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PRELIMINARY OFFICIAL STATEMENT DATED JULY 12, 2011

NEW ISSUE - Book-Entry-Only RATINGS: S&P: “Applied For” PSF ”Applied For” (See “OTHER INFORMATION – Ratings” and “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein.) In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations.

$35,155,000*

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Brooks County)

UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011 Dated Date: July 1, 2011 Due: August 15, as shown on inside cover PAYMENT TERMS . . . T he $35,155,000* Brooks County I ndependent S chool D istrict U nlimited Tax S chool B uilding Bonds, S eries 2011 ( the “Bonds”) will be issued in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds will accrue from July 1, 2011 (the “Dated Date”) and will be payable on February 15 and August 15 of each year until stated maturity or prior redemption commencing February 15, 2012, and will be calculated on the basis of a 360-day year of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company, New York, New York (“DTC”), pursuant to the Book-Entry-Only System described herein. DTC will act as securities depository. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the P aying Agent/Registrar (defined herein) to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See "THE BONDS - Book-Entry-Only System" herein. The initial Paying Agent/Registrar is BOKF, NA dba Bank of Texas, Austin, Texas (see "THE BONDS - Paying Agent/Registrar"). AUTHORITY FOR ISSUANCE . . . The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, including Chapter 45, Texas Education Code, as amended, an election held in the District on May 14, 2011, and an order (the “Order”) adopted by the Board of Trustees of the Brooks County Independent School District (the “District” or “Issuer”). SECURITY AND SOURCE OF PAYMENT . . . The Bonds are direct obligations of the District payable from an annual ad valorem tax levied, without legal limitation as to rate or amount, on all taxable property located within the District, as provided in the Order (see "THE BONDS - Authority for Issuance"). The District has applied for and received conditional approval from the Texas Education Agency for the Bonds to be guaranteed under the State of Texas Permanent School Fund Guarantee Program (hereinafter defined) which guarantee will automatically become effective when the Attorney General of Texas approves the Bonds. (see “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein). PURPOSE . . . Proceeds from the sale of the Bonds will be used (i) to construct, acquire and equip school buildings in the District and (ii) for the payment of costs of issuance related to the Bonds. (see “PLAN OF FINANCE - Purpose”).

_______________

See Stated Maturities, Principal Amounts, Interest Rates, Initial Yields, CUSIP Numbers, and Redemption Provisions on Inside Cover _______________

LEGALITY . . . The Bonds are offered for delivery when, as and if issued and received by the initial purchasers named below (the “Underwriters”) and subject to the approving opinion of the Attorney General of Texas and the approval of certain legal matters by McCall, Parkhurst, & Horton L.L.P., San Antonio, Texas, Bond Counsel. Certain legal matters will be passed upon f or the Underwriters by their counsel, Escamilla, Poneck & Cruz, LLP, San Antonio, Texas. DELIVERY . . . The Bonds are expected to be available for initial delivery through the services of DTC on or about August 11, 2011.

SOUTHWEST SECURITIES PIPER JAFFRAY & CO./FIRST PUBLIC LLC RAYMOND JAMES RBC CAPITAL MARKETS ________________ *Preliminary, subject to change.

ii

STATED MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, INIITAL YIELDS, CUSIP NUMBERS, AND REDEMPTION PROVISIONS

CUSIP No. Prefix (1):114385

$35,155,000* Unlimited Tax School Building Bonds, Series 2011

Maturity Principal Interest Initial CUSIP (1) Maturity Principal Interest Initial CUSIP (1)

(February 15) Amount Rate Yield Suffix (February 15) Amount Rate Yield Suffix2012 805,000$ 2025 1,220,000$ 2013 830,000 2026 1,560,000 2014 855,000 2027 1,625,000 2015 870,000 2028 1,695,000 2016 895,000 2029 1,760,000 2017 920,000 2030 1,835,000 2018 950,000 2031 1,910,000 2019 985,000 2032 1,995,000 2020 1,020,000 2033 2,090,000 2021 1,055,000 2034 2,190,000 2022 1,095,000 2035 2,290,000 2023 1,130,000 2036 2,400,000 2024 1,175,000

(Accrued Interest from July 1, 2011 to be added)

OPTIONAL REDEMPTION . . . T he District reserves the right to redeem the Bonds maturing August 15, 2021 in whole or in part, in principal a mount of $5, 000 or a ny i ntegral m ultiple th ereof o n August 15, 2020 , o n any d ate t hereafter, at a p rice eq ual to the principal amount thereof, plus accrued interest to the date of redemption as further described herein. (See "THE BONDS – Optional Redemption"). The Bonds may also be subject to mandatory sinking fund redemption in the event the Underwriters elect to aggregate two or more the maturities as a term bond. _________________________ (1) CUSIP numbers a re i ncluded s olely for t he c onvenience of owners of the Bonds. CUSIP is a r egistered t rademark o f t he

American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a d atabase and does not s erve i n a ny w ay a s a s ubstitute f or t he C USIP S ervices. N one of t he D istrict, t he F inancial A dvisor, nor t he Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein.

________________ *Preliminary, subject to change.

iii

USE OF INFORMATION For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission (“Rule 15c2-12”), this Preliminary Official Statement constitutes an official statement of the District with respect to the Bonds that has been deemed “final” by the District as of its date, except for the omission of no more than the information permitted by Rule 15c2-12. This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those representations contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon. The information set forth herein has been obtained from the District and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor or the Underwriters. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described. The Bonds are exempt from registration with the United States Securities and Exchange Commission and consequently have not been registered therewith. The registration, qualification, or exemption of the Bonds in accordance with applicable securities law provisions of the jurisdictions in which these securities have been registered, qualified, or exempted should not be regarded as a recommendation thereof. In connection with this offering, the Underwriters may over-allot or effect transactions which stabilize the market price of the issue at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. None of the District, the Underwriters, nor the Financial Advisor make any representation or warranty with respect to the information contained in this Official Statement regarding The Depository Trust Company or its Book-Entry-Only System or the affairs of the Texas Education Agency described under “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds. INVESTORS SHOULD READ THIS ENTIRE OFFICIAL STATEMENT, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

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

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iv

OFFICIAL STATEMENT Description of the Bonds ................................................ i SELECTED FINANCIAL INFORMATION .................. v GENERAL FUND CONSOLIDATED STATEMENT

SUMMARY ................................................................... v DISTRICT ADMINISTRATION Elected Officials ............................................................ vi Selected Administrative Staff ....................................... vi Consultants and Advisors ............................................. vi INTRODUCTION .............................................................. 1 PLAN OF FINANCE ......................................................... 1 THE BONDS ....................................................................... 1 THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM ............................................ 7 STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS .............................. 18 CURRENT PUBLIC SCHOOL FINANCE SYSTEM . 19 TAX RATE LIMITATIONS Debt Limitations ........................................................... 24 AD VALOREM TAXATION Table 1 - Exemptions and Tax Supported Debt ........... 29 Table 2 - Taxable Assessed Valuations by Category ... 30 Table 3 - Valuation and Tax Supported Debt History . 31 Table 4 - Tax Rate, Levy and Collection History ......... 31 Table 5 - Ten Largest Taxpayers .................................. 32 Table 6 - Estimated Overlapping Debt ......................... 32 DEBT INFORMATION Table 7 - Tax Supported Debt Service Requirements ............................................................. 33 Table 8 - Estimated Interest and Sinking Fund Budget Projection ...................................................... 34 Table 9 - Authorized But Unissued Unlimited Tax Bonds .................................................................. 34 Table 10 - Other Obligations ........................................ 34 FINANCIAL INFORMATION Table 11 - General Fund Revenues and Expenditures ......................................................... 35 Financial Policies .......................................................... 36 Investments ................................................................... 36 Table 12 - Current Investments .................................... 38

TAX MATTERS ................................................................ 39

OTHER INFORMATION Ratings........................................................................... 40 Litigation ....................................................................... 41 Registration and Qualification of Bonds for Sale ......... 41 Legal Investments and Eligibility to Secure Public Funds in Texas ................................................ 41 Legal Matters ................................................................ 41 Authenticity of Financial Data and other Information . 42 Continuing Disclosure of Information .......................... 42 Financial Advisor .......................................................... 44 Underwriting ................................................................. 44 Forward Looking Statements ........................................ 44 Miscellaneous ............................................................... 45

APPENDICES General Information Regarding the District .................... A Brooks County Independent School District Annual Financial and Compliance Report ................................ B Form of Bond Counsel's Opinion .................................... C The cover page hereof, this page, the appendices included herein and any addenda, s upplement or a mendment he reto, a re pa rt of t he Official Statement.

TABLE OF CONTENTS

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SELECTED FINANCIAL INFORMATION

Ratio Fiscal Per Capita Debt toYear Estimated Taxable Taxable Per Capita Taxable % of

Ended District Assessed Assessed Tax Unlimited Tax Assessed Total Tax8/31 Population Valuation Valuation Debt Debt Valuation Collections2007 6,801 1,086,391,946$ 159,740$ 3,424,429$ 504$ 0.32% 98.82%2008 6,461 914,332,491 141,516 3,284,429 508 0.36% 99.96%2009 6,343 955,519,827 150,642 3,134,429 494 0.33% 99.12%2010 6,156 864,848,689 140,489 2,974,429 483 0.34% 98.77%2011 6,079 798,894,865 131,419 37,964,429 (1) 6,245 4.75% (2)

________ (1) Preliminary, subject to change. (2) In Process of Collection.

GENERAL FUND CONSOLIDATED STATEMENT SUMMARY

2010 2009 2008 2007 2006Beginning Balance 3,308,160$ 3,612,774$ 4,429,357$ 3,657,688$ 3,513,935$ Total Revenues 16,221,450 17,477,651 18,900,109 17,414,240 13,770,788 Total Expenditures (15,051,181) (17,848,001) (20,152,106) (16,648,166) (13,627,825) Net Transfers/Other Resources 17,624 95,832 57,310 142,974 65,268 Extraordinary Item - - 378,104 (137,381) - Changes in Fund Balances 1,287,893 (304,613) (1,194,687) 909,048 143,753 Ending Balance 4,596,053$ 3,308,161$ 3,612,774$ 4,429,355$ 3,657,688$

For Fiscal Year Ended August 31

For additional information regarding the District, please contact:

Ms. Alissa M. Sanchez Mr. Robert A. Tijerina Business Manager Estrada Hinojosa & Company, Inc. Brooks County Independent School District or 100 W. Houston Street P.O. Box 589 Suite 1400 Falfurrias, Texas 78355 San Antonio, Texas 78205 (361) 325-8002 - Telephone (210) 223-4888 - Telephone (361) 325-1913 - Fax (210) 223-4849 - Fax

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vi

DISTRICT ADMINISTRATION ELECTED OFFICIALS

Board of Trustees Length of Service Term Expires Occupation Roel Garza President

2 Years May 2013 USDA Farm Loan Officer

Israel Villareal, Jr. Vice President

4 Years May 2015 Healthcare Unlimited Representative

Eric Ramos Secretary

6 Years May 2013 Federal Programs Director-Premont ISD

Richard Garcia Member

4 Years May 2015 Retired

David Longoria Member

4 Years May 2013 Retired

Calixto Mora Jr. Member

4 Years May 2015 Brooks County Foreman

Steve Villareal Member

8 Years May 2015 AEP Service Crew Leader

SELECTED ADMINISTRATIVE STAFF

Name

Position

Length of Service

With the District

Length of Service

in Current Position David Perry Superintendent of Schools 10 Months 10 Months

Alissa M. Sanchez Business Manager 17 Years 7 Years CONSULTANTS AND ADVISORS Auditors ............................................................................................................................................................... John Womack & Co., P.C Certified Public Accountants Kingsville, Texas Financial Advisor ................................................................................................................................. Estrada Hinojosa & Company, Inc. San Antonio, Texas Bond Counsel .......................................................................................................................................McCall, Parkhurst & Horton L.L.P. San Antonio, Texas

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PRELIMINARY OFFICIAL STATEMENT

RELATING TO

$35,155,000*

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Brooks County)

UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011

INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $35,155,000* Brooks County Independent School District Unlimited Tax School Building Bonds, Series 2011 (the “Bonds”). Except as otherwise indicated herein, capitalized terms used in this Official Statement not otherwise defined herein have the same meanings assigned to such terms in the order (the “Order”) to be adopted by the Board of Trustees (the “Board”) of the Brooks County Independent School District (the “District” or “Issuer”) on the date of sale of the Bonds which will authorize the issuance of the Bonds. All financial and other information presented in this Official Statement has been provided by the District from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent hi storic i nformation, a nd i s not i ntended t o i ndicate f uture or c ontinuing t rends i n f inancial position or ot her a ffairs of the District. N o r epresentation i s m ade t hat p ast ex perience, as i s s hown b y f inancial an d o ther information, will necessarily continue or be repeated in the future (see “OTHER INFORMATION – Forward Looking Statements” herein). There follows in this Official Statement descriptions of the Bonds and certain information regarding the District and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the District's Financial Advisor, Estrada Hinojosa & Company, Inc., San Antonio, Texas, in an electronic format, or upon request and upon payment of reasonable copying, handling and delivery charges. This O fficial S tatement s peaks onl y a s t o i ts da te, a nd t he i nformation c ontained herein is subject to change. A copy of the Official Statement will be deposited with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access ( “EMMA”) system. See “ OTHER I NFORMATION - Continuing Disclosure of Information” for a description of the District’s undertaking to provide certain information on a continuing basis. DESCRIPTION OF THE DISTRICT . . . The District is a p olitical subdivision of the S tate o f Texas located in Brooks County. Th e District is governed by a seven-member board of trustees who serve staggered three-year terms with elections being held in May of each year. P olicy-making and supervisory functions are the responsibility of, and are vested in, the Board. T he Board delegates administrative responsibilities to the Superintendent of Schools, who is th e c hief a dministrative o fficer o f th e D istrict. S upport services are supplied by consultants and advisors. For more information regarding the District, see Appendix A – “General Information Regarding the District”.

PLAN OF FINANCE

PURPOSE . . . Proceeds from the sale of the Bonds will be used (i) to construct, acquire and equip school buildings in the District and (ii) for the payment of costs of issuance related to the Bonds.

THE BONDS

DESCRIPTION OF THE BONDS . . . The Bonds will be issued in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds will accrue from July 1, 2011 (the “Dated Date”), will be payable on February 15 and August 15 of each year commencing February 15, 2012, and will be calculated on the basis of a 360-day year of twelve 30-day months. ______________ *Preliminary, subject to change.

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The definitive Bonds will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially r egistered a nd de livered onl y t o C ede & C o., t he nom inee of The Depository Trust Company, New York, New York (“DTC”), pursuant t o t he B ook-Entry-Only S ystem d escribed he rein. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., w hich w ill m ake di stribution of t he a mounts s o pa id to t he pa rticipating m embers of D TC f or s ubsequent pa yment t o t he beneficial owners of the Bonds. See "THE BONDS - Book-Entry-Only System" herein. If the date for any payment due on any Bond is a Saturday, Sunday, legal holiday, or day on which banking institutions in the city in which the designated corporate trust office of the Paying Agent/Registrar is located is authorized by law or executive order to close, then the date for such payment will be the next succeeding day which is not such a day. The payment on such date has the same force and effect as if made on the original date payment was due. AUTHORITY FOR ISSUANCE . . . The Bonds are issued and the tax levied for their payment pursuant to authority conferred by the Texas Constitution; the laws of the State of Texas, particularly Chapter 45, Texas Education Code, as amended; an election held in the District on May 14, 2011; and the Order. SECURITY AND SOURCE OF PAYMENT . . . All taxable property within the District is subject to a continuing direct annual ad valorem tax levied by the District, without legal limit as to rate or amount, sufficient to provide for the payment of principal of and interest on all Bonds. Additionally, the District has made an application and has received conditional approval for the payment of the principal of and interest on the Bonds to be guaranteed by the Permanent School Fund of Texas (see “THE BONDS – Permanent School Fund Guarantee” below). PERMANENT SCHOOL FUND GUARANTEE. . . In connection with the sale of the Bonds, the District has submitted an application to the Texas E ducation Agency and has received conditional approval from the Commissioner of Education for guarantee o f the Bonds under the Permanent School Fund Guarantee Program (Chapter 45, Subchapter C, of the Texas Education Code). Subject to meeting certain c onditions di scussed unde r t he he ading " THE P ERMANENT S CHOOL F UND G UARANTEE P ROGRAM" herein, the Bonds will be absolutely and unconditionally guaranteed by the corpus of the Permanent School Fund. In the event of default, registered owners will receive all payments due from the corpus of the Permanent School Fund. OPTIONAL REDEMPTION . . . The District reserves the right to redeem the Bonds maturing August 15, 2021 in whole or in part, in principal amount of $5,000 or any integral multiple thereof on August 15, 2020 or on any date thereafter, at a p rice equal to the principal amount thereof, plus accrued interest to the date of redemption and without premium. If less than all of the Bonds of a maturity, s ubject t o r edemption ar e t o b e r edeemed, t he D istrict w ill d etermine t he amounts of each maturity or maturities to b e redeemed and direct the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Only from) to select at random and by lot the Bonds, or portions thereof, within such maturity or maturities to be redeemed; provided; however, that during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity and bearing the same interest rate are to be redeemed, the particular Bonds will be selected in accordance with the arrangements between the District and the securities depository. NOTICE OF REDEMPTION . . . Not less than 30 days prior to the date fixed for any redemption of any Bonds or portions thereof prior to stated maturity, the District shall cause notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owner of each Bond or a portion thereof to be redeemed at its address as it appears on the registration books of the Paying Agent/Registrar on the day such notice of redemption is mailed. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed. I f such notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. Bonds of a denomination larger than $5,000 may be redeemed in part ($5,000 or any integral multiple thereof). Any Bonds to be partially redeemed must be surrendered in exchange for one or more new Bonds of the same stated maturity and interest rate for the unredeemed portion of the principal. NOTICES WITHIN THE BOOK-ENTRY-ONLY SYSTEM . . . The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System i s used for the Bonds, will send any not ice of redemption, not ice of proposed amendment to the Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial o wner, w ill n ot a ffect th e v alidity o f th e r edemption o f th e Bonds called f or redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the District will reduce the

3

outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the District or the Paying Agent/Registrar. N either the District nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on t he Bonds or t he pr oviding of not ice t o D TC pa rticipants, i ndirect pa rticipants, or be neficial ow ners of t he s election of portions of the Bonds for redemption. (See “THE BONDS – Book-Entry-Only System” herein.) BOOK-ENTRY-ONLY SYSTEM . . . This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company ("DTC"), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District, the Financial Advisor, and the Underwriters believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" w ithin t he m eaning o f t he N ew Y ork B anking L aw, a m ember o f t he F ederal R eserve S ystem, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants ("Direct Participants") deposit with DTC. D TC also facilitates the post-trade settlement among Direct Participants o f s ales an d o ther s ecurities t ransactions i n de posited s ecurities, t hrough e lectronic c omputerized book -entry transfers an d p ledges b etween D irect P articipants’ acco unts. T his el iminates the need for physical movement of securities certificates. D irect Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, a nd c ertain ot her or ganizations. D TC i s a w holly-owned s ubsidiary of T he D epository T rust & Clearing Corporation ("DTCC"). D TCC is the holding company for DTC, National Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearing agencies. D TCC is owned by the users of i ts regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear t hrough or maintain a c ustodial r elationship w ith a D irect P articipant, e ither directly or indirectly ("Indirect Participants"). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a cr edit for the Bonds on D TC’s records. T he ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

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To f acilitate s ubsequent t ransfers, al l Bonds de posited by D irect P articipants with D TC a re r egistered i n t he na me of D TC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. F or example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the al ternative, B eneficial O wners m ay w ish t o p rovide t heir n ames and ad dresses t o t he r egistrar an d r equest t hat co pies o f notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct P articipant i n acco rdance w ith D TC’s P rocedures. U nder i ts us ual pr ocedures, D TC mails a n O mnibus P roxy t o t he District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct P articipants t o w hose acco unts B onds ar e cr edited o n the record date (identified in a lis ting a ttached to th e O mnibus Proxy). Redemption, principal, and interest pa yments on t he B onds w ill be made t o C ede & C o., or s uch ot her nominee a s may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or the P aying Agent/Registrar, on payable date in acco rdance with their r espective holdings shown on D TC’s records. Payments by P articipants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in " street n ame", a nd w ill b e th e r esponsibility o f s uch Participant and not of D TC nor i ts nom inee, t he P aying Agent/Registrar, o r th e District, subject t o an y s tatutory o r r egulatory r equirements as m ay b e i n ef fect f rom t ime t o t ime. Payment of redemption proceeds, principal, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) i s the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to Issuer or Paying Agent/Registrar. U nder such circumstances, in the event that a successor depository is not obtained, security certificates for each maturity of the Bonds are required to be printed and delivered. The Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, security certificates for each maturity of t he B onds w ill be pr inted a nd de livered a nd t he B onds w ill be s ubject t he t ransfer, e xchange a nd r egistration provisions as set forth in the Order and summarized under “Transfer, Exchange and Registration” below. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the District, the Financial Advisor, a nd t he Underwriters believe t o b e r eliable, b ut n either o f t he District, t he F inancial Advisor, nor t he Underwriters take responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement . . . In reading this Official Statement it should be understood that while t he B onds a re i n t he B ook-Entry-Only System, r eferences i n o ther s ections o f t his O fficial S tatement t o r egistered owners s hould be r ead t o i nclude t he pe rson for which t he P articipant a cquires a n i nterest i n t he B onds, but (i) a ll r ights o f ownership must be exercised through DTC and the Book-Entry-Only S ystem, an d ( ii) except as d escribed ab ove, p ayment o r notices that are to be given to registered owners under the Order will be given only to DTC. PAYING AGENT/REGISTRAR . . . The initial Paying Agent/Registrar is BOKF, NA dba Bank of Texas, Austin, Texas. In the Order, the D istrict r etains th e r ight to r eplace th e P aying A gent/Registrar. T he D istrict c ovenants to m aintain a nd provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. U pon any change in the Paying Agent/Registrar for the

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Bonds, the District agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. SUCCESSOR PAYING AGENT/REGISTRAR . . . The District reserves the r ight to replace the P aying Agent/Registrar. I f the P aying Agent/Registrar is replaced by the District, the new Paying Agent/Registrar must accept the previous Paying Agent/Registrar's records and act in the same capacity as the previous Paying Agent/Registrar. Any successor paying Agent/Registrar selected by the District shall be a b ank, a t rust company, financial institution, or other entity duly qualified and legally authorized to serve and perform the duties of Paying Agent/Registrar for the Bonds. TRANSFER, EXCHANGE AND REGISTRATION . . . In the event the Book-Entry-Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on t he respective Bonds or by other instrument of t ransfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the P aying Agent/Registrar, i n l ieu of t he B onds be ing t ransferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer will be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Bonds surrendered for exchange or transfer. S ee "THE BONDS-Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. N either th e D istrict n or th e P aying A gent/Registrar w ill b e r equired to tr ansfer or exchange any Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer will not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. RECORD DATE FOR INTEREST PAYMENT . . . The record date ("Record Date") for determining the person to whom the interest is payable on the Bonds on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, i f and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which must be 15 days after the Special Record Date) will be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. MUTILATED, DESTROYED, LOST, OR STOLEN BONDS . . . The District has agreed to replace mutilated, destroyed, lost, or stolen Bonds upon surrender of the mutilated Bonds to the Paying Agent, or receipt of satisfactory evidence of such destruction, loss, or theft, and receipt by the District and Paying Agent of security or indemnity as may be required by either of them to hold them harmless. The District may require payment of taxes, governmental charges, and other expenses in connection with any such replacement. DEFEASANCE OF BONDS . . . .The Order provides for the defeasance of the Bonds when the payment of the principal of the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of stated maturity, redemption, or otherwise), is provided by irrevocably depositing with a trust company or commercial bank not a depository of the District (1) cash sufficient to make such pa yment or ( 2) G overnmental O bligations (hereinafter defined) certified by an i ndependent publ ic a ccounting firm of national reputation t o be of s uch maturities a nd i nterest pa yment da tes a nd t o be ar i nterest a t s uch r ates a s will, without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom (likewise to be held in trust and committed, except as hereinafter provided), be sufficient to make such payment or (3) a combination of money and Governmental Obligations together so certified to be sufficient, provided that all the expenses pertaining to the Bonds with respect to which such deposit is made will have been paid, or the payment thereof provided for, to the satisfaction of the aforementioned depository. The Order pr ovides that “Governmental O bligations” means (a) di rect, nonc allable obl igations of t he U nited S tates o f A merica, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent, and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, t o s ubstitute other G overnmental O bligations f or t he G overnmental O bligations or iginally deposited, to reinvest the

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uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required f or s uch d efeasance. T he defeasance o f t he B onds w ill can cel t he P ermanent S chool F und g uarantee. See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein. Upon such deposit as described above, such Bonds shall no l onger be regarded to be outstanding obl igations for purposes of applying any debt limitation on indebtedness or for purposes of taxation. After firm banking and financial arrangements for the discharge and final payment of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided however, the District has reserved the option, to be exercised at the t ime of the defeasance of the Bonds, to call for redemption at an earlier date those Bonds which have been defeased to their maturity date, i f the District (i) in the proceedings providing for the firm banking an d f inancial ar rangements, ex pressly reserves the right to c all th e B onds f or r edemption, ( ii) g ives n otice o f th e reservation of t hat r ight t o t he ow ners of t he B onds i mmediately f ollowing t he m aking of t he f irm ba nking a nd f inancial arrangements, and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. AMENDMENTS . . . The District may amend the Order without the consent of or notice to any registered owners in any manner not detrimental to th e in terests o f th e r egistered o wners, in cluding t he c uring of a ny a mbiguity, i nconsistency, or f ormal defect or omission therein. In addition, the District may, with the written consent of the holders of a majority in aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order; except that, without the consent of the registered owners of all of the Bonds affected, no s uch amendment, addition, or rescission may (1) change the date specified as the date on w hich the principal of or any installment of interest on any Bond is due and payable, reduce the principal amount thereof, redemption pr ice therefor, or the rate of interest thereon, change the p lace or p laces at or the coin or currency in which any Bond or interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any amendment, addition, or waiver. BONDHOLDERS’ REMEDIES . . . The Order does not specify events of default with respect to the Bonds. If the District defaults in the payment of principal, interest, or redemption price on the Bonds when due or the State fails to honor the Permanent School Fund G uarantee a s he reinafter di scussed, or t he D istrict de faults i n t he obs ervation or pe rformance of a ny other covenants, conditions, or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel the District or District officials to carry out the legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the Bonds or the Order and the District's obligations are not uncertain or disputed, as well as to enforce the rights of pa yment unde r t he P ermanent S chool F und G uarantee. T he i ssuance of a w rit of m andamus i s c ontrolled by equitable pr inciples, s o r ests with t he di scretion of t he c ourt, but may not be arbitrarily refused. There is no acceleration o f maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the Bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. On June 30, 2006, t he T exas S upreme C ourt r uled i n Tooke v. City of Mexia 197 S .W. 3d 325 ( Tex. 2006) t hat a w aiver of s overeign immunity in a contractual dispute must be provided for by statute in “clear and unambiguous” language. Because it is unclear whether the Texas l egislature h as ef fectively w aived t he D istrict’s s overeign i mmunity f rom a s uit f or m oney d amages, Bondholders may not be able to br ing such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment a gainst t he D istrict c ould be obt ained, i t c ould not be e nforced by di rect l evy a nd e xecution against the District's property. Further, the registered owners cannot themselves foreclose on pr operty within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Furthermore, the District is eligible t o s eek r elief f rom i ts c reditors unde r C hapter 9 of t he U .S. B ankruptcy C ode ( "Chapter 9" ). A lthough C hapter 9 provides f or t he r ecognition o f a s ecurity i nterest r epresented b y a s pecifically p ledged s ource o f revenues, the pledge of ad valorem taxes in support of a g eneral obligation of a b ankrupt en tity is not specifically recognized as a s ecurity interest under Chapter 9. C hapter 9 a lso includes an automatic s tay provision that would prohibit, without Bankruptcy Court approval, the prosecution of a ny ot her l egal a ction by c reditors or B ondholders of a n e ntity which ha s s ought pr otection unde r Chapter 9. Therefore, should the District avail i tself of Chapter 9 pr otection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state co urt); and the Bankruptcy Code provides for br oad di scretionary pow ers of a B ankruptcy C ourt i n a dministering a ny proceeding brought before it. See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein for a description of the procedures to be followed for payment of the Bonds by the Permanent School Fund in the event the District fails to make a payment on the Bonds when due. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order a nd t he B onds a re qua lified with respect t o t he c ustomary r ights of de btors r elative t o t heir c reditors a nd by g eneral principles of equity which permit the exercise of judicial discretion.

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USE OF BOND PROCEEDS . . . Proceeds from the sale of the Bonds are expected to be expended as follows:

Sources: Par Amount of the Bonds -$ Accrued Interest - Net Premium - Total Sources of Funds -$

Uses: Deposit to Construction Fund Depostit to Interest & Sinking Fund Costs of Issuance - Underwriters' Discount - Total Uses of Funds -$

THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM This disclosure statement provides information relating to the program administered by the Texas Education Agency (the “TEA”) with respect to the Texas Permanent School Fund guarantee of Texas school district bonds, which program is referred to, and defined herein, as the Guarantee Program. Some of the information contained in this Section may include projections or other forward-looking statements regarding future events or the future financial performance of the Texas Permanent School Fund (the “PSF” or the “Fund”). Actual results may differ materially from those contained in any such projections or forward-looking statements. History and Purpose The P SF was c reated with a $2, 000,000 a ppropriation by t he Texas Legislature ( the “ Legislature”) in 1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 s tipulated that certain lands and all proceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land and rights to the PSF. In 1953, the U.S. Congress passed the Submerged Lands Act that r elinquished to coastal s tates a ll r ights of the U.S. n avigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years of litigation (1957-1960), the U. S. S upreme C ourt on M ay 31, 1960, a ffirmed T exas’ hi storic t hree m arine l eagues ( 10.35 miles) seaward boundary. Texas proved i ts submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws and treaties dating back to 1836. All lands lying within that limit belong to the PSF. The proceeds from the sale and the mineral-related rental of these lands, including bonuses, delay rentals and royalty payments, become the corpus of the Fund. Prior to the approval by the voters of the State of an amendment to the constitutional provision under which the Fund is established and administered, which occurred on September 13, 2003 (the “Total Return Constitutional Amendment”), and which is further described below, the PSF had as i ts main sources of revenues capital gains from securities transactions and royalties from the sale of oil and natural gas. The Total Return Constitutional Amendment provides t hat i nterest a nd di vidends pr oduced by F und i nvestments will b e additional revenue to the PSF. The State School Land Board (“SLB”) maintains the land endowment of the Fund on behalf of the Fund and is authorized to manage the investments of the capital gains, royalties and other investment income relating to the land e ndowment. T he S LB i s a t hree m ember boa rd, t he m embership of w hich c onsists of t he C ommissioner of the Texas General Land Office (the “Land Commissioner”) and two citizen members, one appointed by the Governor and one by the Texas Attorney General (the “Attorney General”). The Texas Constitution describes the PSF as “permanent” and “perpetual.” Prior to the approval by Total Return Constitutional Amendment, only the income produced by the PSF was to be used to complement taxes in financing public education. On November 8, 1983, the voters of the State approved a constitutional amendment that provides for the guarantee of school district bonds by the PSF. On approval by the State Commissioner of Education (the “Commissioner”), bonds properly issued by a school district are fully guaranteed by the corpus of the PSF. See “The Guarantee Program.” The s ole pur pose of t he P SF i s t o a ssist i n t he f unding of publ ic e ducation f or pr esent and future generations. Prior to the

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adoption of the Total Return Constitutional Amendment, all interest and dividends produced by Fund investments flowed into the Available School Fund (the “ASF”), where they are distributed to local school districts based on average daily attendance. Any net gains from investments of the Fund accrue to the corpus of the PSF. Prior to the approval by the voters of the State of the Total Return Constitutional Amendment, costs of administering the PSF were allocated to the ASF. With the approval of the Total Return Constitutional Amendment, the administrative costs of the Fund have shifted from the ASF to the PSF. I n fiscal year 2010, the total amount distributed to the ASF was $60.70 million. Audited financial information for the PSF is provided annually through the PSF Annual Report (the “Annual Report”), which is filed with the Municipal Securities Rulemaking Board (“MSRB”). T he Annual Report includes the Message of the Executive Administrator of the Fund (the “Message”) and the Management’s Discussion and Analysis (“MD&A”). R eference is made to the Annual Report for the complete Message and MD&A for t he y ear e nded A ugust 31, 2010 a nd f or a de scription of t he financial results of the PSF for the year ended August 31, 2010, the most recent year for which audited financial information regarding the Fund is available. The 2010 Annual Report is incorporated herein and made a part hereof for all purposes, but the 2010 Annual Report speaks only as of i ts date and the TEA has not obligated i tself to update the 2010 A nnual Report or any other Annual Report. The TEA posts each Annual Report, which includes statistical data regarding the Fund as of the close of each fiscal year, the most r ecent d isclosure f or t he G uarantee P rogram, t he S tatement o f I nvestment O bjectives, P olicies an d Guidelines of t he T exas P ermanent S chool F und, w hich i s c odified a t 19 T exas A dministrative C ode, C hapter 33 (the “Investment Policy”), monthly updates with respect t o t he cap acity o f t he G uarantee P rogram ( collectively, t he “W eb S ite Materials”) on the TEA web site at www.tea.state.tx.us/psf and with the MSRB at www.emma.msrb.org. Such monthly updates regarding the Guarantee Program are also incorporated herein and made a part hereof for all purposes. I n addition to the Web Site M aterials, th e F und is r equired t o m ake qua rterly f ilings w ith t he S ecurities a nd Exchange Commission (“SEC”) under Section 13(f) of the Securities Exchange Act of 1934. S uch filings, which consist of a list of the Fund’s holdings of securities specified i n S ection 13( f), i ncluding e xchange-traded ( e.g., NYS E) o r NA SDAQ-quoted stocks, equity opt ions a nd warrants, shares o f cl osed-end investment companies and certain co nvertible d ebt s ecurities, i s av ailable f rom t he S EC at www.sec.gov/edgar.shtml. A list of the Fund’s equity and fixed income holdings as of August 31, 2010 has been posted to the TEA web s ite a nd f iled with t he M SRB. S uch l ist e xcludes hol dings i n the Fund’s securities lending program. Such list is incorporated herein and made a part hereof for all purposes. The Total Return Constitutional Amendment The Total Return Constitutional Amendment approved a fundamental change in the way that distributions are made to the ASF from the PSF. T he Total Return Constitutional Amendment requires that PSF distributions to the ASF be determined using a total-return-based formula instead of the current-income-based formula, which was used from 1964 to the end of the 2003 fiscal year. The Total Return Constitutional Amendment provides that the total amount distributed from the Fund to the ASF: (1) in each year of a State fiscal biennium must be an amount that is not more than 6% of the average of the market value of the Fund, excluding real property (the “Distribution Rate”), on the last day of each of the sixteen State fiscal quarters preceding the Regular Session of the Legislature that begins before that State fiscal biennium (the “Distribution Measurement Period”), in accordance with the rate adopted by: (a) a vote of two-thirds of the total membership of the State Board of Education (“SBOE”), taken before the Regular Session of the Legislature convenes or (b) the Legislature by general law or appropriation, i f the SBOE does not adopt a r ate as provided by clause (a); and (2) over the ten-year period consisting of the current State fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment assets of the Fund over the same ten-year period (the “Ten Year Total Return”). In April 2009, the Attorney General issued a legal opinion, Op. Tex. Att’y Gen. No. GA-0707 (2009) (“GA-0707”), at the request of the Chairman of the SBOE with regard to certain matters pertaining to the Distribution Rate and the determination of the Ten Year Total Return (see “Other Events and Disclosures”). In determining the Distribution Rate, the SBOE has adopted the goal of maximizing the amount distributed from the Fund in a manner designed to preserve “intergenerational equity.” I ntergenerational equity is the maintenance of endowment purchasing power t o e nsure that e ndowment s pending keeps pa ce with i nflation, with t he ul timate goal be ing t o e nsure t hat c urrent a nd future generations are given equal levels of pur chasing pow er. I n m aking t his de termination, t he S BOE t akes i nto a ccount various considerations, and relies particularly upon its external investment consultant, which undertakes a probability analysis for long term projection periods that includes certain assumptions. Among the assumptions used in the analysis are a projected rate of growth of the average daily scholastic attendance State-wide, the projected contributions and expenses of the Fund, projected returns in the capital markets and a projected inflation rate. In September 2006, the SBOE established the Distribution Rate from the F und t o t he ASF for f iscal years 2008 a nd 2009 a t 3.5% of the average of the P SF market value dur ing the Distribution Measurement P eriod. T he de cision of t he S BOE r egarding t he D istribution R ate f or 2008 a nd 2009 t ook into account a commitment by the SLB to transfer at least $100 million per year for each year of the biennium commencing September 1, 2007. The SLB has advised the SBOE that it will make a similar $100 million release to the PSF in the 2011 fiscal year. The SBOE set the Distribution Rate for the Fund for fiscal years 2010 and 2011 at 2.5% of the average of the PSF market value during the Distribution M easurement P eriod t hat e nded i n N ovember 2008, which will pr oduce t ransfers of approximately $1.15 billion

9

during the 2010-11 biennium. At its November 2010 meeting, the SBOE set the Distribution Rate for the upcoming biennium at 3.5%, but, based upon c orrespondence received from the Commissioner of the General Land Office by the Chair of the SBOE during that meeting, the SBOE approved an increased Distribution Rate of 4.2% contingent on the SLB voting to release a total of $500 million to the PSF i n qua rterly i nstallments dur ing t he 2012 -13 bi ennium, w hich c ontingency w as s atisfied by a resolution adopted by the SLB on January 4, 2011. Since the enactment of a prior amendment to the Texas Constitution in 1964, the investment of the Fund has been managed with the dual objectives of producing current income for transfer to the ASF and growing the Fund for the benefit of future generations. As a result of this prior constitutional framework, prior to the adoption of the 2004 A sset Allocation P olicy (as defined be low) the investment of the Fund hi storically included a significant amount of fixed income investments and dividend-yielding equity investments, to produce income for transfer to the ASF. With respect to the management of the Fund’s investment portfolio, the single most significant change made to date as a result of the Total Return Constitutional Amendment has been new asset allocation policies adopted by the SBOE in February 2004 (the “2004 Asset Allocation Policy”), in July 2006 (as subsequently reaffirmed in July 2008 such asset allocation is referred to herein as the “2008 Asset Allocation Policy”) and in July 2010 ( the “2010 Asset Allocation Policy”), which have significantly altered the asset allocations of t he F und. T he F und’s i nvestment pol icy pr ovides f or m inimum a nd m aximum r anges a mong t he components of each of the three general asset classifications: equities, fixed income and alternative asset investments. The 2004 Asset Allocation P olicy de creased t he f ixed i ncome t arget f rom 45% t o 25% of F und i nvestment a ssets a nd i ncreased t he allocation for equities from 55% to 75% of investment assets. In July 2006, the SBOE modified its asset allocation to reduce the equity allocation, including both domestic and foreign equity portfolios, to a target of 53% of Fund assets, further reduced the fixed income allocation target to 19% and added an alternative asset allocation, which included real estate, real return, absolute return and private equity components, t otaling 28% of the Fund’s asset t arget. A lternative asset c lasses diversify the SBOE-managed assets and are not as correlated to t raditional asset classes, which is intended to increase investment returns over the long run while reducing risk and return volatility of the portfolio. In July 2010, the SBOE modified the 2008 Asset Allocation Policy by decreasing the equity allocation to 50%, and the fixed income allocation to 15%, while increasing the alternative asset allocation (which may include equity and fixed income investments as part of a v ariety of al ternative investment s trategies) to 35%. The new asset categories added by the 2010 Asset Allocation Policy are a new 7% allocation for risk parity investments, added in accordance with the recommendation of a new investment advisor, and a .5% allocation for charter school investments, both o f w hich ar e cat egorized w ithin t he F und’s al ternative as set cat egory. W ith r espect t o the charter school i nvestment category, the SBOE Chair has indicated that she will seek an opinion of the Attorney General with respect to several questions presented by that allocation, including whether investments in T exas c harter s chool f acilities a re c onsistent w ith t he constitutionally-established prudent person standard applicable to the Fund. Any charter school investments would be made in part for the purpose of increasing funding for charter school facilities in the State. The PSF Staff and the Fund’s investment advisor are tasked with advising the SBOE with respect to the implementation of the 2010 Asset Allocation Policy, including the timing and manner of the selection of any external managers and other consultants. For a variety of reasons, each change in asset allocation for the Fund, including the 2010 Asset Allocation Policy, has been, and is being, implemented in phases. At August 31, 2010 the Fund was invested as follows: 63.76% in public and private market equity i nvestments; 25. 18% i n f ixed i ncome investments; 10.61% in absolute r eturn a ssets, 0. 33% i n r eal e state a ssets; a nd 0.12% in cash. In accordance with th e Texas Constitution, th e SBOE v iews th e P SF as a p erpetual institution. Consistent with its perpetual nature, t he P SF i s m anaged as an e ndowment fund with a l ong-term i nvestment hor izon. U nder t he t otal-return in vestment objective, the Investment Policy provides that the PSF shall be managed consistently with respect to the following: generating income f or t he be nefit of t he publ ic f ree s chools of Texas, t he r eal g rowth of t he c orpus of t he P SF, pr otecting c apital, a nd balancing t he ne eds of pr esent a nd f uture g enerations of T exas s chool children. As described above, the Total Return Constitutional Amendment restricts the annual pay out from the Fund to the total-return on all investment assets of the Fund over a rolling ten-year period. State law provides that each transfer of funds from the PSF to the ASF is made monthly, with each transfer to be in the amount of one-twelfth of the annual distribution. The heavier weighting of equity securities relative to fixed income investments has resulted in greater volatility of the value of the Fund. Given the greater weighting in the overall portfolio of p assively managed i nvestments, i t i s ex pected t hat t he F und w ill r eflect t he g eneral performance returns of the markets in which the Fund is invested.

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The asset allocation of the Fund is subject to change by the SBOE from time to time based upon a number of factors, including recommendations to the SBOE made by internal investment staff and external consultants, changes made by the SBOE without regard to such recommendations and directives of the Legislature. Fund performance may also be affected by factors other than asset allocation, including, without limitation, the general performance of the securities markets in the United States and abroad; political a nd i nvestment c onsiderations i ncluding t hose r elating t o s ocially r esponsible i nvesting; application of the prudent person investment standard, which may eliminate certain investment opportunities for the Fund; and limitations on the number and compensation of internal and external investment s taff, which is subject to Legislative oversight. The Guarantee Program could also be impacted by changes in State or federal law or the implementation of new accounting standards. Management and Administration of the Fund The Texas Constitution and applicable statutes delegate to the SBOE the authority and responsibility for investment of the PSF’s financial assets. In investing the Fund, the SBOE is charged with exercising the judgment and care under the circumstances then prevailing which persons of ordinary prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income therefrom as well as t he p robable s afety o f t heir cap ital. T he S BOE h as ad opted a “S tatement o f I nvestment O bjectives, P olicies, and Guidelines of the Texas Permanent School Fund,” which is codified in the Texas Administrative Code beginning a t 19 T AC section 33.1. The Total Return Constitutional Amendment provides that expenses of managing the PSF are to be paid “by appropriation” from the PSF. In January 2005, at the request of the SBOE, the Attorney General issued a legal opinion, Op. Tex. Att’y Gen. No. GA-0293 (2005) (“GA-0293”), that the Total Return Constitutional Amendment requires that SBOE expenditures for managing or administering PSF investments, including payments to external investment managers, be paid from appropriations made by the Legislature, but that the Total Return Constitutional Amendment does not require the SBOE to pay from such appropriated PSF funds the indirect management costs deducted from the assets of a mutual fund or other investment company in which PSF funds have been invested. Texas l aw a ssigns c ontrol of t he F und’s l and and mineral rights to the three-member S LB, w hich co nsists o f t he el ected Commissioner of the General Land Office (“GLO”), an appointee of the Governor, and an appointee of the Attorney General. Administrative duties related to t he l and a nd m ineral r ights r eside w ith t he G LO, w hich i s unde r t he g uidance of t he Commissioner of the GLO. In 2007, the Legislature established the real estate special fund account of the PSF (the “Real Estate Account”) consisting of the land, mineral or royalty interest, real estate investment, or other interest, including revenue received from t hose sources, th at is s et a part to th e P SF u nder th e T exas C onstitution a nd la ws, to gether w ith th e m ineral e state in riverbeds, channels, and the tidelands, including islands. T he investment of the Real Estate Account is subject to the sole and exclusive m anagement a nd c ontrol of t he S LB a nd t he L and C ommissioner, w ho i s a lso t he he ad of the GLO. The 2007 legislation that established the Real Estate Account, House Bill 3699 (“HB 3699”) presented constitutional questions regarding the respective roles of the SBOE and the SLB relating to the disposition of proceeds of real estate transactions to the ASF, among other questions. On April 9, 2008, the Attorney General issued a legal opinion, Op. Tex. Att’y Gen. No. GA-0617 (2008), at the request of t he C hair of the S BOE ad vising, am ong o ther m atters, t hat an y p roceeds f rom t he s ale o f r eal es tate t hat ar e n ot reinvested by the SLB in other real estate assets must be invested under the direction of the SBOE, and that the provisions of H.B. 3699 that permit the SLB to directly transfer real estate investment proceeds to the ASF (in lieu of transfer to the investment portfolio of the PSF under the management of the SBOE), would likely be determined by a court to be in violation of the State constitution. A mounts in the investment portfolio of the PSF are taken into account by the SBOE for purposes of determining the Distribution Rate. The SBOE contracts with its securities custodial agent to measure the performance of the total return of the Fund. A consultant is typically retained for the purpose of providing consultation with respect to strategic asset allocation decisions and to assist the SBOE in selecting external fund management advisors. T he SBOE also contracts with financial institutions for custodial and securities lending services. T he SBOE has established the Committee of Investment Advisors, which consists of independent investment experts each appointed by a member of the S BOE t o cl osely ad vise t he r espective S BOE member o n i nvestment issues. As noted above, the Texas Constitution and applicable statutes make the SBOE responsible for investment of the PSF’s financial assets. By law, the Commissioner is appointed by t he G overnor, w ith S enate c onfirmation, a nd a ssists t he S BOE, but t he Commissioner can neither be hired nor dismissed by the SBOE. The Executive Administrator of the Fund is also hired by and reports to the Commissioner. M oreover, although the Fund’s Executive Administrator and his staff implement the decisions of and provide information to the School Finance/PSF Committee of the SBOE and the full SBOE, the SBOE can neither select nor dismiss the Executive Administrator. T EA’s General Counsel provides legal advice to the Executive Administrator and to the SBOE. T he S BOE h as al so en gaged o utside c ounsel t o a dvise i t a s t o i ts dut ies ov er t he F und, including specific actions

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regarding t he i nvestment of t he P SF t o e nsure c ompliance w ith f iduciary standards, and to provide transactional advice in connection with the investment of Fund assets in non-traditional investments. The Guarantee The Guarantee P rogram for S chool D istrict B onds ( the “Guarantee P rogram”) was au thorized b y an amendment t o t he Texas Constitution in 1983 and by Subchapter C of Chapter 45 of the Texas Education Code ( the “Act”). I f the conditions for the Guarantee Program are satisfied, the guarantee becomes effective upon ap proval o f t he B onds b y t he A ttorney G eneral an d remains in effect until the guaranteed bonds are paid or defeased, by a refunding or otherwise. In t he e vent of de fault, hol ders of g uarantee bonds w ill r eceive a ll pa yments due f rom t he c orpus of t he P SF. F ollowing a determination that a district will be or is unable to pay maturing or matured principal or interest on any guaranteed bond, the Act requires the district to notify the Commissioner not later than the fifth day before the stated maturity date of such bond or interest payment. I mmediately f ollowing r eceipt of s uch not ice, t he C ommissioner must c ause t o be t ransferred f rom t he a ppropriate account in the PSF to the Paying Agent/Registrar an amount necessary to pay the maturing or matured pr incipal and interest. Upon receipt of funds for payment of such principal or interest, the Paying Agent/Registrar must pay the amount due and forward the canceled bond or evidence of payment of the interest to the State Comptroller of Public Accounts (the “Comptroller”). The Commissioner will instruct the Comptroller to withhold the amount paid, plus interest, from the first State money payable to the district. T he amount withheld will be deposited to the credit of the PSF. T he Comptroller must hold such canceled bond or evidence of payment of the interest on behalf of the PSF. F ollowing full reimbursement of such payment by the district to the PSF with interest, the Comptroller will cancel the bond or evidence of payment of the interest and forward it to the district. The Act permits the Commissioner to order a school district to set a tax rate sufficient to reimburse the Fund for any payments made with r espect to g uaranteed bonds , a nd a lso s ufficient t o pa y f uture pa yments on g uaranteed bonds , a nd pr ovides c ertain enforcement mechanisms to the Commissioner, including the appointment of a board of managers or annexation of a defaulting district to another district. If a di strict f ails t o pa y pr incipal or i nterest on a bond a s i t i s s tated t o mature, ot her a mounts not due and payable are not accelerated and do not become due and payable by virtue of the district’s default. The Guarantee Program does not apply to the payment of principal and interest upon r edemption of bonds , e xcept upon m andatory s inking fund r edemption, a nd doe s not apply to the obligation, if any, of a school district to pay a redemption premium on bonds. In t he e vent t hat t wo or m ore pa yments a re m ade f rom t he P SF on be half of a di strict, the Commissioner shall request the Attorney General to institute legal action to compel the district and its officers, agents and employees to comply with the duties required of them by law in respect to the payment of guaranteed bonds. Capacity Limits for the Guarantee Program The cap acity o f t he F und t o g uarantee b onds u nder t he G uarantee P rogram i s l imited i n t wo w ays: b y S tate l aw ( the “S tate Capacity L imit”) a nd by r egulations a nd a not ice i ssued by the I nternal R evenue S ervice ( the “I RS” an d t he “I RS L imit,” respectively). Prior to May 20, 2003, the State Capacity Limit was equal to two times the lower of cost or fair market value of the Fund’s assets, exclusive of real estate. During the 78th Regular Session of the Legislature in 2003, legislation was enacted that increased the State Capacity Limit by 25%, to two and one half times the lower of cost or fair market value of the Fund’s assets as estimated by the SBOE and certified by the State Auditor, and eliminated the real estate exclusion from the calculation. Prior to the issuance of the IRS Notice (defined below), the capacity of the program under the IRS Limit was limited to two and one-half times the lower of cost or fair market value of the Fund’s assets adjusted by a factor that excluded additions to the Fund made since May 14, 1989. During the 2007 Texas Legislature, Senate Bill 389 (“SB 389”) was enacted providing for additional increases in the capacity of the Guarantee Program, and specifically providing that the SBOE may by rule increase the capacity of the Guarantee P rogram from two and one-half t imes the cost value of the PSF to an amount not to exceed five t imes the cost value of t he P SF, pr ovided t hat t he i ncreased l imit doe s not v iolate federal law and regulations a nd doe s not pr event bonds guaranteed by the Guarantee P rogram from receiving the h ighest available credit rating, as determined by the SBOE. SB 389 further provides that the SBOE shall at least annually consider whether to change the capacity of the Guarantee Program. Since 2005, the Guarantee Program has twice reached capacity under the IRS Limit, and in each instance the Guarantee Program was closed to new bond g uarantee applications unt il r elief was obtained f rom the IRS. The most recent closure o f the Guarantee Program commenced in March 2009 a nd the Guarantee Program reopened in February 2010 on t he basis of receipt of the IRS Notice.

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On December 16, 2009, the IRS published Notice 2010-5 (the “IRS Notice”) stating that the IRS will issue proposed regulations amending the existing regulations to raise the IRS limit to 500% of the total cost of the assets held by the PSF as of December 16, 2009. In accordance with the IRS Notice, the amount of any new bonds to be guaranteed by the PSF, together with the then outstanding amount of bonds previously guaranteed by the PSF, must not exceed the IRS limit on the sale date of the new bonds to be guaranteed. The IRS Notice further provides that the IRS Notice may be relied upon for bonds sold on or after December 16, 2009, and before the effective date of future regulations or other public administrative guidance affecting funds like the PSF. The IRS Notice establishes a s tatic capacity for the Guarantee Program based upon the cost value of Fund assets on December 16, 2009 multiplied by five. On December 16, 2009, the cost value of the Guarantee Program was $23,463,749,653 (estimated and unaudited), thereby producing an IRS Limit of approximately $117.3 billion. The State Capacity Limit is determined on the basis of the cost value of the Fund from time to time multiplied by the capacity multiplier determined annually by the SBOE, but not to exceed a multiplier of five. The capacity of the Guarantee Program will be limited to the lower of the State Capacity Limit and the IRS Limit. On May 21, 2010, the SBOE modified the regulations that govern the Guarantee Program (the “Guarantee Program R ules”), an d i ncreased t he S tate L aw C apacity t o an am ount eq ual t o three times the cost value of t he P SF. S uch modified regulations, including the revised capacity rule, became e ffective on J uly 1, 2010. T he G uarantee P rogram R ules provide that the Commissioner may r educe th e m ultiplier to m aintain th e A AA c redit r ating o f th e G uarantee Program, but provide t hat a ny c hanges t o t he multiplier made by t he C ommissioner a re t o be ratified or rejected by the SBOE at the next meeting following the change. See “Valuation of the PSF and Guaranteed Bonds,” below. Since J uly 1991, when t he SBOE a mended t he Guarantee P rogram R ules t o br oaden t he r ange of bonds that are eligible for guarantee unde r t he G uarantee P rogram t o e ncompass m ost T exas s chool di strict bonds , t he pr incipal amount of bonds guaranteed under the Guarantee Program has increased sharply. In addition, in recent years a number of factors have caused an increase in the amount of bonds issued by school di stricts i n t he S tate. S ee t he t able “ Permanent S chool F und G uaranteed Bonds” below. The SBOE has approved and modified the Guarantee Program Rules in recent years, most recently in May 2010. Generally, t he G uarantee P rogram R ules l imit g uarantees t o c ertain t ypes of notes and bonds, including, with respect to refunding bonds, a requirement that the bonds produce debt service savings, and that bonds issued for capital facilities must have been voted as unlimited tax debt of the issuing district. The Guarantee Program regulations include certain accreditation criteria for districts applying for a guarantee of their bonds, and limit guarantees to districts that have less than the amount of annual debt service per average daily attendance that represents the 90th percentile of annual debt service per average daily attendance for all districts, but such limitation will not apply to school districts that have enrollment growth of at least 25% over the previous five school years. Effective September 1, 2009, the Act provides that the SBOE may annually establish a percentage of the cost value of the Fund to be reserved from use in guaranteeing bonds. T he capacity of the Guarantee Program in excess of any reserved portion is referred to herein as the “Capacity Reserve”. The Guarantee Program Rules provide for a minimum Capacity Reserve of no less than 5%, and provide that the amount of the Capacity Reserve may be increased by a majority vote of the SBOE. The Commissioner is authorized to change the Capacity Reserve, which decision must be ratified or rejected by the SBOE at its next meeting following any change m ade by t he C ommissioner. T he G uarantee P rogram R ules ar e co dified i n t he T exas Administrative Code at 19 T AC s ections 33. 65 e t s eq., a nd a re a vailable on t he T EA w eb s ite a t www.tea.state.tx.us/rules/tac/chapter033/index.html. The current Capacity Reserve is noted in the monthly updates with respect to the capacity of the Guarantee Program on the TEA web site at www.tea.state.tx.us/psf, which are also filed with the MSRB. Based upon historical performance of the Fund, the legal restrictions relating to the amount of bonds that may be guaranteed has generally resulted in a lower ratio of g uaranteed b onds t o av ailable as sets as co mpared t o m any o ther t ypes o f cr edit enhancements that may be available for Texas school district bonds. However, changes in the value of the Fund due to changes in s ecurities m arkets, i nvestment obj ectives of t he F und, a n i ncrease i n bond i ssues by s chool di stricts i n t he S tate or legal restrictions on the Fund, among other factors, could adversely affect the ratio of Fund assets to guaranteed bonds and the growth of t he F und i n general. I t i s a nticipated t hat t he i ssuance of t he I RS N otice will s ubstantially i ncrease t he a mount of bonds guaranteed under the Guarantee Program. The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program (the Annual Report). The State Auditor audits the financial statements of the PSF, which are separate from other State financial statements. The TEA has filed the audited annual report of the PSF for the year ended August 31, 2010 with the MSRB. The 2009 Annual Report has also been filed with the Municipal Advisory Council of Texas and posted to the PSF web site. S uch report speaks only as of the date thereof. Ratings of Bonds Guaranteed Under the Guarantee Program Moody’s Investors Service, Standard & Poor’s Rating Service, a S tandard & Poor’s Financial Service LLC business, and Fitch Ratings rate bonds guaranteed by the PSF “Aaa,” “AAA” and “AAA,” respectively. Not all districts apply for multiple ratings on their bonds, however. See “Ratings” herein.

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Valuation of the PSF and Guaranteed Bonds

Permanent School Fund Valuations

Fiscal Year Ended 8/31

Book Value(1)

Market Value(1)

2006 $19,359,570,146 $26,537,687,968

2007 21,234,323,093 29,251,882,931

2008 22,926,299,922 29,336,248,611 2009 23,117,052,793 25,443,104,623 2010 23,653,185,489(2) 27,066,220,259(2)

(1) SLB managed assets are included in the market value and book value of the Fund. In determining the market value of the PSF from time to time during a fiscal year, the TEA uses current, unaudited values for TEA managed investment portfolios and cash held by the SLB. Market values of land and mineral interests, and investments in externally managed real estate funds managed by the SLB are based upon i nformation reported to the PSF by the SLB. B eginning in fiscal year 2009, the SLB reported that information to the PSF on a quarterly basis. T he valuation of such assets at any point in t ime is dependent upon a variety of factors, including economic conditions in the State and nation in general, and the values of these assets, and, in particular, the valuation of mineral holdings administered by the SLB, can be volatile and subject to material changes from period to period. At August 31, 2010, l and, e xternal r eal e state i nvestments, m ineral a ssets a nd c ash m anaged by t he SLB had book values of approximately $462. 9 m illion, $1. 150 bi llion, $13. 39 m illion a nd $1 bi llion, r espectively, a nd una udited m arket v alues o f approximately $827.6 million, $749.8 million, $2.38 billion and $1 billion, respectively. (2) At Februrary 28, 2011, the PSF had a book value of $23,842,180,439 and a market value of $30,820,974,175 (in each case, based on unaudited data).

Permanent School Fund Guaranteed Bonds

At 8/31 Principal Amount(1) 2006 $37,793,429,328 2007 44,856,621,419 2008 49,860,572,025 2009 50,032,724,439

2010(1) 49,301,683,338(2) _________ (1) Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds (zero coupon securities). The amount shown excludes bonds that have been refunded and released from the Guarantee Program. The TEA doe s not m aintain r ecords of the accr eted v alue o f cap ital ap preciation b onds t hat ar e guaranteed under the Guarantee Program. (2) As of August 31, 2010, the TEA expected that the principal and interest to be paid by school districts over the remaining life of the bonds guaranteed by the Guarantee Program is $84.7 bi llion, of which $35.4 bi llion represents interest to be paid. A t February 28, 2011, t here w ere $51, 664,586,943of bonds g uaranteed unde r t he Guarantee Program and the capacity of the Guarantee Program was $71,526,541,317 based on the three times cost value multiplier approved by the SBOE on May 21, 2010. The guarantee capacity of the Fund was increased by $13.2 billion (22.8%) during fiscal year 2010 due to the change in the State multiplier approved by the SBOE during the year. Such capacity figures include the Reserve Capacity. Discussion and Analysis Pertaining to Fiscal Year Ended August 31, 2010 The following discussion is derived from the Annual Report for the year ended August 31, 2010, including the Message of the Executive Administrator of the Fund and the Management’s Discussion and Analysis contained therein. Reference is made to the Annual Report for the complete Message and MD&A. Investment assets managed by the fifteen member SBOE are referred to throughout this MD&A as the PSF(SBOE) assets. As of August 31, 2010, the Fund’s land, mineral rights and certain real assets are managed b y t he t hree-member SLB and these assets are referred t o t hroughout as t he P SF(SLB) as sets. T he 2 008 Asset Allocation Policy includes an allocation for real estate investments, and as such investments are made, and become a part of the PSF investment portfolio, those investments will be managed by the SBOE and not the SLB. At the end of fiscal 2010, the total Fund balance was $24.4 billion. F und balance increased $1.80 billion from the prior year primarily a ttributable to the increase in the fair value o f the PSF(SBOE) investments and the recovering markets. During the year, t he S BOE c ontinued i mplementing i ts r evised l ong t erm strategic asset allocation to d iversify an d s trengthen t he PSF(SBOE) i nvestment a ssets of t he F und. T he r evised a llocation i s pr ojected t o i ncrease returns over the long run while reducing risk and return volatility of the portfolio. The one year, three year, five year and ten year annualized total returns for the PSF(SBOE) assets were 7 .51%, -2.64%, 3.11% and 2.87% respectively (total return takes into consideration the change in the

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market value of the Fund during the year as well as the interest and dividend income generated by the Fund’s investments). In addition, the SLB continued its shift into externally managed real asset investment funds and the one year, three year, and five year annualized total returns for the PSF(SLB) real assets, including cash, are -2.85%, -4.68%, and 2.19% respectively. The market value of the Fund’s assets is directly impacted by the performance of the various financial markets in which the assets are invested. The most important factors affecting investment performance are the asset allocation decisions made by the SBOE and SLB. T he c urrent S BOE l ong t erm a sset a llocation pol icy a llows f or di versification of t he P SF(SBOE) por tfolio i nto alternative asset classes whose returns are not as correlated to traditional asset classes. The implementation of the long term asset allocation will occur over several fiscal years and is expected to provide incremental total return at reduced risk. As of August 31, 2010, the PSF(SBOE) portion of the Fund had diversified into emerging market international equities, absolute return funds, real es tate and private equity. O ther asset classes such as r isk parity and real return will be s trategically added commensurate with the economic environment and the goals and objectives of the SBOE. The P SF(SLB) p ortfolio i s g enerally ch aracterized b y three broad categories: (1) d iscretionary r eal as sets i nvestments, ( 2) sovereign an d o ther l ands, an d ( 3) mineral i nterests. D iscretionary r eal as sets i nvestments co nsist o f externally managed real estate, infrastructure, and energy/minerals investment f unds; i nternally m anaged d irect r eal es tate i nvestments, an d cas h. Sovereign and other lands consist primarily of the lands set aside to the PSF when it was created. Mineral interests consist of the minerals that are associated with PSF lands. The investment focus of PSF(SLB) discretionary real assets investments has shifted from internally managed direct real estate investments to externally managed real assets investment funds. Approximately $230 million of capital commitments to e xternally managed r eal a ssets i nvestment funds were funded dur ing f iscal year 2010. At August 31, 2010, the SLB had approved total capital commitments, net of the original capital commitments associated with any investments that were subsequently sold or dissolved, of $2.122 billion to thirty-four funds, and one co-investment vehicle, o f which approximately $971 million remains unfunded. The PSF(SBOE)’s investment in equity securities experienced a return of 5.50% during the fiscal year ended August 31, 2010. The PSF(SBOE)’s investment in fixed income securities produced a return of 11.29% during the fiscal year and absolute return investments yielded a return of 7.85%. Combined, all PSF(SBOE) asset classes produced an investment return of 7.51% for the fiscal year ended August 31, 2010, outperforming the target index by approximately 84 basis points. All PSF(SLB) real assets (including cash) returned -2.85% for the fiscal year ending August 31, 2010. For fiscal year 2010, total revenues, inclusive of unrealized gains and losses and net of security lending rebates and fees, totaled $1.93 billion, an increase of $3.92 billion from fiscal year 2009 ne gative earnings of $1.98 billion. T his increase is primarily attributable to the recovery of domestic and international securities markets in fiscal year 2010. I n fiscal year 2010, revenues earned by the Fund included lease payments, bonuses and royalty i ncome r eceived f rom o il, g as an d m ineral l eases; l ease payments from commercial real estate; surface lease and easement revenues; revenues from the resale of natural and liquid gas supplies; dividends, interest, and securities lending revenues; the net change in the fair value of the investment portfolio; and, other miscellaneous fees and income. Expenditures are paid from the Fund before distributions are made under the total return formula. Such expenditures include the costs i ncurred by t he S LB t o m anage t he l and e ndowment, a s w ell a s ope rational c osts of t he F und, including e xternal management fees paid from appropriated funds. Total operating expenditures, net of security lending rebates and fees, decreased 41.7% for the fiscal year ending August 31, 2010. This decrease is primarily attributable to the decrease in the expenditures for gas supplies purchased for resale within the State Energy Management Program. The Fund supports the public school system in the State by distributing a predetermined percentage of its asset value to the ASF. For fiscal years 2009 and 2010, this distribution to the ASF totaled $716.53 million and $60.7 million, respectively. At the end of the 2010 fiscal year, PSF assets guaranteed $49.3 billion in bonds issued by 776 l ocal school districts. S ince its inception in 1983, the Fund has guaranteed 4,243 school district bond issues totaling $88.9 billion in principal amount. During the 2010 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program decreased by 76, or -3.1%. The dollar amount of guaranteed school bond issues outstanding decreased by $731.0 million or 1.5%. The guarantee capacity of the Fund increased by $13.167 billion, or 22.8%, during fiscal year 2010 due to the change in the multiplier.

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Other Events and Disclosures The S tate I nvestment E thics C ode g overns t he e thics a nd di sclosure r equirements f or f inancial advisors and other service providers who advise certain State governmental entities, including t he P SF. I n a ccordance with t he pr ovisions of t he S tate Investment Eth ics Code, the SBOE periodically modifies i ts code of e thics, which occurred most recently in May 2010. T he SBOE c ode of e thics i ncludes pr ohibitions on s haring c onfidential i nformation, a voiding c onflict of i nterests a nd requiring disclosure filings with respect to contributions made or received in connection with the operation or management of the Fund. The code of ethics applies to members of the SBOE as well as to persons who are responsible by contract or by virtue of being a TEA PSF staff member for managing, investing, executing brokerage transactions, providing consultant services, or acting as a custodian of the PSF, and persons who provide investment and management advice to a member of the SBOE, with or without compensation under certain circumstances. The code of ethics is codified in the Texas Administrative Code at 19 TAC sections 33.5 et seq., and is available on the TEA web site at www.tea.state.tx.us/rules/tac/chapter033/index.html. For the 2008-2009 biennium, the SBOE requested an additional appropriation of approximately $18 m illion to be used for the implementation of the 2008 Asset Allocation Policy. Such amount was requested in addition to a general operating appropriation for 2008 -2009 of $14 m illion. T he 2007 L egislature a ppropriated $9 m illion of t he r equested 2008 -2009 a dditional appropriation for external management services, and a $14 m illion operating appropriation. F or the 2010-2011 biennium, the SBOE made an exceptional item request of approximately $12.5 million to fund costs of implementing the 2008 Asset Allocation Policy, but the exceptional item was not funded. The Legislature provided a total appropriation of $23.2 million for the general administration of t he F und f or t he 2010 -2011 biennium. While f unds w ere not a ppropriated i n t he 2009 L egislature t o implement the 2008 Asset Allocation Policy, Fund management is o f t he v iew t hat t here ar e sufficient r esources available t o continue the phased implementation of new alternative asset allocations during the 2010-2011 biennium. In accordance with HB 3699, the SLB approved a resolution on August 7, 2007 to begin depositing revenues previously deposited with the PSF into the Real Estate Account, commencing September 1, 2007. A lso on A ugust 7, 2007, July 23, 2008 and August 6, 2009, the SLB adopted resolutions to make four quarterly payments of $25,000,000 during fiscal years 2008, 2009 and 2010, respectively, from the Real Estate Account to the SBOE for investment, which action was taken to honor a SLB commitment to the Fund that was made prior to the enactment of HB 3699. As of August 31, 2010, c ertain l awsuits were pe nding a gainst t he S tate a nd/or t he GLO, which c hallenge t he F und’s t itle t o certain real property and/or past or future mineral income from that property. R eference i s made to the Annual Report for a description of such lawsuits that are pending, which may represent contingent liabilities of the Fund. PSF Continuing Disclosure Undertaking The SBOE has adopted an investment policy rule (the “TEA Rule”) pertaining to the PSF and the Guarantee Program. The TEA Rule is codified in Section I of the TEA Investment Procedure Manual, which relates to the Guarantee Program. The most recent amendment to the TEA Rule was adopted by the SBOE on November 19, 2010, and is summarized below. Through the adoption of the TEA Rule and its commitment to guarantee the Bonds, the SBOE has made the following agreement for the benefit of the District a nd hol ders a nd be neficial ow ners of t he B onds. T he T EA ( or i ts successor with respect t o t he management o f t he Guarantee Program) is required to observe the agreement for so long as it remains an “obligated person,” within the meaning of SEC Rule 15c2-12 (“Rule 15c2-12”), with respect to the Bonds. Nothing in the TEA Rule obl igates the Agency to make any filings or disclosures with respect to guaranteed bonds, as the obligations of the Agency under the TEA Rule pertain solely to the Guarantee Program. The district issuing the guaranteed bonds has assumed the applicable obligation under Rule 15c-12 to make all disclosures and filings relating directly to guaranteed bonds, and the TEA takes no responsibility with respect to such district undertakings. Under the TEA agreement, the TEA will be obligated to provide annually certain updated financial information and operating data, and timely notice of specified material events, to the MSRB. The M SRB h as es tablished t he E lectronic M unicipal M arket A ccess ( “EMMA”) s ystem, an d t he T EA i s r equired t o file its continuing disclosure information using the EMMA system. I nvestors may access continuing disclosure information filed with the MSRB at www.emma.msrb.org. Annual Reports The TEA will annually provide certain updated financial information and operating data to the MSRB. T he information to be updated includes all quantitative financial information and operating data with respect to the Guarantee Program and the PSF of the general type included in this Official S tatement under the heading “THE P ERMANENT SCHOOL FUND GUARANTEE PROGRAM.” T he information also includes the Annual Report. The TEA will update and provide this information within six months after the end of each fiscal year.

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The T EA m ay pr ovide upda ted i nformation i n f ull t ext or may incorporate by reference certain other publicly-available documents, as permitted by Rule 15c2-12. The updated information includes audited financial statements of, or relating to, the State or the PSF, when and if such audits are commissioned and available. Financial statements of the State will be prepared in accordance with generally accepted accounting p rinciples as applied to s tate governments, as such p rinciples may be changed from time to time, or such other accounting principles as the State Auditor is required to employ from time to time pursuant to State law or regulation. The financial statements of the Fund were prepared to conform to U.S. Generally Accepted Accounting Principles as established by the Governmental Accounting Standards Board. The Fund is reported by the State of Texas as a permanent fund and accounted for on a current financial resources measurement focus and the modified accrual basis of accounting. Measurement focus refers to the definition of the resource flows measured. Under t he modified accr ual b asis o f acco unting, al l r evenues r eported ar e r ecognized b ased o n t he cr iteria o f availability and measurability. Assets are defined as available if they are in the form of cash or can be converted into cash within 60 days to be usable for payment of current liabilities. A mounts are defined as measurable if they can be estimated or otherwise determined. Expenditures are recognized when the related fund liability is incurred. The State’s current fiscal year end is August 31. A ccordingly, the TEA must provide updated information by the last day of February in each year, unless the State changes its fiscal year. If the State changes its fiscal year, the TEA will notify the MSRB of the change. Material Event Notices The T EA w ill a lso p rovide tim ely n otices of certain events t o t he M SRB. S uch not ices will be pr ovided not more t han t en business days after the occurrence of the event. The TEA will provide notice of any of the following events with respect to the Guarantee Program: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if such event is material within the meaning of the federal securities laws; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their f ailure t o pe rform; ( 6) a dverse t ax opi nions, t he i ssuance by t he I RS of proposed or final determinations of taxability, Notices of P roposed I ssue ( IRS F orm 5701 -TEB), or o ther material n otices o r d eterminations with r espect to th e tax-exempt status of the Guarantee Program, or other material events affecting the tax status of the Guarantee Program; (7) modifications to rights of hol ders of B onds guaranteed by t he Guarantee Program, if such event i s material within t he meaning o f t he federal securities laws; (8) Bond calls, if such event is material within the meaning of the federal securities laws, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of Bonds guaranteed by the Guarantee Program, if such e vent i s m aterial w ithin t he m eaning of t he f ederal s ecurities l aws; ( 11) r ating c hanges; ( 12) bankruptcy, insolvency, receivership, o r s imilar ev ent o f t he G uarantee P rogram (which is c onsidered t o oc cur when a ny of t he following oc cur: t he appointment o f a r eceiver, f iscal ag ent, o r s imilar o fficer f or t he Guarantee Program in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Guarantee Program, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental a uthority ha ving s upervision or j urisdiction over s ubstantially a ll of t he a ssets or bus iness of t he G uarantee Program); (13) the consummation of a merger, consolidation, or acquisition involving the Guarantee Program or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such a n a ction or t he t ermination of a de finitive a greement r elating t o a ny s uch a ctions, ot her than pursuant to its terms, if material; and (14) the appointment of a successor or additional trustee with respect to the Guarantee Program or the change of name of a trustee, if such event is material within the meaning of the federal securities laws. (Neither the Act nor any other law, regulation or i nstrument pe rtaining t o t he Guarantee P rogram make an y p rovision w ith r espect t o t he Guarantee Program for bond calls, debt service reserves, credit enhancement, l iquidity enhancement, early redemption or the appointment of a trustee with respect to the Guarantee Program.) I n addition, the TEA will provide timely notice of any failure by the TEA to provide information, data, or financial statements in accordance with its agreement described above under “Annual Reports.” Availability of Information The TEA has agreed to provide the foregoing information only to the MSRB and to transmit such information electronically to the MSRB in such format and accompanied by such identifying information as prescribed by the MSRB. T he information is available from the MSRB to the public without charge at www.emma.msrb.org.

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Limitations and Amendments The TEA has agreed to update information and to provide notices of material events only as described above. The TEA has not agreed t o p rovide o ther i nformation t hat m ay b e r elevant o r m aterial t o a complete p resentation o f its f inancial r esults o f operations, condition, or prospects or agreed to update any information that is provided, except as described above. T he TEA makes no r epresentation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The TEA disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the TEA to comply with its agreement. The continuing disclosure agreement of the TEA is made only with respect to the PSF and the Guarantee Program. The District may make a continuing disclosure undertaking in accordance with Rule 15c2-12 with respect to its obligations arising under Rule 15c2-12 pertaining to financial and operating data concerning the District and notices of material events relating to the Bonds. A description of the District’s undertaking, if any, is included elsewhere in the Official Statement relating to the Bonds. This continuing disclosure agreement may be amended by the TEA from t ime to t ime to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the TEA, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell guaranteed bonds in the primary offering of such bonds in compliance with Rule 15c2-12, taking into account any amendments or interpretations of Rule 15c2-12 since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregate principal amount of the outstanding bonds guaranteed by the Guarantee Program consent to such amendment or (b) a person that is unaffiliated with the TEA (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the holders and beneficial owners of the bonds guaranteed by the Guarantee Program. The TEA may also amend or repeal the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provision of Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling bonds guaranteed by the Guarantee Program in the primary offering of such bonds. Compliance with Prior Undertakings The TEA has not previously failed to substantially comply with its previous continuing disclosure agreements in accordance with Rule 15c2-12. SEC Exemptive Relief On February 9, 1996, the TEA received a letter from the Chief Counsel of the SEC that pertains to the availability of the “small issuer e xemption” s et f orth i n pa ragraph ( d)(2) of R ule 15c 2-12. T he l etter pr ovides t hat Texas s chool di stricts which of fer municipal securities that are guaranteed under the Guarantee Program may undertake to comply with the provisions of paragraph (d)(2) of R ule 15c 2-12 i f t heir of ferings ot herwise qua lify f or s uch e xemption, not withstanding the guarantee of the school district s ecurities under the Guarantee Program. Among ot her r equirements e stablished by R ule 15c 2-12, a s chool di strict offering may qualify for the small issuer exemption if, upon issuance of the proposed series of securities, the school district will have no more than $10 million of outstanding municipal securities.

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STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System On April 9, 2001, four p roperty wealthy d istricts f iled suit in th e 2 50th District Court o f Travis County, Texas ( the "District Court") against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the "Commissioner") and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate (the "M&O T ax") h ad b ecome i n effect a state property ta x, in v iolation o f A rticle V III, S ection 1 -e of t he T exas C onstitution, because i t pr ecluded t hem a nd ot her s chool di stricts f rom ha ving meaningful di scretion t o t ax a t a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the "Finance System") was inefficient, inadequate, and unsuitable, i n v iolation of A rticle V II, S ection 1 of t he T exas C onstitution, be cause t he S tate of T exas ( the " State") di d not provide adequate funding. A s described below, this case has twice reached the Texas Supreme Court (the "Supreme Court"), which rendered decisions in the case on M ay 29, 2003 ( "West Orange-Cove I") and November 22, 2005 ( "West Orange-Cove II"). After the remand by the Supreme Court back to the District Court in West Orange-Cove I, 285 other school districts were added as p laintiffs o r in tervenors. T he p laintiffs jo ined the in tervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on a ll of t heir c laims a nd f or t he i ntervenors on a ll but one of t heir c laims, f inding t hat ( 1) t he F inance System was unconstitutional in th at th e F inance System v iolated Article V III, Section 1 -e of the Texas Constitution because the s tatutory limit of $1. 50 pe r $100. 00 of t axable a ssessed v aluation on pr operty t axes levied by school districts for maintenance and operation purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article V II, S ection 1 of t he T exas C onstitution, be cause c hildren i n pr operty-poor districts di d not ha ve s ubstantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by Article VII, Section 1 of the Texas Constitution, because the Finance System was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange-Cove II, the Supreme Court's holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a v iolation o f Article V II, S ection 1 of the Texas Constitution. I n reaching i ts f irst holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. I n reaching i ts second holding, the Supreme Court, us ing a t est of a rbitrariness de termined that: t he publ ic education system was "adequate," since it is capable of acco mplishing a g eneral d iffusion o f k nowledge; t he F inance S ystem w as not "inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of "suitability," since the Finance System was suitable for adequately and efficiently providing a public education. In reversing the District Court's holding that the Finance System was unconstitutional under Article VII, Section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of de ficiencies i n t he publ ic s chool f inance s ystem, w e c onclude t hat t hose deficiencies do not amount to a violation of Article VII, Section 1. W e remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts' contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ("Edgewood IV") that

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such funding variances may not be unreasonable. The Supreme Court further stated that "[t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that "[e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system," and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence t o pr ove t hat t here w as a n i nability t o pr ovide f or a " general di ffusion of k nowledge" w ithout a dditional facilities. Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature ( the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the State treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to r educe M &O T ax r ates, br oadened t he S tate bus iness f ranchise ta x, m odified th e procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products ( HB 1 and other d escribed l egislation ar e co llectively r eferred t o h erein as t he "Reform Legislation"). The Reform Legislation generally became effective at the beginning of the 2006-07 fiscal year of each district. Possible Effects of Litigation and Changes in Law on District Bonds The Reform Legislation did not alter the provisions of Chapter 45, Texas Education Code, that authorizes districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service tax as security for payment of the Bonds. R eference is made, in particular, t o t he i nformation unde r t he he ading " THE B ONDS - Security and S ource of Payment" in th e O fficial Statement. In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past State funding systems. Among other possibilities, a district's boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. I n Edgewood IV, the Supreme Court stated that any future determination of unconstitutionality "would not, however, affect the district's authority to levy the taxes necessary t o r etire pr eviously i ssued bonds , but w ould instead r equire t he L egislature t o cu re t he s ystem's unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions" (collectively, the "Contract C lauses"). C onsistent w ith t he C ontract C lauses, i n t he ex ercise o f i ts p olice p owers, t he S tate m ay m ake s uch modifications in the terms and conditions of contractual covenants related to the payment of the Bonds as are reasonable and necessary for the attainment of important public purposes. Although, as a m atter of l aw, t he B onds, upon i ssuance a nd de livery, w ill be e ntitled t o t he pr otections a fforded pr eviously existing contractual obligations under the Contract Clauses, the District can make no r epresentations or predictions concerning the ef fect o f f uture l egislation o r litig ation, o r h ow s uch le gislation o r f uture c ourt o rders m ay a ffect th e D istrict's f inancial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address s chool funding in Texas could substantially adversely affect t he f inancial c ondition, r evenues or ope rations of t he District, as noted herein, the District does not anticipate that the security for payment of the Bonds, specifically, the District's obligation to levy a n unl imited de bt s ervice t ax a nd t he P ermanent S chool F und guarantee of t he Bonds would be adversely affected by any such litigation or legislation. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM."

CURRENT PUBLIC SCHOOL FINANCE SYSTEM

General The following description of the F inance System i s a summary of the Reform Legislation and the changes made by the State Legislature to the Reform Legislation since i ts enactment, including modifications made during the regular session of the 81st Texas L egislature (the "2009 Regular Legislative Session"). F or a m ore c omplete de scription of s chool f inance a nd f iscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 t hrough 46, as amended. The R eform L egislation, which g enerally b ecame ef fective at t he b eginning o f t he 2 006-07 f iscal year o f each d istrict, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded were intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately 11% in fiscal year 2006-07 and approximately another 22% in f iscal year 2007 -08, s ubject t o l ocal r eferenda t hat may i ncrease l ocal M &O T ax l evies, t hus o ffsetting a p art o f t he

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compression in local M&O Tax levies (see "TAX INFORMATION – Tax Rate Limitation"). Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board projected that the Reform Legislation would be underfunded f rom t he R eform L egislation r evenue sources by a c umulative a mount of $25 bi llion ov er f iscal years 2006 -07 through 2010-11, however State surpluses have been appropriated to offset the revenue shortfall in fiscal year 2006-07 and for the 2008-09 and 2010-11 State biennia. Under the Finance System, as modified during the 2009 Regular Legislative Session, a school district that imposes an M&O Tax at least equal to the product of the "state compression percentage" (as defined below) multiplied by the district's 2005-06 M&O Tax rate is entitled to at least the amount of State funding necessary to provide the district with the sum of (A) the amount of State and local revenue per weighted average daily attendance ("WADA") to which the school district would be entitled for the 2009-10 school year as calculated under the law as i t existed on J anuary 1, 2009, (B) an additional $120 pe r WADA, (C) an amount to which the district is entitled based on supplemental payments owed to any tax increment fund for a reinvestment zone and (D) any amount due to the district to the extent the district contracts for students residing in the district to be educated in another district (i.e., tuition allotment). If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the 2005-06 fiscal year, t he di strict's guaranteed a mount i s r educed i n a pr oportionate a mount. I f a di strict would receive more State and local revenue from the Tier One and Tier Two al lotments (each as hereinafter defined) and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to "compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the 2006-07 fiscal year. The state compression percentage is a basic component of the funding formulas. The state compression percentage was 66.67% for fiscal years 2007-08, 2008-09 and 2009-10. For fiscal year 2010-11 and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a d istrict is able to reduce its M&O Tax rate for that year, as compared to such district's adopted M&O Tax rate for the 2005-06 fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made a vailable by t he L egislature f or s chool di strict pr operty t ax r elief. F or f iscal y ear 2 010-11, t he Commissioner determined the State compression percentage to be 66.67%. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the "equalized wealth level" (described under "Wealth Transfer Provisions") to reduce their wealth to the equalized wealth level or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for "enrichment" of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ("Tier One") and (2) State guaranteed revenues per student for each cent of local tax effort that exceeds the compressed tax rate to provide operational funding for an "enriched" educational program ("Tier Two"). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ("EDA"), the Instructional Facilities Allotment ( "IFA"), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. T ier One and Tier Two al lotments and p rior year IFA al lotments are generally required t o be funded e ach year by the Legislature. E DA an d future year I FA al lotments supplement l ocal ad valorem t axes levied for debt service on bonds i ssued by di stricts t o c onstruct, a cquire a nd i mprove f acilities a nd a re g enerally s ubject t o appropriation by the Legislature. S tate funding a llotments may b e a ltered and adjusted to p enalize school d istricts with h igh administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will s ubsidize l ocal t ax r eceipts at a t ax r ate o f t he s tate co mpression percentage multiplied by the lesser of (a) $1.50 or (b) the district's 2005 M&O Tax to ensure that the cost to a district of the basic program is met. T ier Two a llotments a re in tended to g uarantee e ach s chool district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay.

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The cost of the basic program is based on a n allotment per s tudent known as the "Tier One Basic Allotment." The Tier One Basic Allotment is a djusted for a ll d istricts b y a c ost-of-living factor known as the "cost of education index." I n addition, a district-size adjustment further ad justs the Tier One Basic Allotment for districts that ( i) have not more than 1,600 students in average daily attendance (with alternative formulas established for such districts that contain at least 300 square miles and those districts that contain less than 300 square miles) or (ii) offer a kindergarten through grade 12 program and have less than 5,000 students in average daily attendance. For fiscal year 2007-08, the Tier One Basic Allotment was $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort, and for fiscal year 2008-09, the Tier One Basic Allotment was $3,218 based upon a guaranteed yield of $37.42 for each cent of tax effort. For the 2009-10 through 2012-13 school years, the basic allotment is set at the greater of $4,765 or 1.65% of the s tatewide average p roperty value per s tudent in WADA and, thereafter, at the l esser o f $4,765 or that amount multiplied by the quotient of the district's compressed tax rate divided by the State maximum compressed tax r ate of $1. 00. T his i ncrease w as due t o c hanges i n l aw ef fected b y t he L egislature d uring t he 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 R egular Legislative Session limits, beginning with 2010-11 school year, the annual increases in a district's M&O Tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the 2009-10 school year, the revenue increases are limited to the funds that a district would have r eceived unde r t he s chool f inance f ormulas a s t hey e xisted on J anuary 1, 2009, pl us a n a dditional $350 pe r WADA, excluding Tier Two funds. Tier Two currently provides two levels of enrichment with different guaranteed yields depending on the district's local tax effort. For f iscal year 2 009-10, t he f irst s ix cen ts o f t ax ef fort t hat exceeds t he co mpressed t ax r ate will generate a g uaranteed yield equivalent to (a) that of the Austin Independent School District or (b) the amount of tax revenue per WADA received on that tax effort i n t he p revious y ear, w hichever i s g reater. T he s econd l evel o f T ier T wo i s g enerated b y tax effort that exceeds the compressed tax rate plus six cents and has a guaranteed yield per penny of local tax effort of $31.95. Before 2009-10, Tier Two consisted of a district's M&O Tax levy above $0.86. For fiscal year 2008-09, State funding to equalize local M&O Tax levies above $0.86, up to a district's compressed rate, was funded at a guaranteed yield of $37.42 per student in WADA for each cent of tax effort; any amount above a district's compressed rate up to $0.04 was funded at a guaranteed yield of $50.98 per WADA for each cen t o f t ax ef fort; an d an y t ax effort associated w ith a t ax ap proved b y v oters at a r ollback el ection w as f unded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district's compressed rate plus $0.04. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion of the State compression percentage. The IFA guarantees each school district a specified amount per student (the "IFA Guaranteed Yield") in State and local funds for each c ent of t ax e ffort t o pa y pr incipal of a nd i nterest on e ligible bonds i ssued t o c onstruct, a cquire, r enovate or i mprove instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in t he bi ennium i n w hich t he bonds a re i ssued; or ( 2) t he greater of (a) $100,000 or ( b) $250 m ultiplied by t he number of students i n av erage d aily at tendance. T he I FA i s al so av ailable f or l ease-purchase a greements a nd r efunding bonds meeting certain prescribed conditions. I f the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing d istricts. O nce a d istrict receives an IFA award for bonds, i t is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were i ssued. I n 2007, t he Legislature a ppropriated funds for out standing s chool di strict bonds t hat qua lified i n pr ior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State's 2008-09 fiscal biennium; how ever, t he T exas E ducation A gency ha s i ndicated t hat i t i ntends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the "EDA Yield"), which for the 2009-11 State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 i n revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. E ffective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district's bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final school year of the preceding State fiscal biennium or (ii) levied taxes to pay the principal of and interest on the bonds for

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that school year. Access to EDA funding will be determined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. T he new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district's Tier Two State funding. Local Revenue Sources - Property Tax Authority The primary source of local funding f or s chool di stricts i s a d v alorem t axes l evied against t he l ocal t ax b ase. T he f ormer provision of the Education Code, Section 45.003, that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed value, was replaced by the Reform Legislation with a f ormula using the State compression percentage so that the maximum tax rate t hat may be a dopted by a di strict i n a ny f iscal year i s l imited ba sed on the amount of State funds to be received by the District in that year. F or the 2006-07 and 2007-08 f iscal years, d istricts were permitted to generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts generated equalized funding dollars from the State under the Tier Two program. I n fiscal year 2008-09 and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing e ffort s o l ong a s t he v oters a pprove s uch t ax r ate increase. M any s chool d istricts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service t ax t hat m ay b e u nlimited i n r ate. S ee " TAX I NFORMATION-Tax R ate Limitations" he rein. T he g overning body of a s chool di strict c annot a dopt a n a nnual t ax rate which exceeds the district's "rollback tax rate" without submitting such proposed tax rate to the voters at a referendum election. See "TAX INFORMATION-Public Hearing and Rollback Tax Rate" herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted s tudent ( "wealth pe r s tudent") f or each school year t o n o g reater t han t he " equalized w ealth l evel", d etermined i n accordance with a formula set forth in the Reform Legislation. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The w ealth l evel t hat r equired w ealth r eduction m easures f or f iscal y ear 2 006-07 was $319, 500 pe r s tudent i n av erage d aily attendance. For 2007-08 that wealth level was increased to $364,500 per student in average daily attendance with respect to that portion of a d istrict's M&O tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district's local tax effort that was beyond its compressed rate plus $.04. F or 2008-09 that wealth level was further increased to $374,200 per student in average daily attendance with respect to that portion of a district's M&O Tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district's local tax effort that was beyond i ts compressed rate plus $0.06. F or 2009-10 that wealth l evel has been increased to $476,500 per s tudent in average daily at tendance with r espect t o t hat p ortion o f a d istrict's M &O Tax ef fort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district's local tax effort that is beyond its compressed rate plus $.06. Property wealthy districts may also be able to levy up t o an additional six cents per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) A district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O Taxes or both M&O Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property-poor district. ( 4) A d istrict m ay e ducate s tudents f rom o ther d istricts who transfer to the district without charging tuition to s uch students.

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A district has three options to transfer tax revenues from its e xcess p roperty wealth. F irst, a d istrict w ith e xcess wealth per student may purchase "attendance credits" by paying the tax revenues to the State for redistribution under the Foundation School Program. S econd, i t can contract to disburse the tax revenues to educate s tudents in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving e lections by the transferring d istrict's qualified voters. T hird, a wealthy d istrict may reduce its wealth by paying tuition to a non-wealthy district for the education of students that reside in the wealthy district. A district may not adopt a tax rate until its effective wealth per s tudent is the equalized wealth level o r less. I f a f inal court decision holds any of the preceding permitted remedial opt ions unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner. If a district fails to exercise a permitted option, the Commissioner must reduce the district's property wealth per student to the equalized w ealth l evel b y d etaching certain t ypes of pr operty f rom t he di strict a nd a nnexing t he pr operty t o a pr operty-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district's existing debt. Possible Effects of Wealth Transfer Provisions on the District's Financial Condition The District's wealth per student for the 2010-11 school year is less than the equalized wealth value. Accordingly, the District has not been required to exercise one of the permitted wealth equalization options. As a district with wealth per student less than the equalized wealth value, the District may benefit in the future by agreeing to accept taxable property or funding assistance from or a greeing t o c onsolidate w ith a pr operty-rich d istrict to e nable s uch d istrict to r educe its w ealth p er s tudent to th e permitted level. A district's wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District's wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district's combined property tax base, and the District's ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its out standing de bt ( including t he B onds) could be a ssumed by t he di strict t o which t he pr operty i s a nnexed, i n which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district. 82nd Texas Legislature in Special Session – Potential Impact of Texas Budget on the District

The Texas Legislature convened in its 82nd Regular Session (the “Regular Session”) on January 11, 2011, and ended the Regular Session on May 30, 2011. During the Regular Session, the Legislature enacted a budget that cuts $4 billion from public school finance for the 2012-13 State fiscal biennium, as compared to the budget for the 2010-11 State fiscal biennium. The cuts were made in light of a pr ojected S tate de ficit of up t o $27 bi llion f or t he 2012 -13 S tate f iscal b iennium, ba sed upon t he S tate Comptroller’s bi ennial r evenue e stimate of J anuary 10, 2011. H owever, during the Regular Session, the Legislature did not adopt implementing legislation providing for funding the public school finance system for the upcoming biennium. As a result, the Governor called the Legislature into special session on M ay 31, 2011 ( the “First Called Session”). E ach called session is limited in duration to th irty d ays a nd is r estricted to c onsidering le gislation o n m atters s pecified b y th e Governor. T he Governor’s call of the First Called Session includes the consideration of legislation relating to fiscal matters necessary for the implementation of the budget for the 2012-13 State fiscal biennium, including measures relating to funding the public school finance system.

During the Regular Session, Senate Bill 1811 (“SB 1811”) was introduced to address funding for various State budgetary items, but it was not adopted. In its final form, SB 1811 would have reduced State funding for public schools in the State by $2 billion for each fiscal year of the upcoming biennium. SB 1811 would have reduced State funding by $2 billion in fiscal year 2012 by applying an across the board percentage c ut f or a ll s chool di stricts a nd us ing $830 m illion of F ederal f unds av ailable f or education jobs in the State in 2012. SB 1811 provided for an additional $2 bi llion funding cut for public schools in fiscal year 2013, of which $500 million would be made proportionately to all school districts, and another $1.5 billion would have been cut by reducing the target revenue hold harmless funding provided in HB 1 adopted by the Legislature in 2007. Such cuts to target revenue hold harmless provisions of the current Finance System would have impacted higher spending districts that have a higher target revenue more significantly than districts with lower target revenues.

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Senate Bill 1 (“SB 1”) has been introduced in the First Called Session and contains similar school finance provisions as those found in SB 1811. While the District cannot express a view on what measures the Texas Legislature will ultimately enact during the First Called Session, or in any subsequent special session that may be required, if SB 1 is enacted, the District, like other districts in the State, would experience a loss of State funding for the 2012-13 State fiscal biennium as further described below.

Any legislation pertaining to public school finance that may be enacted during the remainder of the 82nd State Legislature will likely not become effective until the start of the upcoming State biennium, and the Finance System described under “CURRENT PUBLIC FINANCE S YSTEM” w ill a pply unt il t he e nd of t he c urrent S tate f iscal y ear, on A ugust 31, 2011. B ased upon financial p rojections o f th e im pact o f SB 1811, that were released by t he T exas H ouse o f R epresentatives C ommittee o n Appropriations on May 28, 2011, if legislation similar to SB 1811, such as SB 1, should ultimately be enacted, State funding to the District could be reduced by approximately 3.3% during the 2012 fiscal year and 8.3% during the 2013 fiscal year.

TAX INFORMATION Tax Rate Limitations A school district is authorized to levy an M&O Tax subject to approval of a proposition submitted to district voters under Section 45.003(d) of the T exas E ducation C ode, as amended. T he maximum M &O T ax r ate t hat may b e l evied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. T he maximum voted M&O Tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on October 2, 1965 under and pursuant to the provisions of Section 45.003, as amended, Texas Education Code. The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50, or such lower rate as described in the preceding paragraph, and (B) the sum of (1) the rate of $0.17, and (2) the product of the "state compression percentage" multiplied by $1.50. T he State compression percentage was 66.67% for fiscal years 2007-08, 2008-09 and 2009-10. For fiscal year 2010-11 and thereafter, the Commissioner is required to determine the State compression percentage for each fiscal year which is based on the amount of State funds appropriated for distribution to the District for the current fiscal year. F or fiscal year 2010-11, the Commissioner has determined to maintain the State compression percentage at 66.67%. F or a more detailed description of the State compression percentage, see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General". F urthermore, a s chool district cannot annually increase its tax rate in excess of the district's "rollback tax rate" without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. See "TAX INFORMATION – Public Hearing and Rollback Tax Rate." A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of a proposition submitted to the voters under Section 45.003(b)(1), Texas Education Code, as amended, which provides a tax unlimited as to rate or amount to support of school district bonded indebtedness (see "THE BONDS - Security and Source of Payment"). Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on ot her outstanding "new debt" of t he d istrict, f rom a t ax l evied a t a r ate of $0. 50 pe r $100 of a ssessed v aluation be fore bonds m ay be i ssued. I n demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduces the district's local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. T axes levied to pay debt service on bond s approved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued to refund s uch bonds ) a re not s ubject t o t he foregoing t hreshold t ax r ate t est. I n a ddition, t axes l evied to pay refunding bonds issued pursuant to Chapter 1207, Texas Government Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds are included in the calculation of the $0.50 tax rate test as applied to subsequent issues of "new debt." The B onds a re ”new debt”, and therefore, are subject t o t he $ 0.50 t hreshold t ax r ate t est. U nder cu rrent l aw, a d istrict may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier o f t he t ax y ear f ive y ears af ter t he cu rrent t ax y ear o r t he t ax y ear i n w hich t he f inal payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax at a r ate g reater t han $0. 50 pe r $100 of v aluation t o pa y f or bonds s ubject t o t he t est, t hen f or s ubsequent bond issues, t he Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used projected property values to satisfy this threshold test. DEBT LIMITATIONS... Under State law, there is no explicit bonded indebtedness limitation, although the tax rate limits described above under “TAX RATE LIMITATIONS” effectively impose a limit on the incurrence of debt.

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ROLLBACK TAX RATE AND ELECTION… In setting its annual tax rate, the governing body of a school district generally cannot adopt a t ax r ate ex ceeding t he d istrict's " rollback t ax r ate" without approval by a majority o f th e voters voting a t an e lection approving t he hi gher r ate. T he t ax r ate c onsists of t wo c omponents: ( 1) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. For the 2007-08 fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district's "state compression percentage" for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of (1) the district's effective maintenance and operations tax rate, (2) the product of the district's state compression percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a description of the "state compression percentage"). If for the preceding tax year a district adopted an M&O Tax rate that was less than its effective M&O Tax rate for that preceding tax year, the district's rollback tax f or t he cu rrent y ear i s cal culated as i f t he d istrict h ad ad opted an M &O T ax r ate f or t he p receding t ax y ear equal to its effective M&O Tax rate for that preceding tax year. The "effective maintenance and operations t ax rate" for a s chool d istrict i s the t ax rate that, applied to the cu rrent t ax values, would provide local maintenance and operating funds, when added to S tate funds to be di stributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. Section 26.05 of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section 44.004 of the Texas Education Code. Section 44.004(e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or t he l anguage a nd f ormat r equirements of s uch not ice a s s et f orth i n S ection 44.004(b), (c) and (d) and if such failure to comply was not in good faith. Beginning September 1, 2009, a district may adopt its budget after adopting a tax rate for the tax year in which the fiscal year covered by the budget begins if the district elects to adopt its tax rate before receiving the certified appraisal roll. A district that adopts a t ax r ate be fore a dopting i ts budget must hol d a publ ic he aring on t he pr oposed t ax r ate followed by another public hearing on the proposed budget rather than holding a single hearing on the two items.

AD VALOREM TAXATION

AD VALOREM TAX LAW . . . The appraisal of property within the District is the responsibility of the Brooks County Appraisal District (the "Appraisal District"). Ex cluding agricultural and open-space land, which may be taxed on t he basis of productive capacity, the Appraisal District is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of i ts market value and i s prohibited f rom applying any assessment r atios. In de termining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount that would not exceed either the lesser of (1) the property’s market value in the most recent tax year in which i t was assessed or (2) the sum of (a) 10% of the property’s appraised value in the preceding tax year, plus (b) the property’s appraised value the preceding tax year, plus (c) the market value of a ll new improvements to the property. Effective January 1 , 2010, State law requires the appraised value of a residence homestead to be based solely on the property’s value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. The value placed upon property within the Appraisal District is subject to r eview by a n Appraisal R eview B oard, c onsisting of t hree members a ppointed by t he B oard of D irectors of t he Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The District may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the District by petition filed with the Appraisal Review Board. Reference is made to the Texas Tax Code for identification of property subject to the District's taxing authority, property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem tax purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes.

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Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions from property taxes, the valuation of timber land, agricultural and open-space lands at productivity value, and the exemption of certain property exempt property from ad valorem taxation. Certain residence homestead exemptions from ad valorem taxes for public school purposes are mandated by Section 1-b, Article VIII, and State law and apply to the market value of residence homestead in the following sequence:

$15,000; and an additional $10,000 for t hose 65 y ears of a ge or ol der, or t he di sabled. A pe rson over 65 a nd di sabled may r eceive onl y one $10, 000 exemption, and only one such exemption may be received per family, per residence homestead. State law also mandates a freeze on taxes paid on residence homesteads of persons 65 years of age or older which receive the $10,000 exemption. Such residence homesteads shall be appraised and taxes calculated as on any other property, but taxes shall never exceed the amount imposed in the first year in which the property r eceived t he $10, 000 e xemption. T he f reeze on a d v alorem t axes on t he hom esteads of persons 65 years of age or older for general elementary and secondary public school purposes is also transferable to a different residence homestead. Also, the surviving spouse of a taxpayer who qualifies for the freeze on ad valorem taxes is entitled to the same exemption so long as (i) the taxpayer died in a year in which he or she qualified for the exemption, (ii) the surviving spouse was at least 55 years of age when the taxpayer died and (iii) the property was the residence homestead of the surviving spouse when the taxpayer died and the property remains the residence homestead of the surviving spouse. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons 65 years of age or over or of disabled persons to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year (see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM – General” herein). The school property tax limitation provided by the constitutional amendment and enabling legislation apply to the 2007 and subsequent tax years. In addition, under Section 1 -b, Article VIII and State law, the governing body of a political subdivision (including the District), at its option, may grant: (1) An exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; and

(2) An exemption of up to 20% of the market value of residence homesteads; minimum exemption of $5,000. In the case of residence homestead exemptions granted under Section 1-b, Article VIII ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a d eceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to $12,000. House Bill 3613, enacted by the 81st Texas Legislature during its Regular Session, added Section 11.131 to the Texas Tax Code. This law, effective January 1, 2009, states that a disabled veteran who receives from the United States Department of Veterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual un employability is entitled to a n e xemption f rom ta xation o f th e to tal a ppraised v alue o f th e v eteran’s r esidence homestead. Effective January 1, 2004, the freeze on taxes paid on residence homesteads of persons 65 years of age and older was extended to include t he r esident hom esteads of “ disabled” pe rsons, i ncluding t he r ight t o t ransfer t he f reeze t o a different residence homestead. A “disabled” person is one who is “under a disability for purposes of payment of disability insurance benefits under the Federal Old Age, Survivors and Disability Insurance”. Article VIII provides that eligible owners of both agricultural land (Section I-d) and open-space land (Section 1-d-1), including open-space l and devoted to farm or r anch purposes or open-space l and devoted to t imber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1.

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The f reeze o n ad valorem t axes o n t he h omesteads o f p ersons 6 5 years o f age o r o lder for general el ementary and secondary public school purposes is also transferable to a different residence homestead. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax the property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article V III, S ection 1 -j of the T exas C onstitution pr ovides f or " freeport pr operty" t o be e xempted f rom ad v alorem t axation. Freeport property is defined as goods detained in Texas for 175 da ys or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in-transit”, defined by a new provision to the Tax Code effective for tax years 2008 and thereafter, as personal property acquired or imported i nto T exas a nd t ransported t o a nother l ocation i n t he S tate or out side of t he S tate w ithin 175 da ys of t he da te the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the first year in which goods-in-transit are proposed to be taxed, and after holding a public hearing, to take official action to tax goods-in- transit during the following tax year and to c ontinue t o t ax t hose g oods unt il t he a ction a uthorizing s uch t axation i s r escinded or repealed. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property.

A district and other taxing bodies may create a t ax increment financing district (“TIF”) within the territory with defined boundaries and e stablish a ba se value of t axable pr operty i n t he TIF a t t he t ime of i ts creation. Overlapping taxing units, including school districts, may agree with the city to contribute all or part of future ad valorem taxes levied and collected against the “incremental value” (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of cer tain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing t axing uni ts. E ffective S eptember 1, 2001, s chool di stricts m ay not e nter i nto t ax a batement a greements unde r t he general s tatute th at p ermits m unicipalities a nd c ounties to in itiate ta x a batement a greements. C redit w ill n ot be given by the Commissioner of Education in determining a district’s property value wealth per student for (1) the appraisal value, in excess of the “frozen” value, of property that is located in a t ax increment financing zone created after May 31, 1999 (except in certain limited circumstances where the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units that levy ad valorem taxes in the zone of i ts intention to create the zone and the zone is created and has its final project and financing plan approved by the municipality pr ior to August 31, 1999) or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, 1993. N otwithstanding the foregoing, in 2001, the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for certain school districts to grant tax abatements on certain eligible property to encourage economic development in their tax base and provides additional State funding for each year of such tax abatement in the amount of the tax credit provided to the taxpayer by the district. PROPERTY TAX ASSESSMENT AND TAX PAYMENT . . . Property within the District is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily oil price of oil and gas for the prior year. Taxes become due on October 1 of the same year and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1.

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PENALTIES AND INTEREST . . . Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Penalty Month (% per annum) Interest Total February 6% 1% 7% March 7% 2% 9% April 8% 3% 11% May 9% 4% 13% June 10% 5% 15% July 12% 6% 18% After July the penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, up to 20% attorney's collection fee is added to the total tax penalty and interest charge. Taxes levied by the District are also a personal obligation of the owner of the property for the period of ownership of the property. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the District, having the power to tax the property. The District's tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the at tachment o f the t ax l ien. P ersonal p roperty under cer tain ci rcumstances i s subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. The ability of the District to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, adverse market conditions, t axpayer r edemption r ights, or bankruptcy proceedings which restrain the collection of a taxpayer's debt. Federal bankruptcy law provides that an automatic stay of actions by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT . . . T he D istrict d oes n ot l evy a t ax ag ainst the value of residence homesteads exempted from ad valorem taxes as permitted on a local option basis. The Board of Trustees of the District has not elected to grant an additional exemption of residence homestead of a person 65 years of age or older and certain disabled persons. The District does not presently tax non-business vehicles. The District has not taken official action to tax "freeport property" located within the District. The Brooks County Tax Office collects taxes for the District. The District does not allow split payments of tax bills. The District does not allow discounts for early payment of taxes.

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TABLE 1 - EXEMPTIONS AND TAX SUPPORTED DEBT

2010 Market Valuation Established by Brooks County Appraisal District (1) 1,562,034,237$

Less Exemptions/Reductions at 100% Market Value:Homestead Exemptions 22,832,044 Over-65 Homestead Exemptions 4,373,014 Local Optional Over-65 Exemptions 1,702,032 100% disabled or unemployable verterns homestead exemptions 451,024 Veterans Exemptions 233,009 Productivity Loss 728,807,048 Pollution Controll Exemption 592,960 10% Residential Cap 709,313 759,700,444$

2010 Taxable Assessed Valuation before Freeze Loss 802,333,793$

Freeze Loss with local optionla deducted: (3,438,928)

2010 Taxable Assessed Valuation (after freeze) 798,894,865$

Debt Payable from Ad Valorem Taxes

Unlimited Tax Refunding Bonds, Series 2006 2,809,429$ The Bonds (2) 35,155,000 Funded Debt Payable from Ad Valorem Taxes 37,964,429$

Interest and Sinking Fund Balance (as of 08-31-10) 34,803$

Ratio Funded Tax Supported Net Debt to Taxable Assessed Valuation (after freeze) 4.75%

2011 Estimated Population 6,079 Per Capita Taxable Assessed Valuation 131,419$

Per Capita Net Funded Debt 6,245$

________ (1) Source: Texas Comptroller of Public Accounts, Property Tax Division. (2) Preliminary, subject to change.

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TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY (1)

% %Category Amount Amount of Total Amount of Total

Real, Residential, Single-Family 54,459,610$ 3.49% 54,487,340$ 3.37% 52,535,941$ 4.00%Real, Residential, Multi-Family 146,363 0.01% 1,110,829 0.07% 1,000,440 0.08%Real, Vacant Lots/Tracts 3,616,086 0.23% 3,613,659 0.22% 3,717,510 0.28%Real, Acreage (Land Only) 784,358,880 50.21% 770,091,249 47.65% 373,070,859 28.41%Real, Farm and Ranch Improvements 29,867,228 1.91% 29,150,484 1.80% 21,961,688 1.67%Real, Commercial 31,474,711 2.01% 31,750,891 1.96% 31,381,551 2.39%Real, Industrial 232,570 0.01% 232,570 0.01% 376,490 0.03%Real, Minerals, Oil & Gas 533,580,100 34.16% 599,877,230 37.12% 711,739,640 54.21%Real and Tangible Personal, Utilities 60,323,950 3.86% 61,556,210 3.81% 65,318,240 4.97%Tangible Personal, Commercial 11,600,403 0.74% 12,930,842 0.80% 12,224,292 0.93%Tangible Personal, Industrial 49,024,020 3.14% 48,155,480 2.98% 36,675,170 2.79%Tangible Personal, Mobile Homes 3,350,316 0.21% 3,197,822 0.20% 2,952,991 0.22%Tangible Personal, Other - 0.00% - 0.00% - 0.00%Total Appraised Value Before Exemptions 1,562,034,237$ 100.00% 1,616,154,606$ 100.00% 1,312,954,812$ 100.00%Less: Freeze Loss (3,438,928) (3,438,928) (2,369,253) Less: Total Exemptions/Reductions 759,700,444 747,866,989 355,065,732 Net Taxable Assessed Valuation 798,894,865$ 864,848,689$ 955,519,827$

2008% %

Category Amount of Total Amount of TotalReal, Residential, Single-Family 54,974,087$ 4.32% 50,447,860$ 3.71%Real, Residential, Multi-Family 999,967 0.08% 1,000,420 0.07%Real, Vacant Lots/Tracts 3,758,076 0.30% 3,574,120 0.26%Real, Acreage (Land Only) 371,971,468 29.23% 288,061,280 21.16%Real, Farm and Ranch Improvements 20,606,292 1.62% 19,444,090 1.43%Real, Commercial 27,186,238 2.14% 26,847,210 1.97%Real, Industrial 1,791,180 0.14% 1,636,180 0.12%Real, Minerals, Oil & Gas 684,767,506 53.80% 841,699,405 61.83%Real and Tangible Personal, Utilities 56,937,510 4.47% 57,517,540 4.23%Tangible Personal, Commercial 10,201,597 0.80% 10,736,920 0.79%Tangible Personal, Industrial 38,634,010 3.04% 55,937,380 4.11%Tangible Personal, Mobile Homes 920,510 0.07% 4,394,170 0.32%Tangible Personal, Other - 0.00% - 0.00%Total Appraised Value Before Exemptions 1,272,748,441$ 100.00% 1,361,296,575$ 100.00%Less: Freeze Loss (1,469,949) (2,115,509) Less: Total Exemptions/Reductions 356,946,001 272,789,120 Net Taxable Assessed Valuation 914,332,491$ 1,086,391,946$

2010

2007

2009

Taxable Appraised Value for the Fiscal Year Ending August 31,

2011

% of Total

Taxable Appraised Value for the Fiscal Year Ending August 31,

________ (1) Source: Texas Comptroller of Public Accounts, Property Tax Division.

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TABLE 3 - VALUATION AND TAX SUPPORTED DEBT HISTORY

Fiscal Net Taxable Funded Debt Ratio FundedYear Taxable Assessed Outstanding Debt to Funded

Ended Estimated Assessed Valuation At End Taxable Assessed Debt31-Aug Population Valuation (1) Per Capita of Year Valuation Per Capita

2002 7,315 429,226,741$ 58,678$ 3,835,000$ 0.89% 524$ 2003 7,238 532,311,502 73,544 3,875,000 0.73% 535 2004 6,991 507,697,353 72,622 3,660,000 0.72% 524 2005 6,900 686,638,013 99,513 3,565,000 0.52% 517 2006 6,899 799,671,410 115,911 3,464,429 0.43% 502 2007 6,801 1,086,391,946 159,740 3,424,429 0.32% 504 2008 6,461 914,332,491 141,516 3,284,429 0.36% 508 2009 6,343 955,519,827 150,642 3,134,429 0.33% 494 2010 6,156 864,869,509 140,492 2,974,429 0.34% 483 2011 6,079 798,894,865 131,419 37,964,429 (2) 4.75% 6,245

___________ (1) Source: T he valuations shown are the certified Taxable Assessed Valuations reported annually in September to the Property Tax Board. The

valuations are subject to change during the ensuing year due to settlement of contested valuations or other similar matters. (2) Preliminary, subject to change. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY

FiscalYear

Ended Tax Local Debt Tax31-Aug Rate (1) Maintenance Service Levy Current Total

2002 1.4850$ 1.3900$ 0.0950$ 6,115,041$ 93.59% 101.95%2003 1.4590 1.3870 0.0720 7,972,675 95.80% 99.60%2004 1.4970 1.4500 0.0470 7,793,154 95.31% 98.36%2005 1.5350 1.5000 0.0350 8,294,346 98.28% 100.87%2006 1.2668 1.2308 (2) 0.0360 8,894,522 98.19% 99.62%2007 1.4273 1.3938 0.0335 11,831,619 97.25% 98.82%2008 1.3027 1.2761 0.0266 9,495,427 96.55% 99.96%2009 1.0395 1.0140 0.0255 10,223,956 96.08% 99.12%2010 1.0700 1.0400 0.0300 9,342,874 96.09% 98.77%2011 1.0714 1.0400 0.0314 9,294,201 In process of collection

% Collections

___________ (1) The levies shown are those reported annually in September to the State Property Tax Board. The levies are subject to change during the ensuing

year due to settlement of contested valuations, etc. (2) The de clines i n t he D istrict’s M &O T ax f or t he 2006/ 07 a nd 2007/ 08 f iscal years a re a f unction of H ouse Bill 1 adopted b y t he T exas

Legislature in May 2006. See “STATE A ND L OCAL F UNDING OF S CHOOL DI STRICTS I N T EXAS” a nd “ CURRENT P UBLIC SCHOOL FINANCE SYSTEM” herein.

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TABLE 5 - TEN LARGEST TAXPAYERS

2010 Assessed % of AssessedName Nature of Property Valuation Valuation

Exxon Mobile Corp. Oil & Gas 113,531,150$ 14.21%Smith Production Inc. Oil & Gas 42,142,120 5.28%Tecpetrol Operating LLC Oil & Gas 32,340,660 4.05%Coronado Energy E&P Company LLC Oil & Gas 31,548,170 3.95%Hilcorp Energy Company Oil & Gas 29,873,190 3.74%LMBI O&G TX LP Oil & Gas 27,318,620 3.42%Pogo Producing Co LLC Oil & Gas 22,692,760 2.84%AEP Texas Central Company Real Estate 19,402,460 2.43%Bass Lee M Inc. Oil & Gas 18,974,430 2.38%Brigham Oil & Gas Oil & Gas 15,186,210 1.90%

353,009,770$ 44.19%_______Source: Comptroller of Public Accounts - Property Tax Division

TAX VALUE CONCENTRATION . . . As shown in "Table 2 – Taxable Assessed Valuation by Category" and reflected on "Table 5 – Ten Largest Taxpayers", a significant p ercentage o f t he ap praised v alue i n t he D istrict i s co mprised o f m ineral p roperty an d r elated business activities. Fluctuations in the price of oil and gas affect the market value of such properties and can result in changes in the taxable v alue of s uch pr operties. A dverse de velopments i n e conomic c onditions, e specially i n the oil and gas industries could adversely impact the businesses that own such properties and the tax values in the District. I f any major taxpayer were to default in the payment of taxes, the ability of the District to make timely payment of debt service on the Bonds will be dependent on its ability to enforce a nd liq uidate its ta x lie n, w hich is a tim e-consuming pr ocess, or t o f und de bt s ervice pa yments f rom ot her r esources, i f available. See "THE BONDS – Bondholders’ Remedies" and "AD VALOREM TAXATION" in the Official Statement. TABLE 6 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing bodies within the territory of the District are paid out of ad valorem taxes levied by such entities on properties within the District. Such entities are independent of the District and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ("Tax Debt") was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no pe rson should rely upon s uch information as being accurate or complete. F urthermore, certain of the entities listed may have issued additional bonds since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the District.

District's2010/2011 Overlapping Authorized

Taxable 2010/2011 Total Estimated Funded Debt But UnissuedAssessed Tax Funded % As Of Debt As Of

Taxing Jurisdiction Valuation (2) Rate Debt Applicable 06/1/11 09/01/10Brooks County 807,896,259$ 0.56230$ 2,965,000$ 100.00% 2,965,000$ -$ Brooks County ISD 798,894,865 1.07140 37,964,429 (1) 100.00% 37,964,429 - Total Direct and Overlapping G.O. Tax Debt 40,929,429$

Ratio of Direct and Overlapping G.O. Tax Debt to Taxable Assessed Valuation 5.12%

Per Capita Overlapping G.O. Tax Debt 6,733$

___________ (1) Preliminary, subject to change. Includes the Bonds.

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DEBT INFORMATION TABLE 7 –TAX SUPPORTED DEBT SERVICE REQUIREMENTS

Fiscal FiscalYear Total % of Year

Ended Debt Service Principal Ended8/31 Principal Interest Total Principal Interest Total Requirements Retired 8/312011 54,471$ 228,862$ 283,333$ -$ -$ -$ 283,333$ 20112012 43,775 239,558 283,333 805,000 1,423,480 2,228,480 2,511,813 20122013 36,184 252,149 288,333 830,000 1,391,738 2,221,738 2,510,070 20132014 175,000 108,333 283,333 855,000 1,375,138 2,230,138 2,513,470 20142015 185,000 101,333 286,333 870,000 1,353,763 2,223,763 2,510,095 10.15% 20152016 190,000 93,933 283,933 895,000 1,332,013 2,227,013 2,510,945 20162017 200,000 86,333 286,333 920,000 1,305,163 2,225,163 2,511,495 20172018 210,000 78,333 288,333 950,000 1,272,963 2,222,963 2,511,295 20182019 215,000 69,933 284,933 985,000 1,239,713 2,224,713 2,509,645 20192020 225,000 61,333 286,333 1,020,000 1,205,238 2,225,238 2,511,570 25.46% 20202021 235,000 52,333 287,333 1,055,000 1,169,538 2,224,538 2,511,870 20212022 240,000 42,933 282,933 1,095,000 1,132,613 2,227,613 2,510,545 20222023 255,000 33,213 288,213 1,130,000 1,093,193 2,223,193 2,511,405 20232024 265,000 22,758 287,758 1,175,000 1,046,863 2,221,863 2,509,620 20242025 280,000 11,760 291,760 1,220,000 998,688 2,218,688 2,510,448 43.76% 20252026 - - - 1,560,000 948,668 2,508,668 2,508,668 20262027 - - - 1,625,000 884,708 2,509,708 2,509,708 20272028 - - - 1,695,000 818,083 2,513,083 2,513,083 20282029 - - - 1,760,000 748,588 2,508,588 2,508,588 20292030 - - - 1,835,000 676,428 2,511,428 2,511,428 66.09% 20302031 - - - 1,910,000 598,440 2,508,440 2,508,440 20312032 - - - 1,995,000 515,355 2,510,355 2,510,355 20322033 - - - 2,090,000 421,590 2,511,590 2,511,590 20332034 - - - 2,190,000 323,360 2,513,360 2,513,360 20342035 - - - 2,290,000 220,430 2,510,430 2,510,430 20352036 - - - 2,400,000 112,800 2,512,800 2,512,800 100.00% 2036

2,809,429$ 1,483,091$ 4,292,520$ 35,155,000$ 23,608,545$ 58,763,545$ 63,056,065$

(1) Preliminary, subject to change. Interest calculated at an assumed rate for purposes of illustration only.

Outstanding Debt Service Requirements The Bonds (1)

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TABLE 8 - ESTIMATED INTEREST AND SINKING FUND BUDGET PROJECTION Estimated Tax Debt Requirements, Fiscal Year Ending 8/31/2011 283,333$

Interest and Sinking Fund Balance at 9/1/2010 34,803$ Estimated Interest and Sinking Fund Tax Levy @ 96.09% Collections 241,045 275,848

Estimated Interest and Sinking Fund Balance as of 8/31/11 7,485$

Source: The District's audited financial statements

TABLE 9 - AUTHORIZED BUT UNISSUED UNLIMITED TAX BONDS After the issuance of the Bonds, the District will have no authorized but unissued debt. Preliminary, subject to change. TABLE 10 - OTHER OBLIGATIONS

2011 333,338$ 2012 240,938 2013 200,614 2014 27,899 2015 27,899

Total minimum lease payments 830,688$ Less: amount representing interest 85,190 Present value of minimum lease payments 745,498$

The effective interest rate on capital leases ranges from 3.9% to 8.0%.

Note: The above information was taken from the Issuer's 2010 Annual Financial Report.

Commitments under capitalized lease agreements for facilities and equipment provide for minimum future lease payments as of August 31, 2010, as follows:

Year Ending August 31:

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FINANCIAL INFORMATION

TABLE 11 - GENERAL FUND REVENUES AND EXPENDITURES

2010 2009 2008 2007 2006Program Revenues:Local and Intermediate Sources 9,321,388$ 10,131,264$ 10,109,986$ 14,623,926$ 11,917,563$ State Program Revenues 6,116,532 6,566,867 8,002,044 2,751,486 1,794,141 Federal Program Revenues 783,530 779,520 788,079 38,828 59,084 Total Revenues 16,221,450 17,477,651 18,900,109 17,414,240 13,770,788

Expenditures: Instruction 6,967,485 7,885,480 8,074,337 7,402,916 6,947,881 Instruction Resources and Media Services 190,118 207,951 231,157 82,034 69,246 Curriculum & Staff Development 114,309 109,822 171,992 115,892 71,167 Instructional Leadership 425,767 422,499 431,734 421,885 359,011 School Leadership 912,376 986,726 1,033,753 942,838 824,494 Guidance, Counseling & Evaluation Services 477,705 624,139 605,379 549,052 460,994 Health Services and social work 216,677 236,945 161,691 143,898 148,079 Student Transportation (Pupil) 493,687 532,567 481,024 680,363 473,618 Food Services 850,444 862,844 895,321 - - Curricular/Extracurricular Activities 743,637 853,991 964,596 848,918 725,252 General Administration 735,521 833,846 806,554 851,939 789,215 Plant Maintenance & Operation 2,201,619 2,324,032 2,532,001 2,312,257 2,053,016 Security & Monitoring Services 129,460 148,307 135,019 108,121 88,477 Data Processing - - - 23,803 20,265 Community Service - 197 6,084 12,004 18,007 Debt Service - Principal on Long Term Debt 280,591 341,910 311,935 248,464 295,500 Debt Service - Interest on Long Term Debt 51,747 66,941 70,205 75,348 77,540 Facilities Acquisition and Construction - 159,816 651,073 148,903 Payments to Shared Service Arrangements* 84,188 95,939 106,896 1,177,361 57,160 Capital Outlay 6,000 - 816,672 - - Contracted Instructional Services Between Public Schools 118,100 1,074,984 2,254,323 - - Bond Issuance Cost & Fees 51,750 78,990 61,433 - - Total Expenditures 15,051,181 17,847,926 20,152,106 16,648,166 13,627,825

Increase (Decrease) in Net Assets 1,170,269 (370,275) (1,251,997) 766,074 142,963

Other Financing Sources (Uses) 17,624 95,832 57,310 142,974 65,268

Net Change in Fund Balances 1,287,893 (304,613) (1,194,687) 909,048 143,753

Extraordinary Item - - 378,104 (137,381) -

Beginning Net Fund Balance 3,308,160 3,612,774 4,429,357 3,657,688 3,513,935 Ending Net Assets 4,596,053$ 3,308,160$ 3,612,774$ 4,429,355$ 3,657,688$

Year Ended August 31,

_______ Source: District’s audited financial statements.

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FINANCIAL POLICIES Basis of Accounting . . . The accounting policies of the D istrict s ubstantially c omply w ith th e r ules p rescribed in th e F inancial Accountability Systems Resource Guide, by the Texas Board of Education. These accounting policies conform to generally accepted accounting principles applicable to governments (see Appendix B - "Brooks County Independent School District Annual Financial and Compliance Report for the Fiscal Year Ended June 30, 2010"). General Fund Balance . . . The District's current consensus is to build up surplus and unencumbered funds equal to approximately 60 days of expenditures in the General Fund. Budgetary Procedures . . . The District policy is to begin budget preparations on the individual school level in January of each year. The principals work with the teachers to formulate a working budget, which then moves to the office of the Superintendent. After refinements a t th is level, th e b udget goes to th e Board where it is further refined and goes through publ ic hearings pr ior to f inal adoption in late August. Priorities are based on long-term and annual goals. INVESTMENTS The District invests its funds in investments authorized by Texas law in accordance with investment policies approved by the Board. Both state law and the District's investment policies are subject to change. LEGAL INVESTMENTS . . . U nder the Texas Public Funds Investment Act (the “Act”), the District is authorized to invest in (1) obligations, including letters of credit, of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies an d i nstrumentalities, ( 3) co llateralized m ortgage o bligations d irectly i ssued b y a f ederal ag ency o r instrumentality of the United States, the unde rlying s ecurity f or w hich i s g uaranteed by a n a gency or i nstrumentality of t he United States, (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by th e f ull f aith and credit o f, t he S tate o f T exas o r t he U nited S tates o r t heir r espective ag encies an d i nstrumentalities, ( 5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than “A” or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit and share certificates issued by a state or national bank domiciled in the State of Texas, a savings b ank d omiciled i n t he S tate o f T exas, o r a s tate o r f ederal cr edit union domiciled in the State of Texas, that are guaranteed or i nsured by t he F ederal D eposit I nsurance C orporation or its successor or the National Credit Union Share Insurance Fund or its successor, or are secured as to principal by obligations described in clauses (1) through (5), or in any other manner a nd a mount pr ovided by l aw f or D istrict de posits, ( 8) f ully c ollateralized r epurchase a greements t hat have a defined termination date, are fully secured by obligations described in clause (1), require securities be pledged to the District, held in the District’s name and deposited at the time the investment is made with the District or with a third party selected and approved by the District, and placed through a primary government s ecurities d ealer, as d efined b y t he F ederal R eserve, o r a f inancial institution doing business in the State of Texas, (9) a securities lending program that meets the following conditions: (i) the value of securities loaned under the program must be not less than 100 pe rcent collateralized, including accrued income; (ii) a loan made under the program must allow for termination at any time; (iii) a loan made under the program must be secured by: (A) p ledged securities de scribed by c lauses ( 1) t hrough ( 6); ( B) pl edged i rrevocable l etters of c redit i ssued by ba nks ( I) organized and existing unde r t he l aws of t he U nited S tates or a ny ot her s tate; a nd ( II) c ontinuously r ated by a t l east one nationally recognized investment rating firm at not less than A or its eq uivalent; o r ( III) cas h i nvested i n acco rdance with clauses (1) through (8); (iv) the terms of a loan made under the program must require that the securities being held as collateral be: (I) pledged to the investing entity; (II) be held in the investing entity's name; and (III) deposited at the time the investment is made with the District or with a third party selected by or approved by the District; (v) a loan made under the program must be placed through: (A) a primary government securities dealer, or (B) a financial institution doing business in this state; and (vi) an agreement to l end securities that i s executed under this section must have a t erm o f one year or less; (10) cer tain banker’s acceptances with the remaining term of 270 days or fewer, from the date of issuance, and will be, in accordance with their terms, liquidated in full at maturity, are eligible for collateral for borrowing from a Federal Reserve Bank, and are accepted by a state or federal bank) if the short-term obligations of the accepting bank or i ts parent are rated at least “A-1”or “P-1” or an equivalent rating by at least one nationally recognized credit rating agency, (11) commercial paper that has a stated maturity of 270 days or fewer from the date of its issuance, rated at least “A-1” or “P-1” or an equivalent rating by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a United S tates or s tate bank, (12) no -load money market mutual funds registered with and regulated by the United S tates Securities a nd E xchange C ommission t hat pr ovide t he S chool D istrict with a pr ospectus and other information required by the Securities Exchange Act of 1934 or t he I nvestment C ompany A ct of 1940 a nd t hat ha ve a dol lar w eighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted m aturity o f l ess t han t wo y ears, i nvest ex clusively i n o bligations d escribed i n t he p receding c lauses, ar e

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continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than “AAA” or its equivalent, and conform to the requirements relating to the eligibility of investment pools to receive and invest funds, (14) if specifically adopted by the District in its investment policy as authorized investments, guaranteed investment contracts that have a defined termination date, are secured by obligations of the United States or its agencies or instrumentalities, are pledged to the District and deposited with the District or with a third party selected and approved by the District; are acquired through bids from at least three separate b idders w ith n o m aterial i nterest i n t he b onds, r epresent t he h ighest yielding g uaranteed i nvestment contract, takes into account the reasonably expected drawdown schedule for the bond proceeds to be invested, and the provider certifies its administrative costs other than the prohibited obligations described in the next succeeding paragraph, and the District may invest its funds and funds under its control through an eligible investment pool if the board of trustees of the District by rule, order or resolution, as appropriate, authorizes investment in the particular pool. To be eligible, an investment pool must invest the funds it receives from th e D istrict in a uthorized in vestments p ermitted b y th e A ct, a nd m ust f urnish to th e D istrict’s investment officer or other authorized representative of the District an offering circular or other similar disclosure instrument that contains, at a minimum, the following i nformation: t he t ypes of i nvestments i n which money i s a llowed t o be i nvested; t he maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool; the maximum stated maturity date any investment security within the portfolio has; the objectives of the pool; the size of the pool; the names of the members of the advisory board of the pool and the dates their terms expire; the custodian bank that will safe keep the pool's assets; whether the intent of the pool is to maintain a net asset value of one dollar and the risk of market price fluctuation; w hether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment; t he name and address of the independent auditor of the pool; the requirements to be satisfied for a District to deposit funds in and withdraw funds from the pool and any deadlines or other ope rating pol icies r equired for t he D istrict t o i nvest funds i n a nd withdraw funds f rom t he pool ; a nd t he pe rformance history of the pool, including yield, average dollar-weighted maturities, and expense ratios. In order to maintain eligibility to receive funds from and invest funds on be half of the District, an investment pool must also furnish to the investment officer or other authorized representative of the District: investment transaction confirmations; and a monthly report that contains, at a minimum, the following information: (A) the types and percentage breakdown of securities in which the pool is invested; (B) the current average dollar-weighted maturity, based on the stated maturity date, of the pool; (C) the current percentage of the pool's portfolio in investments that have stated maturities of more than one year; (D) the book value versus the market value of the pool 's por tfolio, us ing amortized cost valuation; (E) t he size of the pool ; ( F) t he number of participants in the pool; (G) the custodian bank that i s safekeeping the assets of the pool ; (H) a l isting of da ily t ransaction activity of the District participating in the pool; (I) th e yield and expense ratio of the pool; (J) t he portfolio managers of the pool; and (K) any changes or addenda to the offering circular. The District may delegate to an investment pool the authority to hold legal title as custodian of investments purchased with its local funds. A public funds investment pool created to function as a money market mutual fund must: mark its portfolio to market daily, and, to the extent reasonably possible, stabilize at a $1 net asset value. If the ratio of the market value of the portfolio divided by the book value of the portfolio is less than 0.995 or greater than 1.005, portfolio holdings shall be sold as necessary to maintain the ratio be tween 0. 995 a nd 1. 005; m ust ha ve a n a dvisory boa rd c omposed: ( A) e qually of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for a public funds investment pool managed by a state agency; or (B) of participants in the pool and other persons who do not have a business relationship with the pool and a re qua lified to advise the pool , for other investment pool s; and must be continuously rated no lower than “AAA” or “AAA-m” or at an equivalent rating by at least one nationally recognized rating service. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on t he outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the p rincipal s tream of c ash f low f rom t he unde rlying m ortgage-backed s ecurity co llateral an d b ears n o interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to changes in a market index. INVESTMENT POLICIES . . . Under Texas la w, th e D istrict is r equired to in vest its funds under written investment policies that primarily emphasize s afety o f p rincipal and liquidity; that address investment diversification, yield, maturity, and th e q uality and capability of investment management; and that includes a list of authorized investments for District funds, maximum allowable stated maturity o f a ny in dividual i nvestment an d t he m aximum av erage d ollar-weighted m aturity a llowed f or pool ed f und g roups. A ll District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund’s investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) l iquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield.

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Under Texas law, District investments must be made "with judgment an d car e, u nder p revailing ci rcumstances, t hat a p erson o f prudence, di scretion, a nd i ntelligence would e xercise i n t he management of t he person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." A t least quarterly the investment officers of the District shall submit an investment report detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy s tatements a nd ( b) s tate la w. N o p erson m ay in vest D istrict f unds w ithout e xpress w ritten a uthority f rom th e B oard of Trustees. ADDITIONAL PROVISIONS . . . Under Texas law, the District is additionally required to: (1) annually review its adopted policies and strategies, (2) adopt an order or resolution stating that it h as reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the said order or resolution on an annual basis, (3) require any investment o fficers with personal business relationships o r relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, ( b) a cknowledge t hat r easonable c ontrols a nd pr ocedures h ave b een i mplemented t o p reclude i nvestment transactions conducted between the District and the bus iness organization that a re not authorized by the District's i nvestment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of s ubjective i nvestment s tandards), an d ( c) d eliver a w ritten s tatement i n a f orm accep table t o t he District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, Chief Financial Officer and investment o fficers; (7) restrict r everse repurchase agreements to not more than 90 da ys and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in mutual funds in the aggregate to more than 15% of the entity’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements, and (10) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. TABLE 12 – CURRENT INVESTMENTS (1) As of June 30, 2010, the District’s investible funds were invested in the following categories:

Investment Type Maturity Fair ValueLone Star Investment Pool, rated AAAm N/A 791$ Total Investments 791$

Source: The District's audited financial statements ______ (1) Unaudited. As of such date, the market value of such investments (as determined by the District by reference to published quotations, dealer bids, and comparable information) was approximately 100% of their book v alue. N o f unds of t he D istrict a re i nvested i n de rivative securities, i.e., securities whose rate of return is determined by reference to some other instrument, index, or commodity.

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TAX MATTERS

OPINION . . . On t he da te of i nitial de livery of t he B onds, M cCall, P arkhurst & H orton L .L.P., San A ntonio, T exas, B ond Counsel to the Issuer, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as “specified private activity bonds”, the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local t ax c onsequences of t he pur chase, ownership or disposition of the Bonds. S ee Appendix C - Form of Bond Counsel’s Opinion. In rendering its opinion, Bond Counsel will rely upon (a) the Issuer's federal tax certificate and (b) representations of the Issuer with respect to arbitrage, the application of the proceeds to be received from the issuance and sale of the Bonds and certain other matters. Failure of the Issuer to comply with these representations could cause the interest on the Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to c omply w ith s uch r equirements m ay c ause i nterest on t he B onds t o be i ncluded i n g ross i ncome retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel is conditioned on compliance by the Issuer with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. Bond C ounsel's opi nion r epresents i ts l egal j udgment ba sed upon i ts r eview of Existing Law and t he r eliance o n t he aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. The Existing Law i s s ubject t o c hange by t he C ongress a nd t o s ubsequent j udicial a nd a dministrative i nterpretation by the c ourts a nd t he Department of the Treasury. There can be no assurance that such Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the Project. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds. Bond Counsel's opinion is not binding on the Internal Revenue Service. I f an Internal Revenue Service audit i s commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. FEDERAL INCOME TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT . . . The initial public offering price to be paid for one or more maturities of the Bonds (the "Original Issue Discount Bonds") may be less than the principal amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year. In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on t he bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude f rom g ross i ncome ( as de fined i n s ection 61 of t he C ode) an amount of i ncome with r espect t o s uch O riginal I ssue Discount Bond equal to that portion of the amount of such or iginal i ssue di scount a llocable t o t he a ccrual pe riod. F or a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner ( adjusted upw ard by t he por tion of t he or iginal i ssue di scount a llocable t o t he pe riod f or w hich s uch Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the o riginal is sue d iscount on e ach O riginal I ssue D iscount B ond i s a ccrued da ily t o t he s tated maturity thereof ( in am ounts cal culated as d escribed b elow f or each six-month pe riod e nding on t he da te be fore t he s emiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield

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to s tated maturity (determined on t he basis of compounding a t t he c lose of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The f ederal i ncome t ax co nsequences o f the pur chase, ow nership, r edemption, s ale or ot her disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. A ll owners of Original Issue Discount Bonds should consult their own tax advisors with r espect t o t he de termination f or f ederal, s tate a nd l ocal i ncome tax purposes of the treatment of interest accrued upon redemption, s ale or ot her di sposition of s uch O riginal Issue Discount Bonds and with r espect t o t he f ederal, s tate, l ocal a nd foreign t ax c onsequences of t he pur chase, ow nership, r edemption, s ale or other disposition of such Original Issue Discount Bonds. COLLATERAL FEDERAL INCOME TAX CONSEQUENCES . . . T he following d iscussion is a s ummary of certain collateral federal income t ax c onsequences r esulting f rom t he pur chase, ow nership or di sposition of t he B onds. T his di scussion is based on Existing Law, which is s ubject to c hange o r modification, r etroactively. T he following di scussion i s a pplicable t o i nvestors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, l ife i nsurance c ompanies, i ndividual r ecipients of S ocial S ecurity o r R ailroad R etirement b enefits, individuals allowed an earned income credit, certain S corporations with Subchapter C earnings and profits, foreign corporations subject to the branch profits t ax and t axpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TR EATMENT WHICH MAY B E A NTICIPATED T O R ESULT F ROM T HE P URCHASE, OW NERSHIP A ND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under s ection 6012 of t he C ode, hol ders of t ax-exempt obl igations, s uch a s t he B onds, may be r equired t o disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon t he disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. S uch treatment applies to "market discount bonds" to the extent such gain does not e xceed t he a ccrued market di scount of s uch bonds ; a lthough for t his p urpose, a de minimis a mount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days dur ing which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. STATE, LOCAL AND FOREIGN TAXES . . . Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons.

OTHER INFORMATION RATINGS Application for a contract rating has been made to Standard & Poor's Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”). T he pr esently out standing t ax s upported de bt of t he D istrict ha s a n unde rlying r ating of “ A-” by S &P. A n explanation of the significance of such rating may be obtained from the company furnishing the rating. The rating reflects only the views of such organization and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating company, if in the judgment of such company, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds.

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LITIGATION On the date of delivery of the Bonds to the Underwriters, the District will execute and deliver to the Underwriters a certificate to the effect that, except as disclosed herein, no litigation of any nature has been filed or is pending, as of that date, to restrain or enjoin the issuance or delivery of the Bonds or which would affect the provisions made for their payment or security or in any manner question the validity of the Bonds. The D istrict i s not a pa rty t o a ny l itigation or ot her pe nding or t o i ts k nowledge, t hreatened, i n a ny c ourt, a gency or other administrative body (either state or federal) which, if decided adversely to the District, would have a m aterial adverse effect on the financial statements of the District. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2) thereof; and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The District assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of t he P ublic S ecurities P rocedures A ct ( Chapter 1201, T exas G overnment C ode), pr ovides t hat t he B onds constitute negotiable instruments, a nd a re i nvestment s ecurities g overned by C hapter 8, T exas U niform C ommercial C ode, notwithstanding any provisions of law or court decision to the contrary, and are legal and authorized investments for banks, savings banks, trust companies, building and loan associations, savings and loan associations, insurance companies, fiduciaries, and, and for the sinking funds of cities, towns, villages, school districts, and other political subdivisions or public agencies of the State of Texas. The Bonds are eligible to secure deposits of any public funds of the state, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. For political subdivisions in Texas which have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Chapter 2256, Texas Government Code), the Bonds may have to be assigned a rating o f at l east "A" or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds a nd ot her publ ic f unds. See “ OTHER I NFORMATION - Ratings” he rein. I n a ddition, various pr ovisions of t he T exas F inance C ode pr ovide t hat, s ubject t o a pr udent i nvestor s tandard, t he B onds a re l egal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. The Bonds are eligible to sure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. The D istrict ha s m ade no i nvestigation of ot her l aws, r ules, r egulations or investment c riteria w hich m ight a pply to s uch institutions or entities or which might limit the suitability of the bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bond for such purposes. The District has made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states. LEGAL MATTERS When the Bonds are issued, the State Attorney General will issue an opinion to the effect that the Bonds are valid and legally binding obl igations of t he D istrict a nd w ill a pprove t he B onds. B ased upon an examination of a t ranscript of pr oceedings incident to the issuance of the Bonds, McCall, Parkurst, & Horton L.L.P., San Antonio, Texas, Bond Counsel, will deliver its legal opinions to the effect that the Bonds are valid, legally binding, and enforceable obligations of the District, issued in compliance with the provisions of the Order of the District and, subject to the qualifications set forth herein under “TAX MATTERS”, the interest on the Bonds is exempt from federal income taxation under existing statutes, published rulings, regulations, and court decisions. Though it represents the Financial Advisor and the Underwriters from time to time in matters unrelated to the Bonds, Bond Counsel has been engaged by and only represents the District in connection with the issuance of the Bonds. The form of Bond Counsel’s anticipated opinion is reproduced as Appendix C hereto. In its capacity as Bond Counsel, McCall, Parkurst, & Horton L .L.P. has reviewed the i nformation unde r t he c aptions “ THE B ONDS” ( except f or t he i nformation c ontained i n t he subcaptions “Sources and Uses of Bond Proceeds”, “Permanent School Fund Guarantee”, “Bondholders’ Remedies”, and “Book-Entry-Only System” as to which no opi nion i s expressed), “STATE AND LOCAL F UNDING OF S CHOOL DISTRICTS IN TEXAS”, “ CURRENT PUBLIC SCHOOL F INANCE S YSTEM” (except the i nformation unde r t he s ubheading " Possible Effects of Wealth Transfer Provisions on t he District's Financial Condition" and “82nd Texas Legislature in Special Session –

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Potential I mpact of T exas B udget on t he D istrict” a s t o w hich no opinion is expressed), “ TAX M ATTERS”, “ OTHER INFORMATION - Registration a nd Q ualification of B onds f or S ale”, “ OTHER I NFORMATION – Legal Investments an d Eligibility to Secure Public Funds in Texas”, “OTHER INFORMATION - Continuing Disclosure of Information” (except under the subcaption “Compliance with P rior Undertakings” as to which no opi nion is expressed) and “OTHER INFORMATION - Legal Matters” (except for the last sentence of the first paragraph thereof, as to which no opi nion is expressed), in the Official Statement and such firm is of the opinion that the information relating to the Bonds and the Order contained under such captions is a fair and accurate summary of the information purported to be shown and that the information and descriptions contained under such captions relating to the provisions of applicable state and federal laws are correct as to matters of law. The fees to be paid t o B ond C ounsel a re c ontingent upon s ale a nd initial delivery of t he B onds. T he l egal opinion of Bond Counsel will accompany the Bonds deposited with DTC or will be printed on t he definitive bonds in the event of the discontinuance of the Book-Entry-Only System. C ertain legal matters will be passed upon for the Underwriters by its counsel, Escamilla, Poneck, & Cruz Inc., San Antonio, Texas, whose legal fee is also contingent upon the sale and initial delivery of the Bonds. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The f inancial da ta a nd ot her i nformation c ontained he reunder ha ve be en obt ained f rom t he D istrict's records, audited financial statements an d o ther s ources w hich ar e b elieved t o b e r eliable. T here i s n o g uarantee t hat any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of s uch pr ovisions a nd r eference i s m ade t o s uch doc uments f or f urther i nformation. R eference i s m ade t o original documents in all respects. CONTINUING DISCLOSURE OF INFORMATION In the Order, the District has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains an “obligated person” with respect to the Bonds, within the meaning of the Securities and Exchange Commission’s Rule 15c2-12 (the “Rule”). Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and t imely notice of specified material events, to the Municipal Securities Rulemaking Board (the “MSRB”). ANNUAL REPORTS . . . The District will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement under Tables numbered 1 t hrough 5, 7 through 12 and in Appendix B . T he District will upda te and provide this information within s ix months a fter the end of each f iscal year. T he District w ill pr ovide t he upda ted i nformation t o t he M unicipal S ecurities Rulemaking Board (the “MSRB”) through the “EMMA” information system in accordance with recent amendments to Rule 15c2-12 (the “Rule”) promulgated by the United States Securities and Exchange Commission (the “SEC”). The D istrict m ay pr ovide upda ted i nformation i n f ull t ext or m ay i ncorporate by r eference cer tain o ther p ublicly available documents, as permitted by the Rule. The u pdated in formation w ill in clude a udited f inancial s tatements, if th e D istrict commissions an audit and it is completed by the required time. I f audited financial statements are not available by the required time, the District will provide audited financial statements when and if the audit report becomes available. Any such financial statements w ill be pr epared i n a ccordance w ith t he a ccounting pr inciples de scribed i n A ppendix B or such ot her a ccounting principles as the District may be required to employ from time to time pursuant to state law or regulation. The District’s current fiscal year end is August 31. Accordingly, it must provide updated information by February in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify the MSRB of the change.

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MATERIAL EVENT NOTICES . . . NOTICE OF OCCURRENCE OF CERTAIN EVENTS, WHETHER OR NOT MATERIAL . . . The District will notify the MSRB through EMMA (in an electronic format as prescribed by the MSRB) within ten business days following the occurrence of any of the following events with respect to the Bonds, without regard to whether such event is material within the m eaning of t he f ederal s ecurities l aws: ( 1) pr incipal a nd i nterest pa yment de linquencies; ( 2) uns cheduled draws on debt service reserves reflecting f inancial d ifficulties; (3) unscheduled d raws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) adverse tax opinions or the issuance by the Internal Revenue Service of proposed or f inal de terminations of t axability, Notices of P roposed I ssue ( IRS Form 5701-TEB) o r o ther material notices or determinations with respect to the tax-exempt status of the Bonds, or other events affecting the tax-exempt status of the Bonds; (6) tender offers; (7) defeasances; (8) rating changes; and (9) bankruptcy, insolvency, receivership or similar event of an obligated pe rson. ( Neither t he B onds nor t he O rder m ake a ny pr ovision f or c redit e nhancement, l iquidity enhancement, or a debt service reserve with respect to the Bonds.) NOTICE OF OCCURRENCE OF CERTAIN EVENTS, IF MATERIAL . . . The District also will notify the MSRB through EMMA (in an electronic format as prescribed by the MSRB) within ten business days following the occurrence of any of the following events with respect to the Bonds, if such event is material within the meaning of the federal securities laws: (1) non-payment related defaults; (2) modifications to r ights of B ondholders; ( 3) B ond c alls; ( 4) r elease, s ubstitution, or s ale of pr operty s ecuring repayment of the Bonds; (5) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; and (6) appointment of a successor or additional trustee or the change of name of a trustee. NOTICE OF FAILURE TO TIMELY FILE . . . The District also will notify the MSRB through EMMA, in a t imely manner, of any failure by the District to provide financial information or operating data in accordance with the provisions described above. AVAILABILITY OF INFORMATION . . . Effective July 1, 2009 (the "EMMA Effective Date"), the SEC implemented amendments to the Rule which approved the establishment by the MSRB of i ts EMMA system, at www.emma.msrb.org. E MMA is the sole successor to the national municipal securities information repositories w ith r espect t o f ilings m ade i n c onnection w ith undertakings made under the Rule after t he E MMA E ffective D ate. C ommencing w ith t he E MMA E ffective D ate, al l information and documentation filing required to be made by the District in accordance with its undertaking made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. With respect to debt of the District issued prior to the EMMA Effective Date, the District remains obligated to make required annual filings, as well as notices of material events, under its respective continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information repository (the "SID")). Prior to the EMMA Effective Date, the Municipal Advisory Council of Texas (the "MAC") had been designated by the State and approved by the SEC staff as a q ualified SID. S ubsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRB pursuant to which t he M SRB makes available t o t he M AC, i n el ectronic format, al l Texas-issuer continuing disclosure documents and related information posted to EMMA's website simultaneously with such posting. Until the District receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the District has determined, in reliance on guidance from the MAC, that making its continuing disclosure f ilings s olely w ith th e M SRB w ill s atisfy its o bligations to m ake f ilings w ith th e S ID p ursuant to its c ontinuing disclosure agreements entered into prior to the EMMA Effective Date. LIMITATIONS AND AMENDMENTS . . . The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except a s de scribed a bove. T he D istrict makes no r epresentation or w arranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in pa rt f rom a ny br each of i ts c ontinuing di sclosure a greement or f rom a ny s tatement m ade pursuant to i ts agreement, a lthough holders of Bonds may seek a writ o f mandamus to compel the District to comply with its agreement. The District may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds c onsent t o t he a mendment or ( b) any person unaffiliated with the D istrict ( such a s n ationally r ecognized C ertificate

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counsel) determines that the amendment will not m aterially i mpair t he i nterests of t he hol ders a nd be neficial ow ners of t he Bonds. I f the District so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under “ANNUAL REPORTS” an explanation, in narrative form, of the r easons f or t he a mendment a nd of t he i mpact of a ny change in the type of financial i nformation a nd ope rating da ta s o provided. COMPLIANCE WITH PRIOR UNDERTAKINGS. . . The District has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule. FINANCIAL ADVISOR Estrada Hinojosa & Company, Inc. is employed as Financial Advisor to the District in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. Estrada Hinojosa & Company, Inc., in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants, and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor has provided t he f ollowing s entence f or i nclusion i n t his O fficial S tatement. T he F inancial A dvisor ha s reviewed t he i nformation in th is O fficial S tatement in a ccordance w ith its responsibilities to the D istrict a nd, a s a pplicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the District at the prices indicated on the inside front cover of this Official Statement, less at an underwriting discount of $__________, plus accrued interest on t he Bonds. The Underwriters’ obligation is subject to certain conditions precedent. The Underwriters will be obligated to purchase all of the Bonds if any Bonds are purchased. T he Bonds may be offered and sold to certain dealers and others at prices lower than such offering prices, and such public prices may be changed, from time to time, by the Underwriters. 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 their responsibilities to investors under the federal securities laws as applied to t he f acts a nd c ircumstances of this transaction, but the Underwriters do n ot g uarantee t he accu racy o r co mpleteness o f s uch information. FORWARD LOOKING STATEMENTS The s tatements contained in this Official S tatement, and in any other information provided by the District, that are not purely historical, ar e f orward-looking s tatements, in cluding s tatements r egarding th e D istrict’s e xpectations, h opes, in tentions, o r strategies regarding the future. R eaders should not place undue reliance on f orward-looking s tatements. A ll forward-looking statements in cluded in t his O fficial S tatement ar e b ased o n i nformation av ailable t o t he D istrict o n t he date hereof, and the District assumes no obl igation to update any such forward-looking statements. I t is important to note that the District’s actual results could differ materially from those in such forward-looking statements. The forward-looking statements included herein are necessarily based on v arious assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates a nd pos sible c hanges or de velopments i n s ocial, e conomic, bus iness, i ndustry, m arket, l egal, a nd regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate.

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MISCELLANEOUS The O rder a uthorizing t he i ssuance of t he B onds w ill a lso a pprove t he form and content of this Official S tatement, an d an y addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds by the Underwriters. The Official Statement has been approved by the Board of Trustees of the District for distribution in accordance with provisions of the United States Securities and Exchange Commission’s rule codified at 17 C.F.R. Section 240.15c2-12. Brooks County Independent School District

/s/ President, Board of Trustees

Brooks County Independent School District

ATTEST: /s/

Secretary, Board of Trustees Brooks County Independent School

District

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APPENDIX A

GENERAL INFORMATION REGARDING THE DISTRICT

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A-1

THE DISTRICT DISTRICT ENROLLMENT The following is the historic enrollment and average daily attendance of the District:

FiscalYear ADA Enrollment2001 1,642 1,804 2002 1,623 1,756 2003 1,606 1,719 2004 1,551 1,648 2005 1,531 1,649 2006 1,506 1,629 2007 1,471 1,573 2008 1,392 1,539 2009 1,474 1,475 2010 1,388 1,495 2011 1,379 1,497

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APPENDIX B

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT ANNUAL FINANCIAL AND COMPLIANCE REPORT

For the Year Ended August 31, 2010

The in formation c ontained in th is A ppendix c onsists o f e xcerpts f rom the Brooks C ounty

Independent School District Annual Financial and Compliance Report for the Year Ended August 31, 2 010 and is not in tended to b e a c omplete s tatement o f th e D istrict's f inancial c ondition. Reference is made to the complete Report for further information.

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I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT

ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED AUGUST 31,2010

!/4rooqCtnmty I~S.e(fJistrkt . .

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Brooks County Independent School District Annual Financial Report

For The Year Ended August 31,2010

TABLE OF CONTENTS

Page Exhibit

INTRODUCTORY SECTION

Certificate of Board ....................................................................................... :........................ 1

FINANCIAL SECTION

Independent Auditor's Report on Financial Statements.. ......................... ...................... ....... 2 Management's Discussion and Analysis (Required Supplementary Information)................. 4

Basic Financial Statements

Government-wide Financial Statements: Statement of Net Assets ........................................................................................... .. 13 A-1 Statement of Activities ............................................................................................... . 14 B-1

Fund Financial Statements: Balance Sheet - Governmental Funds ....................................................................... . 16 C-1 Reconciliation of the Governmental Funds .

Balance Sheet to the Statement of Net Assets ..................................................... . 18 C-1R Statement of Revenues, Expenditures, and Changes in

Fund Balances - Governmental Funds ................................................................. . 19 C-2 Reconciliation of the Statement of Revenues, Expenditures, and Changes in

Fund Balances of Governmental Funds to the Statement of Activities ................ . 21 C-3 Statement of Net Assets - Proprietary Funds ............................................................ . 22 0-1 Statement of Revenues, Expenses, and Changes in

Fund Net Assets - Proprietary Funds ................................................................... . 23 0-2 Statement of Cash Flows - Proprietary Funds ................................. ; ........................ .. 24 0-3 Statement of Fiduciary Net Assets - Fiduciary Funds ................................................ . 25 E-1

Notes to the Financial Statements ................................................................................. . 26

Required Supplementary Information:

Budgetary Comparison Schedules:

General Fund.............................................................................................................. 39 G-1

OTHER SUPPLEMENTARY INFORMATION SECTION

Schedule of Delinquent Taxes Receivable............................................................................ 41 J-1 Indirect Cost Computation Schedule .................................................................................... 43 J-2 Fund Balance and Cash Flow Calculation Worksheet (Unaudited)-General Fund .............. : 44 J-3 Budgetary Comparison Schedules Required by the Texas Education Agency:

National School Breakfast and Lunch Program................... ........ ............................... 45 J-4 Debt Service Fund.... ............. ............................ .............................. ................ ....... .... 46 J-5

Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards....................................................... 47

Report on Compliance with Requirements Applicable To each Major Program and Internal Control over Compliance In Accordance With OMB Circular A-133......................................................................... 49

Brooks County Independent School District Annual Financial Report

For The Year Ended August 31,2010

TABLE OF CONTENTS

Schedule of Findings and Questioned Costs ...................................................................... . Summary Schedule of Prior Audit Findings .. ............ , ........................................................... . Schedule of Expenditures of Federal Awards ..................................................................... . Notes to the Schedule of Expenditures of Federal Awards .... .............................................. . Schedule of Required Responses to Selected School First Indicators ................ ................ .

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Page ExhlQit I 51 I 54 56 K-1 58 I 59 K-2

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CERTIFICATE OF BOARD

Brooks County Independent School District Name of School District

Brooks County

024::9.01 Co.-Dist. Number

We, the undersigned, certify that the attached annual financial reports of the above named school district

were reviewed and (check one) I approved ___ disapproved for the year ended August 31, 2010,

at a meeting of the board of trustees of such school district on the J1- day of T(.(..n fAA7- , dlo ,I .

~ ~~~--

S~ of Board ~tary Signature.~nt If the board of trustees disapproved of the auditor's report, the reason(s) for disapproving it is (are):

(attach list as necessary)

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JOHN L. WOMACK, CPA

JOHN R. WOMACK. CPA MARGARET KELLY, CPA

Board of Trustees

JOHN WOMACK & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS

Independent Auditor's Report on Financial Statements

Brooks County Independent School District P. O. Drawer A Falfurrias, Texas 78355

Members of the Board of Trustees:

P. O. BOX 1147 KINGSVILLE. TEXAS 78364

(361) 592-2671 FAX (361) 592-1411

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Brooks County Independent School District as of and for the year ended August 31,2010, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of Brooks County Independent School District's management. Our responsibility is to express opinions on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Brooks County Independent School District as of August 31,2010, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated December 3, 2010, on our consideration of Brooks County Independent School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreem~nts and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

The Management's Discussion and Analysis and the budgetary comparison information identified as Required Supplementary Information in the table of contents are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

flit PRIVATE COMPANIES PRACTICE SECTION. AICPA DIVISION FOR CPA FIRMS

2

Our audit was performed for the purpose of forming opinions on the financial statements which collectively comprise the Brooks County. Independent School District's basic financial· statements. The accompanying schedule of expenditures of federal awards required by U. S. Office of Management and Budget Circular A-133, Audits of States, Local Govemments and Non-Profit Organizations and the supporting schedules listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information, except for that portion marked "unaudited" on which we express no opinion, has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial

statements taken as a whole.

Respectfully submitted,

~K,~./ J~( 2. £e. !

n Womack & Company, P.C. December 3,2010

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Management's Discussion and Analysis

This section of Brooks County Independent School District's annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year ended August 31, 2010. Please read this in cOI~iunction with the District's financial statements, which follow this section.

FINANCIAL IDGHLIGHTS

• The District's total combined net assets were $7,651,484 at August 31, 2010.

• During the year, the District's expenses were $1,487,312 less than the $20,109,031 generated in taxes and other revenues for governmental activities.

• The total cost of the District's programs was $18.6 million or 9.3% less than last year, and no new programs were added this year.

• The general fund reported a fund balance this year of $4,596,053.

• For the 2010 year, the District was still designated as a Chapter 41 school and had to purchase W ADA from the state for $118,100.

OVERVIEW OF THE FINANCIAL STATEMENTS

This annual report consists of three parts-management's discussion and analysis (this section), the basic financial statements, and required supplementary information. The basic fmancial stateme1').ts include two kinds of statements that present different views of the District:

• The first two statements are government- wide financial statements that provide both long-term and short-term information about the District's overall financial status.

• The remaining statements are fund financial statements that focus on individual parts of the government, reporting the District's operations in more detail than the government-wide statements.

• The governmental funds statements tell how general government services were fmanced in the short term as well as what remains for future spending.

• Proprietary fund statements offer short-term and long-term fmancial information about the activities the government operates like bUSinesses, such as self-insurance.

• Fiduciary fund statements provide information about the financial relationships in which the District acts solely as a trustee or agent for the benefit of others, to whom the resources in question belong.

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Figure A-I. Required Components of the District's Annual Financial Report

i-----------------~

: ( ------~,

Management's Discussion and Analysis

Basic Financial Statements

Required Sq:pkmmy llinnliin

::: ill!:::::::! mm: :lli~~f~~~~m~~ ~~m~~ n~1:::! I: 1m i. l~ Government- ~~ Fund ~~ Notes to the ~~ :: Wide :: Financial ': Financial ::. :: Financial ~: Statements ~ ~ Statements ~ r n Statements :: .: H: =::: :.. :: •• '. * •••••••• &. p'.' .' .• ~: : ...... : ••• ;.: • .,' :. : .;: •• : ' •• ;'. ' •••••••• ~ •••• : ~.

Summary <r----> Detail

The financial statements also include notes that explain some of the information in the fmancial statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the information in the fmancial statements. Figure A-I shows how the required parts of this annual report are arranged and related to one another.

Figure A-2 summarizes the major features of the District's fmancial statements, including the portion of the District government they cover and the types of information they contain. The remainder of this overview section of management's discussion and analysis explains the structure and contents of each of the statements.

Figure A-2. Major Features of the District's Government-Wide and Fund Financial Statements

Fund Statements Type of

Statements Government-Wide Governmental Funds Proprietary Funds Fiduciary Funds Entire District's The activities ofthe Activities the District Instances in which the government (except District that are not operates similar to district is the trustee or

Scope fiduciary funds) and proprietary or fiduciary private businesses: agent for someone else's the District's self insurance resources component units '" Statement of net "'Balance Sheet *Statement of net *Statement of Fiduciary assets assets net assets

ReqUired "'Statement of * Statement of revenues, *Statement of *Statement of changes in

financial activities expenditures & changes in revenues, expenses fiduciary net assets

statement fund balances and changes in fund net assets ·Statement of cash flows

Accounting basis Accrual accounting Modified accrual Accrual accounting Accrual accounting and and measurement and economic accounting and current and economic economic resources

focus resources focus financial resources focus resources focus focus All assets and Only assets expected to be All assets and All assets and liabilities,

Type of liabilities, both used up and liabilities that liabilities, both both short-term and

assetliiability financial and capital, come due during the year financial and capital, long-term, the District's

information short-term and long- or soon thereafter; no and short-term and funds do not currently term capital assets included long-term contain capital assets,

although they can All revenue and Revenues for which cash All revenues and All revenues and expenses during the is received during or soon expenses during the expenses during the year,

Type of year, regardless of after the end ofthe year; year, regardless of regardless of when cash

inflow/outflow when cash is expenditures when goods when cash is received is received or paid

information received or paid or services have been or paid received and payment is due during the year or soon thereafter

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Government-Wide Statements

The government-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The statement of net assets includes all of the government's assets and liabilities. All of the current year's revenues and expenses are accounted for in the statement activities regardless of when cash is received or paid.

The two government-wide statements report the District's net assets and how they have changed. Net assets -- the difference between the District's assets and liabilities -- are one way to measure the District's fmancial health or position.

• Over time, increases or decreases in the District's net assets are an indicator of whether its fmancial health is improving or deteriorating, respectively.

• To assess the overall health of the District, you need to consider additional non financial factors such as changes in the District's tax base

The government-wide fmancial statements of the District include the Governmental activities. Most of the District's basic services are included here, such as instruction, extracurricular activities, curriculum and staff development, health services, and general administration. Property taxes and grants fmance most of these activities.

Fund FinancilIl Statements

The fund fmancial statements provide more detailed information about the District's most significant funds-not the District as a whole. Funds are accounting devices that the District uses to keep track of specific sources offunding and spending for particular purposes.

• Some funds are required by State law and by bond covenants. • The Board of Trustees establishes other funds to control and manage money for particular

purposes or to show that it is properly using certain taxes and grants.

The District has two types offunds: • Governmental funds-Most of the District's basic services are included in governmental funds,

which focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental fund statements provide a detailed view that helps you determine whether there are more or fewer fmancial resources that can be spent in the near future to fmance the District's programs. Because this information does not encompass the additional long-term focus of the government-wide statement, we provide additional information at the bottom of the governmental funds statement, or on the subsequent page, that explains the relationship (or differences) between them.

• Proprietary funds-Services for which the District charges customers a fee are generally reported in proprietary funds. Proprietary funds, like the government-wide statements, provide both Iong­and short-term financial information.

o We use internal service funds to report activities that provide supplies and services for the District's other programs and activities-such as the District's Selflnsurance Fund.

• Fiduciary funds----The District is the trustee, or fiduciary, for certain funds. It is also responsible for other assets that-because of a trust arrangement-can be used only for the trust beneficiaries. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. The District's fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. We exclude these activities from the District's government-wide fmancial statements because the District caunot use these assets to finance its operations.

6

FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE

Net assets

The District's combined net assets were approximately $7,651,484 at August 31, 2010. (See Table A-I).

Table A-I The District's Net Assets

Current and other assets Capital and non-current assets

Total Assets

Current liabilities Long term liabilities

Total Liabilities

Net assets Invested in capital assets

net of related debt Restricted Unrestricted

Total Net As sets

$

Governmental Activities

2010 2009

6,037,762 6,513,751

12,551,513

1,170,896 3,729,133

4,900,029

2,602,795 179,894.00 4,868,795

$ 5,586,180 6,740,131

12,326,311

2,063,561 4,098,579

6,162,140

2,357,138 248,206.00

3,558,827

$ 7,651,484 $ 6,164,171

% Change

8.08% -3.36%

1.83%

-43.26% -9.01%

-2Q.48%

lQ.42%

-27.52% 36.81%

24.l3%

The $4,868,795 ofumestricted net assets represents resources available to fund the programs of the District next year.

Major changes in Governmental Activities are as follows:

Total assets have increased by $225,202 or 1.83%; this was the result of a $758,913 decrease in Current Cash and Investments offset by an increase in due from other governments of $1,235,070 and a decrease in buildings and improvements of$379,544 offset by an increase in furniture and equipment of $290,564.

Comparatively, long-term liabilities decreased $369,446 due to scheduled debt payments of $445,593, a net decrease in compensated absences payable of $41,320, and increases in the current portions of long-term debt.

Current liabilities decreased $892,665 due to decreases of $276,463 in amounts in accounts payable and $479,079 in deferred state revenues.

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Changes in net assets

The District's total revenues were $20,109,031. A significant portion, 46%, of the District's revenue comes from taxes, (See Figure A~3). 24% comes from operating grants, while only 1.0% relates to charges for services.

FigureA-3

Sources of Revenue for Fiscal Year

Investment Earnings, 0%

Charges for Service, 1 %

The total cost of all programs and services was $18,6;21,719 and 73% of these costs are for instructional . and student services. Programs and services costs, less contracted instructional services costs of$1l8,100

are $18,503,619. The total cost ofInstructional and Student Services was $14,407,864.

Governmental Activities

Property tax rates were increased by .13%. This increase coupled with a $90.9 million decrease in values, resulted in a decrease in tax revenues of$977 thousand or 9.57%.

8

I

Table A-2 ·1 District Revenues and Expenditures

Governmental Total % I Activities Changes

2010 2009 I Revenues: Program Revenues: I Charges for service $ 144,173 $ 147,293 -2.12%

Operating grants and contributions 4,862,425 4,013,804 21.14%

General Revenues: Maintenance and operations taxes 9,234,994 10,212,491 -9.57% I Grants and contributions not restricted

to specific functions 5,540,331 5,945,307 -6.81%

Investment earnings 40,699 114,036 -64.31% I Miscellaneous 186,409 118,149 57.77%

Extraordinary Item Inflow 100,000 0 100.00%

Total Revenue 20,109,031 20,551,080 -2.15% I Expenses: I Instruction, curriculum and media

services 9,858,579 10,377,195 -5.00%

Ins tructional and school leadership 1,533,125 1,577,744 -2.83% I Student support services 1,344,515 1,546,865 -13.08%

Child nutrition 907,002 902,887 0.46%

Co curricular activities 764,643 874,107 -12.52%

General administration 727,361 854,990 -14.93% I Plant maintenance, security & data

processing 2,370,297 2,532,961 -6.42%

Community services 20,910 29,781 -29.7~1o I Debt service 185,530 209,594 -11.48%

Capital Outlay 6,000 0 100.00%

Payments to Fiscal Agent/Member Districts I of Share Service Arrangement 733,907 475,260 54.42%

Other Intergovernmental Charges 51,750 78,990 -34.4~/o

Contracted instructional service 118,100 1,074,984 -89.01% I Total Expens es 18,621,719 20,535,358 -9.32%

Increase (Decrease) in net assets 1,487,312 15,722 9360.07% I Net assets, beginning of year 6,164,172 6,148,449 0.26%

Net assets, end of year $ 7,651,484 $ 6,164,171 24.13% I I I

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Table A-3 presents the cost of each of the District's largest functions as well as each function's net cost -(total cost less fees generated by the activities and intergovernmental aid). The net cost reflects what was funded by state revenues as well as local tax dollars.

• The cost of all governmental activities this year was $18,621,719. • However the amount that our taxpayers paid for these activities through property taxes was

$9,234,994, or 46%. • Some of the cost was paid by those who directly benefited from the programs $144,173, or by

grants and contributions $10,402,756.

TableA-3 Net Cost ofSelecred District Functions

Total Cos t of % Net Cost of %

Sen.ices Change Services Change

2010 2009 2010 2009

Instruction $ 9,208,658 $ 9,800,107 -6.04% $ 6,708,938 $ 7,716,694 -13.06% General administration 727,361 854,990 -14.93% 699,865 822,079 -14.8']010 Plant maintenance security &

operations 2,237,180 2,378,659 -5.95% 2,110,434 2,258,042 -6.54% Food Service 907,002 902,887 0.46% 51,074 126,840 -59.73%

FINANCIAL ANALYSIS OF THE DISTRICT'S FUNDS

Revenues from governmental fund types totaled $20,003,970, down $382,369 compared to the preceding year, There was a decrease in local and intermediate sources of $826,014, a decrease in state program revenues of$861,888 and a $1.3 million increase in federal program revenues.

General Fund Budgetary Highlights

Over the course of the year, the District revised its budget several times. Even with these adjustments, actual expenditures were $639,825 under final budget amounts. The most significant positive variance resulted from Instruction and Related Services. Staffmg is budgeted for full employment throughout the school year.

Resources available were also below the financial budgeted amount, by $16,417. As noted earlier:

• The District maintained its own campus and has plans for campus expansion/construction in the near future.

• Federal program revenue was $25,440 below final budget.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

At the end of2010, the District had invested $19,309,460 in a broad range of capital assets, including land, buildings, and vehicles. (See Table A-4.) This amount represents a net increase (including additions and deductions) of $239,652, or 1.26%.

10

Table A-4 District's Capital Assets

Governmental Total % Activities Change

2010 2009

Land $ 340,790 $ 340,790 0.00% Buildings and improvements 16,569,920 16,639,735 -0.42% Vehicles 1,195,408 1,218,950 -1.93% Equipment 1,203,342 732,933 64.18% Construction in Progress 0 137,400 -lOO.O(J%

Totals at historical cost 19,309,460 19,069,808 1.26%

Less Total accumulated depreciation 12,795,717 12,329,684 3.78%

Net capital assets $ 6,513,743 $ 6,740,124 -3.36%

Long -Term Debt

The District long-term debt consists of Tax Refunding Bond Series 2006 of $2,810,000, Capital Leases of $745,495, and compensated absences of $182,51 0, for a total of $3,738,005 in long term debt and $355,451 in CAP accretion at 8/31110. For additional detail see note F.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES

• Appraised valuations used for the 2011 Budget decreased $66.2 million, or 7.8% from 2010. New construction is anticipated for 2011.

• General operating fund spending per student decreased slightly in the 2011 budget from $11,242 in 2010 to $10,892, a $350 decrease. The District has budgeted $85,000 for WADA purchasing which is down from $118,100 in the prior year due to legislative changes that have increased the recapture level from $319,500 to $476,500. However, this number is not reflected in the spending per student.

• The district's 2011 refined average daily attendance is expected to decrease by 17 students from 1,364 in 2010 to approximately 1,347 students.

These indicators were taken into account when adopting the general fund budget for 20ll. Amounts available for appropriation in the general fund budget are $14,671,524, a decrease of .44% under the final 2010 budget of $14,735,741. Property taxes will decrease. $584,053 or 6.6% under the prior year due a $66.2 million decrease in values, even coupled with a 0.l3% rate increase. State revenue will increase due to a decrease in taxable values. Overall, revenues are expected to increase $45,602 in the 2010-2011 school year.

Expenditures are budgeted to decrease to $14,671,524. The largest decline involves a decrease in instructional costs of $266,762 thousand under 2010. Their competitive salary schedule allowed tbe District to open the 20 II school year with no teacher vacancies. The District had added no major new programs or initiatives to the 2011 budget.

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If these estimates are realized, the District's budgetary General Fund balance is expected to increase by $9,382 by the end of the fiscal year 2011.

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

This fmancial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the District's fmances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional fmandal infonnation, contact the District's Business Office.

12

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I I I I I I I I I I I I I I I I I I I

I I I I I I I I I Basic Financial Statements

I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

I I I I I 'I I I I I I I I I I I

~CmmtJ~Sdit» I - I

I

I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT

EXHIBIT A·1

I STATEMENT OF NET ASSETS AUGUST 31. 2010

I I I I I I I I I I I I I I I I I

Data Control Codes

1110 1225 1240 1250 1290 1420

1510 1520 1530 1800 1000

2110 2140 2165 2180 2300

2501 2502 2000

ASSETS: Cash and Cash Equivalents Property Taxes Receivable (Net) Due from Other Governments Accrued Interest Other Receivables (Net) Capitalized Bond and Other Debt Issuance Costs Capital Assets:

Land Buildings and Improvements, Net Furniture and Equipment, Net

Restricted Assets Total Assets

LIABILITIES: Accounts Payable Interest Payable Accrued Liabilities Due to Other Governments Unearned Revenue Noncurrent Liabilities:

Due Within One Year Due in More Than One Year

Total Liabilities

NET ASSETS 3200 Invested in Capital Assets, Net of Related Debt

$

Governmental Activities

4,161.515 340,630

1,429,418 1,037

31,508 73,654

340,790 5,088,578 1,084,376

7 _12,551,513

232,442 35,904

430,732 90,879 16,613

364,326 3,729,133 4,900,029

2,602,795

2 3

Business-type Activities Total

$ 1,158 $ 4.162,673 340,630

1,429,418 1,037

31,508 73,654

340,790 5,088,578 1,084,376

7 -.!..?,552,671

232,442 35,904

430,732 90,879 16,613

364,326 3,729,133 4,900,029

2,602,795

Restricted For: 3820 State and Federal Programs 27,912 27.912 3850 Debt Service 151.239 151,239 3860 Capital Projects 743 743 3900 Unrestricted 4.868,795 1,158 4.869.953

?%i~~~~f~~~~~~Zt1~ttt§~%~t~t%~;~%~~~%~tts~~~~~~~~~~~~~%~1t~~i~~f.~~~rl:g%:i~*:g%:g%%:1:f,t~itt&~~%%%:g:~"{~~

The accompanying notes are an integral part of this statement.

13

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31, 2010

3 4

Program Revenues

Data Control Codes

11 12 13 21 23 31 32 33 34 35 36 41 51 52 61 72 73 81 91 93 99 TG

TP

MT DT IE

GC MI

E1 TR CN NB NE

Charges for

Functions/Programs Expenses Services

Governmental Activities: Instruction $ 9,208,658 $ 3,919

Instructional Resources and Media Services 209,904 107

Curriculum and Staff Development 440,017 1,566

Instructional Leadership 576,899 239

School Leadership 956,226 6,587

Guidance, Counseling, & Evaluation Services 583,490 269

Social Work Services 82,020 38

Health Services 154,098 84

Student Transportation 524,907 233

Food Service 907,002 62,080

Cocurricular/Extracurricular Activities 764,643 61,199

General Administration 727,361 397

Plant Maintenance and Operations 2,237;180 6,887

Security and Monitoring Services 133,117 73

Community Services 20,910

Interest on Long-term Debt 179,220 350

Bond Issuance Costs and Fees 6,310

Capital Outlay 6,000 3

Contracted Instructional Services between Schools 118,100 66

Payments Related to Shared Services Arrangements 733,907 47

51,750 29 Other Intergovernmental Charges Total Governmental Activities

Business-type Activities: Total Primary Government

18,621,719 144,173

$ 18,621,719 $ 144,173

General Revenues: Property Taxes, Levied for General Purposes Property Taxes, Levied for Debt Service Investment Earnings

Operating Grants and

Contributions

$ 2,495,801 29,026

356,171 150,078 49,711 92,479 14,576 10,373 17,589

793,848 24,205 27,099

119,859 4,679

22,377 3,762

1 14

650,771 6

4,862,425

$ 4,862,425

Grants and Contributions Not Restricted to Specific Programs

Miscellaneous Special and Extraordinary Items:

Extraordinary Item Inflow Total General Revenues

~~!~!~!t~~~~f~!!\~*t.****~*~~(~M~*M~~~~~~~~~*~ff.~~$.~**~*~~~~~**~~~~~~~ Net Assets - Ending

The accompanying notes are an integral part of this statement.

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$

6 7 8

Net (Expense) Revenue and Changes in Net Assets

Governmental Activities

(6,708,938) (180,771)

(82,280) (426,582) (899,928) (490,742)

(67,406) (143,641) (507,085)

(51,074) (679,239) (699,865)

(2,110,434) (128,365)

1,467 (175,108)

(6,310) (5,996)

(118,020) (83,089) (51,715)

(13,615,121)

(13,615,121)

9,013,563 221,431 40,699

5,540,331 186,409

Business-type Activities

$

Total

(6,708,938) (180,771)

(82,280) (426,582) (899,928) (490,742)

(67,406) (143,641) (507,085)

(51,074) (679,239) (699,865)

(2,110,434) (128,365)

1,467 (175,108)

(6,310) (5,996)

(118,020) (83,089) (51,715)

(13,615,121)

(13,615,121)

9,013,563 221,431 40,699

5,540,331 186,409

100,000 100,000 15,102,433 15,102,433

~~$~~~:::~~~::~~!:~{~~l:~$.~~}.~:?~~~~~~~~~~f.i~~~~~~~:::::~:~t~:~~~~~*~&~f~~~:~~:!;:~~1f}~1.~ 6,164,172 1,158 6,165,330

$ 7,651,484 $ 1,158 $ 7,652,642

EXHIBIT B-1

15

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT BALANCE SHEET - GOVERNMENTAL FUNDS AUGUST 31, 2010

Data Control Codes

ASSETS: 1110 Cash and Cash Equivalents 1225 Taxes Receivable, Net

$

10

General Fund

3,670,067 313.060

1,045,745 1240 Due from Other Governments 1250 Accrued Interest 1260 Due from Other Funds 534,211 1290 Other Receivables 31,009

$

IDEA-B Formula

4,928

307,671

1800 Restricted Assets 7 rtf.Nil~~~*~~"?fj~JI&~~'f/},~1;,Y!:!i~1:,WAWA~~'@;,~~~Z~*~~WAfj;Jrlif!lj,l!;,~~l!;,ff;,~f,p;f£fi,a:.~1i,Jfffl!!l[$}ftf£~~*~,&f3lWi, ... }

2110 2160 2170 2180 2200 2300 2000

LIABILITIES: Current Liabilities:

Accounts Payable Accrued Wages Payable Due to Other Funds. Due to Other Governments

Accrued Expenditures Unearned Revenue

Total Liabilities

FUND BALANCES: Reserved Fund Balances:

3420 Debt Service 3450 Reserve for Food Service

Designated Fund Balance: 3510 Construction 3600 Unreserved

Unreserved, Reported in Nonmajor: 3610 Special Revenue Funds 3000 Total Fund Balances

The accompanying notes are an integral part of this statement. .

$ 222,449 366,880

74,214 21,363

80 313,060

~_~9~~046_

1,025

4,595,028

16

$ 1,673 10,720

300,206

I I I I I I I I I I I I I I I I I I I

1 I· 1 1 1 1 1 1 1 1 1 1 1 1 1 I I 1

$

$

SSA IDEA-B Formula

322,794 $

5,585

$

307,672 20,707

Other Governmental

Funds

168,655 27,570

373,160 1,039

148,648 499

8,320 53,052

308.441 48.809

44.183 462;805

34,803

129,019

92,944 256,766

17

$

$

EXHIBIT C~1

98 Total

Governmental Funds

4,161,516 340,630

1,429,418 1,039

990,530 31,508

7

232,442 430,652 990,533

90.879 80

357.243 2,101,829

34,803 1,025

129,019 4,595,028

92.944 __ 4.852.819

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS AUGUST 31, 2010

Total fund balances - governmental funds balance sheet

Amounts reported for govemmental activities in the Statement of Net Assets are different because:

Capital assets used in governmental activities are not reported in the funds. Property taxes receivable unavailable to pay for current period expenditures are deferred in the funds. Payables for bond principal which are not due in the current period are not reported in the funds. Payables for capital leases which are not due in the current period are not reported in the fiJnds. Payables for bond interest which are not due in the current period are not reported in the funds. Payables for compensated absences which are not due in the current period are not reported in the funds. Other long-term liabilities which are not due and payable in the current period are not reported in the funds. Other long-term assets are not available to pay for current period expenditures and are deferred in the funds.

Net assets of governmental activities - Statement of Net Assets

The accompanying notes are an integral part of this statement.

18

$

$

EXHIBIT C-1 R

4,852,819

6,513,744 340,631

(2,810,000) (745,499)

(35,904) (182,510) (355,451)

73,654

7.651,484,

I I I I I I I I I I I I I I I I I I I

I I I I I I I I· I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS FOR THE YEAR ENDED AUGUST 31, 2010

Data Control Codes

REVENUES: 5700 Local and Intermediate Sources 5800 State Program Revenues 5900 Federal Program Revenues 5020 Total Revenues

0011 0012 0013 0021 0023 0031 0032 0033 0034 0035 0036 0041 0051 0052 0061 0071 0072 0073 0081 0091 0091 0093 0099 6030

EXPENDITURES: Current:

Instruction Instructional Resources and Media Services Curriculum and Staff Development Instructional Leadership School Leadership Guidance, Counseling, & Evaluation Services Social Work Services Health Services Student Transportation Food Service' Cocurricular/Extracurricular Activities General Administration Plant Maintenance and Operations Security and Monitoring Services Community Services

Principal on Long-term Debt Interest on Long-term Debt Bond Issuance Costs and Fees Capital Outlay Contracted Instructional Services

Between Public Schools Payments to Shared Service Arrangements Other Intergovernmental Charges

Total Expenditures

1100 Excess (Deficiency) of Revenues Over (Under) 1100 Expenditures

7915 7949 8911 7080

Other Financing Sources and (Uses): Transfers In Other Resources Transfers Out

Total Other Financing Sources and (Uses)

EXTRAORDINARY ITEM: 7919 Extraordinary Item (Resource) 1200 Net Change in Fund Balances

$

10

General Fund

9,321,388 6,116,532

783,530 16,221,450

6,967,485 190,118 114,309 425,767 912,376 477,705

67,825 148,852 493,687 850,444 743,637 735,521

2,201,619 129,460

280,591 51,747

6,000

118,100 84,188 51,750

-15.051,181

1,170,269

221,467 20,738

(224,581) 17,624

100,000 --1;287,893

$

IDEA-B Formula

304,230 304,230

237,412

350 3,582

62,886

--~304,230

--.---

0100 Fund Balances - Beginning 3,308,160-

The accompanying notes are an integral part of this statement.

19

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$

SSA IDEA-8 Formula

$

435,363 435,363

435,363

435,363

other Governmental

Funds

279,826 118,554

2,644,547 3,042,927

1,954,646 14,020

313,270 131,702

17,581 26,870 11,942

1,013

79,576

11,184

20,335 165,000 118,014

1,400

214,356

3,080,909

(37,982)

3,114

3,114

(34,868)

$

EXHIBIT C-2

98 Total

Governmental Funds

9,601,214 6,235,086 4,167,670

20,003,970

9,159,543 204,138 427,929 561,051 929,957 567,461

79,767 149,865 493,687 930,020 743,637 735,521

2,212,803 129,460

20,335 445,591 169,761

1,400 6,000

118,100 733,907

51,750 18,871,683

1,132,287

224,581 20,738

(224,581) 20,738

100,000 1,253,025

291,634 3,599,794

~'#J/fMX{,ik~tf§'!£!/fi,*~~~f/i~~~~~~~Jli.i~f:g:g'!;.f!t,Fl);w.tJea~~~~Viwtfj~~~~t%~~~i~~~~~*f!/&*¥lkr$ftl!{$Xa~

20

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31,2010

Net change in fund balances - total governmental funds $

Amounts reported for governmental activities in the Statement of Activities ("SOA") are different because:

Capital outlays are not reported as expenses in the SOA. The depreciation of capital assets used in governmental activities is not reported in the funds. Trade-in or disposal of capital assets decrease net assets in the SOA but not in the funds. Certain property tax revenues are deferred in the funds. This is the change in these amounts this year. Repayment of bond principal is an expenditure in the funds but is not an expense in the SOA. Repayment of capital lease principal is an expenditure in the funds but is not an expense in the SOA. Bond issuance costs and similar items are amortized in the SOA but not in the funds. (Increase) decrease in accrued interest from beginning of period to end of period. Compensated absences are reported as the amount earned in the SOA but as the amount paid in the funds.

EXHIBITC-3

1.253,025

364,598 (587,177)

(3,800) (11,876) 165,000 280,593

(4,910) (9.460) 41,320

Change in net assets of governmental activities - Statemeryt of Activities $===1:=:.4::=8=7=,3=12:::=

The accompanying notes are an integral part of this statement.

21

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS PROPRIETARY FUNDS AUGUST 31,2010

Data Control Codes

ASSETS: Current Assets:

1110 Cash and Cash Equivalents Total Current Assets

1000 Total Assets

LIABILITIES: 2000 Total Liabilities

NET ASSETS:

Nonmajor Enterprise

Fund Brooks County

Community Network

Nonmajor Internal Service

Fund

Insurance Fund

$_----

$._----

3900 Unrestricted Net Assets $ 1,158 $:=",=====

The accompanying notes are an integral part of this statement.

22

EXHIBIT 0·1

BROOKS COUNTY INDEPENDENT. SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS - PROPRIETARY FUNDS FOR THE YEAR ENDED AUGUST 31, 2010

Data Control Codes

OPERATING REVENUES: 5700 Local and Intermediate Sources 5020 Total Revenues

OPERATING EXPENSES: 6400 Other Operating Costs 6030 Total Expenses

1300 Change in Net Assets

Nonmajor Enterprise

Fund Brooks County

Community Network

$_----

Nonmajor Internal Service

Fund

Insurance

$. __ -,-1-,-18",-,O;..;6~5 118,065

118,065 118,065

0100 Total Net Assets - Beginning 1,158-

The accompanying notes are an integral part of this statement.

23

EXHIBIT D-2 I I I I I I I I I I I I I I I I I I I

I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS

I PROPRIETARY FUNDS

I I I I I I I I I I I I I I I I I

FOR THE YEAR ENDED AUGUST 31, 2010

Cash Flows from Operating Activities: Cash Receipts (Payments) for Quasi-external

Operating Transactions with Other Funds Cash Payments to Other Suppliers for Goods and Services

Net Cash Provided (Used) by Operating Activities

Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year

The accompanying notes are an integral part of this statement.

24

Internal Service Funds

$ 118,065 __ (_118,065)

$-~.--

EXHIBIT 0·3

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS AUGUST 31, 2010

Data Control Codes

ASSETS: 1110 Cash and Cash Equivalents 1290 Other Receivables 1000 Total Assets

LIABILITIES: Current liabilities:

2190 Due to Student Groups 2400 Payable from Restricted Assets 2000 Total Liabilities

NET ASSETS

The accompanying notes are an integral part of this statement.

25

Agency Funds

--~.~

$ 119,514 12,818

$--~33:r

$ 124,133 8,199

___ 13,-2,332

EXHIBIT E·1 I I I I I I I I I I I I I I I I I I I

I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

A. Summary of Significant Accounting Policies

The basic financial statements of Brooks County Independent School District (the "District") have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") applicable to governmental units in conjunction with the Texas Education Agency's Financial Accountability System Resource Guide ("Resource Guide"). The Governmental Accounting Standards Board ("GASB") is the accepted standard setting body for establishing governmental accounting and financial reporting principles.

1. Reporting Entity

The Board of School Trustees ("Board"), a seven-member group, has governance responsibilities over all activities related to public elementary and secondary education within the jurisdiction of the District. The Board is elected by the public and has the exclusive power and duty to govern and oversee the management of the public schools of the District. All powers and duties not specifically delegated by statute to the Texas Education Agency ("TEA") or to the State Board of Education are reserved for the Board, and the TEA may not substitute its judgment for the lawful exercise of those powers and duties by the Board. The District receives funding from local, state and federal government sources and must comply with the requirements of those funding entities. However, the District is not included in any other governmental "reporting entity" as defined by the GASB in its Statement No. 14, "The Financial Reporting Entity," as revised by GASB Statement No.39, and there are no component units included within the reporting entity.

I 2. Basis of Presentation, Basis of Accounting

I I I I I I I I I I

a. Basis of Presentation

Government-wide Financial Statements: The statement of net assets and the statement of activities include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double-counting of internal activities. These statements distinguish between the governmental and business-type activities of the District. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. Business-type activities are financed in whole or in part by fees charged to external parties.

The statement of activities presents a comparison between direct expenses and program revenues for the different business-type activities of the District and for each function of the District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. The District does not allocate indirect expenses in the statement of activities. Program revenues include (a) fees, fines, and charges paid by the recipients of goods or services offered by the programs and (b) 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, including all taxes, are presented as general revenues.

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

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

The. District reports the following major governmental. funds:

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

26

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2010

b.

IDEA-8 Formula: This fund is used to account for the District's revenue and expenditures related to the federallDEA-B Formula Grant for Special Education.

SSA IDEA-8 Formula: The District is the fiscal agent for a Shared Service Arrangement (SSA) under the federal IDEA-B Formula Grant for Special Education. This fund is used to account for the revenues of the SSA and the amounts passed through to member districts.

In addition, the District reports the following fund types:

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

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

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

Measurement Focus, Basis of Accounting

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

Governmental Fund Financial Statements: Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The District considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year-end, with the exception of property taxes, which are fully deferred because collections received within the following sixty days are immaterial. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible-ta-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received, Investment eamings are recorded as earned, since they are both measurable and available. Expenditures are recorded when the related fund liability is incurred. except for prinCipal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources.

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

27

I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

Under GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," all proprietary funds will continue to follow Financial Accounting Standards Board ("FASB") standards issued on or before November 30, 1989. However, from that date forward, proprietary funds will have the option of either 1) choosing not to apply future FASB standards (including amendments of earlier pronouncements), or 2) continuing to follow new FASB pronouncements unless they conflict with GASB guidance. The District has chosen not to apply future FASB standards.

3. Financial Statement Amounts

a.

b.

c.

d.

Cash and Cash Equivalents

For purposes of the statement of cash flows, highly liquid investments are considered to be cash equivalents if they have a maturity of three months or less when purchased.

Property Taxes

Property taxes are levied by October 1 on the assessed value listed as of the prior January 1 for all real and business personal property in conformity with Subtitle E, Texas Property Tax Code. Taxes are due on receipt of the tax bill and are delinquent if not paid before February 1 of the year following the year in which imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. Property tax revenues are considered available when they become due or past due and receivable within the current period.

Allowances for uncollectible tax receivables within the General and Debt Service Funds are based upon historical experience in collecting property taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the District is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature.

Delinquent Taxes Receivable

The following table shows a schedule of delinquent taxes receivable and the allowance for uncollectible taxes for the District:

Balance Current Total Yearly Balance 09/01/09 Year Levy Collections Adjustments 08131110

Delinquent Taxes -------

Receivable $ 1,223,602 $ 9,294,201 $ 9,077,906 $ (209,393) $ 1,230,504 Allowance for

Uncollectible Taxes (871,095) (18,779) (889,874) Net Delinquent Taxes Receivable $ 194,774 $ 9,2941201 $ 9,0771906 $ (228,172}$ 340,630

Inventories and Prepaid Items

The District records purchases of supplies as expenditures, utilizing the purchase method of accounting for inventory in accordance with the Resource Guide.

Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items.

28

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS . FOR THE YEAR ENDED AUGUST 31, 2010

e.

f.

g.

Capital Assets

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

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

Asset Class

Infrastructure Buildings Building Improvements Vehicles Office Equipment

. Computer Equipment

Receivable and Payable Balances

Estimated Useful Lives

30 50 20

2-15 3-15 3-15

The District believes that sufficient detail of receivable and payable balances is provided in the financial statements to avoid the obscuring of significant components by aggregation. Therefore, no disclosure is provided which disaggregates those balances.

There are no significant receivables which are not scheduled for col/ection within one year of year end.

Compensated Absences

I I I I I I I I I I

On retirement or death of certain employees, the District pays any accrued sick leave in a lump case I payment to such employee or his/her estate. Individuals employed after October 1, 1985 are not eligible

h

i.

j.

to receive the lump sum payments. \

Interfund Activity

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the use of mi:magemenfs estimates.

Data Control Codes

Data Control Codes appear in the rows and above the columns of certain financial statements. The TEA requires the display of these codes in the financial statements filed with TEA in order to insure accuracy in bui/ding a statewide database for policy development and funding plans.

29

I I I I I I I

I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

B. Compliance and Accountability

I 1. Finance-Related Legal and Contractual Provisions

I I I I

C.

I I

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

Violation none

Actio.!lT~ nla

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

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

Fund Name None reported

~s and Investments

Deficit Amount

Not applicable BeJ'llaJ:ks. Not applicable

The Districrs funds are required to be deposited and invested under the terms of a depository contract. The depository bank deposits for safekeeping and trust with the District's agent bank approved pledged securities in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation C'FDIC") insurance.

I 1. Cash Deposits:

I I I I

I I

2.

At August 31, 2010, the carrying amount of the Districfs deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $4,282,194 and the bank balance was $4,884,109. The District's cash deposits at August 31, 2010 and during the year ended August 31, 2010, were entirely covered by FDIC insurance or by pledged collateral held by the Districrs agent bank in the District's name.

Investments:

The District is required by Government Code Chapter 2256, The Public Funds Investment Act, to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfoliO investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit.

The Public Funds Investment Act ("Act") requires an annual audit of investment practices. Audit procedures in this area conducted as a part of the audit of the basic financial statements disclosed that in the areas of investment practices, management reports and establishment of appropriate policies, the District adhered to the requirements of the Act. Additionally, investment practices of the District were in accordance with local policies.

The Act determines the types of investments which are allowable for the District. These include, with certain restrictions, 1) obligations of the U.S. Treasury, U.S. agencies, and the State of Texas, 2) certificates of deposit, 3) certain municipal securities, 4) securities lending program, 5) repurchase agreements, 6) bankers acceptances. 7) mutual funds, 8) investment pools, 9) guaranteed investment contracts, and 10) commercial paper.

30

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

The District's investment at August 31, 2010 are shown below.

lDJl~ment or Investment Type Lone Star Investment Pool, rated AAAm Total Investments

~ N/A

FajrValue $ 791

$=-~!~1_

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

a. Credit Risk

b.

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The ratings of securities by nationally recognized rating agencies are designed to give an indication of credit risk. At year end, the District was not significantly exposed to credit risk.

Custodial Credit Risk

Deposits are exposed to custodial credit risk if they are not covered by depository insurance and the

I I I I I I I I

deposits are uncollateralized, collateralized with securities held by the pledging financial institution, or I collateralized with securities held by the pledging financial institution's trust department or agent but not in the District's name.

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

At year end, the District was not exposed to custodial credit risk. I c. Concentration of Credit Risk

This risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. N. year I end, the District was not exposed to concentration of credit risk.

d.

e.

Interest Rate Risk

This is the risk that changes in interest rates will adversely affect the fair· value of an investment. At year end, the District was not exposed to interest rate risk.

Foreign Currency Risk

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

Investment Accounting Policy The District's general policy is to report money market investments and short~term participating interest~eaming investment contracts at amortized cost and to report nonparticipating interest-eaming investment contracts using a cost~based measure. However, if the fair value of an investment is significantly affected by the impairment of the credit standing of the issuer or by other factors, it Is reported at fair value. All other Investments are reported at fair value unless a legal contract exists which guarantees a higher value. The term "short~term" refers to investments which have a remaining term of one year or less at time of purchase. The term "nonparticipating" means that the investment's value does not vary with market interest rate changes. Nonnegotiable certificates of deposit are examples of nonparticipating interest-eaming investment contracts.

31

I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2010

Public Funds Investment Pools Public funds investment pools in Texas ("Pools'1 are established under the authority of the Interlocal Cooperation Act, Chapter 79 of the Texas Government Code, and are subject to the provisions of the Public Funds Investment Act (the "Act,,), Chapter 2256 of the Texas Government Code. In addition to other provisions of the Act designed to promote liquidity and safety of principal, the Act requires Pools to: 1) have an advisory board composed of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool; 2) maintain a continuous rating of no lower than AAA or AAA-m or an equivalent rating by at least one nationally recognized rating service; and 3) maintain the market value of its underlying investment portfolio within one half of one percent of the value of its shares.

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

D. Capital Assets

Capital asset activity for the year ended August 31,2010, was as follows:

Governmental activities: Capital assets not being depreciated: Land Construction in progress Total capital assets not being depreciated Capital assets being depreciated: Buildings and improvements Equipment Vehicles

$

Beginning Balances

340,790 $ 137,400 478,190

Increases Decreases

$ 137,400 137,400

137,400 207,215 470,409

Total capital assets being depreciated Less accumulated depreciation for:

110,779 134,321 718,588 341,536

16,639,735 732.933

1,218,950 '---1~8;':",59Dffif __ ~:..::.!.=..;;;.;;... ___ --'-_

Buildings and improvements (11,171,612) (394,917) (85,187) Equipment (439,000) (166,670) Vehicles (719,072) (111.170) (121,537)

Total accumulated depreciation (12,329,684) (672,757) (206,724)

$

Total capital assets being depreciated, net __ 6-=,,=26.:..1-=""7"93=--4~ ___ ···~4-:-:5-=,!=-83=-1:- 134,812 Governmental activities capital assets. net $ 6.740,124 $ 45.831 $:::==27,:::2~,2=1,:::2==$

Depreciation was charged to functions as follows:

Instruction Instructional Resources and Media Services Curriculum and Staff Development Instructional Leadership School Leadership Guidance, Counseling. & .Evaluation Services Social Work Services Health Services Student Transportation Food Services Extracurricular Activities General Administration Plant Maintenance and Operations Security and Monitoring Services Community Services

$ 258,731

32

5,766 12.088 15,848 26,269 16.029 2,253 4,233

111,170 26,270 21,006 20,776

·62,506 3,657

575

Ending Balances

340,790

340.790

16,569,920 1.203,342 1,195,408

18.968,670

(11,481,342) (605,670) (708,705)

(12,795,717) .6,172,953 6.{j~

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

E. lnterfund Balances and Activities

1. Due To and From Other Funds

Balances due to and due from other funds at August 31 , 2010, consisted of the following:

Due To Fund --------- Due From Fund Amount Purpose ~~~------------------

General Fund General Fund General Fund Other Governmental Funds General Fund Other Govemmental Funds

Other Governmental Funds $ IDEA-B Formula (Major Fund) SSA IDEA-B Formula (Major Fund) Other Governmental Funds General Fund General Fund

164,741 Short-term loans 300,206 Short-term loans 307,671 143,698 Short-term loans 24,976 Short-term loans 49,238 Short-term loans

---=~=-Total $===9~90,530_

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

2. Transfers To and From other Funds

Transfers to and from other funds at August 31,2010, consisted ofthe following:

Transfers From

General fund General fund

F. Long-Term Obligations

1. Long-Term Obligation Activity

Transfers To

Other Governmental Funds General fund

Total

Amount

$ 3,114 221,467

$===22=4=,5=::8=1

Reason

Supplement other funds sources Supplement other funds sources

Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the year ended August 31, 2010, are as follows: .

~rnental activities: Unlim. tax bond Series 2000 $ Unlimited tax refunding bond

Series 2006 Capital leases

Beginning Balance

125,000 $

Increases

$

Decreases Ending Balance

Amounts Due Within One Year

--------~ ---------125,000 $ $

2,850,000 40,000 2,810,000 54,471 1,026,088 280,593 745,495 291,604

Compensated absences * Total governmental activities

223,830 75,341 116,661 182,510 18.251 $-----..,.4--:.224,918 $ 75,341 $- . 562,254 $-·3,738,005$--364,326

Add: 2006 Capital Appreciation Bond Accretion 355,451 Total Long-Term Debt -~A56

* Other long-term liabilities

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

Liability Activity Type Fund Compensated absences Governmental -;G::-e-n-er-a',--

33

I I I I I I I I I I I I I I I I I I I

I

I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

2.

3.

Bonds Payable:

$4,000,000 Unlimited Tax School Building Bonds, Series 2000, payable in annual installments on August 15th with

2010 2009

a final principal payment of $125,000 plus interest at 6.25%, maturing in 2010. ~=====$==::;;;;12=5=,oo=0==

$3,000,000 Unlimited Tax Refunding Bonds, Series 2006, payable in annual installments on August 15th with principal ranging from $40,000 to $280,000 and interest at 4.2%, and maturing in 2025. $ __ 2&JMrul $,====2,=85:=0=,00=,===0

Debt Service Requirements

Debt service requirements on long-term debt at August 31, 2010, are as follows:

Year Ending August 31, 2011 2012 2013 2014 2015 2016-2020 2021-2025 Totals

Advance Refunding of Debt

Governmental Activities Principal Interest Total

$ 54,471 $ 228,862 $ 283,333 43,775 239,558 283,333 36,754 252,149 288,903

175,000 108,333 283,333 185,000 101,333 286,333

1,040,000 389,865 1,429,865 1,275,000 162,997 1,437,997

$ 2,810,000 $ 1,483,097 $,===4!:=:,29:=3=,0=9=7

In 2006, the District issued $3,000,000 in bonds to refund the 2000 Bond Series and for bond issuance expense. As a result of the defeasement of $3,000,000 of the 2000 Series Bond Debt of $3,565,000, leaving $565,000 outstanding and payable, the District saved $209,332 in interest costs with a present value savings of $146,718. .

. GASB Statement No.7, "Advance Refundings Resulting in Defeasance of Debt," provides that refunded debt and assets placed in escrow for the payment of related debt service be excluded from the financial statements. As of August 31, 2010, outstanding balances of bond issues that have been refunded and defeased in-substance by placing existing assets and the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments are as follows.

Defeased Original Balance

Bond Issue Amount as of 8/31/10

Series 2000 $ 4,000,000 $ 3,000,000

Total $ 4,000,000 $ 31000,000

34

I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS I FOR THE YEAR ENDED AUGUST 31,2010

G.

4. Capital Leases

Commitments under capitalized lease agreements for facilities and equipment provide for minimum future lease payments as of August 31,2010, as follows:

Year Ending August 31: 2011 2012 2013 2014 2015 Total Minimum Lease Payments

. Less Amount Representing Interest Present value of net minimum lease payments

$ 333,338 240,938 200,614

27,899 27,899

$ --- 830,688 85,190

$====7=45==:,49===8

The effective interest rate on capital leases ranges from 3.9% to 8.0%.

Ris~ Managenmnt

I I I I I I

During the year ended Al.\gust 31, 2010, Brooks County Independent School District provided unemployment compensation coverage to its employees through participation in the TASB Risk Management Fund (the I Fund). The Fund was created and is operated under the provisions of the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code. The Fund's Unemployment Compensation Program is authorized by Section 22.005 of the Texas Education Code and Chapter 172 of the Texas Local Government Code. All members participating in the Fund execute Inter/ocal Agreements that define the responsibilities of the parties. I The Fund meets its quarterly obligation to the Texas Workforce Commission. Expenses are accrued each month until the quarterly payment has been made. Expenses can be reasonably estimated; therefore, there is no need for I specific or aggregate stop loss coverage for Unemployment Compensation pool members.

The Fund engages the services of an independent auditor to conduct a financial audit after the close of each plan year on August 31. The audit is accepted by the Fund's Board of Trustees in February of the following year. The I Fund's audited financial statements as of August 31, 2009, are available at the TASB offices and have been filed with the Texas Department of Insurance in Austin.

H. Pension Plan I 1. Plan Description

The District contributes to the Teacher Retirement System of Texas (the "System'1. a public employee retirement system. It is a cost-sharing, multiple-employer defined benefit pension plan with one exception: all risks and costs are not shared by the District, but are the liability of the State of Texas. The System provides service retirement and disability retirement benefits, and death benefits to plan members and beneficiaries. The System operates primarily under the provisions of the Texas Constitution and Texas Government Code, Title 8, Subtitle C. The Texas legislature has the authority to establish or amend benefit provisions. The System issues a publicly available financial report that includes financial statements and required supplementary information for the District. That report may be obtained by writing the Teacher Retirement System of Texas, 1000 Red River Street, Austin, TX 78701-2698 or by calling (800) 223-8778.

35

I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,2010

2. Funding Policy

Under provisions in State law, plan members are required to contribute 6.4% of their annual covered salary and the State of Texas contributes an amount equal to 6.58% of the District's covered payroll. The District's employees' contributions to the System for the years ending August 31, 2010, 2009 and 2008 were $573,596, $632,187 and $651,385, respectively, and were equal to the required contributions for each year. Other contributions made from federal and private grants and from the District for salaries above the statutory minimum for the years ending August 31, 2010, 2009 and 2008 were $108,699, $129,737 and $126,671, respectively, and were equal to the required contributions for each year. The amount contributed by the State on behalf of the District was $568,982 for the year ended August 31, 2010. .

I. Retiree Health Care Plan

1. Plan Description

2.

The District contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple-employer defined benefit postemployment health care plan administered by the Teacher Retirement System of Texas (TRS). TRS-Care Retired Plan provides health care coverage for certain persons (and their dependents) who retired under the Teacher Retirement System of Texas. The statutory authority for the program is Texas Insurance Code, Chapter 1575. Section 1575.052 grants· the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants. The TRS issues a publicly available financial report that includes financial statements and required supplementary information for TRS-Care. That report may be obtained by visiting the TRS web site at WWW.trs.state.tx.us. by writing to the Communications Department of the Teacher Retirement System of Texas at 1000 Red River Street, Austin, Texas 78701, or by calling 1-800-223-8778.

Funding POlicy

Contribution requirements are not actuarially determined but are legally established each biennium by the Texas Legislature. Texas Insurance Code, Sections 1575.202, 203, and 204 establish state, active employee, and public school contributions, respectively. The State of Texas and active public school employee contribution rates were 1.0% and 0.65% of public school payroll, respectively, with school districts contributing a percentage of payroll set at 0.55% for fiscal years 2010, 2009 and 2008. Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. For the years ended August 31, 2010, 2009, and 2008, the State's contributions to TRS-Care were $90,486, $98,006, and $101,779, respectively, the active member contributions were $58,254, $64,103, and $66,120, respectively, and the District's contributions were $49,767, $54,328, and $55,979, respectively, which equaled the required contributions each year.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which was effective January 1. 2006, established prescription drug coverage for Medicare beneficiaries known as Medicare Part D. One of the provisions of Medicare Part D allows for the Texas Public School Retired Employee Group Insurance Program rrRS-Care) to recieve retiree drug subsidy payments from the federal governmment to offset certain prescription drug expenditures for eligible TRS-Care participants. For the fiscal years endee August 31, 2010, 2009, and 2008, the subsidy payments received by TRS-Care on behalf of the District were $24,894, $22.543, and $25,138, respectively.

J. Employee Health Care Coverage

During the year ended August 31, 2010, employees of the District were covered by a health insurance plan (the Plan). The District paid premiums of $275 per month per employee to the Plan. Employees, at their option, authorized payroll withholdings to pay premiums for dependents. All premiums were paid to a licensed insurer. The Plan was authorized by Section 21.922, Texas Education Code and was documented by contractual agreement.

The contract between the District and the licensed insurer is renewable September 1, 2010, and terms of coverage and premium costs are included in the contractual provisions.

36

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2010

Latest financial statements for the Blue Cross Blue Shield of Texas are available for the year ended December 31, 2009, have been filed with the Texas State Board of Insurance, Austin, Texas, and are public records.

K. Commitments a~d Contingencies

1. Contingencies

The District participates in grant programs which are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies; therefore, to the extent that the District has not complied with the rules and regulations governing the grants, refunds of any money received may be required and the collectibility of any related receivable may be impaired. In the opinion of the District, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying basic financial statements for such contingencies.

2. Litigation

No reportable litigation was pending against the District at August 31,2010.

L. Shared Services Arrang~

I I I I I I I I

Shared Seryices Arrangement - Fiscal Agent I The District is the fiscal agent for a Shared Services Arrangement ("SSA") which provides special education funds to the member districts listed below. According to guidance provided in TEA's Resource Guide, the District has accounted for the fiscal agent's activities of the SSA, as well as amounts flowed through to member districts, in the I special revenue funds 313 - IDEA B, Formula and 314 - IDEA B, Preschool and will be accounted for using Model 1 in the SSA section of the Resource Guide. Expenditures of the SSA are summarized below:

MmnbruJlisl~ Brooks County ISD Ben Bolt Palito Blanco ISD La Gloria ISD Total

IDEA-B, Formula

$ 241,761 $ 132,012

1,850

IDEA-B, Preschool

236 3,462

$ ~~-375,623 $======3;:!i,6~9==8_

The District is located within Brooks County, Texas and it derives apprOXimately 46.2% of all revenue from property

I I I

taxes and related penalties and interest. The District's top ten taxpayers have a total taxable property value of I $409,703,990 or 47.2% of the total property tax value of $867,481,893. Nine of the top ten taxpayers are oil and gas related. The highest three are as follows:

Percent of Total Taxpayer Taxable Value Taxable Value I Exxon Mobil Corp $ 121,957,700 14.1% Smith Production Inc. 86,327,850 10.0% Erskine Energy, Inc. 37,916,950 4.4% I Total Top Three $ 246,202,500 28.4%

Total Top Ten $ 409,703,990 47.2% I Total All Taxpayers $ 8671481,893 100.0%

I 37

I I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT

NOTES TO THE FINANCIAL STATEMENTS

I FOR THE YEAR ENDED AUGUST 31, 2010

N. Unearned Revenue

I Unearned Revenue at year end consisted of the following:

I I I I I I I I I I I I I I I

O.

P.

Revenue Description

Net Tax Revenue State Foundation Revenue State Special Revenues

Extraordinary Item Inflow

Chapter 41 WADA Cost

~dType

General/Debt Service General Special Revenue

$

Revenue Amount

340,630

16,613

$===3=57=,2=4=3

On August 10, 2006, the Distlict received official notice from the Texas Commissioner of Education under the provisions of Texas Education Code 41.004, that beginning with the 2006-2007 school year, the wealth' per student of the Brooks County Independent School District would exceed the equalized wealth level established by Texas EdUcation Code 41.002.

The District is required by the prOVisions of Chapter 41 of the Texas Education Code to exercise one or more options to reduce its wealth per student to the required level. The Board of Trustees has determined that the District's best interests will be served by the combination of the purchase of average daily attendance credits as provided by Subchapter 0 of Chapter 41 of the Texas Education Code, and by the education of nonresident students as provided by Subchapter E of Chapter 41 of the Texas Education Code. The implementation of these options requires authorization of the voters of Brooks County Independent School District. In an election on October 14, 2006, these options (HBl 2006-07 Option 3 and HB1 2006-07 Option 4) were chosen by the voters of the District.

For the year ended August 31, 2010, the District purchased their weighted average daily attendance credit for the state of Texas Option 3 as follows:

Option 3

WADA Purchased

Cost PerWADA Cost

Less CAD Credit & Discount

Total Cost

=========$=====1=4=4.=05=$====~12=3=,0=21=.===========$=====11=8=,1:00=

38

~trJ@,g$ ~.u~tJ lr:"~fJ~._t ~~it.~1't~-'t~7~ -"""~ """"~ "" ~~~ • .3 -~r n:1_~ " ... vuwmY6)u~" . ..

- I I I I I I I I

·1 I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

Required Supplementary Information

Required supplementary information includes financial information and disclosures required by the Governmental Accounting Standards Board but not considered a part of the basic financial statements.

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT EXHIBITG-1

1 GENERAL FUND Page 1 of2 BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED AUGUST 31,2010

1 2 3 Variance with

1 Data Final Budget Control Budgeted Amounts Positive Codes Original Final Actual (Negative) ---

REVENUES:

1 5700 Local and Intermediate Sources $ 9.501.271 $ 9.312,138 $ 9.250 5800 State Program Revenues 5,293,489 6,116.759 (227) 5900 Federal Program Revenues 841,186 808,970 (25,440) 5020 Total Revenues 15.635.~~ 16.237,867 --(16,417) I'

EXPENDITURES: Current:

Instruction & Instructional Related Services: 1 0011 Instruction 7,247.242 7,336,452 368.967 0012 Instructional Resources and Media Services 194,603 190,409 291 0013 Curriculum and Staff Development 142,492 119,718 5,409

1 Total Instruction & Instr. Related Services =7,584,337- _7;e46~579 =~=374,667

Instructional and School Leadership: 0021 Instructional Leadership 423,054 431,899 6,132 1 0023 School Leadership 890,966 917,521 5.145

Total Instructional & School Leadership -1,314,020 1,349,420 11,277

Support Services - Student (Pupil): 1 0031 Guidance. Counseling and Evaluation Services 475,564 493,572 15,867 0032 Social Work Services 70,100 67,850 25 0033 Health Services 152,000 150,348 1,496

1 0034 Student (Pupil) Transportation 510,666 510,797 17,110 0035 Food Services 863,022 852,532 2,088 . 0036 Cocurricular/Extracurricular Activities 843,227 790,496 46,859

Total Support Services - Student (Pupil) ~914,57~ --2,865,595 83,445

1 Administrative Support Services: 0041 General Administration 757,710 758,300 22,779

Total Administrative Support Services 757,710 _ 758.300 --22,779-

I Support Services - Nonstudent Based:

0051 Plant Maintenance and Operations 2,408,719 2,337,338 135,719

1 0052 Security and Monitoring Services 131,190 131,797 2,337 Total Support Services - Nonstudent Based 2,539,909 ~,469,-1~~ -138,056~

Ancillary Services:

I 0061 Community Services 100 100 100 Total Ancillary Services 100 100 ---100

----- -.-'-- --~-

Debt Service:

I 0071 Principal on Long-Term Debt 289,010 281.086 495 ·0072 Interest on Long-Term Debt 53,705 53,705 1,958

Total Debt Service 342.'-715... -334..,~~1 -~--. 2,45:f

I Capital Outlay: 0081 Capital Outlay 137,400 6,000

--137,400 --'~6,000 --.~.~ .•. --

Total Capital Outlay

1 I

39 I

I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE I FOR THE YEAR ENDED AUGUST 31,2010

I Data

2

Control Budgeted Amounts

I I I I I I I I I I I I I I I I

Codes

0091 0093 0099

6030

1100 1100

7915 7949 8911 7080

7919 1200

0100

Intergovernmental Charges: Contracted Instr. Servic;es Between Public Schools Payments to Fiscal AgenUMember Dist.-SSA Other Intergovernmental Charges

Total Intergovernmental Charges

Total Expenditures

Excess (Deficiency) of Revenues Over (Under) Expenditures

Other Financing Sources (Uses): Transfers In Other Resources Transfers Out

Total Other Financing Sources and (Uses)

EXTRAORDINARY ITEM: Extraordinary Item (Resource)

Net Change in Fund Balance

Fund Balance -

" .. '

Original Final

125,000 125.000 103.666 84,336 59,000 51,750

287,666 2$1,086

15,878,~36

(242,490) 546,861

17.000 251,636

(22,000) (5,000)

100,000 (247,490) 641,861

40

3

Actual

EXHIBITG-1 Page20f2

Variance with Final Budget

Positive (Negative)

6,900 148

623,408

(30,169) 20,738

m- ~ ~J f!J 1':......"';" 8,Ji SdioetliiilisCbid'" . 7IJlloil'. :.r. """fJtllI ,'.' -",mae." .. . W! [ ',e ," (: Vi'. '"' r r _~ Ii:? ~ ~ ... !r Jj _."" ~ v -r :;< ~ r.r ~ - =- ~ -~ . .... .. ~

. .

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

Other Supplementary Information

This section includes financial information and disclosures not required by the Governmental Accounting Standards Board and not considered a part of the basic financial statements. It may, however, include information which is

required by other entities.

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF DELINQUENT TAXES RECEIVABLE FOR THE YEAR ENDED AUGUST 31,2010

Year Ended

2

Tax Rates Maintenance Debt Service

2001 and Prior Years $ Various $ Various

2002 1.387 .072

2003 1.45 .047

2004 - 1.50 .035

2005 1.2308 .036

2006 1.3938 . .0335

2007 1.2761 .0266

2008 1.014 .0255

2009 1.04 .03

2010 (School Year Under Audit) 1.04 .0314

1000 Totals

9000 - Portion of Row 1000 for Taxes Paid into Tax Increment Zone Under Chapter 311. Tax Code

41

I I

3 I Assessed! Appraised Value For School

Tax Purposes

I $ Various

429.382,650

I 532,576,820

540,348,273 I 687,069,591

779,741,218 I 1,086,441,314

913,478,566 I 955,509,907

867.481,893 I I I I I I I I I I I

I EXHIBIT J-1

I I 10 20 31 32 40

Beginning Current Entire Ending

Balance Year's Maintenance Debt Service Years Balance

I 9/1/09 Total levy Collections Collections Adjustments 8/31/10

$ $ 9,830 $ 129 $ (11,681)

I 2,409 125 (491)

1,398 45 (408)

I 5,095 119 (431)

5,077 150 (292)

I 6,485 157 (275)

I 11,468 240 (218)

14,133 355 (213)

I 111,774 3,224 (1,189)

9,294,201 8,644,689 261,004 (194,195)

I $ 9,294,201 $ 8,812,358 $ 265,548 $ (209,393)

$ $ $ $

I I I I I I I I I

42

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF EXPENDITURES FOR COMPUTATION OF INDIRECT COST FOR 2011·2012 GENERAL AND SPECIAL REVENUE FUNDS FOR THE YEAR ENDED AUGUST 31, 2010

FUNCTION 41 • GENERAL ADMINISTRATION AND FUNCTION 99 • APPRAISAL DISTRIC.LC.QSI

EXHIBIT J·2

Total $ 78,635 $ 183,219 $ 166,929 $ 318.592 $. 10,960 $ 28,936 $====7=87=:,2::=7=1

Total Expenditures for General and Special Revenue Funds

LESS: Deductions of Unallowable Costs

Total Capital Outlay (6600) Total Debt & Lease (6500) Plant Maintenance (Function 51,6100-6400) Food (Function 35, 6341 and 6499) Stipends (6413) Column 4 (above) - Total Indirect Cost

Net Allowed Direct Cost

FISCAL YEAR

Subtotal

CUMULATIVE Total Cost of Buildings Before Depreciation (1520) Historical Cost of Buildings over 50 years old Amount of Federal Money in Building Cost (Net of#16) Total Cost of Furniture & Equipment Before Depreciation (1530 & 1540) Historical Cost of Furniture & Equipment over 16 years old Amount of Federal Money in Furniture & Equipment (Net of #19)

(9)

(10) $ 364,599 (11) $ 332,338 (12) $ 2,174,674 (13) $ 405,301 (14) $ 975

$ 318,592

(15) (16) (17) (18) (19) (20)

$ 18,587,269

3,596,479

$14,990,790

$

$

16,569,920 4,372,119

400,855 2,398,751

61,533 288,439

(8) Note A· No Function 53 expenditures and $51,750 in Function 99 expenditures are included in this report on administrative costs.

43

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT FUND BALANCE AND CASH FLOW CALCULATION WORKSHEET (UNAUDITED) GENERAL FUND AS OF AUGUST 31, 2010

Data Control Codes Explanation

2

3

4

5

6

7

Total General Fund Fund Balance as of August 31,2010 (Exhibit C-1 object 3000 for the General Fund only)

Total General Fund Reserved Fund Balance (from Exhibit C-1 - total of object 3400s for the General Fund only)

Total General Fund Designated Fund Balance (from Exhibit C-1 - total of object 3500s for the General Fund only)

Estimated amount needed to cover fall cash flow deficits in the General Fund (net of borrowed funds and funds representing deferred revenues)

Estimate of one month's average cash disbursements during the regular school session (9/1/10 - 5131/11)

Estimate of delayed payments from state sources (58XX) including August payment delays

Estimate of underpayment from state sources equal to variance between Legislative Payment Estimate (LPE) and District Planning Estimate (DPE) or District's calculated earned state aid amount

8 Estimate of delayed payments from federal sources (59XX)

9

10

11

Estimate of expenditures to be reimbursed to General Fund from Capital Projects Fund (uses of General Fund cash after bond referendum and prior to issuance of bonds)

General Fund Optimum Fund Balance and Cash Flow (Lines 2+3+4+5+6+7+8+9)

Excess (Deficit) Undesignated Unreserved General Fund Fund Balance (Line 1 minus Line 10)

If Item 11 is a Positive Number Explanation of need for andlor projected use of net positive Undesignated Unreserved General Fund Fund Balance:

The excess will be used for future capital purchases and improvements.

44

EXHIBIT J-3

I Amount I

$ ___ 4,-,--,5:....:.9_6,-,0_53_

1,025

1,881,398

1,254,265

1,429,418

4,566,106

$====2::::9=,9:::::47=

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NATIONAL SCHOOL BREAKFAST AND LUNCH PROGRAM BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED AUGUST 31, 2010

2

Data Control

Budgeted Amounts

Codes Original Final

REVENUES: 5700 Local and Intermediate Sources $ 470 $ 470

5900 Federal Program Revenues 16,223 16,223

5020 Total Revenues 16,693 16,693

EXPENDITURES: Current:

Support SelVices - Student (Pupil):

0035 Food Services 18,506 18,506

Total Support Services - Student (Pupil) 18,506 18,506

6030 Total Expenditures 18,506 18,506

1100 Excess (Deficiency) of Revenues Over (Under)

1100 Expenditures (1,813) (1,813)

Other Financing Sources (Uses):

7915 Transfers. In 1,813 1,813

7080 Total Other Financing Sources and (Uses) 1,813 1,813

0100 Fund Balance -

45

3

Actual

$

.....

EXHIBIT J-4

Variance with Final BuC\get

Positive (Negative)

(91)

(91)

2 2

2

(89)

89 89

" ','

I I I I I I I I I I I I I I I I I I I

I BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT DEBT SERVICE FUND

I BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED AUGUST 31, 20.10.

I 2

Data Control Codes

Budgeted Amounts

I I I I I I I I I I I I I I I I

REVENUES: 570.0. Local and Intermediate Sources 50.20. Total Revenues

EXPENDITURES: Debt Service:

0.0.71 Principal on Long-Term Debt 0.0.72 Interest on Long-Term Debt 0.0.73 Bond Issuance Costs and Fees

Total Debt Service

60.30. Total Expenditures

11 DO. Excess (Deficiency) of Revenues Over (Under) 11 DO. Expenditures 120.0. Net Change in Fund Balance

0.1 DO. Fund Balance - RI>"inr.inn

$

Original Final

273,141 $ 272,761 273,141 272,761

165,0.0.0. 165,0.0.0. 119,0.0.0. 118,0.14

3,0.0.0. 1,40.0. 287,0.0.0. 284,414

287,0.0.0. 284,414

(13,859) (11,653) (13,859) (11,653)

48,0.89 48,0.89 .... . .... .... .

46

EXHIBIT J-5

3 Variance with Final Budget

Positive

Actual (Negative)

$ (1,633) (1,633)

(1,633) (1,633)

. ,' .

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

JOHN WOMACK & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS

JOHN L. WOMACK, CPA

JOHN R. WOMACK, CPA MARGARET KELLY, CPA

P. O. BOX 1147 KINGSVILLE, TEXAS 78364

(361) 592-2671

Independent Aud,itors Report

Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements performed in

Accordance with Government Auditing Standards

Board of Trustees Brooks County Independent School District P. O. Drawer A Falfurrias, Texas 78355

Members of the Board of Trustees:

FAX (361 ) 592-141 1

We have audited the financial statements of the governmental activities, the business-type activities, each major fund" and the aggregate remaining fund information of Brooks County Independent School District as of and for the year ended August 31,2010, which cOllectively comprise the Brooks County Independent School District's basic financial statements and have issued our report thereon dated December 3, 2010. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting In planning and performing our audit, we considered Brooks County Independent School Districfs internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purposEfof expressing an opinion on the effectiveness of the Brooks County Independent School District's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Brooks County Independent School District's internal control over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.

Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be defiCiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in· intemal control over financial reporting that we consider to be material weaknesses, as defined above.

Compliance and Other Matters As part of obtaining reasonable assurance about whether Brooks County Independent School District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a

t! ' , PRIVATE COMPANIES PRACTICE SECTION. AICPA DIVISION FOR CPA FIRMS'

47

direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and questioned costs as item(s} 2010-1.

Brooks County Independent School District's response to the findings identified in our audit is described in the accompanying schedule of findings and questioned costs. We did not audit Brooks County Independent

School District's response and, accordingly, we express no opinion on it.

This report is intended solely for the information and use of management, others within the entity, the Board of Trustees, and federal awarding agencies and pass-through entities and is not intended to be and should

not be used by anyone other than these specified parties.

Respectfully submitted,

-""'~.-.-J~ '£ £(! "/

John Womack & Company, P.C. December 3,2010

48

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

JOHN L. WOMACK, CPA

JOHN R. WOMACK, CPA MARGARET KELLY, CPA

Board of Trustees

JOHN WOMACK 8: CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS

Independent Auditor's Report

Report on Compliance wjth ReQuirements Applicable To each Major Program and on Internal Control over Compliance

In Accordance With OMB Circular A-133

Brooks County Independent School District P. O. Drawer A Falfurrias, Texas 78355

Members of the Board of Trustees:

Compliance

P. O. BOX 1147 KINGSVILLE, TEXAS 78364

(361 ) 592-2671 FAX (361) 592-141 1

We have audited the compliance of Brooks County Independent School District with the types of compliance requirements described in the U. S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended August 31, 2010. BrooksCounty Independent School Districfs major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of Brooks County Independent School District's management. Our responsibility is to express an opinion on Brooks County Independent School District's compliance based on our audit. '

We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Govemments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain re'asonable assurance about whether noncompliance with the types of compliance requirements referred to above that could h'ave a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Brooks County Independent School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Brooks County Independent School District's compliance with those requirements.

As described in item 2010-2 in the accompanying schedule of findings and questioned costs, Brooks County , Independent School District did not comply with requirements regarding Subrecipient Monitoring that are applicable to its IDEA-B, Formula - Aid to Students With Disabilities. Compliance with such requirements is necessary. in our opinion, for Brooks County Independent School District to comply with the requirements ' applicable to that program.

In our opinion, except for the noncompliance described in the preceding paragraph, Brooks County Independent School District complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs for the year ended August 31,2010.

,~ PRIVATE COMPANIES PRACTICE SECTION. A/CPA DIVISION FOR CPA FIRMS

49

Internal Control Oyer Compliance Management of Brooks County Independent School District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered Brooks County Independent School District's internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Brooks County Independent School District's internal control over compliance.

Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant defiCiencies, or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be significant deficiencies.

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficienCies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis.

A Significant defiCiency in interal control over compliance is a defiCiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as item 2010-2 to be significant deficiencies.

Brooks County Independent School District's response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit Brooks County Independent School District's response and, accordingly, we express no opinion on the responses.

This report is intended solely for the information and use of management, others within the entity, the Board of Trustees, federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

Respectfully submitted,

t,}~ 'd /

n Womack & Company, P.C. ecember 3,2010

50

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I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31, 2010

A. Summary of Auditor's Results

I 1. Financial Statements

I I I I I I I I I I I I I I I

Type of auditor's report issued:

Internal control over financial reporting:

One or: more material weaknesses identified?

One or more significant deficiencies identified that are not considered to be material weaknesses?

Noncompliance material to financial statements noted?

2. Federal Awards

Internal control over major programs:

One or more material weaknesses identified?

One or more significant deficiencies identified that are not considered to be material weaknesses?

Type of auditor's report issued on compliance for major programs:

Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133?

Identification of major programs:

UnQualified

Yes

Yes

Yes

Yes

X Yes

Qualified

X Yes

CFDA Number(s) Name of Federal Program or Cluster

X No

X None Reported

X No

X No

None Reported

No

84.010 84.389

Title I, Part A - improving Basic Programs Title I, Part A - ARRNStimulus

84.027 84.173 84.391 84.392

84.394A

IDEA-B, Children with Disabilities Program IDEA-B, Children with Disabilities Program - Preschool IDEA-8. ARRNStimulus IDEA-B, Preschool, ARRNStimulus

Title XIV - State Fiscal Stabilization Funds (SFSF)

Dollar threshold used to distinguish between type A and type B programs: $300,000

Auditee qualified as low-risk auditee? Yes X No

51

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31,2010

B. Ei.n~I1CLaLStatement Eindings

2010-1 State Compliance - State Compensatory Education

Criteria:

The District must adopt district and campus improvement plans which contain certain criteria as defined by the State Compensatory Education (SCE) Program.

Condition:

The District Improvement Plan and the Junior High Campus Improvement Plan do not disclose the aggregate amount of supplemental staff FTE's for SCE. .

Cause & Effect:

This information was inadvertantly omitted from these plans through and oversight in the review process. The effect of this is that incomplete information is provided in these plans for submission to the state or other users.

Recommendations:

We recommend that the District improve controls over information provided in the district and campus improvement plans to ensure that all state required information is included.

District Response:

The Curriculum Director, Finance Director and Federal Programs Director will ensure that the supplemental staff FTE's for state compensatory education are included in the DIP and CIP and will ensure that the aggregate amount is disclosed for each campus in accordance with the State Board of Education rule, Title 19, T AC section 109.25.

.t< C. Eederal Award Eindings and QuestiQned Costs.

2010-1 Federal Compliance Finding - Subrecipient Monitoring Department of Education, Passed Through the Texas Education Agency

Criteria:

C~ 84.027 84.173 84.391 84.392

Eederal Award #: H027 A090008 H173A080004 H391A090008 H392A090004

Eederal Award Title IDEA-B, Children with Disabilities Program IDEA-B, Children with Disabilities Program - Preschool IDEA-B. ARRAIStimulus IDEA-B, Preschool, ARRAIStimulus

The District must have controls in place over all subrecipients to ensure that the activities of those subrecipients are monitored for compliance with program requirements.

Condition:

The controls that the District has in place over subrecipient monitoring are inadequate to ensure that all subrecipients are in compliance with provisions of IDEA-B.

52

I I I

I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I I

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31.2010

Questioned Costs:

None

Perspective Information:

The District has two subrecipients, only one of which provides the District with sufficient detail of its expenditures to determine allowability of costs.

Cause & Effect:

The District has had a fiscal agent relationship with these two subrecipients for many years, and they both have a history of compliance. Regular monitoring has not been considered necessary in the past. As a result. the District does not have a system in place to ensure that all costs submitted for reimbursement are allowable under the IDEA-B Programs.

Recommendations:

We recommend that the District develop written pOlicies and procedures that cover sub recipient monitoring sufficient to ensure that all subrecipients are in compliance with federal requirements of the IDEA-B Prograns.

District Response:

The Finance Director and Special Education Director will ensure that a review of the· subrecipients' detailed general ledger is made prior to the draw-down of federal funds during the award monitoring to ascertain that the sub recipient provided reasonable assuranoe that federal awards were used for authorized purposes, complied with laws, regulations. and the provisions of contracts and grant agreements, and achieved performance goals.

The Finance Director and Special Education Director will verify that the subrecipient entity:

1. Ensured that the required subrecipient audits were completed. 2. Issued management decisions on audit findings within six months after receipt of the

subrecipienfs audit report. 3. Ensured that the subrec;ipient took appropriate and timely corrective action on all audit findings.

The Finance Director and Special Education Director will review the sub recipients' follow-up to ensure corrective action on deficiencies noted during the award monitoring.

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BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED AUGUST 31, 2010

Finding/Recommendation __ . __ .

09-1 State Compliance - Excess Expenditures over Appropriations

Condition: The District's General Fund Budgetary Comparison contains line items with excess expenditures over appropriations.

Criteria: The District is required by State law to adopt a budget and to amend it as necessary throughout the year.

Cause: The District did not anticipate the completion of a construction project by year-end, and the resulting accounts payable created an excess of expenditures over appropriations in function 81 at year end. Other minor instances of excess expenditures over appropriations were due to year-end entries.

Effect: The excess expenditures over appropriations is a violation of state law,. and weakens the internal control structure over the expenditure cycle.

Recommendation: We recommend that the District review its internal controls over the budgeting process and implement policies and procedures to ensure that any necessary amendments are adopted in a timely manner.

09-2 State Compliance - Public Funds Investment Act

Condition:

The District did not fully comply with the Public Funds Investment Act. A system of internal controls has not bEllen formally established and documented in writing.

ICriteria:

The Public Funds Investment Act requires that an internal control system be established and documented in writing.

Current Status

Implemented

Implemented

54

Management's Explanation Jf Not Implemented

N/A

N/A

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BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED AUGUST 31, 2010

Finding/Recommendation Cause:

The district personnel was unaware of the requirement to establish written internal control procedures over investments.

Effect:

Noncompliance with the Public Funds Investment Act can mean that the Board does not receive relevant information regarding investments, and can make decisions based on that incomplete or erroneous information. Without written internal control procedures, changes in personnel or other factors may lead to material noncompliace.

Recommendation:

We recommend that the District personnel review the Public Funds Investment Act and implement policies and procedures necessary to ensure compliance with all aspects of the Act.

Current Status

55

Management's Explanation If Not Implemented

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED AUGUST 31,2010

(1) (2)

Federal Grantorl Federal Pass-Through Grantorl CFDA

Title Number

U. S. DEPARTMENT OF EDUCATION Passed Through State Department of Education:

ESEA Title I Part A - Improving Basic Programs" 84.010a ESEA Title I Part A - Improving Basic Programs" 84.010a Title I School Improvement" 84.010a Total CFDA Number 84.010a

o ESEA Title I Part C - Education of Migratory Children 84.011 ESEA Title I Part C - Education of Migratory Children 84.011 Total CFDA Number 84.011

SSA IDEA-B Formula" 84.027

Career and Technical- Basic Grant 84.048

SSA IDEA-B Preschool" 84.173

Title II Part 0 Enhancing Education Through Technology" 84.318x

Gear Up - Students Training Academy 84. 334S

ESEA Title II Part A - Teacher & Principal Training & Recruiting 84.367a

ARRA - Title II Part 0 Subpart 1-Enhancing Education Through Techl 84.386

ARRA - ESEA, Title I, Part A -Improving Basic Programs" 84.389

ARRA - SSA IDEA-Part B Formula" 84.391

ARRA - SSA IDEA Part B, Preschool" 84.392

ARRA of 2009 Title XIV State Fiscal Stabilization Fund" 84.394 ARRA of 2009 Title XIV State Fiscal Stabilization Fund .. 84.394 Total CFDA Number 84.394

Total Passed Through State Department of Education

Passed Through Brooks County ISO: IDEA-B Formula .. 84.027 IDEA-B Formula" 84.027 Total CFDA Number 84.027

IDEA-B Preschool .. 84.173

ARRA - IDEA-Part B Formula" 84.391

ARRA - IDEA Part B, Preschool" 84.392 Total Passed Through Brooks County ISO Total U. S. Department of Education

56

(2A)

Pass-Through Entity Identifying

Number

1061010102490 $ 11610101024901 10610104024901041

10615001024901 11615001024901

EXHIBITK-1 Page 1 of2

(3)

Federal Expenditures

897,002 7,680

138,072 1,042,754

41,060 646

---41,706

10660001024901660( 435,363

10420006024901 35,749

10661 001024901661 ( 5,366

10630001024901 10,471

105110017110002 117,940

10694501024901 183,834

10553001024901 11,671

10551001024901 302,629

10554001024901 208,749

10555001024901 241

10557001024901 426,257 11557001024901 . 26,306

-·~452,563

2,849,036

024-901 299,302 024-901 4,928

304,230

024-901 716

024-901 142,982

024-901 447,928

$--3,296,964

I I I I I I I I I I I I I I I I I I I

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BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED AUGUST 31,2010

(1)

Federal Grantor! Pass-Through Grantor! Program Title

U. S. DEPARTMENT OF AGRICULTURE Direct Program:

Community Facilities Loan and Grant Passed Through Texas Department of Agriculture:

ARRA - NSLP Equipment Assistance Grant Passed Through State Department of Education:

Food Distribution

School Breakfast Program *

(2)

Federal CFDA

Number

10.776

10.579

10.550

10.553

(2A)

Pass-Through Entity Identifying

Number

024-901

6TX340332

024-901

024-901

EXHIBIT K-1 Page 2 of2

(3)

Federal Expenditures

$ 11,176

61,072

39,841

255,632

National School Lunch Program * 10.555 024-901 501,706 Total Passed Through State Department of Education 797,179 Total U. S. Department of Agriculture 869,427

* Indicates clustered program under OMB Circular A-133 Compliance Supplement

The accompanying notes are an integral part of this schedule.

57

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICT NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED AUGUST 31,2010

1. Basis of Presentation

The accompanying schedule of expenditures of federal awards includes the federal grant activity of Brooks County Independent School District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the general purpose financial statements.

2. Subrecipients

Of the federal expenditures presented in the schedule, Brooks County Independent School District provided federal awards to subrecipients as follows:

Program Title

IDEA-B, Formula IDEA-B, Preschool IDEA-B, Formula - ARRAlStimulus IDEA-B, Preschool - ARRAlStimulus

Total Provided to Subrecipients

58

Federal CFDA Number

84.027 84.173 84.391 84.392

Amount Provided to Subrecipients

$ 435,363 5,366

208,749 241

$ 649J19

I I I I I I I I I I I I I I I I I I I

I BROOKS' COUNTY INDEPENDENT SCHOOL DISTRICT

I SCHEDULE OF REQUIRED RESPONSES TO SELECTED SCHOOL FIRST INDICATORS AS OF AUGUST 31,2010

I I I I I I I I I I I I I I I I I

Data Control Codes

SF2 Were there any disclosures in the Annual Financial Report and/or other sources of information concerning default on bonded indebtedness obligations?

SF4 Did the district receive a clean audit? - Was there an unqualified opinion in the Annual Financial Report?

SF5 Pid the Annual Financial Report disclose any instances of material weaknesses in internal controls?

SF9 Was there any disclosure in the Annual Financial Report of material noncompliance?

SF10 What was the total accumulated accretion on capital appreciation bonds included in the government-wide financial statements at fiscal year-end?

59

EXHIBIT K·2

No

Yes

No

No

$ 355,451

I I I I I I I I I I I I I I I I I I I

34

APPENDIX C

FORM OF BOND COUNSEL'S OPINION

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DRAFT DATE: JUNE 30, 2011LAW OFFICES

McCALL, PARKHURST & HORTON L.L.P.717 NORTH HARWOOD 700 N. ST. MARY'S STREET 600 CONGRESS AVENUE

NINTH FLOOR 1525 ONE RIVERW ALK PLACE 1800 ONE AMERICAN CENTER

DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 AUSTIN, TEXAS 78701-3248TELEPHONE: 214 754-9200 TELEPHONE: 210 225-2800 TELEPHONE: 512 478-3805

FACSIMILE: 214 754-9250 FACSIMILE: 210 225-2984 FACSIMILE: 512 472-0871

August __, 2011

BROOKS COUNTY INDEPENDENT SCHOOL DISTRICTUNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2011

DATED AS OF JULY 1, 2011IN THE AGGREGATE PRINCIPAL AMOUNT OF $

AS BOND COUNSEL FOR THE BROOKS COUNTY INDEPENDENT SCHOOLDISTRICT (the "District") in connection with the issuance of the bonds described above (the"Bonds"), we have examined into the legality and validity of the Bonds, which bear interest fromthe dates specified in the text of the Bonds until maturity or prior redemption at the rates and payableon the dates as stated in the text of the Bonds, and which are subject to redemption, all in accordancewith the terms and conditions stated in the text of the Bonds.

WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution andlaws of the State of Texas and a transcript of certified proceedings of the District, and other pertinentinstruments authorizing and relating to the issuance of the Bonds including (i) the order authorizingthe issuance of the Bonds (the "Order"), (ii) one of the executed Bonds, and (iii) the District'sFederal Tax Certificate of even date herewith.

BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Bonds have beenauthorized, issued and delivered in accordance with law; that the Bonds constitute valid and legallybinding general obligations of the District in accordance with their terms except as the enforceabilitythereof may be limited by bankruptcy, insolvency, reorganization, moratorium, liquidation and othersimilar laws now or hereafter enacted relating to creditors' rights generally; that the District has thelegal authority to issue the Bonds and to repay the Bonds; and that ad valorem taxes sufficient toprovide for the payment of the interest on and principal of the Bonds, as such interest comes due,and as such principal matures, have been levied and ordered to be levied against all taxable propertyin the District, and have been pledged for such payment, without limit as to rate or amount.

IN EXPRESSING SUCH OPINION, we have considered the effect of theNovember 22, 2005, decision by the Texas Supreme Court in West Orange-Cove ConsolidatedIndependent School District, et al. v. Neeley, et al., upholding, in part, a lower court judgmentconcluding that the local ad valorem maintenance and operation tax authorized under the schoolfinance system then in effect had become a State property tax in violation of article VIII, section 1-eof the Texas Constitution, in that school districts did not have meaningful discretion in levying thetax. The Court's opinion further noted that the court "...remain convinced...that defects in the

Brooks County Independent School District Unlimited Tax School Building Bonds, Series 2011August __, 2011Page 2

structure of the public school finance system expose the system to constitutional challenge. . . .[Such challenges] will repeat until the system is overhauled." Subsequent to such decision,legislation was enacted by the Texas Legislature to address the constitutional issues raised in thecourt's ruling. Reference is made to the Official Statement for the Bonds for a further descriptionof the rulings and the legislation enacted by the Texas Legislature.

IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bondsis excludable from the gross income of the owners for federal income tax purposes under thestatutes, regulations, published rulings and court decisions existing on the date of this opinion. Weare further of the opinion that the Bonds are not "specified private activity bonds" and that,accordingly, interest on the Bonds will not be included as an individual or corporate alternativeminimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the"Code"). In expressing the aforementioned opinions, we have relied on, and assumed complianceby the District with, certain representations and covenants regarding the use and investment of theproceeds of the Bonds. We call your attention to the fact that failure by the District to comply withsuch representations and covenants may cause the interest on the Bonds to become includable ingross income retroactively to the date of issuance of the Bonds.

EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or localtax consequences of acquiring, carrying, owning or disposing of the Bonds.

WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations,such as the Bonds, is included in a corporation's alternative minimum taxable income for purposesof determining the alternative minimum tax imposed on corporations by section 55 of the Code.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Suchopinions are further based on our knowledge of facts as of the date hereof. We assume no duty toupdate or supplement our opinions to reflect any facts or circumstances that may thereafter cometo our attention or to reflect any changes in any law that may thereafter occur or become effective.Moreover, our opinions are not a guarantee of result and are not binding on the Internal RevenueService (the "Service"); rather, such opinions represent our legal judgment based upon our reviewof existing law and in reliance upon the representations and covenants referenced above that wedeem relevant to such opinions. The Service has an ongoing audit program to determine compliancewith rules that relate to whether interest on state or local obligations is includable in gross incomefor federal income tax purposes. No assurance can be given whether or not the Service willcommence an audit of the Bonds. If an audit is commenced, in accordance with its current publishedprocedures the Service is likely to treat the District as the taxpayer. We observe that the District hascovenanted not to take any action, or omit to take any action within its control, that if taken oromitted, respectively, may result in the treatment of interest on the Bonds as includable in grossincome for federal income tax purposes.

Brooks County Independent School District Unlimited Tax School Building Bonds, Series 2011August __, 2011Page 3

OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as BondCounsel for the District, and, in that capacity, we have been engaged by the District for the solepurpose of rendering an opinion with respect to the legality and validity of the Bonds under theConstitution and laws of the State of Texas, and with respect to the exclusion from gross income ofthe interest on the Bonds for federal income tax purposes, and for no other reason or purpose. Theforegoing opinions represent our legal judgment based upon a review of existing legal authoritiesthat we deem relevant to render such opinions and are not a guarantee of a result. We have not beenrequested to investigate or verify, and have not independently investigated or verified any records,data, or other material relating to the financial condition or capabilities of the District, or thedisclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibilitywith respect thereto. We express no opinion and make no comment with respect to the marketabilityof the Bonds and have relied solely on certificates executed by officials of the District as to thecurrent outstanding indebtedness of, and assessed valuation of taxable property within, the District.Our role in connection with the District's Official Statement prepared for use in connection with thesale of the Bonds has been limited as described therein.

Respectfully,

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