,014,8452005-06 6,591,3552006-07 1,007,8362007-08 806,9902008-09 331,4902009-10(1) 222,159

____________________(1) Unaudited.Source: The District.

Significant Accounting Policies and Audited Financial Reports

The State Department of Education imposes by law uniform financial reporting and budgetingrequirements for K through 12 school districts. Financial transactions are accounted for in accordancewith the Department of Education’s California School Accounting Manual. This manual, according toSection 41010 of the Education Code, is to be followed by all California school districts, including theDistrict. Significant accounting policies followed by the District are explained in Note 1 to the District’saudited financial statements for the fiscal year ended June 30, 2009, which are included as Appendix B.

Independently audited financial reports are prepared annually in conformity with generallyaccepted accounting principles for educational institutions. The annual audit report is generally availableabout six months after the June 30 close of each fiscal year. The following tables contain data abstractedfrom financial statements prepared by the District’s independent auditor Vavrinek, Trine, Day & Co.,LLP, Rancho Cucamonga, California, for fiscal years 2004-05 through 2008-09. Vavrinek, Trine, Day &Co., LLP has not been requested to consent to the use or to the inclusion of its report in this OfficialStatement, and it has neither audited nor reviewed this Official Statement. The District is required by lawto adopt its audited financial statements after a public meeting to be conducted no later than January 31following the close of each fiscal year.

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Statement of General Fund Revenues, Expenditures and Changes in Fund BalanceFiscal Years 2004-05 through 2008-09

Fiscal Year2004-05

Fiscal Year2005-06

Fiscal Year2006-07

Fiscal Year2007-08

Fiscal Year2008-09

REVENUESRevenue limit sources $ 114,804,374 $ 120,080,116 $ 128,793,678 $ 142,007,307 $ 128,980,223Federal sources 12,780,941 13,696,423 13,880,491 13,188,074 22,681,253Other state sources 27,456,724 27,832,034 39,429,815 40,015,053 36,489,279Other local sources 10,664,813 11,514,174 13,294,822 13,830,954 11,680,531

Total Revenues 165,706,852 173,122,747 195,398,806 209,041,388 199,831,286

EXPENDITURESCurrent

Instruction 100,139,837 101,296,393 114,298,110 121,114,904 120,208,340Instruction-related activities:

Supervision of instruction 4,855,185 6,343,822 7,495,152 9,320,892 9,779,902Instructional library, media and

technology1,309,133 1,406,810 1,575,837 1,588,565 1,587,453

School site administration 10,045,782 10,233,458 11,854,210 12,123,794 11,836,019Pupil Services:

Home-to-school transportation 3,985,862 3,246,309 3,845,437 3,857,618 3,600,198Food services 8,874 7,490 7,958 6,705 5,938All other pupil services 9,764,362 10,483,347 12,507,947 12,988,670 13,197,042

General administration:Data processing 2,543,401 2,372,156 3,066,708 3,388,096 2,764,022All other general administration 6,388,709 6,586,048 6,843,187 7,531,170 7,226,286

Plant services 17,116,393 18,712,320 20,770,547 21,850,216 20,857,889Facility acquisition and construction 400,033 116,205 202,838 489,730 1,162,871Ancillary services 1,354,388 1,442,895 1,421,339 1,523,800 1,410,514Community services 150,619 223,411 236,005 231,603 217,194Other outgo 1,920,432 1,734,915 2,042,497 2,272,441 3,263,111

Debt servicePrincipal 1,579,707 489,037 509,658 435,000 -Interest and other 462,994 257,969 339,084 52,447 -

Total Expenditures 162,025,711 164,952,585 187,016,514 198,775,651 197,116,079

Excess (Deficiency) Of Revenues OverExpenditures

3,681,141 8,170,162 8,382,292 10,265,737 2,715,207

Other Financing Sources(Uses):Transfers in - - - - 26,907Transfers out (5,280,047) (2,186,341) (1,196,035) (1,228,229) (1,791,927)Other uses - - - - -

Net Financing Sources (Uses) (5,280,047) (2,186,341) (1,196,035) (1,228,229) (1,765,020)

NET CHANGE IN FUND BALANCES (1,598,906) 5,983,821 7,186,257 9,037,508 950,187

Fund Balance—Beginning 12,586,135 10,987,229 16,971,050 24,157,307 33,194,815

Fund Balance—Ending $ 10,987,229 $ 16,971,050 $ 24,157,307 $ 33,194,815 $ 34,145,002

__________________Source: District Audited Financial Reports for fiscal years 2004-05 through 2008-09.

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The following table shows the general fund balance sheets of the District for the fiscal yearsended June 30, 2005, 2006, 2007, 2008 and 2009.

COLTON JOINT UNIFIED SCHOOL DISTRICTSummary of General Fund Balance Sheet

Fiscal Years 2004-05 Through 2008-09

Fiscal Year2004-05

Fiscal Year2005-06

Fiscal Year2006-07

Fiscal Year2007-08

Fiscal Year2008-09

ASSETSDeposits and investments $ 24,608,268 $ 25,989,227 $ 32,622,047 $ 32,301,746 $ 19,090,554Receivables 6,212,122 5,318,188 10,185,313 17,108,504 32,043,591Due from other funds 375,691 663,313 214,795 321,765 368,374Prepaid expenditures 13,041 17,076 1,326 70,208 1,109,378

Stores Inventories 170,955 153,552 191,462 157,594 172,056

Total Assets $ 31,380,077 $ 32,141,356 $ 43,214,943 $ 49,959,817 $ 52,783,953

LIABILITIES AND FUNDBALANCESLiabilities

Accounts Payable $ 15,595,995 $ 13,761,396 $ 12,584,746 $ 13,342,015 $ 15,871,040Due to Other Funds 2,808,191 244,699 2,904,522 2,527,543 370,234

Deferred Revenue 1,988,662 1,164,211 3,568,368 895,444 2,397,677

Total Liabilities 20,392,848 15,170,306 19,057,636 16,765,002 18,638,951

FUND BALANCESReserved 2,869,004 2,976,878 8,602,113 8,006,308 11,896,094Unreserved:

Designated 7,058,141 11,091,835 15,555,194 25,188,507 22,248,908Undesignated, reported in:

General Fund 1,060,084 2,902,337 - - -

Total Fund Balances 10,987,229 16,971,050 24,157,307 33,194,815 34,145,002

Total Liabilities andFund Balances

$ 31,380,077 $ 32,141,356 $ 43,214,943 $ 49,959,817 $ 52,783,953

________________________Source: District Audited Financial Reports for fiscal years 2004-05 through 2008-09.

District Budget Process and County Review

State law requires school districts to maintain a balanced budget in each fiscal year. The StateDepartment of Education imposes a uniform budgeting and accounting format for school districts. Undercurrent law, a school district governing board must adopt and file with the county superintendent ofschools a tentative budget by July 1 in each fiscal year. The District is under the jurisdiction of the SanBernardino County Superintendent of Schools.

The County Superintendent must review and approve or disapprove the budget no later thanAugust 15. The County Superintendent is required to examine the adopted budget for compliance with thestandards and criteria adopted by the State Board of Education and identify technical correctionsnecessary to bring the budget into compliance with the established standards. If the budget is disapproved,it is returned to the District with recommendations for revision. The District is then required to revise thebudget, hold a public hearing thereon, adopt the revised budget, and file it with the CountySuperintendent no later than September 8. Pursuant to State law, the County Superintendent has availablevarious remedies by which to impose and enforce a budget that complies with State criteria, depending onthe circumstances, if a budget is disapproved. After approval of an adopted budget, the school district’sadministration may submit budget revisions for governing board approval.

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Subsequent to approval, the County Superintendent will monitor each district under itsjurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis ifthe district can meet its current or subsequent year financial obligations. If the County Superintendentdetermines that a district cannot meet its current or subsequent year obligations, the CountySuperintendent will notify the district’s governing board of the determination and may then do either orboth of the following: (a) assign a fiscal advisor to enable the district to meet those obligations, or (b) if astudy and recommendations are made and a district fails to take appropriate action to meet its financialobligations, the County Superintendent will so notify the State Superintendent of Public Instruction, andthen may do any or all of the following for the remainder of the fiscal year: (i) request additionalinformation regarding the district’s budget and operations; (ii) develop and impose, after also consultingwith the district’s governing board, revisions to the budget that will enable the district to meet its financialobligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the CountySuperintendent may not abrogate any provision of a collective bargaining agreement that was entered intoprior to the date upon which the County Superintendent assumed authority.

A State law adopted in 1991 (known as “A.B. 1200”) imposed additional financial reportingrequirements on school districts, and established guidelines for emergency State aid apportionments.Under the provisions of A.B. 1200, each school district is required to file interim certifications with theCounty Superintendent (on December 15, for the period ended October 31, and by mid-March for theperiod ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The CountySuperintendent reviews the certification and issues either a positive, negative or qualified certification. Apositive certification is assigned to any school district that will meet its financial obligations for thecurrent fiscal year and subsequent two fiscal years. A negative certification is assigned to any schooldistrict that is deemed unable to meet its financial obligations for the remainder of the fiscal year orsubsequent fiscal year. A qualified certification is assigned to any school district that may not meet itsfinancial obligations for the current fiscal year or two subsequent fiscal years. A school district thatreceives a qualified or negative certification may not issue tax and revenue anticipation notes orcertificates of participation without approval by the County Superintendent. The District has neverreceived a qualified or negative certification.

The following table summarizes the District’s adopted General Fund Budgets for fiscal years2008-09, 2009-10 and 2010-11, unaudited actuals for fiscal year 2008-09 and estimated actuals for fiscalyear 2009-10.

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General Fund Budgets for Fiscal Years 2008-09, 2009-10 and 2010-11,Unaudited Actuals for Fiscal Year 2008-09 and Estimated Actuals for Fiscal Year 2009-10

2008-09Original Adopted

Budget

2008-09Unaudited

Actuals


Budget

2009-10EstimatedActuals


Budget

REVENUESRevenue Limit Sources $132,531,182.00 $128,980,221.66 $120,292,918.00 $112,960,148.00 $110,834,941.00Federal Revenue 12,661,806.00 22,883,197.05 26,095,918.00 19,225,586.95 13,440,184.00Other State Revenue 31,965,559.00 33,686,062.32 26,362,835.00 28,896,533.01 27,329,152.00Other Local Revenue 13,020,965.00 12,744,597.71 11,577,650.00 12,877,852.37 10,098,519.00

TOTAL REVENUES 190,179,512.00 198,294,078.74(1) 184,329,321.00 173,960,120.33 161,702,796.00

EXPENDITURESCertificated Salaries 99,724,896.00 97,987,900.77 97,899,948.00 95,150,056.95 95,493,287.00Classified Salaries 30,888,955.00 29,970,618.07 30,807,865.00 28,700,904.01 28,952,432.00Employee Benefits 37,021,403.00 36,070,143.50 37,393,042.00 34,806,903.58 37,638,247.00Books and Supplies 9,429,300.00 10,097,167.05 8,831,418.00 6,267,510.88 5,504,463.00Services, Other Operating

Expenditures 14,294,011.00 14,360,159.43 14,965,700.00 13,612,121.36 12,801,404.00Capital Outlay 843,328.00 1,623,584.46 226,641.00 622,395.71 203,700.00Other Outgo (excluding

Transfers of Indirect Costs) 2,886,031.00 4,009,397.64 2,643,610.00 3,247,458.39 2,700,478.00

Other Outgo (Transfers ofIndirect Costs) (681,943.00) (663,692.02) (701,783.00) (648,305.38) (691,897.00)

TOTAL EXPENDITURES 194,405,981.00 193,455,278.90(1) 192,066,441.00 181,759,045.50 182,602,114.00

EXCESS (DEFICIENCY) OFREVENUES OVEREXPENDITURES BEFOREOTHER FINANCING SOURCESAND USES (4,226,469.00) 4,838,799.84 (7,737,120.00) (7,798,925.17) (20,899,318.00)

OTHER FINANCINGSOURCES/USESInterfund Transfers

Transfer In - 26,906.60 - 2,975,356.51 5,477,050.00Transfers Out 1,290,721.00 1,045,641.00 916,417.00 1,111,104.00 381,169.00

Other Sources/UsesSources - - - - -Uses - - - - -

Contributions - - - - -

TOTAL, OTHER SOURCES(USES)

(1,290,721.00) (1,018,734.40) (916,417.00) 1,864,252.51 5,095,881.00

NET INCREASE (DECREASE) INFUND BALANCE (5,517,190.00) 3,820,065.44 (8,653,537.00) (5,934,672.66) (15,803,437.00)BEGINNING FUND BALANCE

As of July 1 – Unaudited 29,852,163.48 33,194,815.22 21,121,678.00 37,014,880.66 28,210,329.00Audit Adjustments - - - (2,869,879.00) (1) -As of July 1 – Audited 29,852,163.48 33,194,815.22 21,121,678.00 34,145,001.66 28,210,329.00Other Restatements - - - - -Adjusted Beginning Fund Balance 29,852,163.48 33,194,815.22 21,121,678.00 34,145,001.66 28,210,329.00

ENDING BALANCE, June 30 $ 24,334,973.48 $ 37,014,880.66(1) $ 12,468,141.00 $ 28,210,329.00 $ 12,406,892.00(2)

(1) Total revenues and total expenditures do not match the District’s audited financial statements because the District does not include contributions of 4.517% ofteacher payroll to the State Teachers’ Retirement System made by the State on behalf of the District in its internal financial reports, amounting to $4,407,087 infiscal year 2008-09. The District’s audited financial statements include such amounts as revenue and as an expenditure. In addition, the District has made adownward adjustment to its fiscal year 2008-09 revenues in its audited financial statements (and, therefore, its June 30, 2009, audited ending balance and July 1,2009 audited beginning balance) to reflect a legislative reduction of State categorical funds in the amount of $2,869,879 after the close of the District’s fiscal year.See Note 17 to the District’s financial statements attached hereto “Appendix B – FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEARENDED JUNE 30, 2009.”

(2) On June 24, 2010, the Board of Education approved the District’s fiscal year 2010-11 budget. While the District is projecting maintaining required reservesdesignated for economic uncertainties and positive ending general fund balances in fiscal years 2010-11, 2011-12 and 2012-13, as a result of the continuingreductions in State education spending, the District is projecting unrestricted general fund deficit spending in such fiscal years. See the discussion of the District’sfiscal year 2010-11 adopted budget immediately following this table.

Source: District Adopted General Fund Budgets for fiscal years 2008-09, 2009-10 and 2010-11; unaudited actuals for fiscal year 2008-09; and estimated actuals forfiscal year 2009-10.

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On June 24, 2010, the Board of Education approved the District’s fiscal year 2010-11 budget.While the District is projecting maintaining required reserves designated for economic uncertainties andpositive ending general fund balances in fiscal years 2010-11, 2011-12 and 2012-13, as a result of thecontinuing reductions in State education spending, the District is projecting unrestricted general funddeficit spending in such fiscal years. Furthermore, the District is meeting fiscal year 2010-11 Staterequired reserves primarily through the use of one time only carryover balances which will be exhaustedby 2011-12 to meet ongoing operational needs. As a result, the District projects that, in order to meet itsfinancial obligations and minimum State required reserves, it will need to implement expenditurereductions of approximately $12.67 million in fiscal year 2011-12 and of another additionalapproximately $12.5 million in fiscal year 2012-13. For fiscal years 2011-12 and 2012-13, only $12.6million in specific reductions have been identified by the District and the District is developing a plan tospecify the necessary additional reductions. The reductions are projected to be accomplished primarilythrough decreases in salaries and benefits (which decreases have not yet been negotiated and agreed to)or, alternatively, through program and service reductions, which may entail layoffs.

Based on the District’s need to implement expenditure reductions totaling approximately $25.17million in fiscal years 2011-12 and 2012-13, the County Superintendent of Schools has indicated inpreliminary communications with the District that it expects to conditionally approve the District’sadopted fiscal year 2010-11 budget. Under the conditional approval, the District will be required to reviseits adopted fiscal year 2010-11 budget and submit a fiscal solvency action plan that clearly identifiesgoverning board approved expenditure reductions, and which of such reductions are one time and whichare ongoing. The District will also need to identify which expenditure reductions will need to benegotiated with the District’s collective bargaining units and specify the status of such negotiations. Inaddition, the County Superintendent of Schools has indicated that it will require further adjustments to theDistrict’s adopted fiscal year 2010-11 budget to include a contingency plan to reflect further reductions ofapproximately $2.9 million in fiscal year 2011-12 and $6.3 million in fiscal year 2012-12 if and to theextent assumed State funded cost of living adjustments are not realized. The County Superintendent ofSchools also indicated that the District will need to make a downward adjustment of approximately $1million in federal funds assumed to be available to the District in fiscal year 2010-11. The revised budgetand fiscal solvency action plan must be submitted to the County Superintendent of Schools no later thanSeptember 8, 2010. As indicated above, the expenditure reductions are projected to be accomplishedprimarily through decreases in salaries and benefits (which decreases have not yet been negotiated andagreed to) or, alternatively, through program and service reductions, which may entail layoffs. TheDistrict is unable to predict the outcome of negotiations with its collective bargaining units.

As of the date of adoption of the District’s fiscal year 2010-11 budget, the State had not adoptedits budget for fiscal year 2010-11. Accordingly, the District’s adopted fiscal year 2010-11 budget is basedon the Governor’s May Revision to the 2010-11 Proposed State Budget. The final fiscal year 2010-11State Budget, which requires approval by a two-thirds vote of each house of the State Legislature, maydiffer substantially from the Governor’s May Revision to the 2010-11 Proposed State Budget. See “-State Funding of Education; State Budget Process - Proposed 2010-11 State Budget,” “- LAO Analysis ofthe 2010-11 Proposed State Budget,” “- May Revision to 2010-11 Proposed State Budget” and “-Changes in State Budget.” Thus, the District may need to develop and implement different or additionalbudgetary adjustments when the final fiscal year 2010-11 State Budget is enacted into law. The CaliforniaEducation Code requires that each school district make available for public review any revisions inrevenues and expenditures that it has made to its budget to reflect the funding made available by theannual State Budget Act not later than forty-five days after the Governor signs the Budget Act.

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District Debt Structure

Long-Term Debt Summary. The changes in the District’s long-term obligations during fiscalyear 2008-09 consisted of the following:

BalanceJuly 1, 2008(1) Additions Deductions

BalanceJune 30, 2009

Due inOne Year

2001 General Obligation Bonds, Series A $ 26,450,000 $ - $ 320,000 $ 26,130,000 $ 330,000Premium on issuance 493,002 - 27,389 465,613 -

2001 General Obligation Bonds, Series B 23,241,792 169,334 385,000 23,026,126 485,000Premium on issuance 400,769 - 19,084 381,685 -

2001 General Obligation Bonds, Series C 50,640,986 861,042 1,990,000 49,512,028 1,990,000Premium on issuance 3,437,931 - 116,540 3,321,391 -

2001 Certificates of Participation 7,255,000 - 450,000 6,805,000 470,000Capital Leases 360,688 - 49,140 311,548 50,459Supplemental Early Retirement Plan - 5,534,570 - 5,534,570 1,106,914Other Postemployment Benefits 1,904,540 2,682,336 1,107,512 3,479,364 -Accumulated Vacation - Net 1,613,844 - 190,871 1,422,973 -

$115,798,552 $9,247,282 $4,655,536 $120,390,298 $4,432,373

________________________(1) Excludes the 2008A Bonds (defined below) issued on October 27, 2009.Source: District Audited Financial Report for fiscal year 2008-09.

Payments on the general obligation bonds are payable from the District’s Interest andRedemption Fund with local ad valorem tax revenues. Payments for the 2001 Certificates of Participationare payable from the District’s General Fund. Capital lease obligations are payable from the District’sGeneral Fund and the District’s Child Development Fund. The Supplemental Early Retirement Planpayments are payable from the District’s General Fund. Claims liability payments are payable from theWorkers’ Compensation Internal Service Fund. The other postemployment benefits and accrued vacationare paid from the fund for which the employee worked.

General Obligation Bonds. On September 25, 2001, a two-thirds majority of the voters of theDistrict approved $102,000,000 principal amount of general obligation bonds (the “2001 Authorization”).On April 10, 2002, the District issued $28,700,000 aggregate original principal amount of its 2001General Obligation Bonds, Series A (the “2001A Bonds”) as the District’s first series under the 2001Authorization. Proceeds from the sale of the 2001A Bonds were used to provide funds to acquire schoolsites, construct and repair school facilities and redeem a portion of the District’s 2001 Certificates (asdefined below). The 2001A Bonds mature on August 1, 2026.

On July 14, 2004, the District issued $23,177,726 aggregate original principal amount of its 2001General Obligation Bonds, Series B (the “2001B Bonds”) as the District’s second series under the 2001Authorization. The 2001B Bonds were issued as both current interest bonds and capital appreciationbonds. The 2001B Bonds mature on February 1, 2029. Proceeds from the sale of the 2001B Bonds will beused to provide funds to acquire school sites, construct and repair school facilities.

On January 11, 2006, the District issued $50,122,151 aggregate original principal amount of its2001 General Obligation Bonds, Series C (the “2001C Bonds”) as the District’s third and final seriesunder the 2001 Authorization. The 2001C Bonds were issued as both current interest bonds and capitalappreciation bonds. The 2001C Bonds mature on February 1, 2038. Proceeds from the sale of the 2001CBonds will be used to provide funds to acquire school sites, construct and repair school facilities.

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The following table summarizes the District’s general obligation debt that was outstanding as ofJune 30, 2009:

IssueDate

MaturityDate

InterestRate

OriginalIssue

BondsOutstandingJuly 1, 2008 Accreted Redeemed

BondsOutstanding

June 30,2009(1)

4/10/02 8/1/26 3.00 – 5.23% $ 28,700,000 $ 26,450,000 $ - $ 320,000 $ 26,130,0007/14/04 2/1/29 2.00 – 5.89% 23,177,726 23,241,792 169,334 385,000 23,026,1261/11/06 2/1/38 3.17 – 5.12% 50,122,151 50,640,986 861,042 1,990,000 49,512,028

Totals $100,332,778 $1,030,376 $2,695,000 $ 98,668,154

________________________(1) Excludes the 2008A Bonds (defined below) issued on October 27, 2009.Source: District Audited Financial Report for fiscal year 2008-09.

On November 4, 2008, the voters of the District approved $225,000,000 principal amount ofbonds (the “2008 Authorization”). On October 27, 2009, the District issued $48,999,050.25 aggregateinitial principal amount of its Election of 2008 General Obligation Bonds, Series A (the “2008A Bonds”)as the District’s first series under the 2008 Authorization. The 2008A Bonds were issued as both currentinterest bonds and capital appreciation bonds. The 2008A Bonds mature on August 1, 2034. Proceedsfrom the sale of the 2008A Bonds will be used to provide funds to finance specific school facilityconstruction, repair and improvement projects. The Bonds will be the second series of bonds issued underthe 2008 Authorization.

For a table showing the scheduled debt service on all the District’s outstanding general obligationbonds, see “THE BONDS–Aggregate Debt Service” in the front portion of this Official Statement.

Certificates of Participation. On June 27, 2001, the District, pursuant to a lease/purchaseagreement with the Colton Joint Unified School District Facilities Corporation (the “Corporation”),caused to be executed and delivered $15,000,000 aggregate principal amount of certificates ofparticipation (the “2001 Certificates”). The 2001 Certificates were executed and delivered to finance theacquisition of real property within the District and improvements thereon, to finance the acquisition ofrelocatable classrooms, kitchens and multipurpose rooms to be used by the District for educationalpurposes, fund a reserve fund for the 2001 Certificates and pay costs of issuance incurred in connectionwith the execution and delivery of the 2001 Certificates. At June 30,2009 the principal balance of the2001 Certificates outstanding was $6,805,000. The 2001 Certificates mature through 2021 as follows:

Year Ending June 30, Principal Interest Total

2010 $ 470,000 $ 324,310 $ 794,3102011 490,000 304,922 794,9222012 510,000 284,098 794,0982013 530,000 261,785 791,7852014 555,000 237,935 792,935

2015 – 2019 3,205,000 763,961 3,968,9612020 – 2021 1,045,000 69,003 1,114,003

Total $ 6,805,000 $ 2,246,014 $ 9,051,014

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Capital Leases. The District’s liability on lease agreements with options to purchase aresummarized below:

Balance, July 1, 2008 $ 389,756Payments 57,461Balance, June 30, 2009 $ 332,295

The capital leases have minimum lease payments as follows:

Year EndingJune 30,

LeasePayment

2010 $ 57,4592011 57,4592012 57,4592013 57,4592014 57,459

2015 – 2017 45,000

Total 332,295

Less: Amount Representing Interest 20,747

Present Value of Minimum Lease Payments $311,548

Supplemental Employee Retirement Plan (SERP). In March 2009, the District adopted asupplemental retirement plan whereby certain eligible certificated employees are provided an annuity tosupplement the retirement benefits they are entitled to through the State Teachers’ Retirement System orother retirement system. The annuities offered to the employees are to be paid over a five-year period.The annuities were purchased for 106 employees who retired by June 30, 2009. As of June 30, 2009, theoutstanding liability of the District amounted to $5,534,570.

Year Ending June 30, Amount

2010 $ 1,106,9142011 1,106,9142012 1,106,9142013 1,106,9142014 1,106,914

Total $ 5,534,570

Other Post Employment Benefits (OPEBs). In addition to the retirement plan benefits withCalSTRS, CalPERS and APPLE, the District provides certain post retirement healthcare benefits, inaccordance with District employment contracts, to eligible employees. Certificated employees who retirefrom the District on or after attaining age 55 with at least 15 years of service, are (i) eligible for 10 yearsof benefits or until the retiree’s sixty-fifth birthday, whichever occurs first, if such employee reached age50 prior to July 1, 2007, and (ii) are eligible for 5 years of benefits or until the retiree’s sixty-fifthbirthday, whichever occurs first, if such employee reaches age 50 after July 1, 2007. The benefits consistof health insurance benefits and are provided in the form of a subsidy by the District up to the cost ofHMO Employee Plus One medical coverage. Dependents are eligible to receive benefits. Part-timeemployees’ subsidy is pro-rated based on a percentage of scheduled hours worked. Selected retireesreceive lifetime benefits. Currently there are four retirees receiving lifetime benefits. Retirees may elect tocontinue coverage after the age of sixty-five with no direct subsidy from the District.

Classified employees who retire from the District on or after attaining age 50 with at least 15years of service, also receive health insurance benefits in the form of the subsidy by the District up to thecost of HMO Employee Plus One medical coverage. Such benefits are provided for 10 years or until the

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retiree’s sixty-fifth birthday, whichever occurs first. Dependents are eligible to receive benefits. Part-timeemployees’ subsidy is pro-rated based on a percentage of scheduled hours worked. Retirees may elect tocontinue coverage after the age of sixty-five with no direct subsidy from the District.

As of June 30, 2009, 99 retirees and beneficiaries met these eligibility requirements and werereceiving benefits, and there were 3,033 active plan members.

The Governmental Accounting Standards Board (“GASB”) released its Statement Number 45(“Statement Number 45”), which requires municipalities to account for other post-employment benefits(meaning other than pension benefits) liabilities much like municipalities are required to account forpension benefits. The District implemented the Statement Number 45 requirements in fiscal year 2007-08.See Note 11 to the District’s financial statements attached hereto as Appendix B: “FINANCIALSTATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2009.”

LECG-SMART (the “Actuary”), has prepared the District’s most recent actuarial valuation of theDistrict’s retiree health insurance benefits and reports that, as of July 1, 2009, the District had anunfunded actuarial accrued liability of $25,629,250. As of the valuation date, the District had notidentified any funds as plan assets under Statement Number 45. The valuation assumed a discount rate orassumed rate of return on investments of 5.0%, and assumed an 8.0% long term average increase forhealthcare benefits, trending down to an ultimate 5.0% increase for 2012 and later years. Under theDistrict’s actuarial valuation, its annual required contribution for fiscal year 2009-10 was $3,121,121.However, the District’s current funding policy is to contribute an amount sufficient to pay the currentyear’s retiree claim costs and plan expenses. The District has not established an irrevocable trust toprefund its OPEB liability, and no prefunding of benefits has been made by the District. The District’sprevious contributions, on a pay-as-you-go basis, for these benefits for fiscal years 2005-06, 2006-07,2007-08, 2008-09 and 2009-10 were $595,025, $600,795, $805,324, $1,107,512 and $1,233,928(unaudited), respectively.

For further information about the District’s OPEB obligations, see Note 11 to the District’sfinancial statements attached hereto as Appendix B: “FINANCIAL STATEMENTS OF THE DISTRICTFOR THE FISCAL YEAR ENDED JUNE 30, 2009.”

Accumulated Unpaid Employee Vacation. The accumulated unpaid employee vacation for theDistrict at June 30, 2009, amounted to $1,422,973.

Employment

As of June 30, 2010, the District employed 1,213 represented certificated professionals and 638represented classified employees, and 125 management employees. For the year ended June 30, 2010, thetotal certificated and classified payrolls (excluding benefits) were $95,193,367 (unaudited) and$29,798,121 (unaudited), respectively.

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District employees are represented by employee bargaining units as follows:

Name of Bargaining Unit

Number ofEmployees

RepresentedCurrent ContractExpiration Date

California School Employees Association 559 June 30, 2010(1)

California Teachers Association 1,187 June 30, 2008(1)

_____________________(1) The District is in ongoing negotiations with its collective bargaining units with respect to fiscal year 2009-10. It

has not yet opened negotiations with respect to fiscal year 2010-11. The District currently projects that, in orderto meet its financial obligations and minimum State required reserves, it will need to implement expenditurereductions of approximately $12.67 million in fiscal year 2011-12 and of another additional approximately$12.5 million in fiscal year 2012-13. For fiscal years 2011-12 and 2012-13, only $12.6 million in specificreductions have been identified by the District and the District is developing a plan to specify the necessaryadditional reductions. The reductions are projected to be accomplished primarily through decreases in salariesand benefits (which decreases have not yet been negotiated and agreed to) or, alternatively, through programand service reductions, which may entail layoffs. The District is unable to predict the outcome of negotiationswith its collective bargaining units. See “- District Budget Process and County Review.”

Source: The District.

Retirement Benefits

The District participates in retirement plans with the State Teachers’ Retirement System(“CalSTRS”), which covers all full-time certificated District employees, and the State Public Employees’Retirement System (“CalPERS”), which covers certain classified employees. Classified school personnelwho are employed four or more hours per day may participate in CalPERS. The District also contributesto the Accumulation Program for Part-time and Limited Service Employees (“APPLE”), which is adefined contribution pension plan.

District’s Contributions to CalSTRS. Contributions to CalSTRS are fixed in statute. Teacherscontribute 8% of salary to CalSTRS, while school districts contribute 8.25%. In addition to the teacherand school contributions, the State contributes 4.517% of teacher payroll to CalSTRS (calculated onpayroll data from two fiscal years ago). Unlike typical defined benefit programs, however, neither theCalSTRS employer nor the State contribution rate varies annually to make up funding shortfalls or assesscredits for actuarial surpluses. The State does pay a surcharge when the teacher and school districtcontributions are not sufficient to fully fund the basic defined benefit pension (generally consisting of 2%of salary for each year of service at age 60 referred to herein as “pre-enhancement benefits”) within a 30-year period. However, this surcharge does not apply to systemwide unfunded liability resulting fromrecent benefit enhancements.

Because of the downturn in the stock market, an actuarial valuation as of June 30, 2003 showed a$118 million shortfall in the baseline benefits—one-tenth of 1% of accrued liability. Consequently, thesurcharge kicked in for the first time in the fiscal year 2004-05 at 0.524% for three quarterly payments,which amounted to an additional $92 million from the State’s general fund in fiscal year 2004-05.However, in addition to the small shortfall in pre-enhancement benefits (triggering the surcharge), theJune 30, 2003, valuation also showed a substantial $23 billion unfunded liability for the entire system,including enhanced benefits. As indicated above, there is no required contribution from teachers, schooldistricts or the State to fund this unfunded liability.

As of June 30, 2008, an actuarial valuation for the entire system, including enhanced benefits,showed an estimated unfunded actuarial liability of $22.519 billion. Future estimates of the actuarialunfunded liability may change due to market performance, legislative actions and other experience thatmay differ from the actuarial assumptions.

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CalSTRS has developed options to address the shortfall but most would require legislative action.In addition, in the Governor’s 2005–06 Proposed State Budget and the 2005-06 May Revise of the 2005-06 Proposed Budget, the Governor proposed increasing the fixed contribution rate from 8.25% to 10.25%for school districts. Subsequently, the final 2005-06 State Budget was adopted with a contribution rate of8.25%. In addition to the proposal by the Governor to increase the fixed contribution rate for schooldistricts, other proposals have been suggested that would modify the District’s obligation to makecontributions to CalSTRS to closely parallel the full cost of the retirement benefits provided by CalSTRS,which proposals would include components for unfunded liability. If these proposals were adopted, theDistrict’s annual obligations to CalSTRS would likely increase substantially.

The District’s employer contributions to CalSTRS for fiscal years 2006-07, 2007-08 and 2008-09were $7,621,394, $8,002,058 and $8,051,253, respectively, and were equal to 100 percent of the requiredcontributions for each year. The District estimates that that its employer contributions to CalSTRS forfiscal year 2009-10 was approximately $7,800,456 (unaudited) and projects that that its employercontributions to CalSTRS for fiscal year 2010-11 will be approximately $7,891,120.

CalPERS. All qualifying classified employees of K through 12 school districts in the State aremembers in CalPERS, and all of such districts participate in the same plan. As such, all such districtsshare the same contribution rate in each year. However, unlike school districts’ participating in CalSTRS,the school districts’ contributions to CalPERS fluctuate each year and include a normal cost componentand a component equal to an amortized amount of the unfunded liability.

According to the CalPERS State and Schools Actuarial Valuation as of June 30, 2007, theCalPERS Plan for Schools had a funded ratio of 107.8% on a market value of assets basis. It is expectedthat the funded ratio will be less as of June 30, 2008, as the rate of return on assets in fiscal year 2007-08was 2.4%. On October 22, 2008, CalPERS announced that employer rates for fiscal year 2008-09 wouldbe unaffected by the market losses experienced in October 2008. CalPERS indicated that rates were builtusing investment returns from earlier periods, and the effect of the current market downturn in October2008 will be unknown until investment returns are determined for the fiscal year ending June 30, 2009.

In June 2009, the CalPERS Board of Administration adopted a new employer rate smoothingmethodology for local governments and school employer rates. Under the new methodology, which is notmandatory for employers, investment losses will be amortized and paid off over a fixed and declining 30-year period instead of the current, rolling 30-year amortization period. The District has not made anydecision with respect to whether to use the new methodology.

The District’s employer contributions to CalPERS for fiscal years 2006-07, 2007-08 and 2008-09were $2,855,928, $3,012,541 and $3,088,415, respectively, and were equal to 100 percent of the requiredcontributions for each year. The District estimates that that its employer contributions to CalPERS forfiscal year 2009-10 was approximately $2,748,319 (unaudited) and projects that that its employercontributions to CalPERS for fiscal year 2010-11 will be approximately $3,053,027.

APPLE. The District also contributes to the Accumulation Program for Part-time and LimitedService Employees, which is a defined contribution pension plan. A defined benefit contribution pensionplan provides pension benefits in return for services rendered, provides an individual account of eachparticipant, and specifies how contributions to the individual’s account are to be determined instead ofspecifying the amount of benefits the individual is to receive. Under a defined benefit contribution plan,the benefits a participant will receive depend solely on the amount contributed to the participant’saccount, the returns earned on investments of those contributions, and forfeitures of other participants’benefits that may be allocated to such participant’s account.

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As established by federal law, all public sector employees who are not members of theiremployer’s existing retirement system (CalSTRS or CalPERS) must be covered by social security or analternative plan. The District has elected to use APPLE as its alternative plan. Contributions made by theDistrict and an employee vest immediately. The District contributes 2.25% of an employee’s grossearnings. An employee is required to contribute 5.25% of his or her gross earnings to the pension plan.

During the 2008-09 fiscal year, the District’s required and actual contributions amounted to$49,949, which was 2.25% of its current year covered payroll. Employees required and actualcontributions amounted to $116,549, which was 5.25% of the covered payroll.

The District is unable to predict what the amount of State pension liabilities will be in the future,or the amount of the contributions which the District may be required to make. CalSTRS and CalPERSare more fully described in APPENDIX B - “EXCERPTS FROM FINANCIAL STATEMENTS OF THEDISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2009, Note 13.

Insurance, Risk Pooling and Joint Powers Agreements and Joint Ventures

The District participates in three joint ventures under joint powers agreements (“JPAs”): theAlliance of Schools for Cooperative Insurance Programs (ASCIP), the Colton-Redlands-YucaipaRegional Occupational Program (CRYROP), and the High Desert and Inland Employee/Employer PublicJoint Labor Management Trust (HD&IE/ET).

Alliance of Schools for Cooperative Insurance Programs. The District pays an annual premiumto ASCIP for property and liability coverage.

Colton-Redlands-Yucaipa Regional Occupational Program. Payments for regional occupationalprogram services are paid to CRYROP.

High Desert and Inland Employee/Employer Public Joint Labor Management Trust.HD&IE/ET is a joint powers agency that provides health benefit coverage for its members.

The relationships between the District and the JPAs are such that the JPAs are not a componentunit of the District for financial reporting purposes. The JPAs are governed by a board consisting of arepresentative from each member district. The governing board controls the operations of its JPAsindependent of any influence by the member districts beyond their representation on the governing board.Each member district pays a premium commensurate with the level of coverage requested and sharessurpluses and deficits proportionately to its participation in the JPAs.

CONSTITUTIONAL AND STATUTORY PROVISIONSAFFECTING DISTRICT REVENUES AND APPROPRIATIONS

Limitations on Revenues

On June 6, 1978, California voters approved Proposition 13 (“Proposition 13”), which addedArticle XIIIA to the State Constitution (“Article XIIIA”). Article XIIIA limits the amount of any advalorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxesmay be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii)bonded indebtedness for the acquisition or improvement of real property which has been approved on orafter July 1, 1978 by two-thirds of the voters on such indebtedness, and (iii) bonded indebtedness incurredby a school district or community college district for the construction, reconstruction, rehabilitation orreplacement of school facilities or the acquisition or lease of real property for school facilities, approved

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by 55% of the voters of the district, but only if certain accountability measures are included in theproposition. Article XIIIA defines full cash value to mean “the county assessor’s valuation of realproperty as shown on the 1975-76 tax bill under full cash value, or thereafter, the appraised value of realproperty when purchased, newly constructed, or a change in ownership have occurred after the 1975assessment.” This full cash value may be increased at a rate not to exceed two percent per year to accountfor inflation.

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

County of Orange v. Orange County Assessment Appeals Board No. 3. Section 51 of theRevenue and Taxation Code permits county assessors who have reduced the assessed valuation of aproperty as a result of natural disasters, economic downturns or other factors, to subsequently “recapture”such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending onthe assessor’s measure of the restoration of value of the damaged property. The constitutionality of thisprocedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court, and insimilar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new“base year value” for purposes of Proposition 13 and that subsequent increases in the assessed value of aproperty by more than 2% in a single year violate Article XIIIA. On appeal, the California Court ofAppeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling,leaving the recapture law in place.

Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number oftimes since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted tolevy directly any property tax (except to pay voter-approved indebtedness). The one percent property taxis automatically levied by the county and distributed according to a formula among taxing agencies. Theformula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989.

Increases of assessed valuation resulting from reappraisals of property due to new construction,change in ownership or from the two percent annual adjustment are allocated among the variousjurisdictions in the “taxing area” based upon their respective “situs.” Any such allocation made to a localagency continues as part of its allocation in future years.

Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values ontax rolls at the assessed value of 25% of market value which was expressed as $4 per $100 assessed value.All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate isexpressed as $1 per $100 of taxable value. All taxable property value included in this Official Statementis shown at 100% of market value (unless noted differently) and all tax rates reflect the $1 per $100 oftaxable value.

Article XIIIB of the California Constitution

An initiative to amend the State Constitution entitled “Limitation of Government Appropriations”was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution (“ArticleXIIIB”). Under Article XIIIB state and local governmental entities have an annual “appropriations limit”and are not permitted to spend certain monies which are called “appropriations subject to limitation”(consisting of tax revenues, state subventions and certain other funds) in an amount higher than the“appropriations limit.” Article XIIIB does not affect the appropriation of monies which are excluded fromthe definition of “appropriations subject to limitation,” including debt service on indebtedness existing or

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authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In generalterms, the appropriations limit” is to be based on certain 1978-79 expenditures, and is to be adjustedannually to reflect changes in consumer prices, populations, and services provided by these entities.Among other provisions of Article XIIIB, if these entities’ revenues in any year exceed the amountspermitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over thesubsequent two years.

The District’s budgeted appropriations from “proceeds of taxes” (sometimes referred to as the“Gann limit”) for the 2008-09 fiscal year are equal to the allowable limit of $107,309,643, and projects anappropriations limit for 2009-10 of $107,111,163. Any proceeds of taxes received by the District inexcess of the allowable limit are absorbed into the State’s allowable limit.

Article XIIIC and Article XIIID of the California Constitution

On November 5, 1996, the voters of the State of California approved Proposition 218, popularlyknown as the “Right to Vote on Taxes Act.” Proposition 218 added to the California Constitution ArticlesXIIIC and XIIID, which contain a number of provisions affecting the ability of local agencies, includingschool districts, to levy and collect both existing and future taxes, assessments, fees and charges.

According to the “Title and Summary” of Proposition 218 prepared by the California AttorneyGeneral, Proposition 218 limits “the authority of local governments to impose taxes and property-relatedassessments, fees and charges.” Among other things, Article XIIIC establishes that every tax is either a“general tax” (imposed for general governmental purposes) or a “special tax” (imposed for specificpurposes), prohibits special purpose government agencies such as school districts from levying generaltaxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond itsmaximum authorized rate without a two-thirds vote; and also provides that the initiative power will not belimited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIICfurther provides that no tax may be assessed on property other than ad valorem property taxes imposed inaccordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by atwo-thirds vote under Article XIIIA, Section 4. Article XIIID deals with assessments and property-relatedfees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affectexisting laws relating to the imposition of fees or charges as a condition of property development.

The District does not impose any taxes, assessments, or property-related fees or charges whichare subject to the provisions of Proposition 218. It does, however, receive a portion of the basic onepercent ad valorem property tax levied and collected by the County pursuant to Article XIIIA of theCalifornia Constitution. The provisions of Proposition 218 may have an indirect effect on the District,such as by limiting or reducing the revenues otherwise available to other local governments whoseboundaries encompass property located within the District thereby causing such local governments toreduce service levels and possibly adversely affecting the value of property within the District.

Statutory Limitations

On November 4, 1986, State voters approved Proposition 62, an initiative statute limiting theimposition of new or higher taxes by local agencies. The statute (a) requires new or higher general taxesto be approved by two-thirds of the local agency’s governing body and a majority of its voters; (b)requires the inclusion of specific information in all local ordinances or resolutions proposing new orhigher general or special taxes; (c) penalizes local agencies that fail to comply with the foregoing; and (d)required local agencies to stop collecting any new or higher general tax adopted after July 31, 1985,unless a majority of the voters approved the tax by November 1, 1988.

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Appellate court decisions following the approval of Proposition 62 determined that certainprovisions of Proposition 62 were unconstitutional. However, the California Supreme Court upheldProposition 62 in its decision on September 28, 1995 in Santa Clara County Transportation Authority v.Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regardingProposition 62 were not addressed in the Supreme Court’s decision, such as whether the decision appliesretroactively, what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62,and whether the decision applies to charter cities.

Proposition 98 and Proposition 111

On November 8, 1988, voters approved Proposition 98, a combined initiative constitutionalamendment and statute called the “Classroom Instructional Improvement and Accountability Act” (the“Accountability Act”). The Accountability Act changed State funding of public education below theuniversity level, and the operation of the State’s Appropriations Limit. The Accountability Act guaranteesState funding for K through 12 school districts and community college districts (collectively, “K-14districts”) at a level equal to the greater of (a) the same percentage of general fund revenues as thepercentage appropriated to such districts in 1986-87, which percentage is equal to 40.9%, or (b) theamount actually appropriated to such districts from the general fund in the previous fiscal year, adjustedfor growth in enrollment and inflation.

Since the Accountability Act is unclear in some details, there can be no assurance that theLegislature or a court might not interpret the Accountability Act to require a different percentage ofgeneral fund revenues to be allocated to K-14 districts than the 40.9% percentage, or to apply the relevantpercentage to the State’s budgets in a different way than is proposed in the Governor’s Budget. In anyevent, the Governor and other fiscal observers expect the Accountability Act to place increasing pressureon the State’s budget over future years, potentially reducing resources available for other State programs,especially to the extent the Article XIIIB spending limit would restrain the State’s ability to fund suchother programs by raising taxes.

The Accountability Act also changes how tax revenues in excess of the State AppropriationsLimit are distributed. Any excess State tax revenues up to a specified amount would, instead of beingreturned to taxpayers, be transferred to K-14 districts. Such transfer would be excluded from theAppropriations Limit for K-14 districts and the K-14 school Appropriations Limits for the next yearwould automatically be increased by the amount of such transfer. These additional monies would enterthe base funding calculation for K-14 districts for subsequent years, creating further pressure on otherportions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus.The maximum amount of excess tax revenues which could be transferred to schools is four percent of theminimum State spending for education mandated by the Accountability Act, as described above.

On June 5, 1990, California voters approved Proposition 111 (Senate Constitutional Amendment1), which further modified the Constitution to alter the spending limit and education funding provisions ofProposition 98. Most significantly, Proposition 111 (1) liberalized the annual adjustments to the spendinglimit by measuring the “change in the cost of living” by the change in State per capita personal incomerather than the Consumer Price Index, and specified that a portion of the State’s spending limit would beadjusted to reflect changes in school attendance; (2) provided that 50% of the “excess” tax revenues,determined based on a two-year cycle, would be transferred to K-14 school districts with the balancereturned to taxpayers (rather than the previous 100% but only up to a cap of four percent of the districts’minimum funding level), and that any such transfer to K-14 school districts would not be built into theschool districts’ base expenditures for calculating their entitlement for State aid in the following year andwould not increase the State’s appropriations limit; (3) excluded from the calculation of appropriationsthat are subject to the limit appropriations for certain “qualified capital outlay projects” and certain

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increases in gasoline taxes, sales and use taxes, and receipts from vehicle weight fees; (4) provided thatthe Appropriations Limit for each unit of government, including the State, would be recalculatedbeginning in the 1990-91 fiscal year, based on the actual limit for fiscal year 1986-87, adjusted forward to1990-91 as if Senate Constitutional Amendment 1 had been in effect; and (5) adjusted the Proposition 98formula that guarantees K-14 school districts a certain amount of general fund revenues, as describedbelow.

Under prior law, K-14 school districts were guaranteed the greater of (a) 40.9% of general fundrevenues (the “first test”) or (b) the amount appropriated in the prior year adjusted for changes in the costof living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the“second test”). Under Proposition 111, school districts would receive the greater of (a) the first test, (b)the second test or (c) a third test, which would replace the second test in any year when growth in percapita general fund revenues from the prior year was less than the annual growth in State per capitapersonal income. Under the third test, school districts would receive the amount appropriated in the prioryear adjusted for change in enrollment and per capita general fund revenues, plus an additional smalladjustment factor. If the third test were used in any year, the difference between the third test and thesecond test would become a “credit” to be paid in future years when general fund revenue growth exceedspersonal income growth.

Applications of Constitutional and Statutory Provisions

The application of Proposition 98 and other statutory regulations has become increasinglydifficult to predict accurately in recent years. For a discussion of how the provisions of Proposition 98have been applied to school funding see “DISTRICT HISTORY, OPERATION AND FINANCIALINFORMATION — State Funding of Education; State Budget Process.”

Future Initiatives

Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, as well as Propositions 98 and 111were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. Fromtime to time other initiative measures could be adopted, further affecting District revenues or theDistrict’s ability to expend revenues.

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APPENDIX B

FINANCIAL STATEMENTS OF THE DISTRICTFOR THE FISCAL YEAR ENDED JUNE 30, 2009

[THIS PAGE INTENTIONALLY LEFT BLANK]

COLTON JOINT UNIFIED SCHOOL DISTRICT

OF SAN BERNARDINO COUNTY

COLTON, CALIFORNIA

JUNE 30, 2009

GOVERNING BOARD

MEMBER OFFICE TERM EXPIRES

Mrs. Marge Mendoza-Ware President 2010

Mr. Melvin A. Albiso Vice President 2010

Mr. David R. Zamora Clerk 2010

Mr. Robert D. Armenta, Jr. Member 2010

Mrs. Patt Haro Member 2012

Mr. Frank A. Ibarra Member 2012

Mr. Kent Taylor Member 2012

ADMINISTRATION

Mr. James A. Downs Superintendent

Mr. Jaime R. Ayala Assistant Superintendent, Business Services Division

Mr. Jerry Almendarez Assistant Superintendent, Human Resources Division

Mrs. Mollie Gainey-Stanley Assistant Superintendent, Educational Services Division

Mr. Mike Snellings Assistant Superintendent, Student Services Division


TABLE OF CONTENTSJUNE 30, 2009

FINANCIAL SECTIONIndependent Auditors' Report 2Management's Discussion and Analysis 4Basic Financial Statements

Government-Wide Financial StatementsStatement of Net Assets 13Statement of Activities 14

Fund Financial StatementsGovernmental Funds - Balance Sheet 15Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 16Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balance 17Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 18

Proprietary Funds - Statement of Net Assets 20Proprietary Funds - Statement of Revenues, Expenses, and Changes in Fund Net Assets 21Proprietary Funds - Statement of Cash Flows 22Fiduciary Funds - Statement of Net Assets 23

Notes to Financial Statements 24

REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 57Schedule of Other Postemployment Benefits (OPEB) Funding Progress 58

SUPPLEMENTARY INFORMATIONSchedule of Expenditures of Federal Awards 60Local Education Agency Organization Structure 62Schedule of Average Daily Attendance 63Schedule of Instructional Time 64Reconciliation of Annual Financial and Budget Report with Audited Financial Statements 65Schedule of Financial Trends and Analysis 66Schedule of Charter Schools 67Combining Statements - Non-Major Governmental Funds

Combining Balance Sheet 68Combining Statement of Revenues, Expenditures, and Changes in Fund Balance 70

General Fund Selected Financial Information 72Cafeteria Fund Selected Financial Information 73Note to Supplementary Information 74

INDEPENDENT AUDITORS' REPORTSReport on Internal Control over Financial Reporting and on Compliance and Other MattersBased on an Audit of Financial Statements Performed in Accordance with GovernmentAuditing Standards 77

Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 79

Report on State Compliance 81


TABLE OF CONTENTSJUNE 30, 2009

SCHEDULE OF FINDINGS AND QUESTIONED COSTSSummary of Auditors' Results 84Financial Statement Findings 85Federal Awards Findings and Questioned Costs 86State Awards Findings and Questioned Costs 87Summary Schedule of Prior Audit Findings 88Management Letter 90

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FINANCIAL SECTION

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This section of Colton Joint Unified School District's (the District) audited annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, 2009. Please read it in conjunction with the District's financial statements, which immediately follow this section.

OVERVIEW OF THE FINANCIAL STATEMENTS

The Financial Statements

The financial statements presented herein include all of the activities of the Colton Joint Unified School District and its component units using the integrated approach as prescribed by Governmental Accounting Standards Board (GASB) Statement No. 34.

The Government-Wide Financial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting. These statements include all assets of the District (including capital assets) as well as all liabilities (including long-term obligations). Additionally, certain eliminations have occurred as prescribed by the statement in regards to interfund activity, payables and receivables.

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

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 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 prepared using the economic resources measurement focus and the accrual basis of accounting.

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 Colton Joint Unified School District.


MANAGEMENT'S DISCUSSION AND ANALYSISJUNE 30, 2009

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REPORTING THE 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 information 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 governing 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 report the District activities as follows:

Governmental Activities - The District reports all of its services in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development and adult education 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.

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. and California Departments of Education.



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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 of results 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 Revenues, Expenses, and Changes in Fund Net Assets. We use internal service funds to report activities thatprovide supplies and services for the District's other programs and activities - such as the District's Self-Insurance 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. The District's fiduciary activities are reported in the 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.

FINANCIAL HIGHLIGHTS

Despite a deteriorating national and State economy, the District managed to close the 2008-09 year without deficit spending. General Fund revenue totaled $199.8 million compared to expenditures of $198.9 million. Consequently, the year closed at June 30, 2009, with an ending fund balance of $34.1 million. The District is committed to taking all necessary steps to ensure that the District remains financially strong. As part of the District's plans to deal with the on-going economic downturn and resulting decline in revenue, the District is developing plans to reduce costs in the coming years. Coping with projected declines in revenue also includes drawing down on the fund balance significantly in 2009-10, as necessary. While the current state of the economy does present significant General Fund budgetary challenges, the District must still plan for future facility needs. In order to proceed with much needed facility modernization and new construction, the District was successful in getting voter approval of Bond Measure G on November 4, 2008. This bond measure authorized $225 million in general obligation bonds. The initial bond series to be received from Bond Measure G will be used to ensure completion of Grand Terrace High School, which broke ground in early 2009. The new high school will be completed in time for opening of the 2011-12 school year. Other major projects are being planned, most notably new math and science buildings at Colton High School and at Bloomington High School.



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THE DISTRICT AS A WHOLE

Net Assets

The District's net assets were $242.3 million for the fiscal year ended June 30, 2009. Of this amount, $41.5 million was unrestricted. Restricted net assets are reported separately to show legal constraints from debt covenants grantors, constitutional provisions and enabling legislation that limit the governing board's ability touse those net assets for day-to-day operations. Our analysis below, in summary form, focuses on the net assets (Table 1) and change in net assets (Table 2) of the District's governmental activities.

Table 1

(Amounts in millions) Governmental Activities2009 2008

AssetsCurrent and other assets 216.3$ 168.4$ Capital assets 173.4 163.7

Total Assets 389.7 332.1 Liabilities

Current liabilities 27.0 21.2 Long-term obligations 120.4 115.8

Total Liabilities 147.4 137.0 Net Assets

Invested in capital assets,net of related debt 94.8 93.1 Restricted 106.0 52.0 Unrestricted 41.5 50.0

Total Net Assets 242.3$ 195.1$

The $41.5 million in unrestricted net assets of governmental activities represents the accumulated results of allpast years' operations.

Changes in Net Assets

The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 14. Table 2 takes the information from the Statement, rounds off the numbers, and rearranges them slightlyso you can see our total revenues for the year.



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Table 2


RevenuesProgram revenues:

Charges for services 2.5$ 2.9$ Operating grants and contributions 52.1 56.8 Capital grants and contributions 52.0 0.8

General revenues:Federal and State aid not restricted 133.2 147.7 Property taxes 17.9 16.0 Other general revenues 20.3 14.2

Total Revenues 278.0 238.4 Expenses

Instruction-related 152.1 148.7 Student support services 33.5 26.7 Administration 10.8 11.5 Plant services 23.4 25.7 Other 11.0 9.8

Total Expenses 230.8 222.4 Change in Net Assets 47.2$ 16.0$

Governmental Activities

As reported in the Statement of Activities on page 14, the cost of all of our governmental activities this year was $230.8 million. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $17.9 million because the cost was paid by those who benefited from the programs or by other governments and organizations who subsidized certain programs with grants and contributions ($106.6 million). We paid for the remaining "public benefit" portion of our governmental activities with $17.9 million in taxes, $133.2 million in State funds, and with other revenues, like interest and general entitlements.

In Table 3, we have presented the cost and net cost of each of the District's largest functions - instruction, school administration, home-to-school transportation, food services, other pupil services, administration, plant services,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.



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Table 3

(Amounts in millions)2009 2008 2009 2008

Instruction and other related activities 139.5$ 136.2$ 57.0$ 99.9$ School administration 12.6 12.5 12.2 12.2 Home-to-school transportation 4.2 4.1 2.9 3.0 Food services 9.9 9.7 0.5 0.6 Other pupil services 19.4 12.9 14.6 7.6 General administration 10.8 11.5 7.7 8.7 Plant services 23.4 25.7 21.9 22.8 Other 11.0 9.8 7.4 7.1

Total 230.8$ 222.4$ 124.2$ 161.9$

Total Cost of Services Net Cost of Services

THE DISTRICT'S FUNDS

As the District completed this year, our governmental funds reported a combined fund balance of $170.6 million, which is an increase of $42.1 million from last year (Table 4).

Table 4

(Amounts in millions)July 1, 2008 Revenues Expenditures June 30, 2009

General Fund 33.2$ 199.8$ 198.9$ 34.1$ Building Fund 48.1 1.1 11.9 37.3 County School Facilities Fund 13.5 52.7 0.7 65.5 Adult Education Fund 0.1 0.3 0.4 - Child Development Fund 0.4 3.2 3.3 0.3 Cafeteria Fund 1.6 10.5 10.3 1.8 Deferred Maintenance Fund 2.4 0.9 0.9 2.4 Special Reserve Non-Capital Fund 3.4 0.1 - 3.5 Capital Facilities Fund 11.2 2.4 3.1 10.5 Special Reserve Capital Outlay Fund 5.9 0.2 - 6.1 Capital Project Fund forBlended Component Units 0.9 0.4 0.3 1.0

Bond Interest and Redemption Fund 7.8 7.1 6.8 8.1 Total 128.5$ 278.7$ 236.6$ 170.6$

Balances and Activity



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The combined Governmental District Funds net increase is $42.1 over last year. This is mainly as a result of receiving state's 50 percent construction match. Major on-going projects in the Building Fund remain the construction of High School #3 and planning of Middle School #5. In 2008-09, the Adult Education Fund required a contribution from the General Fund in the amount of $44,015. The District did not make a contribution to the Deferred Maintenance Fund in 2008-09.

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. Budget updates are presented to the Board to keep the Board abreast of budget alignments. (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 57).

The categories which required additional budget are Instruction in the amount of $4,287,484, School Site Administration in the amount of $288,673, All Other Pupil Services in the amount of $244,653, Data Processing in the amount of $38,078, Facility Acquisition and Construction in the amount of $35,627, and $1,064,393 in Other Outgo. The District operated below the budget in all other expenditure categories.

CAPITAL ASSET AND DEBT ADMINISTRATION

Capital Assets

At June 30, 2009, the District had $173.4 million in a broad range of capital assets (net of depreciation), including land, buildings, and furniture and equipment. This amount represents a net increase (including additions, deductions and depreciation) of $9.7 million from last year (Table 5).

Table 5


Land and construction in process 55.1$ 52.2$ Buildings and improvements 114.8 107.5 Furniture and equipment 3.5 4.0

Total 173.4$ 163.7$

We present more detailed information about our capital assets in Note 4 to the financial statements.



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Long-Term Obligations

At the end of this year, the District had $120.4 million in long-term obligations outstanding versus $115.8 million last year, an increase of $4.6 million. The long-term obligations consisted of:

Table 6


General obligation bonds (Financed with property taxes) 102.8$ 104.6$ Certificates of participation 6.8 7.3 Capitalized lease obligations 0.3 0.4 Other postemployment benefits 3.5 1.9 Other 7.0 1.6

Total 120.4$ 115.8$

The District's general obligation bond rating continues to be "AAA". The State limits the amount of general obligation debt that districts can issue to five percent of the assessed value of all taxable property within the District's boundaries. The District's outstanding general obligation debt of $102.8 million is significantly below this $182 million statutorily-imposed limit.

Other obligations include compensated absences payable, postemployment benefits (including health benefits), and other long-term obligations. We present more detailed information regarding our long-term obligations in Note 8 of the financial statements.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES

In considering the District Budget for the 2009-10 year, the governing board and management used the following criteria:

The key assumptions in our revenue forecast are:

1. Revenue Limit income will decrease for one-time reduction of $252.83 per ADA.2. No Cost of Living Adjustment (COLA) on Revenue Limit plus a deficit of 17.967 percent.3. Developer fee collections are based on approximate new housing units to be constructed.4. Federal income will increase due to one-time Federal stimulus funds.5. No Cost of Living Adjustment (COLA) or growth increase in State income revenues.6. Decrease of 4.46 percent to State categorical programs.



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Expenditures are based on the following forecasts:

Staffing RatioOctober 07

CSISGrades kindergarten through third 20:1 7,559Grades four through eight 30:1 9,698Grades nine through twelve 32:1 6,974

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors 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 Jaime Ayala, the Assistant Superintendent, Business Services Division, at Colton Joint Unified School District, 1212 Valencia Avenue, Colton, California, 92324 or e-mail at [email protected].


STATEMENT OF NET ASSETSJUNE 30, 2009

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

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GovernmentalActivities

ASSETSDeposits and investments 168,345,065$ Receivables 34,405,936 Prepaid expenses 1,109,378 Stores inventories 242,518 Other current assets 9,907,000 Deferred costs on issuance 1,572,624 Restricted assets - investments 795,025 Capital assets

Land and construction in process 55,129,053 Other capital assets 192,767,173 Less: accumulated depreciation (74,509,962)

Total Capital Assets 173,386,264 Total Assets 389,763,810

LIABILITIESAccounts payable 18,898,561 Accrued interest 1,691,554 Deferred revenue 2,400,895 Claims liability 4,038,640 Long-term obligations

Current portion of long-term obligations 4,432,373 Noncurrent portion of long-term obligations 115,957,925

Total Long-Term Obligations 120,390,298 Total Liabilities 147,419,948

NET ASSETSInvested in capital assets, net of related debt 94,774,449 Restricted for:

Debt service 6,372,457 Capital projects 84,506,037 Educational programs 10,564,660 Other activities 4,587,438

Unrestricted 41,538,821 Total Net Assets 242,343,862$



STATEMENT OF ACTIVITIESFOR THE YEAR ENDED JUNE 30, 2009


14

Net (Expenses)Revenues and

Changes in

Charges for Operating Capital Services and Grants and Grants and Governmental

Functions/Programs Expenses Sales Contributions Contributions ActivitiesGovernmental Activities:Instruction 127,950,743$ 13,618$ 21,731,393$ 51,953,254$ (54,252,478)$ Instruction-related activities:

Supervision of instruction 9,945,097 337,795 8,283,031 - (1,324,271) Instructional library, media and technology 1,605,002 - 240,186 - (1,364,816)

School site administration 12,584,076 3,520 374,790 - (12,205,766) Pupil services:

Home-to-school transportation 4,159,005 - 1,251,703 - (2,907,302) Food services 9,922,244 1,879,881 7,517,930 - (524,433) All other pupil services 19,433,060 10,363 4,832,229 - (14,590,468)

General administration:Data processing 2,781,894 - - - (2,781,894) All other general administration 8,010,585 119,739 2,952,153 - (4,938,693)

Plant services 23,351,323 146,633 1,347,533 - (21,857,157) Facility acquisition and construction 63,000 - - - (63,000) Ancillary services 1,425,497 - 5,420 - (1,420,077) Community services 795,327 15,159 480,321 - (299,847) Interest on long-term obligations 5,291,016 - - - (5,291,016) Other outgo 3,526,916 25,057 3,133,489 - (368,370)

Total GovernmentalActivities 230,844,785$ 2,551,765$ 52,150,178$ 51,953,254$ (124,189,588)

General revenues and subventions:Property taxes, levied for general purposes 9,131,898 Property taxes, levied for debt service 6,724,809 Taxes levied for other specific purposes 2,046,341 Federal and State aid not restricted to specific purposes 133,186,525 Interest and investment earnings 2,316,031 Miscellaneous 17,980,028

Total General Revenues 171,385,632 47,196,044

Net Assets - Beginning 195,147,818 Net Assets - Ending 242,343,862$

Change in Net Assets

Net AssetsProgram Revenues


GOVERNMENTAL FUNDSBALANCE SHEETJUNE 30, 2009


15

General BuildingFund Fund

ASSETSDeposits and investments 19,090,554$ 28,972,249$ Receivables 32,043,591 155,673 Due from other funds 368,374 - Prepaid expenditures 1,109,378 - Stores inventories 172,056 - Other current assets - 9,907,000

Total Assets 52,783,953$ 39,034,922$

LIABILITIES AND FUND BALANCESLIABILITIES

Accounts payable 15,871,040$ 1,757,405$ Due to other funds 370,234 - Deferred revenue 2,397,677 -

Total Liabilities 18,638,951 1,757,405

FUND BALANCESReserved

Revolving cash 50,000 - Stores inventories 172,056 - Prepaid expenditures 1,109,378 - Legally restricted balance 10,564,660 -

Unreserved:Designated 22,248,908 37,277,517 Undesignated, reported in:

Debt service funds - - Total Fund Balances 34,145,002 37,277,517 Total Liabilities and Fund Balances 52,783,953$ 39,034,922$

15

County School Non-Major TotalFacilities Governmental Governmental

Fund Funds Funds

65,938,690$ 32,720,169$ 146,721,662$ 99,972 1,989,976 34,289,212

- 14,511 382,885 - - 1,109,378 - 70,462 242,518 - - 9,907,000

66,038,662$ 34,795,118$ 192,652,655$

550,109$ 696,440$ 18,874,994$ - 377,158 747,392 - 3,218 2,400,895

550,109 1,076,816 22,023,281

- 25,000 75,000 - 70,462 242,518 - - 1,109,378

- 10,564,660

65,488,553 25,558,829 150,573,807

- 8,064,011 8,064,011 65,488,553 33,718,302 170,629,374

66,038,662$ 34,795,118$ 192,652,655$


RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEETTO THE STATEMENT OF NET ASSETS

JUNE 30, 2009


16

Total Fund Balances - Governmental Funds 170,629,374$ Amounts Reported for Governmental Activities in the Statement ofNet Assets are Different Because:Capital assets used in governmental activities are not financial resourcesand, therefore, are not reported as assets in governmental funds.

The cost of capital assets is: 247,896,226$ Accumulated depreciation is: (74,509,962) 173,386,264

In governmental funds, unmatured interest on long-term obligations is recognizedin the period when it is due. On the government-wide financial statements,unmatured interest on long-term obligations is recognized when it is incurred. (1,691,554)

Expenditures relating to issuance of debt were recognized on modified accrualbasis, but are amortized over the life of the debt on the accrual basis. 1,572,624

An internal service fund is used by the District's management to charge the costsof the workers' compensation claims to the individual funds. The assets andliabilities of the internal service fund are included with governmental activities. 18,837,452

Long-term obligations are not due and payable in the current period and, therefore,are not reported as liabilities in the funds.Long-term obligations at year-end consist of:

2001 General Obligation Bonds, Series A, B and C 98,668,154 Unamortized premium on issuance 4,168,689 2001 Certificates of Participation 6,805,000 Capital leases payable 311,548 Supplemental early retirement plan (SERP) 5,534,570 Other postemployment benefits 3,479,364 Compensated absences (vacations) 1,422,973

Total Long-Term Obligations (120,390,298)

Total Net Assets - Governmental Activities 242,343,862$



GOVERNMENTAL FUNDSSTATEMENT OF REVENUES, EXPENDITURES, ANDCHANGES IN FUND BALANCE

FOR THE YEAR ENDED JUNE 30, 2009


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General BuildingFund Fund

REVENUESRevenue limit sources 128,980,223$ -$ Federal sources 22,681,253 - Other State sources 36,489,279 - Other local sources 11,680,531 1,076,308

Total Revenues 199,831,286 1,076,308 EXPENDITURESCurrent

Instruction 120,208,340 - Instruction-related activities

Supervision of instruction 9,779,202 - Instructional library, media and technology 1,587,453 - School site administration 11,836,019 -

Pupil servicesHome-to-school transportation 3,600,198 - Food services 5,938 - All other pupil services 13,197,042 -

General administrationData processing 2,764,022 - All other general administration 7,226,286 -

Plant services 20,857,889 - Facility acquisition and construction 1,162,871 11,898,063 Ancillary services 1,410,514 - Community services 217,194 - Other outgo 3,263,111 -

Debt servicePrincipal - - Interest and other - -

Total Expenditures 197,116,079 11,898,063 Excess (Deficiency) of Revenues Over Expenditures 2,715,207 (10,821,755) Other Financing Sources (Uses)

Transfers in 26,907 - Transfers out (1,791,927) - Other uses - -

Net Financing Sources (Uses) (1,765,020) - Net Change in Fund Balances 950,187 (10,821,755) Fund Balance - Beginning 33,194,815 48,099,272 Fund Balance - Ending 34,145,002$ 37,277,517$

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County School Non-Major TotalFacilities Governmental Governmental

Fund Funds Funds

-$ -$ 128,980,223$ - 9,014,552 31,695,805

51,544,656 2,918,782 90,952,717 408,598 12,168,108 25,333,545

51,953,254 24,101,442 276,962,290

- 1,692,781 121,901,121

- 64,184 9,843,386 - - 1,587,453 - 359,707 12,195,726

- - 3,600,198 - 9,753,471 9,759,409 - 300,475 13,497,517

- - 2,764,022 - 711,164 7,937,450 - 2,350,469 23,208,358

6,035 2,196,090 15,263,059 - - 1,410,514 - 571,982 789,176 - - 3,263,111

450,000 2,744,140 3,194,140 297,243 4,105,942 4,403,185 753,278 24,850,405 234,617,825

51,199,976 (748,963) 42,344,465

746,286 1,045,641 1,818,834 - (26,907) (1,818,834) - (263,805) (263,805)

746,286 754,929 (263,805) 51,946,262 5,966 42,080,660 13,542,291 33,712,336 128,548,714 65,488,553$ 33,718,302$ 170,629,374$


RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OFREVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCESTO THE STATEMENT OF ACTIVITIES



18

Total Net Change in Fund Balances - Governmental Funds 42,080,660$ Amounts Reported for Governmental Activities in the Statement of Activities areDifferent Because:

Capital outlays to purchase or build capital assets are reported in governmentalfunds as expenditures, however, for governmental activities those costs areshown in the statement of net assets and allocated over their estimateduseful lives as annual depreciation expense in the statement of activities.This is the amount by which capital outlay exceeds depreciation in the period:

Capital outlay 15,478,764$Depreciation expense (5,791,669)

Net Expense Adjustment 9,687,095

The statement of activities reports gains or losses arising form the sale ordisposal of assets. Conversely, governmental funds do not report a gainor loss on a sale or disposal of capital assets. (86)

In the statement of activities, certain operating expenses - compensated absences(vacations), special termination benefits (early retirement) and other postemploymentbenefits - are measured by the amounts earned during the year. In the governmentalfunds, however, expenditures for these items are measured by the amount offinancial resources used (essentially, the amounts actually paid) . This year, therewere $5,534,570 of special termination benefits earned. Vacation used was more thanthe amounts earned by $190,871. Other postemployment benefits paid was lessthan the amount earned by $1,574,824. (6,918,523)

Repayment of principal is an expenditure in the governmental funds, but it reduceslong-term obligations in the statement of net assets and does not affect thestatement of activities:

2001 General Obligation Bonds, Series A 320,000 2001 General Obligation Bonds, Series B 385,000 2001 General Obligation Bonds, Series C 1,990,000 2001 Certificates of Participation 450,000 Capital lease obligations 49,140

Supplemental early retirement program (SERP)


RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OFREVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCESTO THE STATEMENT OF ACTIVITIES (Continued)



19

Interest on long-term obligations in the statement of activities differs from the amountreported in the governmental funds because interest is recorded as an expenditurein the funds when it is due, and thus requires the use of current financial resources.In the statement of activities, however, interest expense is recognized as the interestaccrues, regardless of when it is due. The additional interest reported in the statementof activities is the result of two factors. First, accrued interest on the general obligationbonds and the certificates of participation decreased by $48,959, and second, $1,030,376 of additional accumulated interest was accreted on the District's "capitalappreciation" general obligation bonds. (981,417)$ Governmental funds report the effect of premiums, discounts, issuance costs, anddeferred fees on a refunding when the debt is first issued, whereas the amountsare deferred and amortized in the statement of activities. This amount is thenet effect of the amortization of the related items:

Cost of issuance (69,427)$ Premium on issuance 163,013

Combined Adjustment 93,586 An internal service fund is used by the District's management to charge thecosts of workers' compensation to the individual funds. The net revenueof the internal service fund is reported with governmental activities. 40,589

Change in Net Assets of Governmental Activities 47,196,044$


PROPRIETARY FUNDSSTATEMENT OF NET ASSETSJUNE 30, 2009


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InternalService Funds

ASSETSCurrent Assets

Deposits and investments 22,418,428$ Receivables 116,724 Due from other funds 364,507

Total Current Assets 22,899,659

LIABILITIES Current Liabilities

Accounts payable 23,567 Current portion of claims liability 1,400,000

Total Current Liabilities 1,423,567 Noncurrent Liabilities

Noncurrent portion of claims liability 2,638,640

NET ASSETSUnrestricted 18,837,452

Total Net Assets 18,837,452$


PROPRIETARY FUNDSSTATEMENT OF REVENUES, EXPENSES, AND CHANGESIN FUND NET ASSETS



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OPERATING REVENUESCharges to other funds 2,417,559$

Total Operating Revenues 2,417,559

OPERATING EXPENSESPayroll costs 1,342,207 Professional and contract services 1,611,497 Supplies and materials 26,532

Total Operating Expenses 2,980,236 Operating Loss (562,677)

NONOPERATING REVENUESInterest income 603,266

Change in Net Assets 40,589 Total Net Assets - Beginning 18,796,863 Total Net Assets - Ending 18,837,452$


PROPRIETARY FUNDSSTATEMENT OF CASH FLOWSFOR THE YEAR ENDED JUNE 30, 2009


22


CASH FLOWS FROM OPERATING ACTIVITIESCash receipts from customers 475,359$ Cash receipts from interfund services provided 4,338,510 Cash payments to other suppliers of goods or services (83,283) Cash payments to employees for services (1,342,207) Cash payments for insurance premiums (1,625,083)

Net Cash Provided by Operating Activities 1,763,296 CASH FLOWS FROM INVESTING ACTIVITIES

Interest on investments 603,266 Net Increase in Cash and Cash Equivalents 2,366,562 Cash and Cash Equivalents - Beginning 20,051,866 Cash and Cash Equivalents - Ending 22,418,428$

RECONCILIATION OF OPERATING LOSS TO NETCASH PROVIDED BY OPERATING ACTIVITIES:

Operating loss (562,677)$ Adjustments to reconcile operating loss to net cashprovided by operating activities:Changes in assets and liabilities:

Accounts receivable 81,326 Due from other funds 2,314,984 Accounts payable (22,812) Due to other funds (1,383) Claims liability (46,142)

NET CASH PROVIDED BY OPERATING ACTIVITIES 1,763,296$


FIDUCIARY FUNDSSTATEMENT OF NET ASSETSJUNE 30, 2009


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AgencyFunds

ASSETSCash and cash equivalents 1,298,293$ Stores inventories 58,544

Total Assets 1,356,837$

LIABILITIESAccounts payable 62,941$ Due to student groups 674,348 Due to bond holders 619,548

Total Liabilities 1,356,837$


NOTES TO FINANCIAL STATEMENTSJUNE 30, 2009

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Reporting Entity

The Colton Joint Unified School District (the District) was organized in 1966 under the laws of the State of California. The District operates under a locally-elected seven-member Board form of government and provides educational services to grades K-12 as mandated by the State and/or Federal agencies. The District operates 18 elementary schools, four middle schools, two high schools, a continuation high school, an adult school, a school for alternative education, and child development centers.

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 Colton Joint Unified School District, this includes general operations, food service, and student related activities of the District.

Component Units

Component units are legally separate organizations for which the District is financially accountable. Component units may include organizations that are fiscally dependent on the District in that the District approves their budget, the issuance of their debt or the levying of their taxes. For financial reporting purposes, the component units have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are included in the financial statements of the District. The component units, although legally separate entities, are reported in the financial statements using the blended presentation method as if they were part of the District's operations because the governing board of the component units is essentially the same as the governing board of the District and because their purpose is to finance the construction of facilities to be used for the benefit of the District.

The Colton Joint Unified School District has financial and operational relationships with the Colton Joint Unified School Facilities Corporation (SFC) and the Community Facilities District Number Two (CFD) which meet the reporting entity definition criteria of GASB Statement No. 14, The Financial Reporting Entity, as component units of the District. Accordingly, the financial activities of SFC and CFD have been included in the financial statements of the District.

For financial presentation purposes, the SFC and CFD financial activity has been blended, or combined, with the financial data for the District. The financial statements present the SFC's financial activity within the County School Facilities Fund, the CFD's financial activity within the Capital Project Fund for Blended Component Unitsand in an Agency Fund. Certificates of participation issued are included as long-term liabilities in the government-wide financial statements. Special tax bonds issued are not included as long-term obligations in the government-wide financial statements. Additional information regarding CFD is presented in Note 9 to the financial statements.

In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. The District has no such component units.



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Basis of Presentation - Fund Accounting

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

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

Major Governmental Funds

General Fund The General Fund is the chief operating fund for all districts. It is used to account for the ordinary operations of a district. All transactions except those required or permitted by law to be in another fund are accounted for in this fund.

Building Fund The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued.

County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section 17070.43 to receive apportionments from the 1998 State School Facilities Fund (Proposition lA), the 2002 State School Facilities Fund (Proposition 47), or the 2004 State School Facilities Fund (Proposition 55) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section 17070 et seq.).

Non-Major Governmental Funds

Special Revenue Funds The Special Revenue funds are established to account for the proceeds from specific revenue sources (other than trusts or for major capital projects) that are restricted to the financing of particular activities:

Adult Education Fund The Adult Education Fund is used to account separately for Federal, State, and local revenues for adult education programs and is to be expended for adult education purposes only.

Child Development Fund The Child Development Fund is used to account separately for Federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs.



26

Cafeteria Fund The Cafeteria Fund is used to account separately for Federal, State, and local resources to operate the food service program (Education Code Sections 38090-38093) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections 38091 and 38100).

Deferred Maintenance Fund The Deferred Maintenance Fund is used to account separately for State apportionments and the District's contributions for deferred maintenance purposes (Education Code Sections 17582-17587) and for items of maintenance approved by the State Allocation Board.

Special Reserve Non-Capital Fund The Special Reserve Non-Capital Fund is used primarily to provide for the accumulation of General Fund monies for general operating purposes other than for capital outlay (Education Code Section 42840).

Capital Project Funds The Capital Project funds are established to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds).

Capital Facilities Fund The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections 17620-17626). Expenditures are restricted to the purposes specified in Government Code Sections 65970-65981 or to the items specified in agreements with the developer (Government Code Section 66006).

Special Reserve Capital Outlay Fund The Special Reserve Capital Outlay Fund exists primarily to provide for the accumulation of General Fund monies for capital outlay purposes (Education Code Section 42840).

Capital Project Fund for Blended Component Units The Capital Project Fund for Blended Component Units is used to account for capital projects financed by Mello-Roos Community Facilities Districts and similar entities that are considered blended component units of the District under generally accepted accounting principles (GAAP).

Debt Service Funds The Debt Service funds are established to account for the accumulation of resources for and the payment of principal and interest on long-term obligations.

Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a District (Education Code Sections 15125-15262).

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 fund:



27

Internal Service Fund Internal service funds may be used to account for any activity for which services are provided to other funds of the District on a cost-reimbursement basis. The District operates workers'compensation, property and liability, and early retiree benefits self-insurance funds that are 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 operates no trust funds. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. The District's agency fund accounts for student body activities (ASB) and the debtactivity of the Colton Joint Unified School Facilities Corporation.

Basis of Accounting - Measurement Focus

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

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

Net 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 proprietary fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. The internal service fund is presented in a single column on the face of the proprietary fund statements.



28

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) anduses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements therefore include reconciliation with brief explanations to better identify the relationship between the government-wide financial statements and the statements for the governmental funds on a modified accrual basis of accounting and the current financial resources measurement focus. Under this basis, revenues are recognized in the accounting period in which they become measurable and available. Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable.

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 which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter, to be used to pay liabilities of the current fiscal year. Generally, available is defined as collectible within 90 days. However to achieve comparability of reporting among California school districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to state-aid apportionments, the California Department of Education has defined available for school districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources.

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

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.



29

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.

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

Cash and Cash Equivalents

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

Investments

Investments held at June 30, 2009, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county and State investment pools are determined by the program sponsor.

Restricted Assets

Restricted assets arise when restrictions on their use change the normal understanding of the availability of the asset. Such constraints are either imposed by creditors, contributors, grantors, or laws of other governments or imposed by enabling legislation. Certain proceeds of the District debt obligations, as well as certain resources set aside for their repayment, are classified as restricted assets – investments on the statement of net assets because they are maintained in reserve accounts and their use is limited by applicable debt covenants.

Prepaid Expenditures

Prepaid 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. Currently, the District has paid $1,109,378 to United of Omaha for the District's Supplemental Early Retirement Plan.

Stores Inventories

Inventories consist of expendable food and supplies held for consumption. 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.



30

Other Current Assets

Other current assets represent deposits with land owners that the District anticipates acquiring property througheminent domain proceedings.

Capital Assets and Depreciation

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

When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide financial statement of net assets. 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 capital assets of governmental funds.

Depreciation of capital assets is computed and recorded by the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings, 20 to 50 years; improvements, 5 to 50 years; equipment, 2 to 15 years.

Interfund Balances

On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables". These amounts are eliminated in the governmental activities column of the statement of net assets.

Compensated Absences

Accumulated unpaid vacation benefits are accrued as a liability and reported on the government-wide statement of net assets. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid.



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Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January 1, 1999. At retirement, each member will receive .004 year of service credit for each day of unused sick leave. Credit for unused sick leave is applicable to all certificated employees and is determined by dividing the number of unused sick days by the number of base service days required to complete the last school year, if employed full-time.

Accrued Liabilities and Long-Term Obligations

All payables, accrued liabilities, and long-term obligations are reported in the government-wide and proprietary fund financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the funds.

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 loans are recognized as liabilities in the governmental fund financial statements when due.

Deferred Issuance Costs, Premiums and Discounts

In the government-wide financial statements and in the proprietary fund type financial statements, long-term obligations are reported as liabilities in the applicable governmental activities, or proprietary fund statement of net assets. Premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method.

In the fund financial statements, governmental funds recognize premiums and discounts as other financing sources and uses, respectively, and issuance costs as debt service expenditures. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

Fund Balance Reserves and Designations

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

Designations of fund 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 balance designations have been established for economic uncertainties, unrealized gains of investments and cash in county treasury, and other purposes.



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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 first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. The government-wide financial statements reports $106,030,592 of restricted net assets.

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 charges to other funds for self-insurance. Operating expenses are necessary costs incurred to provide the good or service that is the primary activity of the fund. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

Interfund Activity

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

Estimates

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

Budgetary Data

The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 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.



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The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes, on-behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles.

Property Tax

Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of San Bernardino bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received.

New Accounting Pronouncements

In March 2009, the GASB issued GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The requirements of this Statement are effective for the financial statements for periods beginning after June 15, 2010. Early implementation is encouraged.

In April 2009, the GASB issued GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to incorporate the hierarchy of generally accepted accounting principles (GAAP) for State and local governments into the GASB authoritative literature. The "GAAP hierarchy" consists of the sources of accounting principles used in the preparation of financial statements of State and local governmental entities that are presented in conformity with GAAP, and the framework for selecting those principles. GASB Statement No. 55 is effective immediately.

In April 2009, the GASB issued GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance presented in the American Institute of Certified Public Accountants' Statements on Auditing Standards. This Statement addresses three issues not included in the authoritative literature that establishes accounting principles – related party transactions, going concern considerations, and subsequent events. The presentation of principles used in the preparation of financial statements is more appropriately included in accounting and financial reporting standards rather than in the auditing literature. GASB Statement No. 56 is effective immediately.



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NOTE 2 - DEPOSITS AND INVESTMENTS

Summary of Deposits and Investments

Deposits and investments as of June 30, 2009, are classified in the accompanying financial statements as follows:

Governmental activities 169,140,090$ *Fiduciary funds 1,298,293

Total Deposits and Investments 170,438,383$

* $795,025 of these balances represent Restricted Assets - Investments as reflected on theStatement of Net Assets

Deposits and investments as of June 30, 2009, consist of the following:

Cash on hand and in banks 796,745$ Cash in revolving 75,000 Investments 169,566,638 *

Total Deposits and Investments 170,438,383$

* $795,025 of these balances represent Restricted Assets - Investments as reflected on theStatement of Net Assets

Policies and Practices

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

Investment in County Treasury - The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis.



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Investment in the State Investment Pool - The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the District's investment in the pool is reported in the accompanying financial statement at amounts based upon the District's pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which is recorded on the amortized cost basis.

General Authorizations

Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below:

Maximum Maximum MaximumAuthorized Remaining Percentage Investment

Investment Type Maturity of Portfolio in One IssuerLocal Agency Bonds, Notes, Warrants 5 years None NoneRegistered State Bonds, Notes, Warrants 5 years None NoneU.S. Treasury Obligations 5 years None NoneU.S. Agency Securities 5 years None NoneBanker's Acceptance 180 days 40% 30%Commercial Paper 270 days 25% 10%Negotiable Certificates of Deposit 5 years 30% NoneRepurchase Agreements 1 year None NoneReverse Repurchase Agreements 92 days 20% of base NoneMedium-Term Corporate Notes 5 years 30% NoneMutual Funds N/A 20% 10%Money Market Mutual Funds N/A 20% 10%Mortgage Pass-Through Securities 5 years 20% NoneCounty Pooled Investment Funds N/A None NoneLocal Agency Investment Fund (LAIF) N/A None NoneJoint Powers Authority Pools N/A None None



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Authorized Under Debt Agreements

Maximum Maximum MaximumAuthorized Remaining Percentage Investment

Investment Type Maturity of Portfolio in One IssuerU.S. Treasury Obligations NA None NoneU.S. Agency Securities NA None NoneCommercial Paper 92 days 15% NoneSecured Certificates of Deposit 1 year None NoneRepurchase Agreements 30 days 5% 20%Bills of Exchange 270 days 30% NonePre-Refunded Municipal Bonds NA None NoneInvestment Agreements NA 20% NoneCounty of San Bernardino Pooled Investment Funds NA None None

Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by investing in the county pool to provide the cash flow and liquidity needed for operations, and by having the Pool purchase a combination of shorter term and longer term investments and timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow necessary for debt service requirements.

Specific Identification

Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investment by maturity:

Maturity Date/Amortized Fair Average Maturity

Investment Type Cost Value in DaysCounty of San Bernardino Pooled Investment Funds 168,222,269$ 169,513,241$ 371 daysFirst American Treasury Obligations MoneyMarket Mutual Funds 425,061 425,061 46 days

Investment Agreement 795,025 795,025 6/1/2026Local Agency Investment Fund (LAIF) 124,283 124,453 235 days

Total 169,566,638$ 170,857,780$



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Credit Risk

Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The investments with the San Bernardino County Investment Pool and the First American Treasury Obligations Money Market Mutual Funds are rated Aaa by Moody's Investor Service. Neither the Investment Agreement nor the Local Agency Investment Fund were rated.

Custodial Credit Risk - Deposits

This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in anundivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agency. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2009, the District's bank balance of $538,297 was exposed to custodial credit risk because it was uninsured and collateralized with securities held by the pledging financial institution's trust department or agent, but not in the name of the District.

NOTE 3 - RECEIVABLES

Receivables at June 30, 2009, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full.

County School Non-Major InternalGeneral Building Facilities Governmental Service

Fund Fund Fund Funds Fund TotalFederal Government

Categorical aid 8,225,687$ -$ -$ 1,678,095$ -$ 9,903,782$ State Government

Apportionment 17,253,529 - - - - 17,253,529 Categorical aid 4,210,933 - - 157,315 - 4,368,248 Lottery 1,518,897 - - - - 1,518,897

Local GovernmentInterest 123,376 148,765 99,972 111,831 107,398 591,342

Other Local Sources 711,169 6,908 - 42,735 9,326 770,138 Total 32,043,591$ 155,673$ 99,972$ 1,989,976$ 116,724$ 34,405,936$



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NOTE 4 - CAPITAL ASSETS

Capital asset activity for the fiscal year ended June 30, 2009, was as follows:

Balance BalanceJuly 1, 2008 Additions Deductions June 30, 2009

Governmental ActivitiesCapital Assets Not Being Depreciated

Land 23,912,155$ 400,000$ -$ 24,312,155$ Construction in progress 28,291,610 14,226,837 11,701,549 30,816,898

Total Capital AssetsNot Being Depreciated 52,203,765 14,626,837 11,701,549 55,129,053

Capital Assets Being DepreciatedLand improvements 15,171,451 505,960 - 15,677,411 Buildings and improvements 148,549,526 11,642,710 - 160,192,236 Furniture and equipment 16,502,837 404,806 10,117 16,897,526

Total Capital Assets BeingDepreciated 180,223,814 12,553,476 10,117 192,767,173

Less Accumulated DepreciationLand improvements 6,429,970 588,398 - 7,018,368 Buildings and improvements 49,759,830 4,342,598 - 54,102,428 Furniture and equipment 12,538,524 860,673 10,031 13,389,166

Total AccumulatedDepreciation 68,728,324 5,791,669 10,031 74,509,962 Governmental Activities Capital Assets, Net 163,699,255$ 21,388,644$ 11,701,635$ 173,386,264$

Depreciation expense was charged to governmental functions as follows:

Governmental activities:Instruction 4,691,252$ School site administration 231,667 Home-to-school transportation 521,250 Food services 115,833 All other pupil services 231,667

Total Depreciation Expenses Governmental Activities 5,791,669$



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NOTE 5 - INTERFUND TRANSACTIONS

Interfund Receivables/Payables (Due To/Due From)

Interfund receivable and payable balances arise from interfund transactions and are recorded by all funds affected in the period in which transactions are executed. Interfund receivable and payable balances at June 30, 2009, between major and non-major governmental funds and internal service funds are as follows:

Non-MajorGeneral Governmental

Due To Fund Funds TotalGeneral Fund -$ 368,374$ 368,374$ Non-Major Governmental Funds 9,423 5,088 14,511 Internal Service Fund 360,811 3,696 364,507

Total 370,234$ 377,158$ 747,392$

Due From

A balance of $360,811 due from the General Fund to the Internal Service Fund results from General Fund workers' compensation contribution owed at year-end.

A balance of $229,442 due to the General Fund from the Cafeteria Non-Major Governmental Fund resulted from payroll, operational, and indirect costs owed at year-end.

A balance of $101,203 due to the General Fund from the Child Development Non-Major Governmental Fund resulted from payroll and indirect costs owed at year-end.

Remaining 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.



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Operating Transfers

Interfund transfers for the year ended June 30, 2009, consisted of the following:


Transfer To Fund Funds TotalGeneral Fund -$ 26,907$ 26,907$ County School Facilities Fund 746,286 - 746,286 Non-Major Governmental Funds 1,045,641 - 1,045,641

Total 1,791,927$ 26,907$ 1,818,834$

Transfer From

Adult Education Fund for their share of lottery funds 15,015$ Adult Education Fund to cover program costs 29,000 Deferred Maintenance Fund for match 799,615

202,011 1,045,641$

746,286

26,907 Total 1,818,834$

The General Fund transferred to the following non-majorgovernmental funds:

Capital Facilities Fund to fund the cost of student servicecenter lease requirements

The General Fund transferred to the County School Facilities Fund for capital lease payments

The Adult Fund transferred to the General Fund to repay amountborrowed



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NOTE 6 - ACCOUNTS PAYABLE

Accounts payable at June 30, 2009, consisted of the following:

County School Non-Major InternalGeneral Building Facilities Governmental Service

Fund Fund Fund Funds FundSalaries and benefits 10,687,531$ -$ -$ 168,235$ 1,000$ State apportionment 1,112,758 - - 65,259 - Books and supplies 839,439 - - 45,607 51 Services 2,060,448 31,850 - 87,586 20,973 Construction 47,738 1,725,555 - 223,451 - Due to Office of PublicSchool Construction - - 550,109 - -

Other vender payables 1,123,126 - - 106,302 1,543 Total 15,871,040$ 1,757,405$ 550,109$ 696,440$ 23,567$

TotalGovernmental Fuduciary

Activities FundsSalaries and benefits 10,856,766$ -$ State apportionment 1,178,017 - Books and supplies 885,097 - Services 2,200,857 - Construction 1,996,744 - Due to Office of PublicSchool Construction 550,109 -

Other vender payables 1,230,971 62,941 Total 18,898,561$ 62,941$



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NOTE 7 - DEFERRED REVENUE

Deferred revenue at June 30, 2009, consists of the following:


Fund Funds TotalFederal financial assistance 2,202,540$ -$ 2,202,540$ State categorical aid 64,607 - 64,607 Other local 130,530 3,218 133,748

Total 2,397,677$ 3,218$ 2,400,895$

NOTE 8 - LONG-TERM OBLIGATIONS

Summary

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

Balance Balance Due in July 1, 2008 Additions Deductions June 30, 2009 One Year

2001 General Obligation Bonds, Series A 26,450,000$ -$ 320,000$ 26,130,000$ 330,000$ Premium on issuance 493,002 - 27,389 465,613 -

2001 General Obligation Bonds, Series B 23,241,792 169,334 385,000 23,026,126 485,000 Premium on issuance 400,769 - 19,084 381,685 -

2001 General Obligation Bonds, Series C 50,640,986 861,042 1,990,000 49,512,028 1,990,000 Premium on issuance 3,437,931 - 116,540 3,321,391 -

2001 Certificates of Participation 7,255,000 - 450,000 6,805,000 470,000 Capital leases 360,688 - 49,140 311,548 50,459 Supplemental early retirement plan (SERP) - 5,534,570 - 5,534,570 1,106,914 Other postemployment benefits 1,904,540 2,682,336 1,107,512 3,479,364 - Accumulated vacation - net 1,613,844 - 190,871 1,422,973 -

115,798,552$ 9,247,282$ 4,655,536$ 120,390,298$ 4,432,373$

Payments on the General Obligation Bonds are to be made by the Bond Interest and Redemption Fund with local tax collections. Payments for the 2001 Certificates of Participation are made by the County School FacilitiesFund. Capital lease payments are made from the General Fund and the Child Development Fund. The Supplemental Early Retirement Plan payment is made by the General Fund. Claims liability payments are made from the Workers' Compensation Internal Service Fund. The other postemployment benefits and accrued vacation will be paid by the fund for which the employee worked.



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2001 General Obligations Bonds, Series A

On April 10, 2002, the District issued $28,700,000 aggregate original principal amount of the Colton Joint Unified School District 2001 General Obligation Bonds, Series A. The Series A Bonds represent the first series of authorized bonds to be issued under the authorization as approved by voters. Proceeds from the sale of the bonds were used to provide funds to acquire school sites, construct and repair school facilities, and redeem a portion of the District's 2001 Certificates of Participation. The bonds mature on August 1, 2026, with interest yields of 3.00 to 5.23 percent. The principal balance outstanding at June 30, 2009, was $26,130,000. Unamortized premium received on issuance of the bonds amounted to $456,613 as of June 30, 2009.

2001 General Obligation Bonds, Series B

On July 14, 2004, the District issued $23,177,726 of 2001 General Obligation Bonds, Series B. The Series B Bonds represents the second series of the authorized bonds to be issued under the authorization as approved by voters. The bonds were issued as both current interest bonds and capital appreciation bonds, with the value of the capital appreciation bonds accreting $7,542,274, and an aggregate principal debt service balance of $30,720,000. The bonds mature on February 1, 2029, with interest yields of 2.00 to 5.89 percent. Proceeds from the sale of the bonds will be used to acquire school sites, and construct and repair school facilities. At June 30, 2009, the principal balance outstanding was $23,026,126. Unamortized premium received on issuance of the bonds amounted to $381,685 as of June 30, 2009.

2001 General Obligation Bonds, Series C

On January 11, 2006, the District issued $50,122,151 of 2001 General Obligation Bonds, Series C. The Series CBonds represents the third and last in a series of authorized bonds to be issued under the authorization as approved by voters. The bonds were issued as both current interest bonds and capital appreciation bonds, with the value of the capital appreciation bonds accreting $49,472,849, and an aggregate principal debt service balance of $99,595,000. The bonds mature on February 1, 2038, with interest yields of 3.17 to 5.12 percent. Proceeds from the sale of the bonds will be used to acquire school sites, and construct and repair school facilities. At June 30, 2009, the principal balance outstanding was $49,512,028. Unamortized premium received on issuance of the bonds amounted to $3,321,391 as of June 30, 2009.

The outstanding general obligation bonded debt is as follows:

Bonds BondsIssue Maturity Interest Original Outstanding OutstandingDate Date Rate Issue July 1, 2008 Accreted Redeemed June 30, 2009

4/10/02 8/1/26 3.00-5.23% 28,700,000 $ 26,450,000$ -$ 320,000$ 26,130,000$ 7/14/04 2/1/29 2.00-5.89% 23,177,726 23,241,792 169,334 385,000 23,026,126 1/11/06 2/1/38 3.17-5.12% 50,122,151 50,640,986 861,042 1,990,000 49,512,028

100,332,778$ 1,030,376$ 2,695,000$ 98,668,154$



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Debt Service Requirements to Maturity

The bonds mature through 2038 as follows:

Principal CurrentIncluding Accreted Accreted Interest to

Fiscal Year Interest to Date Interest Maturity Total2010 2,805,000$ -$ 3,979,780$ 6,784,780$ 2011 2,210,000 - 3,872,411 6,082,411 2012 3,000,000 - 3,783,093 6,783,093 2013 3,125,000 - 3,650,768 6,775,768 2014 3,270,000 - 3,513,636 6,783,636

2015-2019 18,830,000 - 14,990,579 33,820,579 2020-2024 23,970,000 - 9,394,597 33,364,597 2025-2029 26,928,708 9,503,542 2,314,412 38,746,662 2030-2034 9,566,466 21,833,534 - 31,400,000 2035-2038 4,962,980 22,222,020 - 27,185,000

Total 98,668,154$ 53,559,096$ 45,499,276$ 197,726,526$

2001 Certificates of Participation

On June 27, 2001, the District, pursuant to a lease/purchase agreement with the Colton Joint Unified School District Facilities Corporation, issued $15,000,000 in Certificates of Participation. The certificates were issued to finance the acquisition of real property within the District and improvements thereon, to finance the acquisition of relocatable classrooms, kitchens and multipurpose rooms to be used by the District for educational purposes, fund a reserve fund for the certificates, and pay costs of issuance incurred in connection with the execution and delivery of the certificates. The interest rate of the certificates ranges from 3.00 percent to 5.25 percent, and the certificates mature through May 15, 2021. At June 30, 2009, principal balance outstanding was $6,805,000.

The certificates mature through 2021 as follows:

Year EndingJune 30, Principal Interest Total

2010 470,000$ 324,310$ 794,310$ 2011 490,000 304,922 794,922 2012 510,000 284,098 794,098 2013 530,000 261,785 791,785 2014 555,000 237,935 792,935

2015-2019 3,205,000 763,961 3,968,961 2020-2021 1,045,000 69,003 1,114,003

Total 6,805,000$ 2,246,014$ 9,051,014$



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Capital Leases

The District has entered into agreements to lease various facilities and equipment. Such agreements are, in substance, purchases (capital leases) and are reported as capital lease obligations. The District's liability on lease agreements with options to purchase is summarized below:

Balance, Beginning of Year 389,756$ Payments 57,461 Balance, End of Year 332,295$

The capital leases have minimum lease payments as follows:

Year Ending LeaseJune 30, Payment

2010 57,459$ 2011 57,459 2012 57,459 2013 57,459 2014 57,459

2015-2017 45,000 Total 332,295

Less: Amount Representing Interest 20,747 Present Value of Minimum Lease Payments 311,548$

Supplemental Early Retirement Plan (SERP)

During March 2009, the District adopted a supplemental early retirement plan whereby certain eligiblecertificated and classified employees are provided an annuity to supplement the retirement benefits they are entitled to through the California State Teachers' Retirement System, California State Public Employees'Retirement System, or other retirement system. The criteria for participation are as follows: full-time certificated and classified employees of the District, at least 55 years of age by the date of retirement, with at least five years of continuous service with the District by date of retirement. The annuities offered to the employees are to be paid over a five-year period. The annuities, which were purchased for 106 employees who retired by June 30, 2009, were purchased from United of Omaha Life Insurance Company.



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The outstanding liability as of June 30, 2009, amounted to $5,534,570.

Year EndingJune 30, Amount

2010 1,106,914$ 2011 1,106,914 2012 1,106,914 2013 1,106,914 2014 1,106,914 Total 5,534,570$

Other Postemployment Benefit (OPEB) Obligation

The District implemented GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, during the year ended June 30, 2008. The District's annual required contribution for the year ended June 30, 2009, was $2,709,864, contributions made by the District during the year were $1,107,512, and had a net OPEB obligation of $3,479,364. See Note 11 for additional information regarding the OPEB obligation and the postemployment benefit plan.

Accumulated Unpaid Employee Vacation

The accumulated unpaid employee vacation for the District at June 30, 2009, amounted to $1,422,973.

NOTE 9 - NON-OBLIGATORY DEBT

These bonds are authorized by the Mello-Roos Community Facilities Act of 1982 as amended, and are payable from special taxes levied on property within the Community Facilities Districts according to a methodology approved by the voters within the District. Neither the faith and credit nor taxing power of the District is pledged to the payment of the bonds. Reserves have been established from the bond proceeds to meet delinquencies should they occur. If delinquencies occur beyond the amounts held in those reserves, the District has no duty to pay the delinquency out of any available funds of the District. The District acts solely as an agent for those paying taxes levied and the bondholders. The Community Facilities District Bonds currently active include the Community Facilities District Number Two, 2004 Special Tax Bonds, Series A, with a remaining balance as of June 30, 2009, of $4,355,000.



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NOTE 10 - FUND BALANCES

Fund balances with reservations/designations are composed of the following elements:

County School Non-MajorGeneral Building Facilities Governmental

Fund Fund Fund Funds TotalReserved

Revolving cash 50,000$ -$ -$ 25,000$ 75,000$ Stores inventories 172,056 - - 70,462 242,518 Prepaid expenditures 1,109,378 - - - 1,109,378 Restricted programs 10,564,660 - - - 10,564,660

Total Reserved 11,896,094 - - 95,462 11,991,556 Unreserved

DesignatedEconomic uncertainties 5,835,028 - - 3,500,834 9,335,862 Mandated cost 2,548,770 - - - 2,548,770 E-rate technology program 396,655 - - - 396,655 Future operational budget 11,425,054 - - - 11,425,054 Lottery 1,575,177 - - - 1,575,177 Best practices cohort 114,929 - - - 114,929 Special reserve Reche Canyon 494 - - - 494 School site discretionaryblock grant 352,801 - - 352,801 Child development - - - 332,108 332,108 Nutrition services - - - 1,728,982 1,728,982 Deferred maintenance - - - 2,430,886 2,430,886 Capital facilities - - - 10,479,257 10,479,257 School site constructionand repair - 37,277,517 - - 37,277,517 School facility programs - - 65,488,553 - 65,488,553 Reserve for capital outlay - - 6,057,100 6,057,100 Other designations - - - 1,029,662 1,029,662

Total Designated 22,248,908 37,277,517 65,488,553 25,558,829 150,573,807 Undesignated - - - 8,064,011 8,064,011

Total Unreserved 22,248,908 37,277,517 65,488,553 33,622,840 158,637,818 Total 34,145,002$ 37,277,517$ 65,488,553$ 33,718,302$ 170,629,374$



48

NOTE 11 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION

Plan Description

The Postemployment Benefit Plan (the "Plan") is a single-employer defined benefit healthcare plan administered by the Colton Joint Unified School District. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 99 retirees and beneficiaries currently receiving benefits, no terminated plan members entitled to but not yet receiving benefits, and 3,033 active plan members.

Contribution Information

The contribution requirements of plan members and the District are established and may be amended by the District and the Teachers Association (CEA), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements.For fiscal year 2008-09, the District contributed $1,107,512 to the Plan, all of which was used for current premiums.

Annual OPEB Cost and Net OPEB Obligation

The District's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District's net OPEB obligation to the Plan:

Annual required contribution 2,709,864$ Interest on net OPEB obligation 95,227 Adjustment to annual required contribution (122,755) Annual OPEB cost (expense) 2,682,336 Contributions made (1,107,512) Increase in net OPEB obligation 1,574,824 Net OPEB obligation, beginning of year 1,904,540 Net OPEB obligation, end of year 3,479,364$

The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation was as follows:

Year Ended Annual Required Percentage Net OPEBJune 30, Contribution Contributed Obligation

2008 2,709,864$ 30% 1,904,540$ 2009 2,682,336 41% 3,479,364



49

Funded Status and Funding Progress

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Since this is the first year of implementation, only the current year information is presented.

Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

In the July 1, 2007, actuarial valuation, the unit credit method was used. Currently, the District does not set aside assets in an irrevocable employee benefit trust. The actuarial assumptions included a five percent discount ratebased on employer assets, specifically, the long-term expected return on employer investments that are not restricted for other purposes and are expected to be used to finance benefits payments. Healthcare cost trend rates ranged from an initial eleven percent to an ultimate rate of five percent. The UAAL is being amortized at a closed level dollar method. The remaining amortization period at July 1, 2008, was 29 years. The actuarial value of assets was not determined in this actuarial valuation.

NOTE 12 - 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, 2009, the District participated in the Alliance of Schools for Cooperative Insurance Programs (ASCIP) public entity risk pool for property and liability insurance coverage. Settled claims have not exceeded the insured coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year.

Workers' Compensation

Since 1978, the District has self-insured itself for workers' compensation coverage, retaining risk of loss. Excess workers' compensation coverage is purchased through an insurance product that provides the required additional coverage.



50

Unpaid Claims Liabilities

The fund establishes a liability for both reported and unreported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District from July 1, 2007 to June 30, 2009:

Workers'Compensation

Liability Balance, July 1, 2007 5,775,921$ Claims and changes in estimates (320,961) Claims payments (1,370,178)

Liability Balance, June 30, 2008 4,084,782 Claims and changes in estimates 1,376,582 Claims payments (1,422,724)

Liability Balance, June 30, 2009 4,038,640$

Assets available to pay claims at June 30, 2009 22,899,659$

Employee Medical Benefits

The District has contracted with the High Desert and Inland Employee/Employer Joint Labor Management Trust (HD&IE/ET) to provide employee health benefits. HD&IE/ET is a purchasing and administration pool comprised of local educational agencies. Rates are set through an annual process. The District pays a monthly contribution, with the contributions and related costs accounted for in a separate account from other members of the trust. The trust does not assume risk of loss for claims against its members. The District also purchases medical insurance from Kaiser for health care coverage.



51

NOTE 13 - EMPLOYEE RETIREMENT SYSTEMS

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

CalSTRS

Plan Description

The District contributes to CalSTRS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalSTRS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. CalSTRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalSTRS annual financial report may be obtained from CalSTRS, 7919 Folsom Blvd., Sacramento, California 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 CalSTRS Teachers' Retirement Board. The required employer contribution rate for fiscal year 2008-09 was 8.25 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalSTRS for the fiscal years ending June 30, 2009, 2008, and 2007, were $8,051,253, $8,002,058, and $7,621,394, respectively, and equal 100 percent of the required contributions for each year.

CalPERS

Plan Description

The District contributes to the School Employer Pool under CalPERS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor 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 CalPERS Executive Office, 400 P Street, Sacramento, California 95811.



52

Funding Policy

Active plan members are required to contribute 7.0 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 the CalPERS Board of Administration. The required employer contribution rate for fiscal year 2008-09 was 9.428 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalPERS for the fiscal years ending June 30, 2009, 2008, and2007, were $3,088,415, $3,012,541, and $2,855,928, respectively, and equal 100 percent of the required contributions for each year.

Alternative Retirement Program

The District also contributes to the Accumulation Program for Part-time and Limited Service Employees (APPLE), which is a defined contribution pension plan. A defined contribution pension plan provides pension benefits in return for services rendered, provides an individual account for each participant, and specifies how contributions to the individual's account are to be determined instead of specifying the amount of benefits the individual is to receive. Under a defined contribution pension plan, the benefits a participant will receive depend solely on the amount contributed to the participant's account, the returns earned on investments of those contributions, and forfeitures of other participants' benefits that may be allocated to such participant's account.

As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (CalSTRS or CalPERS) must be covered by social security or an alternative plan. The District has elected to use APPLE as its alternative plan. Contributions made by the District and an employee vest immediately. The District contributes 2.25 percent of an employee's gross earnings. An employee is required to contribute 5.25 percent of his or her gross earnings to the pension plan.

During the year, the District's required and actual contributions amounted to $49,949, which was 2.25 percent of its current year covered payroll. Employees required and actual contributions amounted to $116,549, which was 5.25 percent of the covered payroll.

On Behalf Payments

The State of California makes contributions to CalSTRS on behalf of the District. These payments consist of State General Fund contributions to CalSTRS in the amount of $4,407,087 (4.517 percent of annual payroll). Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budget amounts reported in the General Fund - Budgetary Comparison Schedule.



53

NOTE 14 - 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, 2009.

Litigation

The District is not currently a party to any legal proceedings.

Operating Leases

The District is obligated under a certain lease accounted for as operating lease. Operating leases do not give rise to property rights or lease obligations. This lease has, therefore, not been accounted for as capital lease. The agreements contains a termination clause providing for cancellation after a specified number of days written notice to lessees, but it is unlikely that the District will cancel the agreement prior to the expiration date. Future minimum lease payments under this agreement are as follows:

Year Ending LeaseJune 30, Payment

2010 830,102$ 2011 422,534 2012 20,093 Total 1,272,729$

Total expenditures charged for leases during 2009 were $893,631.

Construction Commitments

As of June 30, 2009, the District had the following commitments with respect to the unfinished capital projects:

Remaining ExpectedConstruction Date of

Capital Projects Commitment CompletionInterim housing at various sites 87,860$ June 2010Grand Terrace High School 74,003,650 September 2011

74,091,510$



54

NOTE 15 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS AND JOINT POWER AUTHORITIES

The District is a member of the Alliance of Schools for Cooperative Insurance Programs (ASCIP) public entity risk pool, the Colton-Redlands-Yucaipa Regional Occupational Program (CRYROP) joint powers authority (JPA), and the High Desert and Inland Employee/Employer Public Joint Labor Management Trust (HD&IE/ET). The District pays an annual premium to ASCIP for property and liability coverage. Payments for ROP services are paid to the CRYOP JPA. Payments for health benefit coverage are paid to HD&IE/ET. The relationships between the District, the pools and the JPA'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 financial statements are not presented in these financial statements; however, fund transactions between the entities and the District are included in these statements. Audited financial statements are available from the respective entities.

During the year ended June 30, 2009, the District made payments of $658,231, $2,212,145 and $10,810,062 to ASCIP, CRYOP and HD&IE/RT, respectively for the services noted.

NOTE 16 - FISCAL ISSUES RELATING TO BUDGET REDUCTIONS

The State of California continues to suffer the effects of a recessionary economy. California school districts are reliant on the State of California to appropriate the funding necessary to continue the level of educational services expected by the State constituency. With the implementation of education trailer bill Senate Bill 4 of the 2009-10 Third Extraordinary Session (SBX3 4) (Chapter 12, Statutes of 2009), 14 percent of current year appropriations have now been deferred to a subsequent period, creating significant cash flow management issues for districts in addition to requiring substantial budget reductions, ultimately impacting the ability of California school districts to meet their goals for educational services.



55

NOTE 17 - SUBSEQUENT EVENT

On July 28, 2009, the Governor of the State of California signed a package of bills amending the 2008-09 and 2009-10 California State budgets. The budget amendments were designed to address the State's budget gap of $24 billion that had developed as a result of the deepening recession since the State's last budget actions in February 2009.

The July budget package reduced, on a State-wide basis, $1.6 billion in 2008-09 Proposition 98 funding through a reversion of undistributed categorical program balances. The budget language identified 51 specific programs and required the amounts associated with these programs that were "unallocated, unexpended, or not liquidated as of June 30, 2009" to revert to the State's General Fund. The July budget package also provided an appropriation in 2009-10 to backfill $1.5 billion of these cuts to repay the 2008-09 reversion of the undistributed categorical program balances.

In accordance with the requirements of Governmental Accounting Standards Board Statement No. 33, the District has not recorded the revenue and related receivable of $2,869,879 associated with the District's portion of the unallocated, unexpended, or unliquidated categorical program balances identified in the July 2009 State Budget package.

56

REQUIRED SUPPLEMENTARY INFORMATION


GENERAL FUNDBUDGETARY COMPARISON SCHEDULEFOR THE YEAR ENDED JUNE 30, 2009

57

Variances -Positive

(Negative)Actual Final

Revenues: Original Final (GAAP Basis) to ActualRevenue limit sources 132,531,182$ 124,827,549$ 128,980,223$ 4,152,674$ Federal sources 12,661,806 13,659,394 22,681,253 9,021,859 Other State sources 31,965,559 31,639,558 36,489,279 4,849,721 Other local sources 13,020,965 12,286,107 11,680,531 (605,576)

Total Revenues 1 190,179,512 182,412,608 199,831,286 17,418,678

ExpendituresCurrent

Instruction 117,036,755 115,920,856 120,208,340 (4,287,484) Instruction-related activities

Supervision of instruction 8,774,588 10,253,533 9,779,202 474,331 Instructional library, media, and technology 2,241,474 1,596,535 1,587,453 9,082 School site administration 11,900,321 11,547,346 11,836,019 (288,673)

Pupil servicesHome-to-school transportation 4,405,443 3,882,271 3,600,198 282,073 Food services 8,163 8,079 5,938 2,141 All other pupil services 12,975,650 12,952,389 13,197,042 (244,653)

General administration:Data processing 3,026,866 2,725,944 2,764,022 (38,078) All other general administration 7,117,761 7,300,014 7,226,286 73,728

Plant services 22,195,316 21,532,787 20,857,889 674,898 Facility acquisition and construction 244,100 1,127,244 1,162,871 (35,627) Ancillary services 1,301,513 1,434,245 1,410,514 23,731 Community services 292,000 242,854 217,194 25,660 Other outgo 2,093,721 2,198,718 3,263,111 (1,064,393)

Debt servicePrincipal 450,000 450,000 - 450,000 Interest and other 342,310 296,286 - 296,286

Total Expenditures 1 194,405,981 193,469,101 197,116,079 (3,646,978)

Excess (Deficiency) of Revenues Over Expenditures (4,226,469) (11,056,493) 2,715,207 13,771,700

Other Financing Sources (Uses)Transfers in - - 26,907 26,907 Transfers out (1,290,721) (1,016,641) (1,791,927) (775,286)

Net Other Financing Sources (Uses) (1,290,721) (1,016,641) (1,765,020) (748,379)

Net Change in Fund Balance (5,517,190) (12,073,134) 950,187 13,023,321 Fund Balance - Beginning 33,194,815 33,194,815 33,194,815 - Fund Balance - Ending 27,677,625$ 21,121,681$ 34,145,002$ 13,023,321$

Budgeted Amounts(GAAP Basis)

1 On behalf payments of $4,407,087 are included in the actual revenues and expenditures, but have not been included in the budgeted amounts.


SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS


58

ActuarialAccrued Unfunded UAAL as a

Actuarial Liability AAL Percentage ofValuation Actuarial Value (AAL) - (UAAL) Funded Ratio Covered Covered Payroll

Date of Assets (a) Unit Credit (b) (b - a) (a / b) Payroll (c) ([b - a] / c)

July 1, 2007 -$ 20,334,938$ 20,334,938$ -$ 126,719,670$ 16.05%

July 1, 2008 1 - 23,452,810 21,980,194 - 130,336,657 16.86%

1 A full actuarial valuation was not performed; amounts disclosed reflect actuarial's estimates using an actuarial roll forward technique.

59

SUPPLEMENTARY INFORMATION


See accompanying note to supplementary information.

60

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDSFOR THE YEAR ENDED JUNE 30, 2009

Pass-ThroughFederal Entity

Federal Grantor/Pass-Through CFDA Identifying FederalGrantor/Program or Cluster Title Number Number Expenditures

U.S. DEPARTMENT OF EDUCATIONPassed through San Bernardino County Superintendent of Schools:

Small Learning Communities 84.215L 06/07-0144 95,221$ Passed through California Department of Education (CDE):

No Child Left Behind ActTitle I, Part A - Low Income and Neglected 84.010 14329 6,087,880 Title I, Part D - Local Delinquent Programs 84.010 14357 2,896 Title I, Part A - Program Improvement LEACorrective Action, Extensive Performance Problems 84.010 14955 719,614 Title II, Part A - Improving Teacher Quality 84.367 14341 1,248,644 Title II, Part A - Principal Training 84.367 14344 3,066 Title II, Part D - Enhancing Education

Through Technology 84.318 14334 1,162 Title III, Part A - Limited English Proficiency 84.365 10084 652,013 Title IV - Safe and Drug-Free Schools 84.186 14347 105,107 Title V, Part A - Innovative Strategies 84.298 14354 54,036 Title X, McKinney-Vento Homeless

Children Assistance 84.196 14332 111,037 Vocational Educational Grants

Applied Technology - Secondary Education 84.048 14894 201,569 Local Plan Area:

Individuals with Disabilities Education Act (IDEA)Federal Preschool 84.173A 13430 74,679 Local Assistance 84.027A 13379 3,606,824 Preschool Local Assistance 84.027A 13682 124,675 Preschool Staff Development 84.027A 13431 472 ARRA - Part B, Basic Local Assistance 84.391 15003 25,788 ARRA - Part B, Preschool Local Entitlement 84.391 15002 9,737 ARRA - Part B, Preschool Grants 84.392 15000 2,729

Total U.S. Department of Education 13,127,149



61

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued)FOR THE YEAR ENDED JUNE 30, 2009

Pass-ThroughFederal Entity

Federal Grantor/Pass-Through CFDA Identifying FederalGrantor/Program or Cluster Title Number Number Expenditures

U.S. DEPARTMENT OF AGRICULTUREPassed through CDE:

Basic School Breakfast Program 10.553 13525 10,915$ Especially Needy Breakfast 10.553 13526 1,366,073 National School Lunch Program 10.555 13524 5,825,449 Child and Adult Care Food Program 10.558 13529 147,632 Food Distribution 10.555 [2] 521,203 Summer Lunch Program 10.559 13004 8,511

Total U.S. Department of Agriculture 7,879,783

U.S. DEPARTMENT OF DEFENSEJunior Reserve Officer Training Corps - Navy 12.000 [1] 101,456

U.S. DEPARTMENT OF HEALTH ANDHUMAN SERVICESChild Development: Quality Improvement 93.575 13942 31,727 Child Development: School-Age Child Care 93.575 13941 2,014 Passed through San Bernardino CountyHuman Services System:Head Start 93.600 10016 1,101,027

Passed through California Department of Health Services:Medi-Cal Administrative Activities 93.778 10060 294,041 Medi-Cal Billings 93.778 10013 163,215

Total U.S. Department of Healthand Human Services 1,592,024 Total Expenditures of Federal Awards 22,700,412$

[1] CFDA number or contract number not available[2] Direct award



62

LOCAL EDUCATION AGENCY ORGANIZATION STRUCTUREJUNE 30, 2009

ORGANIZATION

The Colton Joint Unified School District was established in 1966, and consists of an area comprising approximately 119 acres. The District operates 18 elementary schools, four middle schools, two high schools, acontinuation high school, an adult school, a school for alternative education, and child development centers. There were no boundary changes during the year.

GOVERNING BOARD

MEMBER OFFICE TERM EXPIRES

Mrs. Marge Mendoza-Ware President 2010

Mr. Melvin A. Albiso Vice President 2010

Mr. David R. Zamora Clerk 2010

Mr. Robert D. Armenta, Jr. Member 2010

Mrs. Patt Haro Member 2012

Mr. Frank A. Ibarra Member 2012

Mr. Kent Taylor Member 2012

ADMINISTRATION

Mr. James A. Downs Superintendent

Mr. Jaime R. Ayala Assistant Superintendent, Business Services Division

Mr. Jerry Almendarez Assistant Superintendent, Human Resources Division

Mrs. Mollie Gainey-Stanley Assistant Superintendent, Educational Services Division

Mr. Mike Snellings Assistant Superintendent, Student Services Division



64

SCHEDULE OF INSTRUCTIONAL TIMEFOR THE YEAR ENDED JUNE 30, 2009

1982-83 1986-87 2008-09Actual Minutes Actual Traditional Multitrack

Grade Level Minutes Requirement Minutes Calendar Calendar StatusKindergarten 31,680 36,000 36,540 180 - CompliedGrades 1 - 3 50,568 50,400

Grade 1 51,292 180 - CompliedGrade 2 51,292 180 - CompliedGrade 3 51,292 180 - Complied

Grades 4 - 6 51,636 54,000 Grade 4 54,148 180 - CompliedGrade 5 54,148 180 - CompliedGrade 6 54,148 180 - Complied

Grades 7 - 8 51,636 54,000 Grade 7 57,560 180 - CompliedGrade 8 57,560 180 - Complied

Grades 9 - 12 64,240 64,800 Grade 9 66,141 180 - CompliedGrade 10 66,141 180 - CompliedGrade 11 66,141 180 - CompliedGrade 12 66,141 180 - Complied

Number of Days



65

RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITHAUDITED FINANCIAL STATEMENTS


Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements.

GeneralFund

FUND BALANCEBalance, June 30, 2009, Unaudited Actuals 37,014,881$

Decrease in:Accounts receivable 1 (2,869,879)

Balance, June 30, 2009, Audited Financial Statement 34,145,002$

1 The adjustment is the ABX4 3 unappropriated State categorical as described in Note 17 - Subsequent Event.



66

SCHEDULE OF FINANCIAL TRENDS AND ANALYSISFOR THE YEAR ENDED JUNE 30, 2009

(Budget)2010 1 2009 2008 2007

GENERAL FUNDRevenues 170,771,079$ 199,831,286$ 209,041,388$ 195,398,806$Other sources - 26,907 - -

Total Revenuesand Other Sources 170,771,079 199,858,193 209,041,388 195,398,806

Expenditures 190,882,326 197,116,079 198,775,651 187,016,514 Other uses and transfers out 1,178,569 1,791,927 1,228,229 1,196,035

Total Expendituresand Other Uses 192,060,895 198,908,006 200,003,880 188,212,549

INCREASE (DECREASE)IN FUND BALANCE (21,289,816)$ 950,187$ 9,037,508$ 7,186,257$

ENDING FUND BALANCE 15,725,065$ 34,145,002$ 33,194,815$ 24,157,307$ AVAILABLE RESERVES 2 5,789,520$ 9,335,862$ 5,869,000$ 9,202,050$ AVAILABLE RESERVES AS APERCENTAGE OF TOTAL OUTGO 3 3.0% 4.8% 3.0% 5.0%

LONG-TERM OBLIGATIONS 4 N/A 120,390,298$ 115,798,552$ 115,913,577$K-12 AVERAGE DAILYATTENDANCE AT P-2 5 22,613 22,703 22,747 22,896

The General Fund balance has increased by $9,987,695 over the past two years. The fiscal year 2009-10 budget projects a decrease of $21,289,816. For a district this size, the State recommends available reserves of at least three percent of total General Fund expenditures, transfers out, and other uses (total outgo).

The District has incurred operating surpluses in each of the past three years, however, anticipates incurring an operating deficit during the 2009-10 fiscal year. Total long-term obligations have increased by $4,476,721 over the past two years.

Average daily attendance has decreased by 193 over the past two years. Additional decline of 90 ADA is anticipated during fiscal year 2009-10.

1 Budget 2010 is included for analytical purposes only and has not been subjected to audit.

2 Available reserves consist of all funds designated for economic uncertainty contained within the General Fund and the Special Reserve Non-Capital Fund.

3 On-behalf payments of $4,407,087, $4,381,099, and $4,171,674 have been excluded from the calculation of available reserves for fiscal years ending June 30, 2009, 2008 and 2007, respectively.

4 Long-term obligations for 2007 have been restated to eliminate non-obligatory debt.

5 Excludes Adult Education and ROP ADA.



67

SCHEDULE OF CHARTER SCHOOLSFOR THE YEAR ENDED JUNE 30, 2009

Included in Name of Charter School Audit Report

Nova Meridian Academy No



68

NON-MAJOR GOVERNMENTAL FUNDSCOMBINING BALANCE SHEETJUNE 30, 2009

Adult ChildEducation Development Cafeteria

Fund Fund FundASSETS

Deposits and investments 19,111$ 312,972$ 677,539$ Receivables 65,815 338,474 1,462,249 Due from other funds - 7,058 7,453 Stores inventories - - 70,462

Total Assets 84,926$ 658,504$ 2,217,703$ LIABILITIES ANDFUND BALANCES

Liabilities:Accounts payable 49,946$ 215,659$ 162,066$ Due to other funds 34,980 107,519 231,193 Deferred revenue - 3,218 -

Total Liabilities 84,926 326,396 393,259 Fund Balances:

Reserved for:Revolving cash - - 25,000 Stores inventories - - 70,462

Unreserved:Designated - 332,108 1,728,982 Undesignated, reported in:

Debt service funds - - - Total Fund Balances - 332,108 1,824,444 Total Liabilities andFund Balances 84,926$ 658,504$ 2,217,703$

68

Deferred Special Reserve Capital Special ReserveMaintenance Non-Capital Facilities Capital Outlay

Fund Fund Fund Fund

2,581,793$ 3,484,450$ 10,521,880$ 6,028,751$ 10,013 16,384 68,692 28,349

- - - - - - - -

2,591,806$ 3,500,834$ 10,590,572$ 6,057,100$

160,920$ -$ 107,849$ -$ - - 3,466 - - - - -

160,920 - 111,315 -

- - - - - - - -

2,430,886 3,500,834 10,479,257 6,057,100

- - - - 2,430,886 3,500,834 10,479,257 6,057,100

2,591,806$ 3,500,834$ 10,590,572$ 6,057,100$



69

NON-MAJOR GOVERNMENTAL FUNDSCOMBINING BALANCE SHEET (Continued)JUNE 30, 2009

Capital Project Bond Interest Total Non-MajorFund for Blended and Redemption GovernmentalComponent Units Fund Funds

ASSETSDeposits and investments 1,029,662$ 8,064,011$ 32,720,169$ Receivables - - 1,989,976 Due from other funds - - 14,511 Stores inventories - - 70,462

Total Assets 1,029,662$ 8,064,011$ 34,795,118$ LIABILITIES ANDFUND BALANCES

Liabilities:Accounts payable -$ -$ 696,440$ Due to other funds - - 377,158 Deferred revenue - - 3,218

Total Liabilities - - 1,076,816 Fund Balances:

Reserved for:Revolving cash - - 25,000 Stores inventories - - 70,462

Unreserved:Designated 1,029,662 - 25,558,829 Undesignated, reported in:

Debt service funds - 8,064,011 8,064,011 Total Fund Balances 1,029,662 8,064,011 33,718,302 Total Liabilities andFund Balances 1,029,662$ 8,064,011$ 34,795,118$




70

NON-MAJOR GOVERNMENTAL FUNDSCOMBINING STATEMENT OF REVENUES, EXPENDITURES,AND CHANGES IN FUND BALANCE


Adult ChildEducation Development Cafeteria

Fund Fund FundREVENUESFederal sources -$ 1,134,768$ 7,879,784$ Other State sources 274,390 2,063,353 581,039 Other local sources 7,112 39,683 2,053,141

Total Revenues 281,502 3,237,804 10,513,964 EXPENDITURESCurrent

Instruction 168,749 1,524,032 - Instruction-related activities:

Supervision of instruction - 64,184 - School site administration 89,663 270,044 -

Pupil services:Food services - 53,633 9,699,838 All other pupil services 37,607 262,868 -

General administration:All other general administration 18,063 182,939 462,690

Plant services 73,119 336,139 171,906 Facility acquisition and construction - - - Community services - 571,982 -

Debt servicePrincipal - 49,140 - Interest and other - 8,319 -

Total Expenditures 387,201 3,323,280 10,334,434 Excess (Deficiency) of RevenuesOver Expenditures (105,699) (85,476) 179,530

Other Financing Sources (Uses)Transfers in 44,015 - - Transfers out (26,907) - - Other uses - - -

Net Financing Sources (Uses) 17,108 - -

NET CHANGE IN FUND BALANCES (88,591) (85,476) 179,530 Fund Balance - Beginning 88,591 417,584 1,644,914 Fund Balance - Ending -$ 332,108$ 1,824,444$

70

Deferred Special Reserve Capital Special ReserveMaintenance Non-Capital Facilities Capital Outlay

Fund Fund Fund Fund

-$ -$ -$ -$ - - - -

72,619 98,098 2,228,371 169,750 72,619 98,098 2,228,371 169,750

- - - -

- - - - - - - -

- - - - - - - -

- - 47,472 - 542,376 - 1,226,929 - 324,237 - 1,848,167 -

- - - -

- - - - - - - -

866,613 - 3,122,568 -

(793,994) 98,098 (894,197) 169,750

799,615 - 202,011 - - - - - - - - -

799,615 - 202,011 - 5,621 98,098 (692,186) 169,750

2,425,265 3,402,736 11,171,443 5,887,350 2,430,886$ 3,500,834$ 10,479,257$ 6,057,100$



71

NON-MAJOR GOVERNMENTAL FUNDSCOMBINING STATEMENT OF REVENUES, EXPENDITURES,AND CHANGES IN FUND BALANCE (Continued)


Capital Project Bond Interest Total Non-MajorFund for Blended and Redemption GovernmentalComponent Units Fund Funds

REVENUESFederal sources -$ -$ 9,014,552$ Other State sources - - 2,918,782 Other local sources 386,045 7,113,289 12,168,108

Total Revenues 386,045 7,113,289 24,101,442 EXPENDITURESCurrent

Instruction - - 1,692,781 Instruction-related activities:

Supervision of instruction - - 64,184 School site administration - - 359,707

Pupil services:Food services - - 9,753,471 All other pupil services - - 300,475

General administration:All other general administration - - 711,164

Plant services - - 2,350,469 Facility acquisition and construction 23,686 - 2,196,090 Community services - - 571,982

Debt servicePrincipal - 2,695,000 2,744,140 Interest and other - 4,097,623 4,105,942

Total Expenditures 23,686 6,792,623 24,850,405 Excess (Deficiency) of Revenues

Over Expenditures 362,359 320,666 (748,963) Other Financing Sources (Uses)

Transfers in - - 1,045,641 Transfers out - - (26,907) Other uses (263,805) - (263,805)

Net Financing Sources (Uses) (263,805) - 754,929

NET CHANGE IN FUND BALANCES 98,554 320,666 5,966 Fund Balance - Beginning 931,108 7,743,345 33,712,336 Fund Balance - Ending 1,029,662$ 8,064,011$ 33,718,302$



72

GENERAL FUND SELECTED FINANCIAL INFORMATIONTHREE-YEAR SUMMARY OF REVENUES, EXPENDITURES ANDCHANGES IN FUND BALANCES


(Amounts in thousands, excluding Actual Results for the YearsRevenue Limit Per ADA)

Percent Percent Percentof of of

Amount Revenue Amount Revenue Amount RevenueREVENUES

Federal revenue 22,681$ 11.4 13,188$ 6.3 13,880$ 7.1 State and local revenue

included in revenue limit 128,980 64.5 142,007 67.9 128,794 65.9 Lottery revenue 2,969 1.5 3,279 1.6 3,583 1.8 Other State revenue 33,520 16.8 36,736 17.6 35,847 18.3 Interest revenue 909 0.4 1,841 0.9 1,901 1.0 Other local revenue 236 0.1 1,156 0.5 951 0.5 Tuition and transfers 10,536 5.3 10,834 5.2 10,443 5.4

Total Revenues 199,831 100.0 209,041 100.0 195,399 100.0 EXPENDITURES

Salaries and Employee BenefitsTeachers' salaries 80,395 40.2 79,443 38.0 76,385 39.1 Other certificated salaries 17,593 8.8 17,700 8.5 16,229 8.3 Classified salaries 29,971 15.0 29,832 14.3 28,651 14.6 Employee benefits 40,478 20.3 42,328 20.2 40,995 21.0

Total Salaries and Benefits 168,437 84.3 169,303 81.0 162,260 83.0

Books and supplies 10,097 5.1 12,123 5.8 8,865 4.6 Services and operating expenses 14,360 7.1 14,093 6.7 12,960 6.6 Capital outlay 1,624 0.8 1,140 0.6 660 0.3 Other outgo 2,598 1.3 1,629 0.8 1,424 0.8 Debt service - interest and other - - 487 0.2 848 0.4

Total Expenditures 197,116 98.6 198,775 95.1 187,017 95.7 EXCESS OF REVENUES OVER

EXPENDITURES 2,715 1.4 10,266 4.9 8,382 4.3 OTHER FINANCING USES

Transfers out and other uses (1,765) (0.9) (1,228) (0.6) (1,196) (0.6) Total Other Financing Uses (1,765) (0.9) (1,228) (0.6) (1,196) (0.6)

INCREASE IN FUND BALANCE 950 0.5 9,038 4.3 7,186 3.7 FUND BALANCE, BEGINNING 33,195 24,157 16,971 FUND BALANCE, ENDING 34,145$ 33,195$ 24,157$

BASE REVENUE LIMIT PER ADARegular 6,122$ 5,793$ 5,541$ Adult 2,645$ 2,645$ 2,531$ 0

* * * * * * * * * * * * * * * * * * * * * * * * * *

2008-2009 2007-2008 2006-2007



73

CAFETERIA FUND SELECTED FINANCIAL INFORMATIONTHREE-YEAR SUMMARY OF REVENUES, EXPENDITURES ANDCHANGES IN FUND BALANCE


(Dollar amounts in thousands) Actual Results for the Years

Percent Percent Percentof of of

Amount Revenue Amount Revenue Amount RevenueREVENUES

Federal - NSLP 7,880$ 75.0 7,033$ 70.2 6,400$ 67.1 State meal program 581 5.5 630 6.3 526 5.5 Food sales 2,009 19.1 2,282 22.8 2,503 26.2 Other 44 0.4 71 0.7 112 1.2

Total Revenues 10,514 100.0 10,016 100.0 9,541 100.0 EXPENDITURES

Salaries and employee benefits 4,761 45.3 4,765 47.6 4,702 49.3 Food 4,501 42.8 4,409 44.0 3,899 40.9 Supplies 390 3.7 361 3.6 423 4.4 Other 682 6.5 500 5.0 489 5.1

Total Expenditures 10,334 98.3 10,035 100.2 9,513 99.7 INCREASE (DECREASE) IN

FUND BALANCE 180 1.7 (19) (0.2) 28 0.3 FUND BALANCE, BEGINNING 1,645 15.7 1,664 16.6 1,636 17.1 FUND BALANCE, ENDING 1,825$ 17.4 1,645$ 16.4 1,664$ 17.4

* * * * * * * * * * * * * * * * * * * * * *TYPE 'A' LUNCH/BREAKFAST PARTICIPATION

Amount Percent Amount Percent Amount PercentTYPE 'A' LUNCHES

Paid 358,710 13.7 407,493 16.2 448,494 18.6 Reduced price 355,300 13.5 379,724 15.1 356,234 14.8 Free 1,910,829 72.8 1,723,120 68.7 1,608,058 66.6

Total Lunches 2,624,839 100.0 2,510,337 100.0 2,412,786 100.0 BREAKFAST

Paid 68,514 7.9 70,393 9.0 68,597 9.9 Reduced price 87,118 10.0 91,672 11.7 76,878 11.2 Free 711,681 82.1 621,410 79.3 543,950 78.9

Total Breakfast 867,313 100.0 783,475 100.0 689,425 100.0

2008-2009 2007-2008 2006-2007

2008-2009 2007-2008 2006-2007


74

NOTE TO SUPPLEMENTARY INFORMATIONJUNE 30, 2009

NOTE 1 – PURPOSE OF SCHEDULES

Schedule of Expenditures of Federal Awards

The accompanying Schedule of Expenditures of Federal Awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements.

The following schedule provides reconciliation between revenues reported on the Statement of Revenues, Expenditures and Changes in Fund Balance, and the related expenditures reported on the Schedule of Expenditures of Federal Awards. The reconciling amounts represent Federal funds that have been recorded as revenues that have not been expended by June 30, 2009. The unspent balances are reported as legally restricted ending balances within the General Fund.

CFDA Number Amount

Total Federal Revenues from the Statement of Revenues, Expenditures and Changes in Fund Balance: 31,695,805$ ARRA - State Fiscal Stabilization Funds 84.394 (8,833,500) Medi-cal Billing Option 93.778 (161,893)

Total Schedule of Expenditures of Federal Awards 22,700,412$

Local Education Agency Organization Structure

This schedule provides information about the District's boundaries and schools operated, members of the governing board, and members of the administration.

Schedule of Average Daily Attendance (ADA)

Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs.

Schedule of Instructional Time

The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections 46200 through 46206.

Districts must maintain their instructional minutes at either the 1982-83 actual minutes or the 1986-87 requirements, whichever is greater, as required by Education Code Section 46201.


75

NOTE TO SUPPLEMENTARY INFORMATIONJUNE 30, 2009

Reconciliation of Annual Financial and Budget Report with Audited Financial Statements

This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Unaudited Actual Financial Report to the audited financial statements.

Schedule of Financial Trends and Analysis

This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time.

Schedule of Charter Schools

This schedule lists all Charter Schools chartered by the District, and displays information for each Charter School on whether or not the Charter School is included in the District audit.

Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance

The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balance is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance.

General Fund Selected Financial Information

This schedule provides a comparison of revenues and expenditures as a percentage of total revenue for the General Fund for the past three years.

Cafeteria Fund Selected Financial Information

This schedule provides a comparison of revenues and expenditures as a percentage of total revenue for the cafeteria fund for the past three years.

76

INDEPENDENT AUDITORS' REPORTS

83

SCHEDULE OF FINDINGS AND QUESTIONED COSTS


SUMMARY OF AUDITORS' RESULTSFOR THE YEAR ENDED JUNE 30, 2009

84

Unqualified

NoNone reported

No

FEDERAL AWARDS

NoNone reportedUnqualified

No

CFDA Numbers Name of Federal Program or Cluster84.367 Title II, Part A - Improving Teacher Quality84.367 Title II, Part A - Principal Training84.027A, 84.173A, 84.391, 84.392 Special Education Cluster10.553, 10.555, 10.559 Child Nutrition Cluster93.600 Head Start

681,012$ Auditee qualified as low-risk auditee? No

STATE AWARDS

NoNone reportedUnqualified

Type of auditors' report issued:Internal control over financial reporting:

Material weaknesses identified?

Significant deficiencies identified not considered to be material weaknesses?

Significant deficiencies identified not considered to be material weaknesses?Noncompliance material to financial statements noted?

Internal control over major programs:

FINANCIAL STATEMENTS

Material weaknesses identified?

Type of auditors' report issued on compliance for State programs:

Any audit findings disclosed that are required to be reported in accordance withCircular A-133, Section .510(a)Identification of major programs:

Internal control over State programs:Material weaknesses identified?

Significant deficiencies identified not considered to be material weaknesses?Type of auditors' report issued on compliance for major programs:

Dollar threshold used to distinguish between Type A and Type B programs:


FINANCIAL STATEMENT FINDINGSFOR THE YEAR ENDED JUNE 30, 2009

85

None reported.


FEDERAL AWARDS FINDINGS AND QUESTIONED COSTSFOR THE YEAR ENDED JUNE 30, 2009

86

None reported.


STATE AWARDS FINDINGS AND QUESTIONED COSTSFOR THE YEAR ENDED JUNE 30, 2009

87

None reported.


SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGSFOR THE YEAR ENDED JUNE 30, 2009

88

Except as specified in previous sections of this report, summarized below is the current status of all audit findings reported in the prior year's schedule of financial statement findings.

Financial Statement Findings

2008-1 50000

Federal Program

Title: Head Start CFDA: 93.600Pass-Through Agency: San Bernardino County Human Services SystemFederal Agency: U.S. Department of Education

Criteria or Specific Requirements

Compliance Area: Matching

Districts are required to contribute at least 20 percent of the costs of the program through cash or in-kind contributions.

Condition

For the 2007-08 fiscal year, the District was required to contribute cash or in-kind contributions of $209,837. In reviewing the summary of in-kind contributions submitted by the District, we noted that total in-kind contributions were only $147,565. The District also contributed $15,348 in unrestricted revenues to the Head Start program. However, the total cash and in-kind contributions of $162,913 was less than the required amount of $209,837.

Questioned Costs Identified

There are no specific questioned costs identified for this finding.

Consequences

Program funding is contingent upon meeting all program requirements. Therefore, failing to comply with Federal program requirements places the District at risk of losing the ability to receive program funding.

Recommendation

The District should establish procedures to continuously monitor the progress toward meeting the Federal matching requirement throughout the year. A major portion of the in-kind contribution is generated by volunteer hours. Therefore, the District should ensure that the community is properly informed of the need for volunteers.


SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGSFOR THE YEAR ENDED JUNE 30, 2009

89

Current Status

Implemented.

State Awards Findings

After School Education and Safety (ASES) Program

Indirect Costs

2008-2 40000

Criteria or Specific Requirements

Subagreements for services are excluded from the calculation of the indirect cost rate.

Questioned Costs

$23,188

Context

The District charged an indirect cost to the ASES program of $27,842. However, the after school services were provided through a third party and appears to meet the California State Accounting Manual's (CSAM) definition of a subagreement. Therefore, the $386,354 paid to the third party,except $25,000, should have been excluded from the District's indirect cost calculation.

Effect

This resulted in the District overcharging the program in indirect costs by $23,188.

Cause

The District included subagreement expenditures in the calculation of the indirect cost rate.

Recommendation

The District should review the guidelines of CSAM procedure 910 and apply the procedures to indirect costs for this program such that the first $25,000 of subagreement is recorded to the 5800 object code, while the remainder is charged to the 5100 object. In addition, the District should remember when calculating the indirect costs to exclude the 5100 object code from the total expenditures. The District should amend the final program claim with the appropriate agency.

Current Status

Implemented.

Governing BoardColton Joint Unified School District

91

Terrace Hills Middle School

Master Ticket Log

Finding

A master inventory log is not being utilized to account for all wrist bands on hand and used during the year.

Recommendation

A master inventory log should be maintained, which notes the type of wrist band, color, and beginning and ending number in the roll. When wrist bands are issued, they should be logged out noting the beginning ticket number in the roll and to whom the roll was issued. When the ticket sales recap form is returned, the ending number should be recorded in the master inventory log and the form should be reconciled to the log.

Ticket Sales Recap

Finding

During testing of internal controls over ticket sales, we were unable to agree the total amount of monies that should have been collected, as reported on the ticket sales recap, to the actual monies deposited.

Recommendation

A ticket sales recap form serves the purpose of calculating, based on the number of tickets sold out of the roll and the price per ticket, the amount of cash that should have been collected. The recap should be reconciled to the cash deposit forwarded to the bookkeeper. This procedure documents overages and shortages of cash and informs site personnel about potential problems in cash collections. The forms should be filed along with the deposit form and other pertinent

Cash Receipts

Finding

During testing of internal controls over cash disbursements, we noted that one of the cash receipts was not deposited on a timely basis. The deposit was made 27 days after the receipt date.

Recommendation

At a minimum, deposits should be made weekly to minimize the amount of cash held at the site. During weeks of high cash activity, there may be a need to make more than one deposit. The District should establish guidelines for this procedure including the maximum cash on hand that should be maintained at the site. The ultimate responsibility, however, will reside with the site bookkeeper to make the deposits timely.


C-1

APPENDIX C

PROPOSED FORM OF OPINION OF BOND COUNSEL

Upon issuance and delivery of the Bonds, Stradling Yocca Carlson & Rauth, a ProfessionalCorporation, San Francisco, California, Bond Counsel to the Colton Joint Unified School District,proposes to render its final approving opinion with respect to the Bonds in substantially the followingform:

[Closing Date]

Board of EducationColton Joint Unified School District



Members of the Board of Education:

We have examined a certified copy of the record of the proceedings relative to the issuance andsale of $41,938,348.45 Colton Joint Unified School District Election of 2008 General Obligation Bonds,Series B (the “Bonds”). As to questions of fact material to our opinion, we have relied upon the certifiedproceedings and other certifications of public officials furnished to us without undertaking to verify thesame by independent investigation.

Based on our examination as bond counsel of existing law, certified copies of such legalproceedings and such other proofs as we deem necessary to render this opinion, we are of the opinion, asof the date hereof and under existing law, that:

1. Such proceedings and proofs show lawful authority for the issuance and sale of the Bondspursuant to Article 4.5 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the Stateof California, a vote of fifty-five percent or more of the qualified electors of the Colton Joint UnifiedSchool District (the “District”) voting at an election held on November 4, 2008, and a resolution of theBoard of Education of the District adopted on August 19, 2010 (the “Resolution”).

2. The Bonds constitute valid and binding general obligations of the District, payable as toboth principal and interest from the proceeds of a levy of ad valorem taxes on all property subject to suchtaxes in the District, which taxes are unlimited as to rate or amount.

3. Under existing statutes, regulations, rulings and judicial decisions, interest on the Bondsis excluded from gross income for federal income tax purposes and is not an item of tax preference forpurposes of calculating the federal alternative minimum tax imposed on individuals and corporations. Itshould be noted that, with respect to corporations, such interest is not included as an adjustment in thecalculation of alternative minimum taxable income.

4. Interest on the Bonds is exempt from State of California personal income tax.

C-2

5. The difference between the issue price of a Bond (the first price at which a substantialamount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturitywith respect to such Bonds constitutes original issue discount. For purposes of the previous sentence, thestated redemption price at maturity includes the aggregate sum of all debt service payments on CapitalAppreciation Bonds. Original issue discount accrues under a constant yield method, and original issuediscount will accrue to a Bondowner before receipt of cash attributable to such excludable income. Theamount of original issue discount deemed received by a Bondowner will increase the Bondowner’s basisin the applicable Bond. Original issue discount that accrues to the Bondowner is excluded from the grossincome of such owner for federal income tax purposes, is not an item of tax preference for purposes of thefederal alternative minimum tax imposed on individuals and corporations, and is exempt from State ofCalifornia personal income tax.

6. The amount by which a Bondowner’s original basis for determining loss on sale orexchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity(or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section171 of the Code; such amortizable Bond premium reduces the Bondowner’s basis in the applicable Bond(and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes.The basis reduction as a result of the amortization of Bond premium may result in a Bondowner realizinga taxable gain when a Bond is sold by the Bondowner for an amount equal to or less (under certaincircumstances) than the original cost of the Bond to the Bondowner. Purchasers of the Bonds shouldconsult their own tax advisors as to the treatment, computation and collateral consequences ofamortizable Bond premium.

The opinions expressed herein may be affected by actions taken (or not taken) or events occurring(or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person,whether any such actions or events are taken or do occur. The Resolution and the Tax Certificate relatingto the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel isprovided with respect thereto. No opinion is expressed herein as to the effect on the exclusion from grossincome of interest (and original issue discount) for federal income tax purposes with respect to any Bondif any such action is taken or omitted based upon the advice of counsel other than ourselves. Other thanexpressly stated herein, we express no opinion regarding tax consequences with respect to the Bonds.

The opinions expressed herein as to the exclusion from gross income of interest (and originalissue discount) on the Bonds are based upon certain representations of fact and certifications made by theDistrict and others and are subject to the condition that the District complies with all requirements of theInternal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to theissuance of the Bonds to assure that such interest (and original issue discount) will not become includablein gross income for federal income tax purposes. Failure to comply with such requirements of the Codemight cause interest (and original issue discount) on the Bonds to be included in gross income for federalincome tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted tocomply with all such requirements.

The rights of the owners of the Bonds and the enforceability thereof may be subject tobankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rightsheretofore or hereafter enacted to the extent constitutionally applicable and their enforcement may also besubject to the exercise of judicial discretion in appropriate cases.

Respectfully submitted,

Stradling Yocca Carlson & Rauth

D-1

APPENDIX D

FORM OF CONTINUING DISCLOSURE CERTIFICATE

THIS CONTINUING DISCLOSURE CERTIFICATE (this “Disclosure Certificate”) isexecuted and delivered by the Colton Joint Unified School District (the “District”) in connection with theissuance of $41,938,348.45 aggregate principal amount of Colton Joint Unified School District (SanBernardino and Riverside Counties, California) Election of 2008 General Obligation Bonds, Series B (the“Bonds”). The Bonds are being issued pursuant to a resolution (the “District Resolution”) adopted by theBoard of Education of the District on August 19, 2010. The District covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executedand delivered by the District for the benefit of the Holders and Beneficial Owners of the Bonds and inorder to assist the Participating Underwriters in complying with Securities and Exchange CommissionRule 15c2-12(b)(5).

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

“Annual Report” shall mean any Annual Report provided by the District pursuant to, and asdescribed in, Sections 3 and 4 hereof.

“Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly,to make investment decisions concerning ownership of any Bonds (including persons holding Bondsthrough nominees, depositories or other intermediaries).

“Dissemination Agent” shall mean U.S. Bank National Association, acting in the capacity asDissemination Agent hereunder, or any successor Dissemination Agent designated in writing by theDistrict and which has filed with the District a written acceptance of such designation.

“Holder” shall mean the person in whose name any Bond shall be registered.

“Listed Events” shall mean any of the events listed in Section 5(a) hereof.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designatedor authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Untilotherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRBare to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB,currently located at http://emma.msrb.org.

“Official Statement” shall mean the Official Statement, dated August 31, 2010 (including allexhibits or appendices thereto), relating to the offer and sale of Bonds.

“Participating Underwriter” shall mean any of the original underwriters of the Bonds required tocomply with the Rule in connection with offering of the Bonds.

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

D-2

Section 3. Provision of Annual Reports. (a) The District shall, or shall cause theDissemination Agent to, not later than eight months after the end of the District’s fiscal year (which duedate shall be March 1 of each year, so long as the fiscal year ends on June 30), commencing with thereport for the 2009-10 Fiscal Year (which is due not later than March 1, 2011), provide to the MSRB anAnnual Report which is consistent with the requirements of Section 4 hereof. The Annual Report must besubmitted in electronic format, accompanied by such identifying information as is prescribed by theMSRB, and may cross-reference other information as provided in Section 4 hereof; provided, however,that the audited financial statements of the District may be submitted separately from the balance of theAnnual Report and later than the date required above for the filing of the Annual Report if they are notavailable by that date. If the District’s fiscal year changes, it shall give notice of such change in the samemanner as for a Listed Event under Section 5(c) hereof. The Annual Report shall be submitted on astandard form in use by industry participants or other appropriate form and shall identify the Bonds byname and CUSIP number.

(b) Not later than 15 Business Days prior to the date specified in subsection (a), the Districtshall provide the Annual Report to the Dissemination Agent (if other than the District). If the District isunable to provide to the MSRB an Annual Report by the date required in subsection (a), the District shallsend a notice to the MSRB, in substantially the form attached as Exhibit A.

(c) The Dissemination Agent shall:

(i) (if the Dissemination Agent is other than the District), provide anyAnnual Report received by it to the MSRB, as provided herein; and

(ii) (if the Dissemination Agent is other than the District), file a report withthe District certifying that the Annual Report has been provided to the MSRB pursuant tothis Disclosure Certificate, stating the date it was provided.

Section 4. Content of Annual Reports. The District’s Annual Report shall contain or includeby reference the following:

(a) Audited financial statements of the District for the preceding fiscal year, prepared inaccordance with the laws of the State of California and including all statements and informationprescribed for inclusion therein by the Controller of the State of California. If the District’s auditedfinancial statements are not available by the time the Annual Report is required to be provided to theMSRB pursuant to Section 3(a) hereof, the Annual Report shall contain unaudited financial statements ina format similar to the financial statements contained in the final Official Statement, and the auditedfinancial statements shall be provided to the MSRB in the same manner as the Annual Report when theybecome available.

(b) To the extent not included in the audited financial statements of the District, the AnnualReport shall also include the following:

(i) The adopted budget of the District for the then current fiscal year.

(ii) The District’s average daily attendance.

(iii) The District’s outstanding debt.

(iv) Information regarding total assessed valuation of taxable propertieswithin the District, if and to the extent provided to the District by the County.

D-3

(v) Information regarding total secured tax charges and delinquencies ontaxable properties within the District, if and to the extent provided to the District by theCounty.

(c) In addition to any of the information expressly required to be provided undersubsections (a) and (b), the District shall provide such further information, if any, as may be necessary tomake the specifically required statements, in light of the circumstances under which they are made, notmisleading.

Any or all of the items listed above may be set forth in one or a set of documents or may beincluded by specific reference to other documents, including official statements of debt issues of theDistrict or related public entities, which have been made available to the public on the MSRB’s website.The District shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, theDistrict shall promptly give, or cause to be given, notice of the occurrence of any of the following eventswith respect to the Bonds, if material:

(i) principal and interest payment delinquencies;

(ii) non-payment related defaults;

(iii) unscheduled draws on the debt service reserves reflecting financialdifficulties;

(iv) unscheduled draws on the credit enhancements reflecting financialdifficulties;

(v) substitution of the credit or liquidity providers or their failure to perform;

(vi) adverse tax opinions or events affecting the tax-exempt status of theBonds;

(vii) modifications to rights of Holders;

(viii) optional, contingent or unscheduled bond calls;

(ix) defeasances;

(x) release, substitution or sale of property securing repayment of the Bonds;and

(xi) rating changes.

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the Districtshall as soon as possible determine if such event would be material under applicable federal securitieslaws.

(c) If the District determines that knowledge of the occurrence of a Listed Event would bematerial under applicable federal securities laws, the District shall promptly file a notice of suchoccurrence with the MSRB in electronic format, accompanied by such identifying information as isprescribed by the MSRB. Notwithstanding the foregoing, notice of Listed Events described in

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paragraphs (viii) and (ix) of subsection (a) need not be given under this subsection any earlier than thenotice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the DistrictResolution.

Section 6. Termination of Reporting Obligation. The District’s obligations under thisDisclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of allof the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall givenotice of such termination in the same manner as for a Listed Event under Section 5(c) hereof.

Section 7. Dissemination Agent. The District may, from time to time, appoint or engage aDissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and maydischarge any such Dissemination Agent, with or without appointing a successor Dissemination Agent.The Dissemination Agent shall not be responsible in any manner for the content of any notice or reportprepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall beU.S. Bank National Association. If at any time there is not any other designated Dissemination Agent,the District shall be the Dissemination Agent.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this DisclosureCertificate, the District may amend this Disclosure Certificate, and any provision of this DisclosureCertificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Section 3(a), Section 4, orSection 5(a), it may only be made in connection with a change in circumstances that arises from achange in legal requirements, change in law, or change in the identity, nature or status of anobligated person with respect to the Bonds, or the type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in theopinion of nationally recognized bond counsel, have complied with the requirements of the Ruleat the time of the primary offering of the Bonds, after taking into account any amendments orinterpretations of the Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver either (i) is approved by the Holders in thesame manner as provided in the District Resolution for amendments to the District Resolutionwith the consent of Holders, or (ii) does not, in the opinion of nationally recognized bondcounsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Districtshall describe such amendment in the next Annual Report, and shall include, as applicable, a narrativeexplanation of the reason for the amendment or waiver and its impact on the type (or in the case of achange of accounting principles, on the presentation) of financial information or operating data beingpresented by the District. In addition, if the amendment relates to the accounting principles to be followedin preparing financial statements, (i) notice of such change shall be given in the same manner as for aListed Event under Section 5(c) hereof, and (ii) the Annual Report for the year in which the change ismade should present a comparison (in narrative form and also, if feasible, in quantitative form) betweenthe financial statements as prepared on the basis of the new accounting principles and those prepared onthe basis of the former accounting principles.

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed toprevent the District from disseminating any other information, using the means of dissemination set forthin this Disclosure Certificate or any other means of communication, or including any other information inany Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this

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Disclosure Certificate. If the District chooses to include any information in any Annual Report or noticeof occurrence of a Listed Event in addition to that which is specifically required by this DisclosureCertificate, the District shall have no obligation under this Certificate to update such information orinclude it in any future Annual Report or notice of occurrence of a Listed Event.

Section 10. Default. In the event of a failure of the District to comply with any provision of thisDisclosure Certificate, any Holder or Beneficial Owner of the Bonds may take such actions as may benecessary and appropriate, including seeking mandate or specific performance by court order, to cause theDistrict to comply with its obligations under this Disclosure Certificate. A default under this DisclosureCertificate shall not be deemed an Event of Default under the District Resolution, and the sole remedyunder this Disclosure Certificate in the event of any failure of the District to comply with this DisclosureCertificate shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The DisseminationAgent shall have only such duties as are specifically set forth in this Disclosure Certificate, and (if theDissemination Agent is other than the District) the District agrees to indemnify and save theDissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense andliabilities which it may incur arising out of or in the exercise or performance of its powers and dutieshereunder, including the costs and expenses (including attorneys fees) of defending against any claim ofliability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. Theobligations of the District under this Section shall survive resignation or removal of the DisseminationAgent and payment of the Bonds.

Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of theDistrict, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners fromtime to time of the Bonds, and shall create no rights in any other person or entity.

Dated: September 14, 2010COLTON JOINT UNIFIED SCHOOLDISTRICT

By:James A. Downs,Superintendent

ACCEPTED AND AGREED TO:

U.S. BANK NATIONAL ASSOCIATION, ASDISSEMINATION AGENT

By:Authorized Signatory

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EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARDOF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Colton Joint Unified School District

Name of Issue: Colton Joint Unified School District (San Bernardino and RiversideCounties, California) Election of 2008 General Obligation Bonds, Series B

Date of Issuance: September 14, 2010

NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to theabove-named Bonds as required by Section 4 of the Continuing Disclosure Certificate of the District,dated September 14, 2010. [The District anticipates that the Annual Report will be filed by __________.]

Dated: ____________

U.S. Bank National Association, asDissemination Agent, on behalf of the ColtonJoint Unified School District

cc: Colton Joint Unified School District

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APPENDIX E

SUMMARY OF COUNTY OF SAN BERNARDINOINVESTMENT POLICIES AND PRACTICES

AND DESCRIPTION OF INVESTMENT POOL

The San Bernardino County Treasury Pool

The following information has been provided by the Auditor-Controller/Recorder/Treasurer/TaxCollector of the County (the “County Treasurer”), and the District takes no responsibility for theaccuracy or completeness thereof. Further information may be obtained from the County Treasurer.

General. The County Treasurer is responsible for the investment of the funds of the County, allschool districts and community college districts and certain special districts in the County, which arerequired under state law to be deposited into the County treasury (“Involuntary Depositors”). In addition,certain agencies invest certain of their funds in the County treasury on a voluntary basis (“VoluntaryDepositors” and together with the Involuntary Depositors, the “Depositors”). Deposits made by theCounty and the various local agencies are commingled in a pooled investment fund (the “Treasury Pool”).No particular deposits are segregated for separate investment.

The Treasury Pool is presently assigned the following credit quality ratings:

• Standard & Poor’s Ratings Group - “AAAf” (credit quality) and “S1+” (volatility)

• Moody’s Investors Service - “Aaa” (credit quality) and “MR1” (volatility)

• Fitch Ratings, Inc. - “AAA” (credit quality) and “V1” (volatility)*_____________* Fitch Ratings’ volatility rating reflects their 2010 revised ratings methodology.

These ratings are assessments of the overall credit quality of the Treasury Pool’s portfolio. Theratings thus reflect the level of protection against losses from credit defaults. These ratings reflect only theviews of the respective rating agencies and any explanation of the significance of such ratings may beobtained from such rating agencies as follows: Standard & Poor’s Ratings Services, a Division of theMcGraw Hill Companies, Inc., 55 Water Street, New York, New York 10041, Moody’s InvestorsServices, Inc., 7 World Trade Center, 250 Greenwich Street, Public Finance Group, 23rd Floor, NewYork, New York 10007 and Fitch Ratings, Inc., One State Street Plaza, New York, New York 10004.

Under State law, Depositors in the Treasury Pool are permitted to withdraw funds that they havedeposited on 30 days notice. The County does not expect that the Treasury Pool will encounter liquidityshortfalls based on its current portfolio and investment guidelines or realize any losses that may berequired to be allocated among all Depositors in the Treasury Pool.

The County has established a Treasury Oversight Committee as required by State law. Themembers of the Oversight Committee include the County Administrative Officer, two members of thepublic and the Superintendent of Schools or his designee. The role of the Oversight Committee is toreview and monitor the County’s Investment Policy (the “Investment Policy”) that is prepared by theTreasurer.

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Investments of the Treasury Pool.

Authorized Investments. Investments of the Treasury Pool are placed in those securitiesauthorized by various sections of the California Government Code and the Investment Policy, whichinclude obligations of the United States Treasury, Agencies of the United States Government, local bondissues, bankers acceptances, commercial paper of prime quality, certificates of deposit (both collateralizedand negotiable), repurchase and reverse repurchase agreements, medium term corporate notes and sharesof beneficial interest in diversified management companies (mutual funds). Generally, investments inrepurchase agreements cannot exceed a term of 180 days and the security underlying the agreement shallbe valued at 102% or greater of the funds borrowed against the security. The value of the repurchaseagreement shall be adjusted no less than weekly. In addition, reverse repurchase agreements generallymay not exceed 10% of the base value of the portfolio and the term of the agreement may not exceed 92calendar days. Securities lending transactions are considered reverse repurchase agreements for purposesof this limitation. Base value is defined as the total cash balance excluding any amounts borrowed (i.e.,amounts obtained through selling securities by way of reverse repurchase agreements or other similarborrowing methods).

Legislation that would modify the currently authorized investments and place restrictions on theability of municipalities to invest in various securities is considered from time to time by the CaliforniaState Legislature. Therefore, there can be no assurances that the current investments in the Treasury Poolwill not vary significantly from the investments described herein.

The Investment Policy. The Investment Policy currently states the primary goals of the Treasurerwhen investing public funds to be as follows: the primary objective is to safeguard the principal of thefunds under the Treasurer’s control, the secondary objective is to meet the liquidity needs of the TreasuryPool Participants, and the third objective is to achieve a return on the funds under the control of theTreasurer within the parameters of prudent risk management. The Investment Policy contains arequirement that 40% of the Treasury Pool should be invested in securities maturing in one year or less,and the entire portfolio should maintain an effective duration of less than 1.5 years. With respect toreverse repurchase agreements, the Investment Policy provides for a maximum maturity of 92 days(unless the reverse repurchase agreement includes a written guarantee of a minimum earning or spread forthe entire period of such agreement) and a limitation on the total amount of reverse repurchaseagreements to 10% of the total investments in the Treasury Pool.

The Treasury Pool also does not own any reverse repurchase agreements, nor has the Countyengaged in securities lending. The Treasury Pool has not purchased and does not own any asset-backedsecurities, mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, orany other securities backed by or derived from sub-prime or Alt-A mortgages. FNMA, FHLMC, FHLBand FFCB holdings are senior unsecured obligations.

Certain Information Relating to Treasury Pool. The following table reflects information withrespect to the Treasury Pool as of the close of business July 31, 2010. As described above, a wide rangeof investments is authorized by state law. Therefore, there can be no assurances that the investments inthe Treasury Pool will not vary significantly from the investments described below. In addition, the valueof the various investments in the Treasury Pool will fluctuate on a daily basis as a result of a multitude offactors, including generally prevailing interest rates and other economic conditions. Therefore, there canbe no assurance that the values of the various investments in the Treasury Pool will not vary significantlyfrom the values described below. In addition, the values specified in the following tables were based uponestimates of market values provided to the County by a third party. Accordingly, there can be noassurance that if these securities had been sold on July 31, 2010, the Treasury Pool necessarily would

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have received the values specified. The Treasury Pool has no exposure to any defaulted securities, nordoes it own any securities of institutions in liquidation.

Security Type Par Value Market Value

Bankers Acceptances $ 0.00 $ 0.00

Certificates of Deposit 130,000,000.00 130,018,387.50

Collateralized Certificates of Deposit 0.00 0.00

Commercial Paper 325,000,000.00 324,961,766.66

Corporate Notes 0.00 0.00

Federal Agencies 2,619,206,000.00 2,644,537,488.56

Money Market Funds 22,000,000.00 22,000,000.00

Municipal Debt 0.00 0.00

Repurchase Agreements 83,000,000.00 82,999,677.13

TLGP Corporate Notes 122,100,000.00 123,928,135.50

U.S. Treasuries 470,000,000.00 474,262,941.63

Cash 228,908,462.08 228,908,462.08

TAGP/FDIC NOW 100,000,000.00 100,000,000.00

Total Investments $4,100,214,462.08 $4,131,616,859.06*

_____________*Does not include accrued interest of $18,392,851.59.

Neither the District nor the Underwriters have made an independent investigation of theinvestments in the Pools and has made no assessment of the current Investment Policy. The value ofthe various investments in the Pools will fluctuate on a daily basis as a result of a multitude offactors, including generally prevailing interest rates and other economic conditions. Additionally,the Treasurer, with the consent of the Treasury Oversight Committee and the County Board ofSupervisors, may change the Investment Policy at any time. Therefore, there can be no assurancethat the values of the various investments in the Pools will not vary significantly from the valuesdescribed herein.


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APPENDIX F

COUNTY INVESTMENT POLICY


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OFFICE OF THE AUDITOR-

CONTROLLER/RECORDER/TREASURER/TAX COLLECTOR COUNTY OF SAN BERNARDINO

TREASURER’S STATEMENT OF INVESTMENT POLICY

As of April 2010 SCOPE: The County of San Bernardino’s Investment Policy has been prepared in accordance with California State law. This policy shall be reviewed annually by the County’s Treasury Oversight Committee and approved by the County Board of Supervisors. The purpose of this policy is to establish cash management and investment guidelines for the County Treasurer, who is responsible for the management and investment of the County Treasury Pool, which consists of the pooled monies held on behalf of the County, school districts, community college districts and certain special districts within the County. This policy shall apply to all investments held within the County Treasury Pool and made on behalf of the County and member agencies of the Pool with the exception of certain bond funds for which the Board of Supervisors may specifically authorize other allowable investments, consistent with State law. The Treasurer and Treasurer’s staff are responsible for the full-time, active management of the Pool. All investments and activities of the Treasurer and staff are made with the understanding that the Treasurer holds a public trust with the citizens of the County, which shall not be compromised. FIDUCIARY RESPONSIBILITY: The California Government Code, Section 27000.3, declares each treasurer, or governing body authorized to make investment decisions on behalf of local agencies, to be a fiduciary subject to the prudent investor standard. This standard requires that “When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer or the board of supervisors, as applicable, shall act with care, skill, prudence, and diligence under the circumstances then prevailing, specifically including, but not limited to, the general economic conditions and the anticipated needs of the county and other depositors, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims to safeguard the principal and maintain the liquidity needs of the county and other depositors. Within the limitations of this section and considering individual investments as part of an overall investment strategy, investments may be acquired as authorized by law.” This standard shall be applied in the context of managing the overall portfolio.

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PORTFOLIO OBJECTIVES: It is the policy of the Treasurer to invest public funds in a manner which will preserve the safety and liquidity of all investments within the County investment pool while obtaining a reasonable return within established investment guidelines. The portfolio should be actively managed in a manner that is responsive to the public trust and consistent with State law. Accordingly, the County investment pool will be guided by the following principles, in order of importance:

1. The primary objective of the Treasurer’s investment of public funds is to safeguard investment principal. 2. The secondary objective is to maintain sufficient liquidity to insure that funds are available to meet daily cash flow requirements. 3. The third and last consideration is to achieve a reasonable rate of return or yield consistent with these objectives.

AUTHORITY: The Treasurer’s authority for making investments is delegated by the Board of Supervisors in accordance with the California Government Code. Statutory authority for the investment and safekeeping functions are found in Sections 53600 et seq. and 53630 et seq., of the California Government Code. AUTHORIZED INVESTMENTS: Investments shall be restricted to those authorized in the California Government Code and as further restricted by this policy statement, with the exception of certain bond funds in which the Board of Supervisors has specifically authorized other allowable investments. All investments shall be further governed by the restrictions shown in Schedule I which defines the type of investments authorized, maturity limitations, portfolio diversification (maximum percent of portfolio), credit quality standards, and purchase restrictions that apply. Whenever a maximum allowable percentage of the portfolio is stated for any type of security as detailed above, the limit or maximum allowable, is determined by the portfolio size at the market close of the regular business day prior to the security purchase date. Maximum limits are applicable at the time of security purchase only unless otherwise noted or defined in Schedule I. In conjunction with these restrictions, County Treasurer staff shall diversify its investments by security type, issuer and maturity. The purpose of this diversification is to reduce portfolio risk by avoiding an over concentration in any particular maturity sector, asset class or specific issuer. As Agency security holdings are the largest portion of the pool, diversification among the Agency issuers should be considered to the extent practical when making investments. PROHIBITED INVESTMENTS: No investment shall be made that is prohibited by law. Thus, no investments are authorized in inverse floaters, range notes, interest-only strips that are derived from a pool of mortgages, nor in any other investment that could result in zero interest if held to maturity. Additionally, the following types of investments are also prohibited:

1. Mutual bond funds that do not maintain a constant Net Asset Value (NAV). 2. Illiquid investments which lack a readily available market for trading. These investments are defined to be: private placement notes or bonds, funding agreements, master notes, and loan participations.

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STAFF AUTHORIZED TO MAKE INVESTMENTS: Only the Auditor-Controller/Recorder/Treasurer/Tax Collector, Assistant Treasurer/Tax Collector, Cash Manager/Investment Officer, Assistant Cash Manager/Investment Officer, Investment Analyst and authorized contracted consultant(s) may make investments and order the receipt and delivery of investment securities among custodial security clearance accounts. Authority granted to contracted consultant(s) shall be defined in their contract(s). AUTHORIZED BROKER/DEALERS: The County Treasurer shall maintain an ‘Eligible Broker/Dealer List’. Security transactions are limited solely to those banks, direct issuers and dealers included on this list. All financial institutions, whether investment banks, dealers, commercial banks or savings and loan institutions must be approved by the County Treasurer before they receive County funds or are able to conduct business with the County Treasurer. All firms with whom the County does business shall comply with the requirements set forth in Schedule IV. County Treasurer staff shall conduct an annual review of each Broker/Dealer’s current financial condition and performance in servicing the County over the prior year. Further, in compliance with Section 27133(c) & (d) of the California Government Code, no dealer and/or securities firm shall be eligible if they have made a political contribution in excess of the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board or exceeded the limit on honoraria, gifts, and gratuities set by State law, or by the Fair Political Practices Commission, or by County ordinance. DUE DILIGENCE: County Treasurer staff shall conduct a thorough review and perform due diligence of all brokers, dealers, issuers of securities, and mutual funds prior to investing or conducting transactions with these parties and on a continuing basis. This due diligence shall include a periodic review of recent news, financial statements and SEC filings related to each entity. INTERNAL CONTROLS: The County Treasurer has established a system of internal controls to provide reasonable assurance that the investment objectives are met and to ensure that the assets of the County Treasury Pool are protected from loss, theft or misuse. The concept of reasonable assurance recognizes that the cost of control shall not exceed the benefits likely to be derived and that the valuation of costs and benefits require estimates and judgments by management. The County Treasurer shall develop and maintain written procedures for the operation of the investment program, which are consistent with this policy. These procedures shall include reference to separation of duties, safekeeping, collateralization, wire transfers and banking related activities. Except for declared emergencies, the County Treasurer’s Office shall observe the following procedures on a daily basis:

1. All investment transactions conducted by the County Treasurer’s office shall be documented and reviewed by the Treasurer, and entered daily into the Treasurer’s accounting system. 2. A copy of each day’s investment transactions shall be filed with the Financial Services Division of the Office of the Auditor-Controller/Recorder/Treasurer/Tax Collector. 3. County investments shall be transacted, confirmed, accounted for, and audited by different people.

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SECURITY CUSTODY & DELIVERIES: All securities purchased shall be deposited for safekeeping with the custodial bank that has contracted to provide the County Treasurer with custodial security clearance services or with a tri-party custodian bank under a written tri-party custody agreement. All security holdings shall be reconciled monthly by the County Treasurer and audited at least quarterly by the independent certified public accounting firm approved by the County Board of Supervisors. These third party trust department arrangements provide the County with a perfected interest in, ownership of and control over the securities held by the bank custodian on the County’s behalf, and are intended to protect the County from the bank’s own creditors in the event of a bank default and filing for bankruptcy. Securities are not to be held in investment firm/broker dealer accounts. All security transactions are to be conducted on a “delivery-versus-payment basis”. Confirmation receipts on all investments are to be reviewed immediately for conformity with County transaction documentation. Confirmations resulting from securities purchased under repurchase agreements should clearly state (A) the exact and complete nomenclature of the underlying securities purchased and (B) that these securities have been sold to the County under a repurchase agreement and (C) the stipulated date and amount of the resale by the County back to the seller of the securities. REPURCHASE AGREEMENTS: Repurchase agreements are restricted to primary dealers of the Federal Reserve Bank of New York. All counterparties must sign a Securities Industry & Financial Markets Association (formerly known as The Bond Market Association) Master Repurchase Agreement and for tri-party repurchase agreements a Tri-Party Repurchase Agreement as well before engaging in any repurchase agreement transactions. Collateral for repurchase agreements shall have a market value of at least 102% of the amount invested and must be marked to market by staff or by an independent third-party or custodial bank acting under contract to the County. Collateral for term repurchase agreements should be marked to market no less than once weekly. Repurchase agreements are required to be collateralized by securities authorized under Section 53601 et. seq. of the California Government Code. COMPETITIVE PRICING: Investment transactions are to be made at current market prices. Wherever possible, competitive prices should be obtained through obtaining multiple bids or offers and documenting them on the trade ticket or other written forms. When possible, bids and offers for any investment security shall be taken from a minimum of three security dealers/brokers or banks and awards shall be made to the best offer. When identical securities are not available from multiple sources, or investments are purchased directly from issuers (e.g. commercial paper and certificates of deposit) market prices may be documented by reference to offerings of similar securities that are of comparable rating and maturity by other direct issuers. LIQUIDITY: The portfolio should maintain an effective duration of less than 1.5 years. To provide sufficient liquidity to meet daily expenditure requirements for the following 12 months, the portfolio should maintain at least 40% of its total value in securities having a maturity of 12 months or less. PERFORMANCE EVALUATION: Portfolio performance is monitored daily by the Treasurer and monthly by a third party analysis, which includes security pricing and evaluation. Also, quarterly, a total return measurement is performed on the portfolio using the Merrill Lynch G002 6-month Treasury Bill Index as a

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benchmark. MITIGATING MARKET & CREDIT RISKS: Safety of principal is the primary objective of the portfolio. Each investment transaction shall seek to minimize the County’s exposure to market and credit risks by giving careful and ongoing attention to the: (1) credit quality standards issued by Standard & Poor’s, Moody’s and Fitch’s rating services on the credit worthiness of each issuer of securities, (2) limiting the duration of investments to the time frames noted in Schedule I, and (3) by maintaining the diversification and liquidity standards expressed within this policy. In the event of a downgrade of a security held in the portfolio, the Cash Manager/Investment Officer shall report the downgrade to the Treasurer promptly. In the event of a downgrade below the minimum credit ratings authorized by this policy, the security shall be evaluated on a case-by-case basis to determine whether the security shall be sold or held. It is preferred to sell such a security if there is no book loss. In the event of a potential loss upon sale, the Treasurer will evaluate whether to hold or sell the security based on the amount of loss, remaining maturity and any other relevant factors. TRADING & EARLY SALE OF SECURITIES: Securities should be purchased with the intent of holding them until maturity. However, in an effort to minimize market risks, credit risks, and increase the total return of the portfolio, securities may be sold prior to maturity either at a profit or loss when economic circumstances or a deterioration in credit worthiness of the issuer warrant a sale of the securities to either enhance overall portfolio yield or to minimize loss of investment principal. In measuring a profit or loss, the sale proceeds shall be compared to the original cost as per the County’s books of the security plus accrued interest earned and/or any accretion or amortization of principal on the security from the date of purchase or the last coupon date, to the date of sale. However, the sale of a security at a loss can only be made with the approval of the County Treasurer or his designee. PURCHASE OF ‘WHEN ISSUED’ SECURITIES: ‘When-issued’ purchases of securities for the express purpose of trading these securities prior to cash settlement are considered speculative and are discouraged. Purchases for forward settlement are otherwise authorized as long as: (1) sufficient cash is available to consummate their acceptance into the Treasurer’s portfolio on the settlement date, (2) and at purchase, there is the ability to hold them in the portfolio to maturity without violating any of the diversification/maturity limits of this policy, and (3) the forward settlement period does not exceed 21 days. PORTFOLIO REPORTS/AUDITING: On a monthly basis, the County Assistant Treasurer/Tax Collector shall prepare and file with the Board of Supervisors, the County Administrative Officer, County Assistant Auditor-Controller, Superintendent of Schools and the County’s Treasury Oversight Committee a report consisting of, but not limited to, the following:

1. All investments detailing each by type, issuer, date of maturity, par value and stating the book vs. current market value together with all other portfolio information required by law. 2. Compliance of investments to the existing County Investment Policy 3. A statement confirming the ability of the Pool to meet anticipated cash requirements for the Pool for the next six months.

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TREASURY OVERSIGHT COMMITTEE: In accordance with the California Government Code, the Board of Supervisors has established a Treasury Oversight Committee. The Treasury Oversight Committee will render unbiased and objective opinions on matters involving the Treasurer’s investment of public funds. Specifically, the law requires that the Treasury Oversight Committee meet to:

1. Review the Treasurer’s annual Investment Policy Statement and any subsequent changes thereto, prior to its submission to the Board of Supervisors for review and adoption, 2. Review the Treasurer’s investment portfolio reports and the portfolio’s compliance with law and this Investment Policy, 3. Cause an annual audit to be conducted on the Treasurer’s Pooled Investment portfolio.

The Treasury Oversight Committee shall receive a copy of every Treasurer’s Cash Count Report as prepared by the independent certified public accounting firm approved by the County Board of Supervisors. Such reports are made in accordance with the California Government Code Section 26920 through 26923, and County Board of Supervisor’s resolution dated July 6, 1971, and which includes an evaluation of investments for compliance with California Government Code Section 53601. All meetings of the Oversight Committee are to be open to the public and subject to the Ralph M. Brown Act. By law, the Treasury Oversight Committee is not allowed to direct individual investment decisions, nor select individual investment advisors, brokers, or dealers, or impinge on the day-to-day operations of the County Treasury. Members of the Oversight Committee are prohibited from accepting gifts or gratuities from investment advisors, brokers, dealers, bankers or other persons with whom the county treasury conducts business. QUARTERLY DISTRIBUTION OF INVESTMENT EARNINGS: All moneys deposited in this pool by the participants represent an individual interest in all assets and investments in the pool based upon the amount deposited. Portfolio income shall be reconciled daily against cash receipts, and quarterly prior to the distribution of earnings among those entities sharing in pooled fund investment income. It is the intent of this policy to safeguard and maintain the principal value of funds invested and to minimize “paper losses” caused by changes in market value. Nonetheless, actual portfolio income and/or losses, and net of any reserves, will be distributed quarterly, in compliance with the California Government Code, among those participants sharing in pooled investment income. Except for specific investments in which the interest income is to be credited directly to the fund from which the investment was made, all investment income is to be distributed pro-rata based upon each participant’s average daily cash balance for the calendar quarter. QUARTERLY APPORTIONMENT OF ADMINISTRATIVE COSTS: Prior to the quarterly apportionment of pooled fund investment income, the County Treasurer is permitted, pursuant to the California Government Code, to deduct from investment income before the distribution thereof, the actual cost of the investments, auditing, depositing, handling and distribution of such income. Accordingly, the Treasury shall deduct from pooled fund investment earnings the actual cost incurred for: banking services, wire transfers, custodial safekeeping charges, building remodeling costs and other capital outlay, the costs of investment advisory services, credit ratings, the pro-rata annual cost of the salaries including fringe benefits for the personnel in the Auditor-Controller/Recorder/Treasurer/Tax Collector’s

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office engaged in the administration, investment, auditing, cashiering, accounting, reporting, remittance processing and depositing of public funds for investment, together with the related computer and office expenses associated with the performance of these functions. WITHDRAWAL OF FUNDS: Any depositor or public official having funds on deposit, either voluntary or involuntary, with this pool and that seeks to withdraw these funds for the purpose of investing or depositing them outside this County Treasury Pool, shall first submit a request for withdrawal to the County Treasurer for approval prior to withdrawing funds from this Treasury Pool. The request should be submitted and processed as follows:

1. In writing, from the governing authority of the funds being withdrawn. The request should state the amount, date of transfer, where investment and/or deposit is to be made and the reason for the request. 2. The request must be received by the County Treasurer no later than 30 days prior to the requested date of withdrawal. 3. Prior to approving a withdrawal, the County Treasurer shall find that the proposed withdrawal will not adversely affect the interests of the other depositors in the County Treasury pool, in accordance with California Government Code section 27136(b).

POLICY CRITERIA FOR AGENCIES SEEKING VOLUNTARY ENTRY INTO COUNTY INVESTMENT POOL: The County Treasurer is not soliciting nor accepting any new agency’s voluntary entry into the County’s investment pool. ETHICS & CONFLICTS OF INTEREST: Officers and staff members involved in the investment process shall refrain from any personal business activity that compromises the security and integrity of the County’s investment program or impairs their ability to make impartial and prudent investment decisions. The County Auditor-Controller/Recorder/Treasurer/Tax Collector, Assistant Treasurer/Tax Collector, Cash Manager/Investment Officer, Assistant Cash Manager/Investment Officer, and Investment Analyst are required to file annually the applicable financial disclosure statements as mandated by the Fair Political Practices Commission (FPPC) and/or by County ordinance. In addition, the Assistant Treasurer/Tax Collector, Cash Manager/Investment Officer, Assistant Cash Manager/Investment Officer, Investment Analyst, and any outside investment advisors or contracted consultants are required to sign and abide by an Ethics Policy instituted by the Auditor-Controller/Recorder/Treasurer/Tax Collector. POLICY ADOPTION & AMENDMENTS: This policy statement will become effective immediately following adoption by the Board of Supervisors, and will remain in force as long as the delegation of authority to the Treasurer to invest is in effect and until subsequently amended in writing by the County Auditor-Controller/Recorder/Treasurer/Tax Collector, reviewed by the Treasury Oversight Committee and approved by the Board of Supervisors.

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COUNTY OF SAN BERNARDINO INVESTMENT POLICY

OFFICE OF THE AUDITOR-CONTROLLER/RECORDER/TREASURER/TAX COLLECTOR (SCHEDULE I)

AUTHORIZED INVESTMENTS

DIVERSIFICATION PURCHASE RESTRICTIONS

MATURITY CREDIT QUALITY (S&P/MOODY'S/FITCH)

United States Treasury notes, bonds, bills, or

certificates of indebtedness, or those for which the faith and credit of the U. S. are pledged for the payment of

principal and interest

100% None Max 5 years Not Applicable

Notes, participation's or obligations issued or fully guaranteed as to principal and interest by an agency of the Federal Government or U.S. government-sponsored

enterprises (excluding mortgage-backed securities)

100% Senior unsecured debt only

Max 5 years AAA or AAAe by at least one rating agency**

Bonds, notes, warrants or certificates of indebtedness issued by agencies of and/or within the County of San

Bernardino

10% With approval of Treasurer

Max 5 years AAA by at least 2 of the 3 rating agencies**

Bankers Acceptances issued by approved banks

30% Max $100mm par value of any one

issuer subject to 5% overall corporate

issuer limit.

180 Days Rated by at least 2 of the 3

rating agencies Minimum A-1, P-1, and/or F1 (if rated)**

Commercial paper of U.S. Corps with total assets in

excess of $500 MM

40% total for all Commercial Paper

Max 5% of portfolio by any one issuer subject to 5%

overall corporate issuer limit

270 Days Rated by at least 2 of the 3

rating agencies Minimum A-1, P-1, and/or F1 (if rated)**

Asset-backed Commercial Paper

40% total for all Commercial Paper

Issuer must have program-wide credit

enhancements

270 Days

Rated by at least 2 of the 3 rating agencies Minimum A-1, P-1, and/or F1 (if rated)**

State of California Local Agency Investment Fund

(LAIF)

0% Not Authorized Not Authorized

Not Authorized

Negotiable CDs issued by approved banks

30% Max $100mm par value of any one


issuer limit

Max 18 months from settlement

date

Rated by at least 2 of the 3 rating agencies Minimum A-1, P-1, and/or F1 short-term

rating or long-term letter rating of “AA” (if rated)**

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Collateralized Certificates of Deposit/Deposits

10% As stipulated in Article 2, Section 53630 et al of the Calif. Government

Code

Max. 1 year from

settlement date

See Section 53630 et al of the California Government Code

Repurchase Agreements with 102% collateral

40% Repurchase Agreements

(contracts) must be on file

Max 180 days

Restricted to Primary Dealers on Eligible Dealer list

Reverse Repurchase Agreements

10% See Schedule II Max 92 days (See

Schedule III)

Restricted to Primary Dealers on Eligible Dealer list

Medium Term Notes of U.S. Corporations & Depository Institutions and/or Corporate

or Bank notes (Non FDIC/TLGP guaranteed)

10% total; 5% max. with a maturity of 12-

18 months

Max $50mm par value of any one


issuer limit

Max 18 months from settlement

date

Minimum letter rating of “AA” by at least 2 of the 3 rating

agencies**

Medium Term Notes of U.S. Corporations & Depository

Institutions (and/or Corporate or Bank notes) guaranteed by the Federal Deposit

Insurance Corporation and issued under the Temporary Liquidity Guarantee Program

(TLGP)

30% (including non-FDIC guaranteed

Medium Term Notes)

Excluded from 5% overall corporate issuer limit due to

FDIC/TLGP guarantee

Max 5 years

AAA or AAAe by at least one rating agency**

Money Market mutual funds that meet requirements of

Calif. Govt. Code

15% Registered with SEC. No NAV adjustments. No

loads.

Immediate Liquidity

AAA by at least 2 of the 3 rating agencies**

** Standard & Poor’s Ratings Services, Moody’s Investors Service Inc., and Fitch Ratings Ltd.

Page 10 of 17

Page 11 of 17

OFFICE OF THE AUDITOR-CONTROLLER/RECORDER/TREASURER/TAX COLLECTOR

COUNTY OF SAN BERNARDINO STATEMENT OF INVESTMENT POLICY

SCHEDULE II

POLICY STATEMENT ON REVERSE REPURCHASE AGREEMENTS AND SECURITIES LENDING AGREEMENTS

The Treasurer hereby institutes the following policies as further safeguards governing investments in Reverse Repurchase Agreements and Securities Lending Agreements: The total of Reverse Repurchase Agreement and Securities Lending Agreement transactions shall not exceed 10 percent of the base value of the portfolio. The term of such agreements shall not exceed 92 calendar days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using such an agreement and the final maturity date of the same security. 1. All loaned securities subject to Reverse Repurchase Agreements or Securities Lending Agreements shall be properly flagged and immediately accounted for in the Treasurer’s financial system. 2. Investments purchased from the loaned proceeds of the Reverse Repurchase Agreement shall have maturities not exceeding the due date for repayment of the Reverse Repurchase Agreement transaction. 3. Only U.S. Treasury Notes and Federal Agency securities owned, fully paid for, and held in the Treasurer’s portfolio for a minimum of 30 days can be subject to Reverse Repurchase Agreement and Securities Lending Agreement transactions. 4. Reverse Repurchase Agreements and Securities Lending Agreements shall only be placed on portfolio securities:

(a) intended to be held to maturity (b) fully paid for and held in the portfolio for a minimum of 30 days

5. Reverse Repurchase Agreements and Securities Lending Agreements shall only be made with the authorized primary dealers of the Federal Reserve. 6. A contractual agreement must be in place prior to entering into a Reverse Repurchase Agreement or Securities Lending Agreement with any authorized primary dealer. 7. Reverse Repurchase Agreement and Securities Lending Agreement transactions shall have the approval of the County Treasurer.

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SCHEDULE III

POLICY CRITERIA FOR COLLATERALIZED CERTIFICATE OF DEPOSITS 1. The bank must provide us with an executed copy of the authorization for deposit of moneys. 2. The money-market yield on the certificate of deposit must be competitive to negotiable CD's offered by banks on the county's pre-approved list in the maturities desired by the County. The County Treasurer’s Office reserves the right to negotiate higher yields based on market conditions at the time. 3. Collateral Requirements – The County will only accept municipal government securities (“muni bonds”) or U.S. Treasury and Agency securities as collateral. The collateral must be held by a separate custodial bank in an account in the name of San Bernardino County. The County must have perfected interest in the collateral.

a. For municipal government securities, the following requirements are listed:

i. Securities must be issued by governmental agencies located within the State of California (generally general obligation bonds and revenue bonds only)

ii. Securities must be “AAA” rated iii. Maximum maturity of securities is 5 years

iv. Collateral must be priced at 110% of the face value of the CD on a daily basis v. Minimum face value of $5 million per pledged security b. For U.S. Treasuries and Agency securities, the following requirements are listed: i. Maximum maturity of securities is 5 years

ii. Collateral must be priced at 110% of the face value of the CD on a daily basis iii. Minimum face value of $5 million per pledged security

The County Treasury must receive written confirmation that these securities have been pledged in repayment of the time deposit. Additionally, a statement of the collateral shall be provided on a monthly basis from the custodial bank. 4. The County Treasurer must be given a current audited financial statement for the financial year just ended. The financial reports must both include a statement of financial condition as well as an income statement depicting current and prior year operations. 5. The County Treasurer must receive a certificate of deposit which specifically expresses the terms governing the transaction, deposit amount, issue date, maturity date, name of depositor, interest rate, interest payment terms (monthly, quarterly, etc.) 6. Notwithstanding the above, the certificate of deposit must meet the requirements of Standard & Poor’s, Moody’s and Fitch for the County to maintain its AAA/Aaa/AAA pool ratings. These requirements typically include an A-1/P-1 and/or F1 short-term rating. The County may rely on credit ratings of Standard & Poor’s, Moody’s and Fitch to determine the creditworthiness of an institution and/or may supplement this research with its own financial analysis. For a financial institution that is not rated, a “shadow” rating by these rating agencies may be required. 7. Deposits will only be made with banks and savings and loans having branch office locations within San Bernardino County.

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SCHEDULE IV

POLICY CRITERIA FOR SELECTION OF BROKER/DEALERS

1. All financial institutions wishing to be considered for the County of San Bernardino’s Broker/Dealer List must confirm that they are a member of the National Association of Security Dealers (NASD), registered with the Securities & Exchange Commission (SEC), and possess all other required licenses. 2. The County Treasurer’s intent is to enter into a long-term relationship. Therefore, the integrity of the firm and the personnel assigned to our account is of primary importance. 3. The firm must acknowledge receipt of the County Treasurer’s written Investment Policy guidelines. 4. It is important that the firm provide related services that will enhance the account relationship which could include: (a) An active secondary market for its securities.

(b) Internal credit research analysis on commercial paper, bankers’ acceptances and other securities it offers for sale. (c) Be willing to purchase securities from our portfolio. (d) Be capable of providing market analysis, economic projections, and newsletters.

5. The firm must provide the County with annual financial statements. All firms with whom the County does business must have a stable financial condition. 6. The County Treasury is prohibited from the establishment of a broker/dealer account for the purpose of holding the County’s securities. All securities must be subject to delivery at the County’s custodial bank, the Bank of New York. 7. Without exception, all transactions are to be conducted on a delivery vs. payment (DVP) basis or for repurchase agreements, on a tri-party basis. 8. The broker/dealer must have been in operation for more than five (5) years. 9. Firms must have adequate financial strength and capital to support the level of trading that is approved. Adequate financial strength will be assessed by a review of the balance sheet and income statement of the dealer. Broker/dealers with less than $10 million of capital may be approved for trading that is limited in maturity or amount or may not be approved for extended settlement trades. 10. Repurchase Agreement Counterparty Minimum Requirements:

Repurchase agreement counterparties will be limited to (i) primary government securities dealers who report daily to the Federal Reserve Bank of New York or (ii) banks, savings and loan associations or diversified securities broker-dealers subject to regulation of capital standards by any state or federal regulatory agency. Counterparties must have:

(a) short-term credit ratings of at least A-1/P-1 and/or F1 (b) a minimum asset and capital size of $25 billion in assets and $350 million in capital for primary dealers

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GLOSSARY OF TERMS

ACCRUED INTEREST – Interest that has accumulated but has not yet been paid from the most recent interest payment date or issue date to a certain date. AGENCY ISSUES – Securities issued by federal agencies, those chartered by the federal government or Government Sponsored Enterprises that are considered to be backed by the federal government. See also Government Sponsored Enterprises. AMORTIZED COST – The original cost of the principal adjusted for the periodic reduction of any discount or premium from the purchase date until a specific date (also called “Book Value”). BANKERS ACCEPTANCE – Money market instrument created from transactions involving foreign trade. In its simplest and most traditional form, a bankers acceptance is merely a check, drawn on a bank by an importer or exporter of goods. BASIS POINT – A unit of measurement equal to 1/100 of 1 percent. As an example, the difference between a security yielding 3.25% and one yielding 3.20% is five basis points. BENCHMARK – An index or security used to compare the performance of a portfolio. BOND – A long-term debt instrument of a government or corporation promising payment of the original investment plus interest by a specified future date. BULLET – A colloquial term for a bond that cannot be redeemed, or called, prior to maturity. CALLABLE BOND – A bond in which all or a portion of its outstanding principal may be redeemed prior to maturity by the issuer under specified conditions. COLLATERALIZATION – Process by which a borrower pledges securities, property or other deposits for the purpose of securing the repayment of a loan and/or security. COLLATERALIZED CERTIFICATE OF DEPOSIT – An instrument representing a receipt from a bank for a deposit at a specified rate of interest for a specified period of time that is collateralized by the bank with securities at a minimum of 110% of the deposit amount. COMMERCIAL PAPER – Money Market instrument representing an unsecured short-term promissory note of a corporation at a specified rate of return for a specified period of time. COUPON – The stated interest rate on a debt security that an issuer promises to pay. CREDIT QUALITY – An indication of risk that an issuer of a security will fulfill its obligation, as rated by a rating agency. CREDIT RATING – A standardized assessment, expressed in alphanumeric characters, of a company’s creditworthiness. CREDIT RISK – The risk to an investor that an issuer will default in the payment of interest and/or principal on a security. CUSIP – A unique identifier for a security developed by the Committee on Uniform Security Identification Procedures (CUSIP). The identifier is a nine-digit alphanumeric character. The first six characters identify the

Page 15 of 17

issuer, the following two identify the issue, and the final character is a check digit. DERIVATIVES – Securities which derive their value from that of another security or an underlying index, currency or other measure. Floating rate notes (also “floaters”) are not considered derivatives. DISCOUNT INSTRUMENTS – Securities that are sold at a discount to face value. DIVERSIFICATION – The practice or concept of investing in a range of securities by sector, maturity, asset class or credit quality in order to reduce and spread financial risk. DOLLAR WEIGHTED AVERAGE MATURITY – The sum of the amount of each security investment multiplied by the number of days to maturity, divided by the total amount of security investments. DURATION – Is a measure of the price volatility of a portfolio and reflects an estimate of the projected increase or decrease in the value of that portfolio based upon a decrease or increase in the interest rates. A duration of 1.0 means that for every one percent increase in interest rates, the market value of the Portfolio would decrease by 1.0 percent. EARNINGS APPORTIONMENT – Is the quarterly interest distribution to the Pool Participants where the actual investment costs incurred by the Treasurer are deducted from the interest earnings of the Pool. GOVERNMENT OBLIGATIONS – Securities issued by the U.S. Treasury and Federal Agencies. U.S. Treasuries are direct obligations of the Federal Government. Agencies are not direct obligations of the Federal Government, but involve Federal sponsorship or guarantees. GOVERNMENT SPONSORED ENTERPRISES (GSE’S) – Private, shareholder-owned companies with a relationship with government agencies. These agencies generally are viewed to have an implied guarantee of the U.S. government. These include:

Federal National Mortgage Association (FNMA) Federal Home Loan Bank (FHLB) Federal Farm Credit Bank (FFCB) Federal Home Loan Mortgage Corporation (FHLMC)

HIGHLY LIQUID – The most eminent type of security that is easily converted to cash because there are many interested buyers and sellers to trade large quantities at a reasonable price. ILLIQUID – A security that is difficult to buy or sell or has a wide spread between the bid price and offer price in the secondary market. There are few buyers and sellers willing to trade large quantities at a reasonable price. INTEREST RATE RISK – The risk associated with declines or rises in interest rates which cause an investment in a fixed-income security to increase or decrease in value. Also called “Market Risk”. INVERSE FLOATERS – Floating rate notes which pay interest in inverse relationship to an underlying index. LIQUID – A security that is easily bought and sold because of the willingness of interested buyers and sellers to trade large quantities at a reasonable price. LOCAL AGENCY OBLIGATION – An indebtedness issued by a local agency, department, board, or authority within the State of California. LONG-TERM – The term used to describe a security when the maturity is greater than one year.

Page 16 of 17

MARKET VALUE – An estimate of the value of a security at which the principal would be sold from a willing seller to a willing buyer at the date of pricing. MEDIUM TERM NOTES – These are Corporate Notes and Bank Notes that are debt obligations of banks, corporations, and insurance companies. They are issued at a specific rate of return for a specific period of time. MONEY MARKET MUTUAL FUND – A mutual fund with investments directed in short-term money market instruments only, which can be withdrawn daily without penalty. NEGOTIABLE CERTIFICATE OF DEPOSIT – A Money Market instrument representing a receipt from a bank for a deposit at a specified rate of interest for a specified period of time that is traded in secondary markets. PAR – The stated maturity value, or face value, of a security. PASS-THROUGH SECURITIES – A debt instrument that reflect an interest in a mortgage pool, consumer receivables pool and equipment lease-backed pool that serves as collateral for a bond. POOL – In this context, the pooled monies of different government agencies administered by the County Treasurer. Each pool member owns a fractional interest in the securities held in the Pool. PORTFOLIO VALUE – The total book value amount of all the securities held in the Treasurer’s Pooled Money Fund. PRIMARY DEALER – A group of dealers and banks that can buy and sell securities directly with the Federal Reserve Bank of New York. PRIVATE PLACEMENTS – Securities that do not have to be registered with the Securities and Exchange Commission because they are offered to a limited number of sophisticated investors. RANGE NOTES – Notes which pay interest only if the underlying index upon which it is benchmarked, falls within a certain range. REPURCHASE AGREEMENT – A repurchase agreement consists of two simultaneous transactions. One is the purchase of securities by an investor (i.e., the County), the other is the commitment by the seller (i.e. a broker/dealer) to repurchase the securities at the same price, plus interest, at some mutually agreed future date. REVERSE REPURCHASE AGREEMENT – The mirror image of Repurchase Agreements. In this instance the County Pool is the seller of securities to an investor (i.e. brokers). SAFEKEEPING – A custodian bank’s action to store and protect an investor’s securities by segregating and identifying the securities. SECURITIES LENDING – A transaction wherein the Treasurer’s Pool transfers its securities to broker/dealers and other entities for collateral which may be cash or securities and simultaneously agrees to return the collateral for the same securities in the future. SHORT-TERM – The term used to describe a security when the maturity is one year or less. TOTAL RETURN – The sum of all investment income plus changes in the capital value of a portfolio for a given period. VOLUNTARY PARTICIPANTS – Local agencies that are not required to deposit their funds with the County

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Treasurer. WEIGHTED AVERAGE MATURITY – The remaining average maturity of all securities held in a portfolio. See Dollar Weighted Average Maturity. WHEN-ISSUED SECURITIES – A security traded before it receives final trading authorization with the investor receiving the certificate/security only after the final approval is granted. YIELD – The gain, expressed as a percentage, that an investor derives from a financial asset. YIELD TO MATURITY – The percentage rate of return paid if the security is held to its maturity date. The calculation is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the security is reinvested at the same rate.


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APPENDIX G

BOOK-ENTRY ONLY SYSTEM

The information in this appendix has been provided by DTC for use in securities offeringdocuments, and the District takes no responsibility for the accuracy or completeness thereof. The Districtcannot and does not give any assurances that DTC, DTC Participants or Indirect Participants willdistribute the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respectto the Bonds or (b) certificates representing ownership interest in or other confirmation of ownershipinterest in the Bonds, or that they will so do on a timely basis or that DTC, DTC Direct Participants orDTC Indirect Participants will act in the manner described in this Official Statement.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securitiesdepository for the Bonds (the “Securities”). The Securities will be issued as fully-registered securitiesregistered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may berequested by an authorized representative of DTC. One fully-registered Security certificate will be issuedfor each maturity of the Securities, in the aggregate principal amount of such issue, and will be depositedwith DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificatewill be issued with respect to each $500 million of principal amount, and an additional certificate will beissued with respect to any remaining principal amount of such issue.

2. DTC, the world’s largest securities depository, is a limited-purpose trust companyorganized under the New York Banking Law, a “banking organization” within the meaning of the NewYork Banking Law, a member of the Federal Reserve System, a “clearing corporation” within themeaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to theprovisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides assetservicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debtissues, and money market instruments (from over 100 countries) that DTC’s participants (“DirectParticipants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participantsof sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physicalmovement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokersand dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is awholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is theholding company for DTC, National Securities Clearing Corporation and Fixed Income ClearingCorporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulatedsubsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S.securities brokers and dealers, banks, trust companies, and clearing corporations that clear through ormaintain a custodial relationship with a Direct Participant, either directly or indirectly (“IndirectParticipants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to itsParticipants are on file with the Securities and Exchange Commission. More information about DTC canbe found at www.dtcc.com and www.dtc.org.

3. Purchases of Securities under the DTC system must be made by or through DirectParticipants, which will receive a credit for the Securities on DTC’s records. The ownership interest ofeach actual purchaser of each Security (“Beneficial Owner”)is in turn to be recorded on the Direct andIndirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of theirpurchase. Beneficial Owners are, however, expected to receive written confirmations providing details ofthe transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participantthrough which the Beneficial Owner entered into the transaction. Transfers of ownership interests in theSecurities are to be accomplished by entries made on the books of Direct and Indirect Participants acting

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on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing theirownership interests in Securities, except in the event that use of the book-entry system for the Securities isdiscontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants withDTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as maybe requested by an authorized representative of DTC. The deposit of Securities with DTC and theirregistration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficialownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s recordsreflect only the identity of the Direct Participants to whose accounts such Securities are credited, whichmay or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsiblefor keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, byDirect Participants to Indirect Participants, and by Direct Participants and Indirect Participants toBeneficial Owners will be governed by arrangements among them, subject to any statutory or regulatoryrequirements as may be in effect from time to time. Beneficial Owners of Securities may wish to takecertain steps to augment the transmission to them of notices of significant events with respect to theSecurities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents.For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding theSecurities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In thealternative, Beneficial Owners may wish to provide their names and addresses to the registrar and requestthat copies of notices be provided directly to them.

6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issueare being redeemed, DTC’s practice is to determine by lot the amount of the interest of each DirectParticipant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote withrespect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMIProcedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible afterthe record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those DirectParticipants to whose accounts Securities are credited on the record date (identified in a listing attached tothe Omnibus Proxy).

8. Redemption proceeds, distributions, and dividend payments on the Securities will bemade to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC.DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and correspondingdetail information from Issuer or Agent, on payable date in accordance with their respective holdingsshown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standinginstructions and customary practices, as is the case with securities held for the accounts of customers inbearer form or registered in “street name,” and will be the responsibility of such Participant and not ofDTC, Agent or Issuer, subject to any statutory or regulatory requirements as may be in effect from time totime. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or suchother nominee as may be requested by an authorized representative of DTC) is the responsibility of Issueror Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, anddisbursement of such payments to the Beneficial Owners will be the responsibility of Direct and IndirectParticipants.

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9. DTC may discontinue providing its services as depository with respect to the Securities atany time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that asuccessor depository is not obtained, Security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry-only transfers throughDTC (or a successor securities depository). In that event, Security certificates will be printed anddelivered to DTC.


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APPENDIX H – TABLE OF ACCRETED VALUES

DateCapital Appreciation

Bonds 08/01/2013 12%Capital Appreciation




Bonds 08/01/2017 12%

9/14/2010 3,574.20 3,181.00 2,831.10 2,519.65 2,242.502/1/2011 3,736.25 3,325.25 2,959.45 2,633.90 2,344.158/1/2011 3,960.45 3,524.80 3,137.05 2,791.95 2,484.802/1/2012 4,198.05 3,736.25 3,325.25 2,959.45 2,633.908/1/2012 4,449.95 3,960.45 3,524.80 3,137.05 2,791.952/1/2013 4,716.95 4,198.05 3,736.25 3,325.25 2,959.458/1/2013 5,000.00 4,449.95 3,960.45 3,524.80 3,137.052/1/2014 - 4,716.95 4,198.05 3,736.25 3,325.258/1/2014 - 5,000.00 4,449.95 3,960.45 3,524.802/1/2015 - - 4,716.95 4,198.05 3,736.258/1/2015 - - 5,000.00 4,449.95 3,960.452/1/2016 - - - 4,716.95 4,198.058/1/2016 - - - 5,000.00 4,449.952/1/2017 - - - - 4,716.958/1/2017 - - - - 5,000.002/1/2018 - - - - -8/1/2018 - - - - -2/1/2019 - - - - -8/1/2019 - - - - -2/1/2020 - - - - -8/1/2020 - - - - -2/1/2021 - - - - -8/1/2021 - - - - -2/1/2022 - - - - -8/1/2022 - - - - -2/1/2023 - - - - -8/1/2023 - - - - -2/1/2024 - - - - -8/1/2024 - - - - -2/1/2025 - - - - -8/1/2025 - - - - -2/1/2026 - - - - -8/1/2026 - - - - -2/1/2027 - - - - -8/1/2027 - - - - -2/1/2028 - - - - -8/1/2028 - - - - -2/1/2029 - - - - -8/1/2029 - - - - -2/1/2030 - - - - -8/1/2030 - - - - -2/1/2031 - - - - -8/1/2031 - - - - -2/1/2032 - - - - -8/1/2032 - - - - -2/1/2033 - - - - -8/1/2033 - - - - -2/1/2034 - - - - -8/1/2034 - - - - -2/1/2035 - - - - -8/1/2035 - - - - -2/1/2036 - - - - -8/1/2036 - - - - -2/1/2037 - - - - -8/1/2037 - - - - -2/1/2038 - - - - -8/1/2038 - - - - -2/1/2039 - - - - -8/1/2039 - - - - -2/1/2040 - - - - -8/1/2040 - - - - -2/1/2041 - - - - -8/1/2041 - - - - -2/1/2042 - - - - -8/1/2042 - - - - -2/1/2043 - - - - -8/1/2043 - - - - -2/1/2044 - - - - -8/1/2044 - - - - -2/1/2045 - - - - -8/1/2045 - - - - -

H-2




Bonds 08/01/2020 12%Capital Appreciation Bonds

08/01/2021 12%Capital Appreciation

Bonds 08/01/2023 12%

9/14/2010 1,995.80 1,776.25 1,580.85 1,406.95 1,114.452/1/2011 2,086.30 1,856.80 1,652.55 1,470.75 1,164.958/1/2011 2,211.50 1,968.20 1,751.70 1,559.00 1,234.852/1/2012 2,344.15 2,086.30 1,856.80 1,652.55 1,308.958/1/2012 2,484.80 2,211.50 1,968.20 1,751.70 1,387.502/1/2013 2,633.90 2,344.15 2,086.30 1,856.80 1,470.758/1/2013 2,791.95 2,484.80 2,211.50 1,968.20 1,559.002/1/2014 2,959.45 2,633.90 2,344.15 2,086.30 1,652.558/1/2014 3,137.05 2,791.95 2,484.80 2,211.50 1,751.702/1/2015 3,325.25 2,959.45 2,633.90 2,344.15 1,856.808/1/2015 3,524.80 3,137.05 2,791.95 2,484.80 1,968.202/1/2016 3,736.25 3,325.25 2,959.45 2,633.90 2,086.308/1/2016 3,960.45 3,524.80 3,137.05 2,791.95 2,211.502/1/2017 4,198.05 3,736.25 3,325.25 2,959.45 2,344.158/1/2017 4,449.95 3,960.45 3,524.80 3,137.05 2,484.802/1/2018 4,716.95 4,198.05 3,736.25 3,325.25 2,633.908/1/2018 5,000.00 4,449.95 3,960.45 3,524.80 2,791.952/1/2019 - 4,716.95 4,198.05 3,736.25 2,959.458/1/2019 - 5,000.00 4,449.95 3,960.45 3,137.052/1/2020 - - 4,716.95 4,198.05 3,325.258/1/2020 - - 5,000.00 4,449.95 3,524.802/1/2021 - - - 4,716.95 3,736.258/1/2021 - - - 5,000.00 3,960.452/1/2022 - - - - 4,198.058/1/2022 - - - - 4,449.952/1/2023 - - - - 4,716.958/1/2023 - - - - 5,000.002/1/2024 - - - - -8/1/2024 - - - - -2/1/2025 - - - - -8/1/2025 - - - - -2/1/2026 - - - - -8/1/2026 - - - - -2/1/2027 - - - - -8/1/2027 - - - - -2/1/2028 - - - - -8/1/2028 - - - - -2/1/2029 - - - - -8/1/2029 - - - - -2/1/2030 - - - - -8/1/2030 - - - - -2/1/2031 - - - - -8/1/2031 - - - - -2/1/2032 - - - - -8/1/2032 - - - - -2/1/2033 - - - - -8/1/2033 - - - - -2/1/2034 - - - - -8/1/2034 - - - - -2/1/2035 - - - - -8/1/2035 - - - - -2/1/2036 - - - - -8/1/2036 - - - - -2/1/2037 - - - - -8/1/2037 - - - - -2/1/2038 - - - - -8/1/2038 - - - - -2/1/2039 - - - - -8/1/2039 - - - - -2/1/2040 - - - - -8/1/2040 - - - - -2/1/2041 - - - - -8/1/2041 - - - - -2/1/2042 - - - - -8/1/2042 - - - - -2/1/2043 - - - - -8/1/2043 - - - - -2/1/2044 - - - - -8/1/2044 - - - - -2/1/2045 - - - - -8/1/2045 - - - - -

H-3





Bonds 08/01/2027 6.75%Capital Appreciation Bonds

08/01/2028 5.77%

9/14/2010 991.85 882.75 785.60 1,630.35 1,808.202/1/2011 1,036.80 922.75 821.25 1,672.05 1,847.758/1/2011 1,099.05 978.15 870.55 1,728.50 1,901.052/1/2012 1,164.95 1,036.80 922.75 1,786.85 1,955.908/1/2012 1,234.85 1,099.05 978.15 1,847.15 2,012.352/1/2013 1,308.95 1,164.95 1,036.80 1,909.50 2,070.408/1/2013 1,387.50 1,234.85 1,099.05 1,973.90 2,130.102/1/2014 1,470.75 1,308.95 1,164.95 2,040.55 2,191.558/1/2014 1,559.00 1,387.50 1,234.85 2,109.40 2,254.802/1/2015 1,652.55 1,470.75 1,308.95 2,180.60 2,319.858/1/2015 1,751.70 1,559.00 1,387.50 2,254.20 2,386.802/1/2016 1,856.80 1,652.55 1,470.75 2,330.30 2,455.658/1/2016 1,968.20 1,751.70 1,559.00 2,408.95 2,526.502/1/2017 2,086.30 1,856.80 1,652.55 2,490.25 2,599.358/1/2017 2,211.50 1,968.20 1,751.70 2,574.30 2,674.352/1/2018 2,344.15 2,086.30 1,856.80 2,661.15 2,751.508/1/2018 2,484.80 2,211.50 1,968.20 2,751.00 2,830.902/1/2019 2,633.90 2,344.15 2,086.30 2,843.80 2,912.558/1/2019 2,791.95 2,484.80 2,211.50 2,939.80 2,996.602/1/2020 2,959.45 2,633.90 2,344.15 3,039.00 3,083.058/1/2020 3,137.05 2,791.95 2,484.80 3,141.60 3,172.002/1/2021 3,325.25 2,959.45 2,633.90 3,247.60 3,263.508/1/2021 3,524.80 3,137.05 2,791.95 3,357.25 3,357.652/1/2022 3,736.25 3,325.25 2,959.45 3,470.55 3,454.558/1/2022 3,960.45 3,524.80 3,137.05 3,587.65 3,554.202/1/2023 4,198.05 3,736.25 3,325.25 3,708.75 3,656.758/1/2023 4,449.95 3,960.45 3,524.80 3,833.90 3,762.252/1/2024 4,716.95 4,198.05 3,736.25 3,963.30 3,870.808/1/2024 5,000.00 4,449.95 3,960.45 4,097.10 3,982.452/1/2025 - 4,716.95 4,198.05 4,235.35 4,097.358/1/2025 - 5,000.00 4,449.95 4,378.30 4,215.552/1/2026 - - 4,716.95 4,526.05 4,337.208/1/2026 - - 5,000.00 4,678.80 4,462.302/1/2027 - - - 4,836.75 4,591.058/1/2027 - - - 5,000.00 4,723.502/1/2028 - - - - 4,859.758/1/2028 - - - - 5,000.002/1/2029 - - - - -8/1/2029 - - - - -2/1/2030 - - - - -8/1/2030 - - - - -2/1/2031 - - - - -8/1/2031 - - - - -2/1/2032 - - - - -8/1/2032 - - - - -2/1/2033 - - - - -8/1/2033 - - - - -2/1/2034 - - - - -8/1/2034 - - - - -2/1/2035 - - - - -8/1/2035 - - - - -2/1/2036 - - - - -8/1/2036 - - - - -2/1/2037 - - - - -8/1/2037 - - - - -2/1/2038 - - - - -8/1/2038 - - - - -2/1/2039 - - - - -8/1/2039 - - - - -2/1/2040 - - - - -8/1/2040 - - - - -2/1/2041 - - - - -8/1/2041 - - - - -2/1/2042 - - - - -8/1/2042 - - - - -2/1/2043 - - - - -8/1/2043 - - - - -2/1/2044 - - - - -8/1/2044 - - - - -2/1/2045 - - - - -8/1/2045 - - - - -

H-4


Bonds 08/01/2029 5.90%

Capital AppreciationBonds 08/01/2030 5.95%




9/14/2010 1,667.95 1,558.60 1,443.25 1,336.95 1,236.602/1/2011 1,705.25 1,593.75 1,476.30 1,368.00 1,265.658/1/2011 1,755.55 1,641.20 1,520.90 1,409.85 1,304.902/1/2012 1,807.35 1,690.00 1,566.85 1,453.00 1,345.358/1/2012 1,860.65 1,740.30 1,614.15 1,497.45 1,387.052/1/2013 1,915.55 1,792.05 1,662.90 1,543.30 1,430.058/1/2013 1,972.05 1,845.35 1,713.10 1,590.50 1,474.402/1/2014 2,030.25 1,900.25 1,764.85 1,639.20 1,520.108/1/2014 2,090.15 1,956.80 1,818.15 1,689.35 1,567.252/1/2015 2,151.80 2,015.00 1,873.05 1,741.05 1,615.808/1/2015 2,215.25 2,074.95 1,929.65 1,794.30 1,665.902/1/2016 2,280.60 2,136.70 1,987.90 1,849.20 1,717.558/1/2016 2,347.90 2,200.25 2,047.95 1,905.80 1,770.802/1/2017 2,417.15 2,265.70 2,109.80 1,964.15 1,825.708/1/2017 2,488.45 2,333.15 2,173.50 2,024.25 1,882.302/1/2018 2,561.90 2,402.55 2,239.15 2,086.20 1,940.658/1/2018 2,637.45 2,474.00 2,306.75 2,150.00 2,000.802/1/2019 2,715.25 2,547.60 2,376.45 2,215.80 2,062.858/1/2019 2,795.35 2,623.40 2,448.20 2,283.60 2,126.802/1/2020 2,877.85 2,701.45 2,522.15 2,353.50 2,192.708/1/2020 2,962.75 2,781.85 2,598.30 2,425.50 2,260.702/1/2021 3,050.15 2,864.60 2,676.80 2,499.75 2,330.758/1/2021 3,140.10 2,949.80 2,757.60 2,576.20 2,403.002/1/2022 3,232.75 3,037.55 2,840.90 2,655.05 2,477.508/1/2022 3,328.10 3,127.95 2,926.70 2,736.30 2,554.302/1/2023 3,426.30 3,221.00 3,015.10 2,820.05 2,633.508/1/2023 3,527.35 3,316.80 3,106.15 2,906.30 2,715.152/1/2024 3,631.45 3,415.50 3,199.95 2,995.25 2,799.308/1/2024 3,738.55 3,517.10 3,296.60 3,086.90 2,886.102/1/2025 3,848.85 3,621.75 3,396.15 3,181.35 2,975.558/1/2025 3,962.40 3,729.50 3,498.70 3,278.70 3,067.802/1/2026 4,079.25 3,840.45 3,604.40 3,379.05 3,162.908/1/2026 4,199.60 3,954.70 3,713.25 3,482.45 3,260.952/1/2027 4,323.50 4,072.35 3,825.35 3,589.00 3,362.058/1/2027 4,451.05 4,193.50 3,940.90 3,698.85 3,466.252/1/2028 4,582.35 4,318.25 4,059.90 3,812.05 3,573.758/1/2028 4,717.55 4,446.75 4,182.50 3,928.70 3,684.502/1/2029 4,856.70 4,579.00 4,308.85 4,048.90 3,798.758/1/2029 5,000.00 4,715.25 4,438.95 4,172.80 3,916.502/1/2030 - 4,855.50 4,573.00 4,300.50 4,037.908/1/2030 - 5,000.00 4,711.10 4,432.05 4,163.102/1/2031 - - 4,853.40 4,567.70 4,292.158/1/2031 - - 5,000.00 4,707.45 4,425.202/1/2032 - - - 4,851.50 4,562.408/1/2032 - - - 5,000.00 4,703.802/1/2033 - - - - 4,849.658/1/2033 - - - - 5,000.002/1/2034 - - - - -8/1/2034 - - - - -2/1/2035 - - - - -8/1/2035 - - - - -2/1/2036 - - - - -8/1/2036 - - - - -2/1/2037 - - - - -8/1/2037 - - - - -2/1/2038 - - - - -8/1/2038 - - - - -2/1/2039 - - - - -8/1/2039 - - - - -2/1/2040 - - - - -8/1/2040 - - - - -2/1/2041 - - - - -8/1/2041 - - - - -2/1/2042 - - - - -8/1/2042 - - - - -2/1/2043 - - - - -8/1/2043 - - - - -2/1/2044 - - - - -8/1/2044 - - - - -2/1/2045 - - - - -8/1/2045 - - - - -

H-5

Date

Capital Appreciation Bonds08/01/2034 6.24%

Term CAB BondsMaturing 2037 6.33%



9/14/2010 1,152.65 936.35 668.95 538.802/1/2011 1,179.90 958.85 685.20 552.058/1/2011 1,216.70 989.20 707.15 570.002/1/2012 1,254.65 1,020.50 729.80 588.458/1/2012 1,293.80 1,052.80 753.20 607.552/1/2013 1,334.20 1,086.10 777.35 627.308/1/2013 1,375.80 1,120.50 802.25 647.652/1/2014 1,418.75 1,155.95 827.95 668.658/1/2014 1,463.00 1,192.55 854.50 690.352/1/2015 1,508.65 1,230.30 881.90 712.758/1/2015 1,555.70 1,269.20 910.15 735.902/1/2016 1,604.25 1,309.40 939.35 759.758/1/2016 1,654.30 1,350.85 969.45 784.452/1/2017 1,705.95 1,393.60 1,000.50 809.908/1/2017 1,759.15 1,437.70 1,032.60 836.152/1/2018 1,814.05 1,483.20 1,065.65 863.308/1/2018 1,870.65 1,530.15 1,099.85 891.302/1/2019 1,929.00 1,578.55 1,135.10 920.258/1/2019 1,989.20 1,628.55 1,171.45 950.102/1/2020 2,051.25 1,680.10 1,209.00 980.958/1/2020 2,115.25 1,733.25 1,247.75 1,012.752/1/2021 2,181.25 1,788.10 1,287.75 1,045.658/1/2021 2,249.30 1,844.70 1,329.00 1,079.552/1/2022 2,319.50 1,903.10 1,371.60 1,114.608/1/2022 2,391.85 1,963.35 1,415.55 1,150.752/1/2023 2,466.50 2,025.45 1,460.95 1,188.108/1/2023 2,543.45 2,089.60 1,507.75 1,226.652/1/2024 2,622.80 2,155.70 1,556.10 1,266.458/1/2024 2,704.65 2,223.95 1,605.95 1,307.552/1/2025 2,789.00 2,294.35 1,657.45 1,350.008/1/2025 2,876.05 2,366.95 1,710.55 1,393.802/1/2026 2,965.75 2,441.85 1,765.40 1,439.058/1/2026 3,058.30 2,519.15 1,821.95 1,485.752/1/2027 3,153.70 2,598.90 1,880.35 1,533.958/1/2027 3,252.10 2,681.15 1,940.65 1,583.702/1/2028 3,353.60 2,766.00 2,002.85 1,635.108/1/2028 3,458.20 2,853.55 2,067.00 1,688.152/1/2029 3,566.10 2,943.85 2,133.25 1,742.958/1/2029 3,677.40 3,037.00 2,201.65 1,799.502/1/2030 3,792.10 3,133.15 2,272.20 1,857.908/1/2030 3,910.45 3,232.30 2,345.05 1,918.202/1/2031 4,032.45 3,334.60 2,420.20 1,980.458/1/2031 4,158.25 3,440.15 2,497.75 2,044.702/1/2032 4,288.00 3,549.05 2,577.80 2,111.058/1/2032 4,421.75 3,661.35 2,660.45 2,179.552/1/2033 4,559.75 3,777.25 2,745.70 2,250.308/1/2033 4,702.00 3,896.80 2,833.70 2,323.302/1/2034 4,848.70 4,020.15 2,924.50 2,398.708/1/2034 5,000.00 4,147.35 3,018.25 2,476.552/1/2035 - 4,278.65 3,115.00 2,556.908/1/2035 - 4,414.05 3,214.80 2,639.902/1/2036 - 4,553.75 3,317.85 2,725.558/1/2036 - 4,697.90 3,424.20 2,814.002/1/2037 - 4,846.60 3,533.95 2,905.308/1/2037 - 5,000.00 3,647.20 2,999.602/1/2038 - - 3,764.10 3,096.958/1/2038 - - 3,884.75 3,197.402/1/2039 - - 4,009.25 3,301.208/1/2039 - - 4,137.75 3,408.302/1/2040 - - 4,270.35 3,518.908/1/2040 - - 4,407.20 3,633.102/1/2041 - - 4,548.45 3,751.008/1/2041 - - 4,694.25 3,872.702/1/2042 - - 4,844.70 3,998.408/1/2042 - - 5,000.00 4,128.152/1/2043 - - - 4,262.108/1/2043 - - - 4,400.402/1/2044 - - - 4,543.208/1/2044 - - - 4,690.602/1/2045 - - - 4,842.808/1/2045 - - - 5,000.00

H-6

Date

Convertible CABTerm Bonds

(Converting 8/1/2021) 5.80%

9/14/2010 2,684.052/1/2011 2,743.108/1/2011 2,822.652/1/2012 2,904.508/1/2012 2,988.752/1/2013 3,075.408/1/2013 3,164.602/1/2014 3,256.408/1/2014 3,350.802/1/2015 3,448.008/1/2015 3,548.002/1/2016 3,650.908/1/2016 3,756.752/1/2017 3,865.708/1/2017 3,977.802/1/2018 4,093.158/1/2018 4,211.852/1/2019 4,334.008/1/2019 4,459.702/1/2020 4,589.058/1/2020 4,722.102/1/2021 4,859.058/1/2021 5,000.00

I-1

APPENDIX I

SPECIMEN MUNICIPAL BOND INSURANCE POLICY


MUNICIPAL BOND INSURANCE POLICY

ISSUER: BONDS: $ in aggregate principal amount of

Policy No.: -N

Effective Date:

Premium: $ ASSURED GUARANTY MUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) ("AGM"), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the "Trustee") or paying agent (the "Paying Agent") (as set forth in the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of the Owners or, at the election of AGM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on which AGM shall have received Notice of Nonpayment, AGM will disburse to or for the benefit of each Owner of a Bond the face amount of principal of and interest on the Bond that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by AGM, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in AGM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by AGM is incomplete, it shall be deemed not to have been received by AGM for purposes of the preceding sentence and AGM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, who may submit an amended Notice of Nonpayment. Upon disbursement in respect of a Bond, AGM shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner's right to receive payments under the Bond, to the extent of any payment by AGM hereunder. Payment by AGM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of AGM under this Policy. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. "Business Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment" means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless AGM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. "Nonpayment" means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. "Nonpayment" shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer which has been recovered from such Owner pursuant to the

Page 2 of 2 Policy No. -N United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. "Notice" means telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to AGM which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner" shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. AGM may appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer's Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to AGM pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to AGM and shall not be deemed received until received by both and (b) all payments required to be made by AGM under this Policy may be made directly by AGM or by the Insurer's Fiscal Agent on behalf of AGM. The Insurer's Fiscal Agent is the agent of AGM only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of AGM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, AGM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to AGM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy sets forth in full the undertaking of AGM, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In witness whereof, ASSURED GUARANTY MUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) has caused this Policy to be executed on its behalf by its Authorized Officer. ASSURED GUARANTY MUNICIPAL CORP.

(FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) By

Authorized Officer Form 500NY (5/90)

(212) 826-0100