HOUSTON INDEPENDENT SCHOOL DISTRICT (Harris County, Texas) - EMMA · PDF file2019 15,650,000$...

OFFICIAL STATEMENT Dated November 10, 2009

Ratings: Moody’s: Aa2 S&P: AA+

See “OTHER INFORMATION - RATINGS” herein. NEW ISSUE - Book-Entry-Only In the opinion of Co-Bond Counsel, interest on the Bonds, designated by the District as “Build America Bonds,” is included in gross income for federal income tax purposes. See “TAX MATTERS.”

HOUSTON INDEPENDENT SCHOOL DISTRICT (Harris County, Texas)

$183,750,000

Limited Tax Schoolhouse Bonds Taxable Series 2009A-3

(Build America Bonds – Direct Payment to Issuer)

Dated: November 1, 2009 Due: February 15, as shown on inside cover This Official Statement is provided to furnish information in connection with the offering by the Houston Independent School District (the “District”) of its Limited Tax Schoolhouse Bonds, Taxable Series 2009A-3 (Build America Bonds – Direct Payment to Issuer) (the “Bonds”). PAYMENT TERMS . . . Interest on the Bonds will accrue from November 1, 2009 (the “Dated Date”) and will be payable February 15 and August 15 of each year, commencing August 15, 2010, until maturity or earlier redemption, if any, and will be calculated on the basis of a 360-day year consisting 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 (“DTC”) pursuant to the Book-Entry-Only System described herein. 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 beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar 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 “BOOK-ENTRY-ONLY SYSTEM” herein. The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Houston, 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 (the “State”), including particularly Chapter 45, Texas Education Code, as amended, and an election held within the District on November 6, 2007. The Bonds are direct obligations of the Houston Independent School District (the “District”), payable from a continuing, direct annual ad valorem tax levied by the District, within the limits prescribed by law, on all taxable property located within the District, as provided in the order authorizing the issuance of the Bonds (the “Order”). See “THE BONDS – AUTHORITY FOR ISSUANCE.” PURPOSE . . . Proceeds from the sale of the Bonds will be used for the construction, acquisition and equipment of school buildings (including the rehabilitation, renovation, expansion and improvement thereof) and the purchase of the necessary sites therefor. See “THE BONDS – PURPOSE.”

See Maturity Schedule on the inside cover OPTIONAL REDEMPTION . . . The District reserves the right, at its option, to redeem Bonds maturing on or after February 15, 2020, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2019, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. See “THE BONDS - OPTIONAL REDEMPTION.” The Bonds are also subject to mandatory sinking fund redemption, make-whole optional redemption and extraordinary optional redemption as described herein. See “THE BONDS – MANDATORY SINKING FUND REDEMPTION,” “– MAKE-WHOLE OPTIONAL REDEMPTION” and “– EXTRAORDINARY OPTIONAL REDEMPTION.” LEGALITY . . . The Bonds are offered for delivery when, as and if issued and received by the underwriters listed below (the “Underwriters”) and subject to the approving opinions of the Attorney General of Texas and Andrews Kurth LLP, Houston, Texas, and Burney & Foreman, Houston, Texas, Co-Bond Counsel. See APPENDIX B - “FORM OF CO-BOND COUNSEL'S OPINION.” Certain matters will be passed upon for the Underwriters by Bracewell & Giuliani LLP, Houston, Texas, Underwriters’ Counsel. DELIVERY . . . It is expected that the Bonds will be available for delivery through the facilities of DTC on or about November 17, 2009. RBC CAPITAL MARKETS SIEBERT BRANDFORD SHANK & CO., LLC CITI ESTRADA HINOJOSA & CO., INC. JEFFERIES & COMPANY MERRILL LYNCH & CO. MORGAN KEEGAN & CO., INC. RAMIREZ & CO., INC.

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$183,750,000

LIMITED TAX SCHOOLHOUSE BONDS TAXABLE SERIES 2009A-3

(BUILD AMERICA BONDS – DIRECT PAYMENT TO ISSUER)

MATURITY SCHEDULE

Price/Maturity Interest Initial(Feb 15) Principal* Rate Yield(a)

2019 15,650,000$ 4.761 % 4.761 % 442403 FS52020 (c) 16,150,000 4.961 4.961 442403 FT32021 (c) 16,700,000 5.211 5.211 442403 FU02022 (c) 17,300,000 5.361 5.361 442403 FV8

CUSIP (b)

$36,450,000 5.561% Term Bonds Due February 15, 2024(c); Priced to Yield 5.561%(a); CUSIP 442403 FX4(b)

$81,500,000 6.125% Term Bonds Due February 15, 2028(c); Priced to Yield 6.125%(a); CUSIP 442403 FY2(b)

(Accrued interest from November 1, 2009 to be added)

(a) The initial yields at which the Bonds are priced are established by and are the sole responsibility of the Underwriters and may be changed at any

time at the discretion of the Underwriters. (b) CUSIP Numbers have been assigned to the Bonds by CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are included

solely for the convenience of the purchasers of the Bonds. None of the District, the Financial Advisor, or the Underwriters shall be responsible for the selection or correctness of the CUSIP Numbers set forth herein.

(c) The Bonds maturing on February 15, 2020 and thereafter are subject to optional redemption on February 15, 2019 or any date thereafter at par plus accrued interest to the date of redemption. See “THE BONDS – OPTIONAL REDEMPTION.” The Bonds are also subject to mandatory sinking fund redemption, make-whole optional redemption and extraordinary optional redemption as described herein. See “THE BONDS– MANDATORY SINKING FUND REDEMPTION,” “– MAKE-WHOLE OPTIONAL REDEMPTION” and “– EXTRAORDINARY OPTIONAL REDEMPTION.”

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DISTRICT OFFICIALS, STAFF AND CONSULTANTS

BOARD OF EDUCATION President............................................................................................................................................................... Lawrence Marshall First Vice President............................................................................................................................................Natasha M. Kamrani Second Vice President ................................................................................................................................................... Greg Meyers Secretary ..........................................................................................................................................................Carol Mims Galloway Assistant Secretary......................................................................................................................................................... Diana Dávila Member......................................................................................................................................................................Paula M. Harris Member......................................................................................................................................................................Dianne Johnson Member....................................................................................................................................................................Harvin C. Moore Member............................................................................................................................................................Manuel Rodríguez, Jr.

CERTAIN APPOINTED OFFICIALS Superintendent of Schools...................................................................................................................................... Dr. Terry B. Grier Chief Financial Officer ..............................................................................................................................................Melinda Garrett Controller .................................................................................................................................................................Kenneth Huewitt General Counsel, Office of General Counsel ................................................................................................Elneita Hutchins-Taylor

CONSULTANTS AND ADVISORS Co-Bond Counsel................................................................................................................................................Andrews Kurth LLP Houston, Texas Burney & Foreman Houston, Texas Co-Financial Advisors ...............................................................................................................................First Southwest Company Houston, Texas Rice Financial Products Houston, Texas

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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 contained in this Official Statement, and, if given or made, such other information or representations 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 Co-Financial Advisor. 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 Underwriters have reviewed the information in this Official Statement pursuant to their responsibilities to investors under the federal securities laws, but the Underwriters do not guarantee the accuracy or completeness of such information.

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TABLE OF CONTENTS

OFFICIAL STATEMENT SUMMARY.....................................vi

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

THE BONDS................................................................................... 1 PURPOSE ................................................................................ 1 DESCRIPTION OF THE BONDS................................................. 1 AUTHORITY FOR ISSUANCE ................................................... 1 SECURITY AND SOURCE OF PAYMENT................................... 2 BUILD AMERICA BONDS........................................................ 2 OPTIONAL REDEMPTION........................................................ 2 MANDATORY SINKING FUND REDEMPTION .......................... 2 MAKE-WHOLE OPTIONAL REDEMPTION............................... 3 EXTRAORDINARY OPTIONAL REDEMPTION .......................... 3 NOTICE OF REDEMPTION ....................................................... 4 DEFEASANCE ......................................................................... 4 PAYING AGENT/REGISTRAR .................................................. 4 TRANSFER, EXCHANGE AND REGISTRATION......................... 5 RECORD DATE FOR INTEREST PAYMENT............................... 5 OWNERS’ REMEDIES............................................................... 5 USE OF PROCEEDS.................................................................. 6

BOOK-ENTRY-ONLY SYSTEM ................................................ 6

STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS...................................................... 8 RECENT LITIGATION RELATING TO THE TEXAS PUBLIC

SCHOOL FINANCE SYSTEM ......................................... 8 FUNDING CHANGES IN RESPONSE TO WEST ORANGE-

COVE II ....................................................................... 9 POSSIBLE EFFECTS OF LITIGATION AND CHANGES IN LAW

ON DISTRICT OBLIGATIONS ........................................ 9

CURRENT PUBLIC SCHOOL FINANCE SYSTEM............... 9 GENERAL ............................................................................... 9 STATE FUNDING FOR LOCAL SCHOOL DISTRICTS ............... 10 LOCAL REVENUE SOURCES - PROPERTY TAX AUTHORITY. 11 WEALTH TRANSFER PROVISIONS ........................................ 12 POSSIBLE EFFECTS OF WEALTH TRANSFER PROVISIONS

ON THE DISTRICT’S FINANCIAL CONDITION............. 12

TAX INFORMATION................................................................. 13 AD VALOREM TAX LAW...................................................... 13 TAX RATE LIMITATIONS...................................................... 14 PUBLIC HEARING AND ROLLBACK TAX RATE .................... 15 PROPERTY ASSESSMENT AND TAX PAYMENT..................... 16 PENALTIES AND INTEREST................................................... 16 DISTRICT APPLICATION OF TAX CODE................................ 16 SOURCES OF DISTRICT REVENUES (UNAUDITED) ............... 16 TABLE 1 - VALUATION, EXEMPTIONS AND TAX

SUPPORTED DEBT ..................................................... 17 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY

CATEGORY ................................................................ 18 TABLE 3 - EXEMPTIONS...................................................... 19 TABLE 4 - VALUATION AND TAX-SUPPORTED DEBT

HISTORY.................................................................... 19 TABLE 5 - TAX RATE, LEVY AND COLLECTION HISTORY . 20 TABLE 6 - TEN LARGEST TAXPAYERS ............................... 20 TABLE 7 - ESTIMATED OVERLAPPING DEBT...................... 21

DEBT INFORMATION .............................................................. 22 TABLE 8 - TAX-SUPPORTED DEBT SERVICE

REQUIREMENTS......................................................... 22 TABLE 9 - AUTHORIZED BUT UNISSUED LIMITED TAX

BONDS....................................................................... 22 TABLE 10 - LEASE/PURCHASE BONDS ............................... 23

FINANCIAL INFORMATION .................................................. 24 TABLE 11 - GENERAL FUND REVENUE AND

EXPENDITURE HISTORY............................................ 24

INVESTMENTS........................................................................... 26 LEGAL INVESTMENTS .......................................................... 26 INVESTMENT POLICIES ........................................................ 26 ADDITIONAL PROVISIONS.................................................... 27 DISTRICT’S INVESTMENT POLICY........................................ 27 TABLE 12 - CURRENT INVESTMENTS ................................. 27

TAX MATTERS........................................................................... 28 GENERAL ............................................................................. 28 INTERNAL REVENUE SERVICE CIRCULAR 230 NOTICE ....... 28 STATED INTEREST ON THE BONDS....................................... 28 DISPOSITION OF BONDS ....................................................... 28 BACKUP WITHHOLDING ...................................................... 28

CONTINUING DISCLOSURE OF INFORMATION............. 29 ANNUAL REPORTS ............................................................... 29 MATERIAL EVENT NOTICES ................................................ 29 AVAILABILITY OF INFORMATION ........................................ 29 LIMITATIONS AND AMENDMENTS ....................................... 29 COMPLIANCE WITH PRIOR UNDERTAKINGS ........................ 30

OTHER INFORMATION........................................................... 30 RATINGS............................................................................... 30 LITIGATION .......................................................................... 30 REGISTRATION AND QUALIFICATION OF BONDS FOR SALE 30 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE

PUBLIC FUNDS IN TEXAS .......................................... 30 LEGAL MATTERS ................................................................. 31 CO -FINANCIAL ADVISORS .................................................. 31 UNDERWRITING ................................................................... 31 FORWARD-LOOKING STATEMENTS DISCLAIMER ................ 31 AUTHENTICITY OF FINANCIAL DATA AND OTHER

INFORMATION ........................................................... 32

APPENDICES EXCERPTS FROM THE ANNUAL FINANCIAL REPORT ......... A FORM OF CO-BOND COUNSEL'S OPINION ........................... B The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement.

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OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE DISTRICT.............................. Houston Independent School District (the “District”), a political subdivision of the State of

Texas located within Harris County, is the nation's sixth largest public school system. The District comprises 312 square miles within Harris County, Texas and includes approximately 54% of the current geographic area of the City of Houston, Texas.

THE BONDS .................................. The Bonds are issued as $183,750,000 Limited Tax Schoolhouse Bonds, Taxable Series

2009A-3 (Build America Bonds – Direct Payment to Issuer). The Bonds are issued as serial bonds maturing on February 15 in the years 2019 through and including 2022, and as term bonds maturing on February 15, 2024 and February 15, 2028. See “THE BONDS - DESCRIPTION OF THE BONDS.”

PAYMENT OF INTEREST .............. Interest on the Bonds accrues from November 1, 2009 and is payable August 15, 2010, and

each February 15 and August 15 thereafter until maturity or earlier redemption, if any. See “THE BONDS - DESCRIPTION OF THE BONDS.”

AUTHORITY FOR ISSUANCE.......... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas,

including particularly Chapter 45, Texas Education Code, as amended, and an election held within the District on November 6, 2007. “See “THE BONDS - AUTHORITY FOR ISSUANCE.”

SECURITY FOR THE BONDS ........................................ The Bonds are direct obligations of the District payable as to principal and interest from and

secured by the proceeds of a continuing, direct annual ad valorem tax levied by the District, within the limits prescribed by law, on all taxable property located within the District. See “THE BONDS – SECURITY AND SOURCE OF PAYMENT” and “CURRENT SCHOOL FINANCE SYSTEM.”

REDEMPTION ............................... The District reserves the right, at its option, to redeem Bonds having stated maturities on and

after February 15, 2020, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2019, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. See “THE BONDS – OPTIONAL REDEMPTION.” The Bonds are also subject to mandatory sinking fund redemption, make-whole optional redemption and extraordinary optional redemption as described herein. See “THE BONDS – MANDATORY SINKING FUND REDEMPTION,” “– MAKE-WHOLE OPTIONAL REDEMPTION” and “– EXTRAORDINARY OPTIONAL REDEMPTION.”

TAX MATTERS................................ In the opinion of Co-Bond Counsel, interest on the Bonds, designated by the District as “Build

America Bonds,” is included in gross income for federal income tax purposes. See “TAX MATTERS.”

USE OF PROCEEDS ....................... Proceeds from the sale of the Bonds will be used for the construction, acquisition and

equipment of school buildings (including the rehabilitation, renovation, expansion and improvement thereof) and the purchase of the necessary sites therefor. See “THE BONDS – PURPOSE.”

RATINGS ...................................... The presently outstanding tax supported debt of the District, including the Bonds, is rated

“Aa2” by Moody's Investors Service, Inc. (“Moody's”) and “AA+” by Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc. (“S&P”), without regard to credit enhancement. Certain of the outstanding obligations of the District are rated “Aaa” by Moody’s and “AAA” by S&P by virtue of the guarantee of the Permanent School Fund of the State of Texas. See “OTHER INFORMATION – RATINGS.”

BOOK-ENTRY-ONLY SYSTEM ...................................... The definitive Bonds will be initially registered and delivered only to Cede & Co., the

nominee of DTC pursuant to the Book-Entry-Only System described herein. 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 beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar 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 “BOOK-ENTRY-ONLY SYSTEM” herein.

PAYMENT RECORD ................... The District has never defaulted in payment of its tax supported debt.

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SELECTED FINANCIAL INFORMATION Tax Year 2007 Taxable Assessed Valuation (100% of estimated market value)…………………………………… 96,574,625,420$ (1)

Tax Year 2008 Taxable Assessed Valuation (100% of estimated market value)…………………………………… 109,136,887,108 (1)

Total Ad Valorem Tax Debt at June 30, 2009……………………………………………………………………… 1,980,664,734$ (2)

Plus: The Bonds……………………………………………………………………………………………………… 183,750,000 Plus: The Series 2009 Contractual Obligations……………………………………………………………………… 23,500,000 (3)

Plus: The Series 2009A-1 and 2009A-2 Bonds……………………………………………………………………… 217,770,000 (4)

Plus: Accreted Value of Capital Appreciation Bonds as of June 30, 2009………………………………………… 153,333,836 Plus: Houston Independent School District Public Facili ty Corporation Debt as of June 30, 2009………………… 110,845,981 (5)

Less: Debt Service Fund (cash and investments as of June 30, 2009)……………………………………………… (125,997,707) (6)

Net Debt Outstanding……………………………………………………………………………………………… 2,543,866,845$

Ratio of Net Debt to Tax Year 2007 Taxable Assessed Valuation………………………………………………… 2.63%Ratio of Net Debt to Tax Year 2008 Taxable Assessed Valuation………………………………………………… 2.33%

Tax Year 2008 District Tax Rate (per $100 T.A.V.): Local Maintenance………………………………………………………………………………………………… 1.00670 $ Debt Service…………………………………………………………………………………..…………………… 0.15000 Total……………………………………………………………………………………..……………………… 1.15670 $

Tax Rate Limitation (per $100 T.A.V.):…………………………………………………………………………… 1.70000 $

Average percentage of current tax collections for Tax Years 2004 through 2008………………………………… 96.36%

Average percentage of total (current and delinquent) tax collections for Tax Years 2004 through 2008………… 101.27%

Peak Student Enrollment…………………………………………………………………………………………… 200,225 (7)

District Population Estimate………………………………………………………………………………………… 1,197,412 _______________ (1) Source: The District. Net of exemptions. See “AD VALOREM TAX PROCEDURES—TABLE 4 – VALUATION AND TAX-SUPPORTED

DEBT HISTORY.” (2) Comprised of $1,841,019,734 in bonds payable from debt service taxes and $139,645,000 in obligations payable from maintenance taxes. (3) Represents the District’s Public Property Finance Contractual Obligations, Series 2009 to be issued on November 17, 2009. (4) Represents the District’s Limited Tax Schoolhouse Bonds, Series 2009A-1 and Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2

(Build America Bonds – Direct Payment to Issuer) expected to be issued on November 17, 2009. (5) Includes accreted value of capital appreciation bonds. (6) Source: The District. Unaudited. (7) Source: The District. For additional information regarding the District, please contact:

Ms. Melinda Garrett Chief Financial Officer Houston Independent School District 4400 West 18th Street Houston, Texas 77092 (713) 556-6000

or

Mr. C. Terrell Palmer Senior Vice President First Southwest Company 1021 Main Street, Suite 2200 Houston, Texas 77002 (713) 651-9850

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OFFICIAL STATEMENT

RELATING TO


$183,750,000

Limited Tax Schoolhouse Bonds Taxable Series 2009A-3

(Build America Bonds – Direct Payment to Issuer)

INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of Houston Independent School District Limited Tax Schoolhouse Bonds, Taxable Series 2009A-3 (Build America Bonds – Direct Payment to Issuer) (the “Bonds”). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the order authorizing the issuance of the Bonds (the “Order”), except as otherwise indicated herein. There follows in this Official Statement descriptions of the Bonds and certain information regarding the Houston Independent School District (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 Co-Financial Advisors, First Southwest Company, Houston, Texas, and Rice Financial Products, Houston, Texas. DESCRIPTION OF THE DISTRICT The District, an independent school district and political subdivision of the State of Texas, comprises approximately 312 square miles within Harris County, Texas. The District encompasses approximately 54% of the current geographic area of the City of Houston, Texas, all or part of four other cities or villages, and certain unincorporated areas which include all or part of five utility districts. The State of Texas, Harris County, certain county-wide political entities, the City of Houston, and the various cities, villages and utility districts within the District each have authority to levy ad valorem taxes.

THE BONDS PURPOSE Proceeds from the sale of the Bonds will be used for the construction, acquisition and equipment of school buildings (including the rehabilitation, renovation, expansion and improvement thereof) and the purchase of the necessary sites therefor. Concurrently with the delivery of the Bonds, the District expects to deliver its Limited Tax Schoolhouse Bonds, Series 2009A-1, and its Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2 (Build America Bonds – Direct Payment to Issuer) (collectively with the Bonds, the “Series 2009A Bonds”). The Series 2009A Bonds are being issued by the District for a common purpose and pursuant to a common plan of finance. DESCRIPTION OF THE BONDS The Bonds are dated November 1, 2009, and mature on February 15 in each of the years and in the amounts shown on the inside cover page hereof. Interest will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on February 15 and August 15, commencing August 15, 2010, until maturity or earlier redemption, if any. 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 registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar 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 “BOOK-ENTRY-ONLY SYSTEM” herein. AUTHORITY FOR ISSUANCE The Bonds are being issued pursuant to the Constitution and laws of the State of Texas, including particularly Chapter 45, Texas Education Code, as amended; an election held within the District on November 6, 2007; and the Order.

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SECURITY AND SOURCE OF PAYMENT All taxable property located within the District is subject to an annual ad valorem tax levied by the District, within the limits prescribed by law. See “TAX INFORMATION - TAX RATE LIMITATIONS” herein. BUILD AMERICA BONDS The District will designate the Bonds as “Build America Bonds” (“BABs”) under and pursuant to the federal American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) and intends to elect irrevocably to receive directly from the United States Department of the Treasury direct subsidy payments equal to 35% of the interest payable by the District on the Bonds contemporaneously with each interest payment date. Under the Stimulus Act, the District is entitled to receive the subsidy payments on application to the U.S. Treasury, if (1) the District uses 100% of the proceeds of the Bonds (net of permitted costs of issuance) and investment earnings on such proceeds for capital expenditures and (2) the District complies with the same conditions regarding use and investment of proceeds of the Bonds as described in the Order and as those applicable to the exclusion of interest on tax-exempt obligations from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code (the “Code”). If the District fails to comply with the conditions to the federal subsidy throughout the term of the 3 Bonds, it may no longer receive the subsidy payments and could be subject to a claim for return of previously received subsidy payments. OPTIONAL REDEMPTION The District reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2020 in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2019 or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Bonds are to be redeemed, the District may select the maturities of Bonds to be redeemed. If less than all the Bonds of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Only form) shall determine by lot the Bonds, or portions thereof, within such maturity to be redeemed. If a Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. MANDATORY SINKING FUND REDEMPTION The Bonds maturing on February 15, 2024 and February 15, 2028 (collectively, the “Term Bonds”) are subject to mandatory redemption prior to maturity on February 15 in each of the years and respective principal amounts set forth below at a redemption price equal to 100% of the principal amount plus accrued interest to the date of redemption:

Term Bondsdue February 15, 2024

Redemption Date Principal(February 15) Amount

2023 $17,900,0002024 18,550,000

$36,450,000

Term Bondsdue February 15, 2028

Redemption Date Principal(February 15) Amount

2025 $19,200,0002026 19,950,0002027 20,750,0002028 21,600,000

$81,500,000

On each mandatory redemption date, the Term Bonds shall be called for redemption among the owners of such term bonds on a pro rata basis determined by (i) dividing the principal amount of each mandatory sinking fund payment by the total principal amount of the related Term Bonds then Outstanding, and (ii) multiplying the resulting quotient by the principal amount of the related Term Bonds held by each Registered Owner, or as long as the Term Bonds are held in a book-entry-only system, by each Beneficial Owner.

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MAKE-WHOLE OPTIONAL REDEMPTION The Bonds are subject to redemption prior to their stated maturity date at the option of the District in whole or in part on any date prior to February 15, 2019, at a redemption price equal to the greater of: (1) the principal amount of the Bonds to be redeemed; or (2) the sum of the present value of the remaining scheduled payments of principal and interest to the maturity date of the Bonds to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the Bonds are to be redeemed, discounted to the date on which the Bonds are to be redeemed on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Treasury Rate, plus 25 basis points, plus, in each case, accrued and unpaid interest on the Bonds to be redeemed to the redemption date. “Treasury Rate” means, with respect to any redemption date for a particular Bond, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date (excluding inflation indexed securities) (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to the maturity date of the Bond to be redeemed; provided, however, that if the period from the redemption date to such maturity date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be used. At the request of the Paying Agent/Registrar, the make-whole optional redemption price of the Bonds to be redeemed will be determined by an independent accounting firm, investment banking firm or financial advisor retained by the District at the District’s expense to calculate such redemption price. The Paying Agent/Registrar and the District may conclusively rely on the determination of such redemption price by such independent accounting firm, investment banking firm or financial advisor and will not be liable for such reliance. EXTRAORDINARY OPTIONAL REDEMPTION The Bonds are subject to redemption prior to their maturity at the option of the District, in whole or in part at any time upon or after the occurrence of an Extraordinary Event, at a redemption price equal to the greater of: (1) the issue price of the Bonds to be redeemed, provided that such amount must be at least equal to the par amount of the Bonds to be redeemed; or (2) the sum of the present value of the remaining scheduled payments of principal and interest to the maturity date or first optional redemption date of the Bonds to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the Bonds are to be redeemed, discounted to the date on which the Bonds are to be redeemed on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Treasury Rate, plus 100 basis points, plus, in each case, accrued and unpaid interest on the Bonds to be redeemed to the redemption date. An “Extraordinary Event” will have occurred if a change has occurred to Sections 54AA or 6431 of the Code (as such Sections were added by Section 1531 of the Recovery Act, pertaining to “Build America Bonds”) or any other law, administrative proceeding or regulation, pursuant to which the Federal Subsidy applicable to the Bonds is reduced or eliminated. Treasury Rate has the meaning set forth above under “- MAKE-WHOLE OPTIONAL REDEMPTION.” At the request of the Paying Agent/Registrar, the extraordinary optional redemption price of the Bonds to be redeemed will be determined by an independent accounting firm, investment banking firm or financial advisor retained by the District at the District’s expense to calculate such redemption price. The Paying Agent/Registrar and the District may conclusively rely on the determination of such redemption price by such independent accounting firm, investment banking firm or financial advisor and will not be liable for such reliance.

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NOTICE OF REDEMPTION Not less than 30 days prior to a redemption date for a Bond, the District shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of such Bond to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice 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 owner, shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the District will reduce the 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. Neither 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 the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. See “BOOK-ENTRY ONLY SYSTEM.” DEFEASANCE The District reserves the right to defease the Bonds in any manner now or hereafter provided by law. Currently, Texas law provides that the Bonds may be defeased when payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise) is provided by irrevocably depositing with a paying agent in trust (1) money in an amount sufficient to make such payment and/or (2) Defeasance Securities (as defined below) certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. “Defeasance Securities” include (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) 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 (3) 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. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. Because the Order does not contractually limit such investments, registered owners may be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under Texas law. PAYING AGENT/REGISTRAR The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Houston, Texas. In the Order, the District retains the right to replace the Paying Agent/Registrar. The District covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be a legally qualified bank, trust company, financial institution, or other agency legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the new Paying Agent/Registrar shall 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. The Paying Agent/Registrar shall not be required to transfer or exchange any Bond called for redemption in whole or in part during the 45-day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Owner of the unredeemed portion of a Bond called for redemption in part.

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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 of the Bonds duly endorsed for transfer or accompanied by an assignment duly executed by the registered owner or his authorized representative in a form satisfactory to the Paying Agent/Registrar to the Paying Agent/Registrar and such transfer or exchange shall 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 the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred 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. 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 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 shall 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. See “BOOK-ENTRY-ONLY SYSTEM” herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. RECORD DATE FOR INTEREST PAYMENT The record date (“Record Date”) for the interest payable on the Bonds on any interest payment date means 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, if 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 shall be 15 days after the Special Record Date, shall be sent at least five days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of an 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. OWNERS’ REMEDIES The Order does not provide for the appointment of a trustee to represent the interests of the Bond holders upon any failure of the District to perform in accordance with the terms of the Order or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Order. Furthermore, the Order does not establish specific events of default with respect to the Bonds and, under State law, there is no right to the acceleration of maturity of the Bonds upon the failure of the District to observe any covenant under the Order. A registered owner of Bonds could seek a judgment against the District if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the District and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the District to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes due or perform other material terms and covenants contained in the Order. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The District is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bond holders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection 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 court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Co-Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code.

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USE OF PROCEEDS The proceeds from the sale of the Bonds will be applied approximately as follows(1):

Sources of Funds

Par Amount of the Bonds 183,750,000.00$ Accrued Interest 460,571.00

Total 184,210,571.00$

Uses of Funds

Deposit to Construction Fund 183,750,000.00$ Deposit to Interest & Sinking Fund 460,571.00 Total 184,210,571.00$

_______________ (1) Costs of issuance of the Bonds will be paid from proceeds of the District’s Limited Tax Schoolhouse Bonds, Series 2009A-1, to be

delivered concurrently with the delivery of the Bonds.

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 believes the source of such information to be reliable, but takes 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 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 Bond certificate will be issued for each maturity of the Bonds in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive 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 facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, and principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and corresponding detail information from the District or the Paying Agent/Registrar on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent/Registrar or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, and principal and interest payments on the Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) are the responsibility of the Paying Agent/Registrar or the District, 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 securities depository with respect to the Bonds at any time by giving reasonable notice to the Paying Agent/Registrar or the District. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the District or the Underwriters. Effect of Termination of Book-Entry-Only System In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the District, printed Bonds will be issued to the holders and the Bonds will be subject to transfer, exchange and registration provisions as set forth in the Order and summarized under “THE BONDS - TRANSFER, EXCHANGE AND REGISTRATION.”

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STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS RECENT LITIGATION RELATING TO THE TEXAS PUBLIC SCHOOL FINANCE SYSTEM On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of 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 had become in effect a state property tax, in violation of article VIII, section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the “Finance System”) was inefficient, inadequate, and unsuitable, in violation of article VII, section 1 of the Texas Constitution, because the State of Texas (the “State”) did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the “Supreme Court”), which rendered decisions in the case on May 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, other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors 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 all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated article VIII, section 1-e of the Texas Constitution because the statutory limit of $1.50 per $100.00 of taxable assessed valuation on property taxes levied by school districts for operation and maintenance 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. As stated above, in West Orange-Cove I the plaintiff school districts asserted that the $1.50 per $100.00 of taxable assessed valuation tax that was generally authorized by State law to be levied for school operation and maintenance purposes (the “M&O Tax”), though imposed locally, had become in effect a State property tax prohibited by article VIII, section 1-e of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of article VII, section 1 of the Texas Constitution, because children in property-poor districts did not have substantially 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 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 violation of article VII, section 1 of the Texas Constitution. In reaching its first 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. In reaching its second holding, the Court, using a test of arbitrariness determined that: the public education system was “adequate,” since it is capable of accomplishing a general diffusion of knowledge; the Finance System was 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 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 deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of article VII, section 1. We 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 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 to prove that there was an inability to provide for a “general diffusion of knowledge” without additional facilities.

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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 reduce M&O Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to as the “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 OBLIGATIONS 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 ad valorem debt service tax as security for payment of the Bonds. Reference is made, in particular, to the information under the heading “THE BONDS – SECURITY AND SOURCE OF PAYMENT.” 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 funding structures. Among other possibilities, the 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. In 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 to retire previously issued bonds, but would instead require the Legislature to cure the Finance System's unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions” (collectively, the “Contract Clauses”). Consistent with the Contract Clauses, in the exercise of its police powers, the State may make such 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 matter of law, the Bonds, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of future legislation or litigation, or how such legislation or future court orders may affect the District's financial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address school funding in Texas could substantially adversely affect the financial condition, revenues or operations of the 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 limited debt service tax, 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 Finance System is a summary of the Reform Legislation and the changes made by the State Legislature to the Reform Legislation since its enactment, including modifications made during the regular session of the 81st Texas Legislature (the “2009 Regular Legislative Session”). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon’s Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the 2006-07 fiscal year of each district, 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 fiscal year 2007-08, but subject to local referenda that may increase local M&O Tax levies, thus offsetting a part of the compression in local M&O Tax levies. See “TAX INFORMATION – TAX RATE LIMITATIONS.” 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 LBB projected that the Reform Legislation would be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years 2006-07 through 2010-11, although 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.

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Under the Finance System, as modified during the 2009 Regular Legislative Session, a school district that imposes a M&O tax at least equal to the product of the “state compression percentage” (as defined below) multiplied by the district's 2005-2006 M&O tax rate is entitled to at least the amount of State revenue necessary to provide the district with the sum of (A) the State and local revenue per weighted average daily attendance (“WADA”) to which the school district would be entitled under the funding elements as they existed on January 1, 2009, (B) an additional $120 per WADA, (C) an amount equal to the amount to which the district is entitled based on supplemental payments owed to any tax increment fund 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). State funds appropriated to provide districts the guaranteed amount may only be used for operating and maintenance purposes and not to fund facilities, debt service or other purposes. 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, the district’s guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments 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. A basic component of the funding formulas is the “state compression percentage.” The state compression percentage was 66.67% for fiscal years 2007-08 and 2008-09. For 2009-10 and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to the 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 available by the Legislature for school district property tax relief. For fiscal year 2009-10, the 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” to reduce their wealth to such amount 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 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. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. State funding allotments may be altered and adjusted to penalize school districts with high 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 subsidize local tax receipts at a tax rate of up to $0.86 per $100 of property value to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school 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. The cost of the basic program is based on an allotment per student known as the “Tier One Basic Allotment.” The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the “cost of education index.” In addition, a district-size adjustment further adjusts 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 2009-2010 through 2012-2013 school years, the basic allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district's compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 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 Regular Legislative Session limits, beginning with 2010-2011 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 2009-2010 school year, the revenue increases are limited to the funds the district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two funds.

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Tier Two currently provides two levels of enrichment with different guaranteed yields depending on the amount of local district tax effort. For fiscal year 2009-10, the first six cents of tax effort that exceeds the compressed tax rate will generate a guaranteed 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 in the previous year, whichever is greater. The second level of Tier 2 is generated by 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, 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 cent of tax effort; and any tax effort associated with a tax approved by voters at a roll back election was funded 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 cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve 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 the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. If 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 districts. Once a district receives an IFA award for bonds, it 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 issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior 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, however, the Texas Education Agency has indicated that it intends 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 2010-11 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 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective 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 taxes levied to pay the principal of and interest on the bonds were included in the district's audited debt service collections for that school year and (ii) the district does not receive IFA State assistance for payment of the principal and interest on the bonds. 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. The 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 for school districts is ad valorem taxes levied against the local tax base. The former 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 with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the 2006-07 and 2007-08 fiscal years, districts were able 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 will generate equalized funding dollars from the State under the Tier Two program. In fiscal year 2008-09 and beyond, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, including the District, 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 tax that may be unlimited in rate, if approved by the voters. See “TAX INFORMATION - TAX RATE LIMITATIONS” herein. The governing body of a school district cannot adopt an annual tax 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.

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WEALTH TRANSFER PROVISIONS Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student (“wealth per student”) for each school year to no greater than the “equalized wealth level”, determined in 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 wealth level that required wealth reduction measures for fiscal year 2006-07 was $319,500 per student in average daily 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 district's M&O tax effort that did not exceed its compression 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 $0.04. For 2008-2009 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 its compressed rate plus $0.04. For 2009-10 that wealth level has been increased to $476,500 per student in average daily attendance with respect to that portion of a district's M&O tax effort 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 $0.06. Property wealthy districts may also be able to levy up to an additional four cents (six cents beginning with fiscal year 2009-10) per $100 of assessed valuation of M&O Taxes to provide revenue above the equalized wealth level that is not subject to recapture. Additional funding was provided by the Legislature in HB 1 for low wealth districts that exercise all or part of the local option enrichment tax. 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 district may educate students from other districts who transfer to the district without charging tuition to such students. A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase “attendance credits” by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students 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 elections by the transferring district’s qualified voters. Third, a wealthy district 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 student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options 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 wealth level by detaching certain types of property from the district and annexing the property to a property-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 2009-10 school year is greater than the equalized wealth value. Accordingly, the District has been required to exercise one of the permitted wealth equalization options. The District has chosen to have the estimated recapture wealth amounts deducted from State aid payments. 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 outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district.

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TAX INFORMATION AD VALOREM TAX LAW The appraisal of property within the District is the responsibility of the Harris County Appraisal District (the “Appraisal District”). Excluding agricultural and open space land, which may be taxed on the 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 its market value and is prohibited from applying any assessment ratios. In determining 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 for the most recent tax year in which it was appraised or (2) 110% of the appraised value of the residence homestead for the preceding tax year. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to appraise 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 Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution (“Article VIII”) and State law provide for certain exemptions from property taxes, the valuation of agricultural and open space lands at productivity value, and the exemption of certain personal 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 homesteads in the following sequence: $15,000; and an additional $10,000 for those 65 years of age or older, or the disabled. A person over 65 and disabled may receive only 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 received the $10,000 exemption. The freeze on ad valorem taxes on the homesteads of persons 65 years of age or older for general elementary and secondary public school purposes is also transferable to a different residence homestead. 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, at its option, may grant: (i) 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; (ii) An exemption of up to 20% of the market value of residence homesteads; minimum exemption $5,000. State law and Section 2, article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased 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 a maximum of $12,000. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open space land (Section 1-d-1), including open space land devoted to farm or ranch purposes or open space land devoted to timber 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. 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 this property. Boats owned as nonbusiness property are exempt from ad valorem taxation.

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Article VIII, Section 1-j of the Texas Constitution provides for “freeport property” to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Notwithstanding such exemption, counties, school districts, junior college districts and cities may tax such tangible personal property provided official action to tax the same was taken before April 1, 1990. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. The District currently taxes “freeport property.” Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in-transit” is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date 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 year preceding a tax year, after holding a public hearing, to tax goods-in-transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. A city or county may create a tax increment financing district (“TIF”) within the city or county with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with the city or county 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 certain 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 taxing units. Prior to September 1, 2001, school districts were allowed to enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The school district in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. School districts have been prohibited from entering into new tax abatement agreements since September 1, 2001. Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for school districts to grant limitations on appraised property values and provide ad valorem tax credits to certain corporations and limited liability companies to encourage economic development within the district. Generally, during the last eight years of the ten-year term of a tax limitation agreement, the school district may only levy and collect ad valorem taxes for maintenance and operation purposes on the agreed-to limited appraised property value. The taxpayer is entitled to a tax credit from the school district for the amount of taxes imposed during the first two years of the tax limitation agreement on the appraised value of the property above the agreed-to limited value. Additional State funding is provided to a school district for each year of such tax limitation in the amount of the tax credit provided to the taxpayer. During the first two years of a tax limitation agreement, the school district may not adopt a tax rate that exceeds the district’s rollback tax rate (see “– PUBLIC HEARING AND ROLLBACK TAX RATE” below). Credit will not be given by the Commissioner of Education in determining a district’s property value wealth per student for (1) the appraised value, in excess of the “frozen” value, of property that is located in a tax 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 its intention to create the zone and the zone is created and has its final project and financing plan approved by the municipality prior to August 31, 1999), or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, 1993. TAX RATE LIMITATIONS A school district is authorized to levy M&O taxes subject to approval of a proposition submitted to district voters under Section 45.003(d) of the Texas Education Code, as amended. The maximum M&O Tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. The maximum voted M&O Tax rate for the District is $1.70 per $100 of assessed valuation less the rate levied by the District for debt service, which shall never be more than $1.00 on each $100 valuation of taxable property within the District. The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.70 less the rate levied by the District for debt service, and (B) the sum of (1) the rate of $0.17, and (2) the product of the “state compression percentage” multiplied by $1.50. The rate levied by the District for debt service for Tax Year 2009 is $0.15. For a more detailed description of the state compression percentage, see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM – GENERAL.” Furthermore, a school 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 “– PUBLIC HEARING AND ROLLBACK TAX RATE.” A school district is also authorized to issue bonds and levy taxes for payment of bonds (the “Debt Service Tax”) subject to voter approval of a proposition submitted to the voters under Section 45.003(b)(1), Texas Education Code, as amended. In the case of the District, the Debt Service Tax may not exceed $1.00 and the sum of the M&O Tax and the Debt Service Tax may not exceed $1.70. See “THE BONDS – SECURITY AND SOURCE OF PAYMENT” and “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS.”

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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 other outstanding “new debt” of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In 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. In the case of the District, once the prospective ability to pay such tax has been shown and the bonds are issued, the District may levy a Debt Service Tax subject to the limitations described in the immediately preceding paragraph. Taxes levied to pay debt service on bonds 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 such bonds) are not subject to the foregoing threshold tax rate test. In addition, taxes levied 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 Bonds are secured by the M&O Tax, not the Debt Service Tax, and are not subject to the $0.50 threshold tax rate test. Under current law, a district 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 of the tax year five years after the current tax year or the tax year in which the final 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 rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the 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. PUBLIC HEARING AND ROLLBACK TAX RATE In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district's “rollback tax rate” without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (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.” Effective June 19, 2009, if for the preceding tax year a district adopted an M&O tax rate that was less than its effective M&O rate for that preceding tax year, the district's rollback tax for the current year is calculated as if the district had adopted an M&O tax rate for the preceding tax year equal to its effective M&O tax rate for that preceding tax year. The “effective maintenance and operations tax rate” for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed 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. By each September 1 or as soon thereafter as practicable, the Board of Education adopts a tax rate per $100 taxable value for the current 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 the language and format requirements of such notice as set forth in Section 44.004(b), (c) and (d) and if such failure to comply was not in good faith. Section 44.004(e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Furthermore, Section 26.05 of the Property Tax Code that provides 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. 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 tax rate before adopting its budget must hold a public hearing on the proposed tax rate followed by another public hearing on the proposed budget rather than holding a single hearing on the two items.

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PROPERTY 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 price of oil and gas for the prior year. Taxes become due 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 installment due on February 1 of each year and the final installment due on August 1. PENALTIES AND INTEREST Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows:

Cumulative Cumulative Month Penalty 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, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 20% attorney’s collection fee is added to the total tax penalty and interest charge. Taxes levied by the District are a personal obligation of the owner 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 attachment of the tax lien. Personal property under certain circumstances is 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, taxpayer redemption rights, 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. DISTRICT APPLICATION OF TAX CODE The Harris County Appraisal District (“Appraisal District”) has the responsibility for appraising property in the District as well as other taxing units in Harris County. The Appraisal District is governed by a board of directors appointed by voters of the governing bodies of various Harris County political subdivisions. Harris County collects the District’s taxes. The District grants a state mandated $15,000 general homestead exemption. The District grants a state mandated $10,000 residence homestead exemption for persons 65 years of age or older or the disabled. The District grants a state mandated residence homestead exemption for disabled veterans ranging from $5,000 to $12,000. Ad valorem taxes are not levied by the District against the exempt value of residence homesteads for the payment of debt. The District does not grant an exemption for freeport property or goods-in-transit. The District has elected to participate in 17 tax increment reinvestment zones. SOURCES OF DISTRICT REVENUES (UNAUDITED) During the fiscal year ended June 30, 2008, approximately 44% of the District's revenues were derived from ad valorem taxes, 24% from state sources, 8% from federal sources, and 24% from other sources.

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TABLE 1 - VALUATION, EXEMPTIONS AND TAX SUPPORTED DEBT Tax Year 2007 Taxable Assessed Valuation (100% of estimated market value)…………………………………… 96,574,625,420$ (1)

Tax Year 2008 Taxable Assessed Valuation (100% of estimated market value)…………………………………… 109,136,887,108 (1)

Total Ad Valorem Tax Debt at June 30, 2009……………………………………………………………………… 1,980,664,734$ (2)

Plus: The Bonds……………………………………………………………………………………………………… 183,750,000 Plus: The Series 2009 Contractual Obligations……………………………………………………………………… 23,500,000 (3)

Plus: The Series 2009A-1 and 2009A-2 Bonds……………………………………………………………………… 217,770,000 (4)

Plus: Accreted Value of Capital Appreciation Bonds as of June 30, 2009………………………………………… 153,333,836 Plus: Houston Independent School District Public Facili ty Corporation Debt as of June 30, 2009………………… 110,845,981 (5)

Less: Debt Service Fund (cash and investments as of June 30, 2009)……………………………………………… (125,997,707) (6)

Net Debt Outstanding……………………………………………………………………………………………… 2,543,866,845$

Ratio of Net Debt to Tax Year 2007 Taxable Assessed Valuation………………………………………………… 2.63%Ratio of Net Debt to Tax Year 2008 Taxable Assessed Valuation………………………………………………… 2.33%

Tax Year 2008 District Tax Rate (per $100 T.A.V.): Local Maintenance………………………………………………………………………………………………… 1.00670 $ Debt Service…………………………………………………………………………………..…………………… 0.15000 Total……………………………………………………………………………………..……………………… 1.15670 $

Tax Rate Limitation (per $100 T.A.V.):…………………………………………………………………………… 1.70000 $

Average percentage of current tax collections for Tax Years 2004 through 2008………………………………… 96.36%

Average percentage of total (current and delinquent) tax collections for Tax Years 2004 through 2008………… 101.27%

Peak Student Enrollment…………………………………………………………………………………………… 200,225 (7)

District Population Estimate………………………………………………………………………………………… 1,197,412 _______________ (1) Source: The District. Net of exemptions. See “AD VALOREM TAX PROCEDURES—TABLE 4 – VALUATION AND TAX-SUPPORTED

DEBT HISTORY.” (2) Comprised of $1,841,019,734 in bonds payable from debt service taxes and $139,645,000 in obligations payable from maintenance taxes. (3) Represents the District’s Public Property Finance Contractual Obligations, Series 2009 to be issued on November 17, 2009. (4) Represents the District’s Limited Tax Schoolhouse Bonds, Series 2009A-1 and Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2

(Build America Bonds – Direct Payment to Issuer) expected to be issued on November 17, 2009. (5) Includes accreted value of capital appreciation bonds. (6) Source: The District. Unaudited. (7) Source: The District.

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TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY

2008 2007 2006% of % of % of

Category Amount Total Amount Total Amount TotalReal, Residential, Single-Family 58,932,419,016$ 42.44% 54,123,994,226$ 44.26% 49,172,728,024$ 45.17%Real, Residential, Multi-Family 9,614,645,127 6.92% 8,570,731,552 7.01% 7,326,818,942 6.73%Real, Vacant Lots/Tracts 3,382,198,629 2.44% 2,522,386,818 2.06% 2,187,713,429 2.01%Real, Acreage (Land Only) 396,652,971 0.29% 318,379,180 0.26% 296,608,001 0.27%Real, Farm and Ranch Improvements 611,127 0.00% 429,652 0.00% 89,306 0.00%Real, Commercial 31,609,120,885 22.76% 26,144,413,349 21.38% 22,459,267,207 20.63%Real, Industrial 2,445,551,925 1.76% 2,279,587,127 1.86% 1,840,568,764 1.69%Real, Oil, Gas and Other Mineral Reserves 9,439,360 0.01% 3,299,920 0.00% 6,127,840 0.01%Real and Tangible Personal, Utilities 1,553,900,277 1.12% 1,626,977,288 1.33% 1,667,039,439 1.53%Tangible Personal, Commercial 10,118,713,165 7.29% 9,344,174,816 7.64% 8,823,973,200 8.10%Tangible Personal, Industrial 5,036,580,425 3.63% 4,782,114,178 3.91% 4,160,633,758 3.82%Tangible Personal, Other 51,512,694 0.04% 52,462,030 0.04% 56,234,060 0.05%Real Property Inventory 506,675,554 0.36% 538,124,962 0.44% 317,284,314 0.29%Exempt Property 15,203,516,762 10.95% 11,970,023,076 9.79% 10,558,102,406 9.70%Total Appraised Value Before Exemptions 138,861,537,917$ 100.00% 122,277,098,174$ 100.00% 108,873,188,690$ 100.00%Less: Total Exemptions/Reductions 29,724,650,809 25,702,472,754 23,692,707,260

Taxable Assessed Value 109,136,887,108$ 96,574,625,420$ 85,180,481,430$

2005 2004% of % of

Category Amount Total Amount TotalReal, Residential, Single-Family 45,360,174,014$ 45.39% 42,344,360,520$ 49.85%Real, Residential, Multi-Family 6,975,795,045 6.98% 6,351,762,270 7.48%Real, Vacant Lots/Tracts 1,740,603,876 1.74% 1,606,081,810 1.89%Real, Acreage (Land Only) 303,904,274 0.30% 329,160,960 0.39%Real, Farm and Ranch Improvements 64,795 0.00% 84,760 0.00%Real, Commercial 19,601,845,849 19.61% 18,524,757,290 21.81%Real, Industrial 1,614,035,115 1.61% 1,820,235,750 2.14%Real, Oil, Gas and Other Mineral Reserves 3,689,820 0.00% 3,341,960 0.00%Real and Tangible Personal, Utilities 1,679,482,877 1.68% 1,689,305,560 1.99%Tangible Personal, Commercial 8,772,476,870 8.78% 8,732,272,210 10.28% Tangible Personal, Industrial 3,658,296,030 3.66% 3,315,766,410 3.90%Tangible Personal, Other 54,484,640 0.05% 54,044,300 0.06%Real Property Inventory 92,840,938 0.09% 72,246,870 0.09%Exempt Property 10,083,683,019 10.09% 106,752,920 0.13%Total Appraised Value Before Exemptions 99,941,377,162$ 100.00% 84,950,173,590$ 100.00%Less: Total Exemptions/Reductions 22,311,689,107 11,681,949,360

Taxable Assessed Value 77,629,688,055$ 73,268,224,230$

Taxable Assessed Valuation for Tax Year

Taxable Assessed Valuation for Tax Year

_______________ Source: The District. NOTE: Increase in total exemptions beginning with tax year 2005 is attributable to a change in the method of reporting governmental, religious and charitable properties. The effect of the change is neutral since these values are added to the tax rolls and then deducted as exemptions.

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TABLE 3 - EXEMPTIONS

Classification of Exemption or Exclusion Amount Percent Amount Percent Amount Percent

Local Option and State Mandatory Homestead Exemption 12,179,308,214$ 40.97% 11,637,424,031$ 45.28% 10,978,334,985$ 46.34%

Homestead Exemptions Over 65 years of age or older (up to $10,000 AV) 895,401,200 3.01% 843,213,626 3.28% 834,793,821 3.52%

Disabled Veterans, Surviving Spouses and/or Children and Certain Other Disabled Persons 115,067,795 0.39% 165,456,194 0.64% 157,644,827 0.67%

Tax Abatement Exemption - 0.00% - 0.00% - 0.00%

Tax Exempt (i.e., Church) 15,140,287,680 50.94% 11,941,517,771 46.46% 10,533,350,522 44.46%

Pollution Control 282,724,166 0.95% 299,408,051 1.16% 198,315,349 0.84%

Foreign Trade 358,754,981 1.21% 317,874,857 1.24% 452,181,324 1.91%

Other 753,106,773 2.53% 497,578,224 1.94% 538,086,432 2.27%

Total Exemptions from Assessed Value 29,724,650,809$ 100.00% 25,702,472,754$ 100.00% 23,692,707,260$ 100.00%

2008 Tax Year 2007 Tax Year 2006 Tax Year

_______________ Source: The District. TABLE 4 - VALUATION AND TAX-SUPPORTED DEBT HISTORY

Ratio of TaxSupported

Taxable Debt TaxFiscal Taxable Assessed Gross Debt to Taxable SupportedYear Assessed Valuation Outstanding Assessed Debt

Ended Valuation(2) Per Capita at End of Year(3) Valuation Per Capita2005 73,268,224,230$ 57,701$ 1,951,248,304$ 2.66% 1,537$ 2006 77,629,688,055 62,010 2,048,569,624 2.64% 1,636 2007 85,180,481,430 68,309 1,983,746,986 2.33% 1,591 2008 96,574,625,420 79,054 2,341,976,476 2.43% 1,917 2009 109,136,887,108 91,144 2,669,864,552 (4) 2.45% (4) 2,230 (4)

_______________ (1) Calculated as Average Daily Attendance multiplied by the District's population factor of 6.6238457 (2000 census population of 1,259,617

divided by 2000 ADA of 190,164). (2) As reported by the Harris County Appraisal District, subject to change throughout the year. (3) Includes bonds, contractual obligations, notes, HISD Public Facility Corporation debt, and accretion of capital appreciation bonds. (4) Includes the Bonds and the District’s Public Property Finance Contractual Obligations, Series 2009, Limited Tax Schoolhouse Bonds,

Series 2009A-1, and Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2 (Build America Bonds – Direct Payment to Issuer) expected to be issued on November 17, 2009.

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TABLE 5 - TAX RATE, LEVY AND COLLECTION HISTORY

Maintenance InterestFiscal and andYear Tax Operating Sinking % Current % Total

Ended Rate Fund Fund Tax Levy Collections Collections2005 1.59900$ 1.45000$ 0.14900$ 1,130,129,601$ 96.63% 101.34%2006 1.62000 1.45000 0.17000 1,212,486,814 96.32% 101.18%2007 1.47570 1.32570 0.15000 1,217,856,993 96.39% 102.27%2008 1.15670 1.00670 0.15000 1,080,016,606 96.11% 100.28%2009 1.15670 1.00670 0.15000 1,209,859,983 96.61% (1) 99.74% (1)

_______________ (1) Unaudited. TABLE 6 - TEN LARGEST TAXPAYERS

2008 % of 2008

Taxable TaxableAssessed Assessed

Principal Taxpayers Type of Property Valuation ValuationCrescent Real Estate Buildings and Land 1,378,543,156$ 1.26%Centerpoint Energy Inc. Electric Utility 1,039,803,856 0.95%Hines Interests Ltd Partnership Buildings and Land 962,302,817 0.88%Cullen Allen Holdings LP Buildings and Land 596,155,386 0.55%Southwestern Bell Telephone Co. Telephone Utility 584,839,854 0.54%Teachers Insurance Buildings and Land 578,530,234 0.53%TPG BH ICC LP Buildings and Land 576,224,151 0.53%Chevron Chemical Co. Buildings and Land 478,700,396 0.44%Anheuser Busch Inc. Buildings and Land 451,539,258 0.41%Valero Energy Corp. Buildings and Land 386,825,360 0.35%

7,033,464,468$ 6.44%

_______________ (1) Source: The District.

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TABLE 7 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities 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 person should rely upon such information as being accurate or complete. Furthermore, 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.

Estimated District 'sTaxable Gross Debt % Overlapping

Assessed Value(1) Tax Rate(1) Outstanding(1) Applicable Debt(1)

Bellaire, City of 3,198,441,096$ 0.3770$ 55,386,310$ 100.00% 55,386,310$ Fort Bend Co. WC&ID #2 2,627,829,691 0.1800 51,980,714 0.01% 5,198 Harris County 283,447,261,315 0.3892 2,209,203,399 38.50% 850,543,309 Harris County Department of Education 269,900,567,656 0.0056 - 38.50% - Harris County Flood Control Dist 259,105,893,106 0.0308 97,354,412 38.50% 37,481,449 Harris County Improvement District #1 3,738,230,907 0.1440 12,595,571 100.00% 12,595,571 Harris County MUD #122 65,046,309 0.8700 2,350,000 100.00% 2,350,000 Harris County MUD #355 410,470,747 0.3000 12,574,743 100.00% 12,574,743 Harris County MUD #390 134,904,005 0.7000 13,719,202 100.00% 13,719,202 Harris County MUD #393 81,933,514 0.9300 6,250,000 100.00% 6,250,000 Harris County MUD #407 53,403,252 0.7500 5,260,000 100.00% 5,260,000 Harris County MUD #410 29,443,041 0.7200 5,315,000 27.76% 1,475,444 Harris County MUD #411 56,863,583 0.9600 4,280,519 100.00% 4,280,519 Harris County MUD #420 36,493,113 1.3600 2,964,180 100.00% 2,964,180 Harris County Toll Road 281,185,866,136 - - 38.50% - (2)

Harris County WC&ID #89 198,070,118 1.3400 26,938,395 100.00% 26,938,395 Harris County WC&ID (Fondren Rd) 226,669,936 0.5400 2,808,766 100.00% 2,808,766 Houston Community College System 114,823,824,195 0.0924 192,190,000 100.00% 192,190,000 Houston, City of 150,812,527,994 0.6390 2,402,134,561 64.87% 1,558,264,690 Jacinto City, City of 403,869,944 0.6610 - 35.71% - Missouri City, City of 4,201,692,876 0.5172 85,320,108 99.90% 85,234,788 Port of Houston Authority 268,597,998,000 0.0177 525,705,000 38.50% 202,396,425 Southside Place, City of 483,323,400 0.3480 8,258,876 100.00% 8,258,876 Southwest Harris County MUD #1 55,887,308 0.6100 2,575,000 100.00% 2,575,000 West University Place, City of 3,747,914,916 0.3590 67,520,000 100.00% 67,520,000 Total Net Overlapping Debt 3,151,072,864$

Houston ISD 109,136,887,108 1.1567 2,669,864,552 (3) 100.00% 2,669,864,552Total Direct & Overlapping Funded Debt 5,820,937,416$

_______________ (1) Most recent information provided by the respective Texas Municipal Reports. (2) Debt is self-supporting from toll road fees. (3) Includes the Bonds, previously issued bonds, contractual obligations, notes, HISD Public Facility Corporation debt, accretion of capital

appreciation bonds, and the District’s Public Property Finance Contractual Obligations, Series 2009, Limited Tax Schoolhouse Bonds, Series 2009A-1, and Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2 (Build America Bonds – Direct Payment to Issuer) expected to be issued on November 17, 2009.

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DEBT INFORMATION TABLE 8 - TAX-SUPPORTED DEBT SERVICE REQUIREMENTS

Year Total Net Total Less:End Outstanding Outstanding Direct Total6/30 I&S Fund Debt(1) M&O Fund Debt(2) Principal Interest Total Subsidy(3) Requirements2010 141,118,981$ 22,181,615$ 163,300,597$ 2011 157,541,168 27,367,145 13,356,559$ 13,356,559$ (4,674,796)$ 193,590,076 2012 163,060,858 32,877,393 10,362,848 10,362,848 (3,626,997) 202,674,101 2013 160,413,633 27,089,890 10,362,848 10,362,848 (3,626,997) 194,239,374 2014 171,557,033 18,767,113 10,362,848 10,362,848 (3,626,997) 197,059,996 2015 175,928,058 10,315,375 10,362,848 10,362,848 (3,626,997) 192,979,284 2016 171,763,583 10,078,313 10,362,848 10,362,848 (3,626,997) 188,577,746 2017 175,425,833 8,341,525 10,362,848 10,362,848 (3,626,997) 190,503,209 2018 177,600,539 8,308,750 10,362,848 10,362,848 (3,626,997) 192,645,140 2019 162,862,789 11,344,500 15,650,000$ 10,362,848 26,012,848 (3,626,997) 196,593,140 2020 160,900,664 10,796,125 16,150,000 9,617,751 25,767,751 (3,366,213) 194,098,327 2021 156,251,127 10,250,000 16,700,000 8,816,550 25,516,550 (3,085,792) 188,931,884 2022 154,614,527 17,300,000 7,946,313 25,246,313 (2,781,209) 177,079,630 2023 154,159,927 17,900,000 7,018,860 24,918,860 (2,456,601) 176,622,185 2024 156,535,277 18,550,000 6,023,441 24,573,441 (2,108,204) 179,000,513 2025 159,612,489 19,200,000 4,991,875 24,191,875 (1,747,156) 182,057,208 2026 162,775,177 19,950,000 3,815,875 23,765,875 (1,335,556) 185,205,495 2027 129,970,264 20,750,000 2,593,938 23,343,938 (907,878) 152,406,324 2028 130,003,264 21,600,000 1,323,000 22,923,000 (463,050) 152,463,214 2029 152,485,289 152,485,289 2030 129,148,516 129,148,516 2031 108,269,268 108,269,268 2032 107,884,287 107,884,287 2033 85,385,589 85,385,589 2034 28,394,512 28,394,512

3,633,662,652$ 197,717,743$ 183,750,000$ 148,406,940$ 332,156,940$ (51,942,429)$ 4,111,594,905$

The Bonds

________ (1) Interest rates on variable rate bonds are shown at the set rates through June 2009 and are assumed at 4.50% thereafter. Includes net debt

service on the District’s Limited Tax Schoolhouse Bonds, Series 2009A-1 and Limited Tax Schoolhouse Bonds, Taxable Series 2009A-2 (Build America Bonds – Direct Payment to Issuer) to be issued on November 17, 2009.

(2) Since the principal and interest payments occur on July 15 of each year, the District accrues the payments in the fiscal year prior to the July 15 payment date. However, the amounts in the table above are shown in the fiscal years that the payments are actually paid rather than the fiscal year in which the payments are accrued. Includes debt service on the District’s Public Property Finance Contractual Obligations, Series 2009 to be issued on November 17, 2009.

(3) Represents a subsidy, estimated at 35% of the interest payments on the Bonds, that is expected to be paid by the federal government. TABLE 9 - AUTHORIZED BUT UNISSUED LIMITED TAX BONDS

Date Amount Amount Issued Amount UnissuedAuthorized Authorized To Date(1) This Issue(2) Balance11/6/2007 805,000,000$ 400,000,000$ 405,000,000$ -$

________ (1) Includes a portion of the original issue premium on such bonds. (2) Includes the Bonds and the District’s Limited Tax Schoolhouse Bonds, Series 2009A-1, and Limited Tax Schoolhouse Bonds, Taxable

Series 2009A-2 (Build America Bonds – Direct Payment to Issuer) to be issued on November 17, 2009. Includes a portion of the original issue premium on the Series 2009A-1 Bonds.

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TABLE 10 - LEASE/PURCHASE BONDS On May 28, 1998, the District entered into a Lease/Purchase Agreement for two high schools. On April 1, 2006, the District entered into a Lease/Purchase Agreement for a food service warehouse. The District will make the following lease payments from available pledged revenues, principally Tier I funds:

FiscalYear Ending Total

June 30 Principal Interest Requirements2010 6,191,872$ 5,430,978$ 11,622,850$ 2011 6,013,787 5,740,919 11,754,706 2012 6,017,493 6,212,476 12,229,969 2013 5,811,800 6,561,731 12,373,531 2014 5,804,089 7,049,561 12,853,650 2015 5,646,180 7,358,621 13,004,800 2016 5,499,225 7,663,838 13,163,063 2017 5,308,482 7,844,818 13,153,300 2018 2,649,393 3,543,995 6,193,388 2019 2,634,517 3,569,767 6,204,284 2020 2,626,219 3,582,172 6,208,391 2021 2,626,456 3,587,557 6,214,013 2022 2,630,073 3,584,987 6,215,059 2023 1,585,000 746,256 2,331,256 2024 1,660,000 673,244 2,333,244 2025 1,735,000 596,856 2,331,856 2026 1,815,000 516,981 2,331,981 2027 1,900,000 433,394 2,333,394 2028 1,985,000 345,981 2,330,981 2029 2,075,000 253,334 2,328,334 2030 2,170,000 155,169 2,325,169 2031 2,270,000 52,494 2,322,494

76,654,584$ 75,505,128$ 152,159,713$

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FINANCIAL INFORMATION TABLE 11 - GENERAL FUND REVENUE AND EXPENDITURE HISTORY The District maintains four separate principal funds: a general fund used to finance a majority of its current operations; a special revenue fund for certain state and federal grants made for specific operating purposes; a debt service fund; and a capital projects fund. All ad valorem taxes and a major portion of state and federal grants are allocated among such funds. All ad valorem taxes levied for maintenance are allocated to the general fund. All ad valorem taxes levied for debt service are allocated to the debt service fund. All federal and state funds, except those for designated purposes, are placed in the general fund. Other non-revenue receipts are designated for the capital projects fund. The general and special revenue funds are generally utilized for operating expenditures. The debt service fund and the capital projects fund are restricted for debt service and capital projects purposes, respectively. The following is a summary of the District's revenues by source for the fiscal years 2005 through 2008 and the currently budgeted sources of revenue for fiscal year 2009, and summaries of changes in the balances in such funds for the last five fiscal years. All of the information set forth in the tables below was provided by the District.

Total RevenuesFiscal Year Ended (000's Omitted)

Source 2009 (1) 2008 2007 2006 2005Property Taxes 1,208,553$ 1,091,125$ 1,245,492$ 1,226,814$ 1,145,279$ Other Local Sources 76,998 86,235 94,847 85,108 64,767 State Sources 495,309 587,449 403,583 250,436 259,596 Federal Sources 215,127 196,168 203,613 229,693 177,873 Subtotal 1,995,987$ 1,960,977$ 1,947,535$ 1,792,051$ 1,647,515$ Other Sources 150,012 526,938 479,411 729,178 571,873 Total Revenues 2,145,999$ 2,487,915$ 2,426,946$ 2,521,229$ 2,219,388$

_______________ (1) Budgeted.

General FundFiscal Year Ended (000's Omitted)

Source 2009 (1) 2008 2007 2006 2005Beginning of Fiscal Year 523,685$ 457,764$ 352,552$ 256,892$ 207,302$ Revenues 1,540,429 1,534,280 1,522,324 1,356,015 1,288,481 Total Funds Available 2,064,114$ 1,992,044$ 1,874,876$ 1,612,907$ 1,495,783$

Expenditures (1,538,735)$ (1,425,457)$ (1,342,483)$ (1,245,685)$ (1,237,488)$

Other Sources 28,142 36,893 26,250 34,262 25,100 Other Uses (80,390) (79,795) (100,879) (48,932) (26,503) Balance, End of Fiscal Year 473,131$ 523,685$ 457,764$ 352,552$ 256,892$

_______________ (1) Budgeted.

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Special Revenue Fund

Fiscal Year Ended (000's Omitted)Source 2009 (1) 2008 2007 2006 2005

Beginning of Fiscal Year 9,452$ -$ -$ -$ -$ Revenues 263,949 247,617 254,328 273,581 214,897 Total Funds Available 273,401$ 247,617$ 254,328$ 273,581$ 214,897$

Expenditures (264,058)$ (245,327)$ (254,328)$ (273,581)$ (214,897)$

Other Sources - - - - - Other Uses - - - - - Prior Period Adjustment - 7,162 - - - Balance, End of Fiscal Year 9,343$ 9,452$ -$ -$ -$

_______________ (1) Budgeted.

Debt Service FundFiscal Year Ended (000's Omitted)

Source 2009 (1) 2008 2007 2006 2005Beginning of Fiscal Year 104,224$ 99,636$ 88,503$ 79,552$ 70,993$ Revenues 157,658 144,260 129,517 130,785 108,041 Total Funds Available 261,882$ 243,896$ 218,020$ 210,337$ 179,034$

Expenditures (246,139)$ (194,409)$ (171,096)$ (145,157)$ (128,660)$

Other Sources 91,313 54,737 382,133 481,069 335,384 Other Uses - - (329,421) (457,746) (306,206) Balance, End of Fiscal Year 107,056$ 104,224$ 99,636$ 88,503$ 79,552$

_______________ (1) Budgeted.

Capital Projects FundFiscal Year Ended (000's Omitted)

Source 2009 (1) 2008 2007 2006 2005Beginning of Fiscal Year 654,984$ 320,020$ 450,297$ 519,634$ 533,373$ Revenues 33,951 34,820 41,366 31,670 36,097 Total Funds Available 688,935$ 354,840$ 491,663$ 551,304$ 569,470$

Expenditures (96,967)$ (126,474)$ (234,427)$ (305,576)$ (247,195)$

Other Sources 30,557 435,308 71,029 213,846 211,389 Other Uses (11,018) (8,690) (8,245) (9,277) (14,030) Balance, End of Fiscal Year 611,507$ 654,984$ 320,020$ 450,297$ 519,634$

_______________ (1) Budgeted.

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INVESTMENTS The District invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Board of Education of the District. Both State law and the District’s investment policies are subject to change. LEGAL INVESTMENTS Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board. Both state law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (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, or invested by an investing entity through, a depository institution that has its main office or a branch office in the State of Texas, that are guaranteed or insured as required by, or otherwise meet the requirements of, the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended); (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent 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 U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted 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, and (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAA-m or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no 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 the changes in a market index. INVESTMENT POLICIES Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for District funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All 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) liquidity, (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 and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person’s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived.” At 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 statements and (b) state law. No person may invest District funds without express written authority from the Board of Education. ADDITIONAL PROVISIONS Under Texas law the District is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the District to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Education; (3) require the registered principal of firms seeking to sell securities to the District to: (a) receive and review the District’s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform an annual audit of the management controls on investments and adherence to the District’s investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict the investment in mutual funds in the aggregate to no more than 80% of the District’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in non-money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no more than 15% of the entity’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. DISTRICT’S INVESTMENT POLICY The District maintains a conservative investment policy. The District's goal is to minimize credit and market risks while maintaining a competitive yield on its portfolio. Funds of the District are invested either in short-term U.S. Government or Agency Notes and Discount Notes, A1+ or better Commercial Paper, TexPool, the Lone Star Investment Pool, managed by the Texas Association of School Boards, or TexSTAR. All cash deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) or are secured by collateral held at the Federal Reserve Bank. The District does not currently own, nor does it anticipate the inclusion of derivative products in the District’s portfolio. Please refer to Note No. 3 to the District's Audited Financial Statement (Appendix A) for a more complete description of the District's investments. TABLE 12 - CURRENT INVESTMENTS As of July 31, 2009, the District’s investable funds were invested in the following categories:

PercentDescription of Total Market Value

Lone Star Investment Pool 34.11% 432,460,442$ TexPool 36.44% 462,088,205 Certificate of Deposit 0.06% 740,000 TexStar 3.09% 39,127,193 U.S. Government Sponsored Securities 26.31% 333,539,017

100.00% 1,267,954,857$

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TAX MATTERS GENERAL The District intends to designate the Bonds as “Build America Bonds.” The following is a general summary of United States federal income tax consequences of the purchase and ownership of the Bonds. The discussion is based upon laws, Treasury Regulations, rulings and decisions now in effect, all of which are subject to change (possibly with retroactive effect) or possibly differing interpretations. No assurances can be given that future changes in the law will not alter the conclusions reached herein. The discussion below does not purport to deal with United States federal income tax consequences applicable to all categories of investors. Further, this summary does not discuss all aspects of United States federal income taxation that may be relevant to a particular investor in the Bonds in light of the investor’s particular personal investment circumstances or to certain types of investors subject to special treatment under United States federal income tax laws (including insurance companies, tax exempt organizations, financial institutions, broker-dealers, and persons who have hedged the risk of owning the Bonds). The summary is therefore limited to certain issues relating to initial investors who will hold the Bonds as “capital assets” within the meaning of Section 1221 of the Code, and acquire such Bonds for investment and not as a dealer or for resale. This summary addresses certain federal income tax consequences applicable to beneficial owners of the Bonds who are United States persons within the meaning of Section 7701(a)(30) of the Code (“United States persons”) and, except as discussed below, does not address any consequences to persons other than United States persons. Prospective investors should note that no rulings have been or will be sought from the IRS with respect to any of the U.S. federal income tax consequences discussed below, and the discussion below is not binding on the IRS. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE BONDS. INTERNAL REVENUE SERVICE CIRCULAR 230 NOTICE You should be aware that:

(i) the discussion with respect to United States federal tax matters in this Official Statement was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer; (ii) such discussion was written to support the promotion or marketing (within the meaning of IRS Circular 230) of the transactions or matters addressed by such discussion; and (iii) each taxpayer should seek advice based on his or her particular circumstances from an independent tax advisor.

This notice is given solely for purposes of ensuring compliance with IRS Circular 230. STATED INTEREST ON THE BONDS The stated interest on the Bonds will be included in the gross income, as defined in Section 61 of the Code, of the beneficial owners thereof and be subject to U.S. federal income taxation when paid or accrued, depending on the tax accounting method applicable to the beneficial owners thereof. DISPOSITION OF BONDS A beneficial owner of Bonds will generally recognize gain or loss on the redemption, sale or exchange of a Bond equal to the difference between the redemption or sales price (exclusive of the amount paid for accrued interest) and the beneficial owner’s adjusted tax basis in the Bond. Generally, the beneficial owner’s adjusted tax basis in a Bonds will be the beneficial owner’s initial cost, increased by any original issue discount previously included in the beneficial owner’s income to the date of disposition and reduced by any amortized bond premium. Any gain or loss generally will be capital gain or loss and will be long-term or short-term, depending on the beneficial owner’s holding period for the Bond. No defeasance of the Bonds will relieve the District of its obligation to pay principal of and interest on the Bonds or, consequently, result in a constructive disposition of the defeased Bonds. BACKUP WITHHOLDING Under Section 3406 of the Code, a beneficial owner of the Bonds who is a United States person, as defined in Section 7701(a)(30) of the Code, may, under certain circumstances, be subject to “backup withholding” with respect to current or accrued interest on the Bonds or with respect to proceeds received from a disposition of Bonds. This withholding applies if such beneficial owner of Bonds: (i) fails to furnish to the payor such beneficial owner’s social security number or other taxpayer identification number (“TIN”); (ii) furnishes the payor an incorrect TIN; (iii) fails to report properly interest, dividends, or other “reportable payments” as defined in the Code; or (iv) under certain circumstances, fails to provide the payor with a certified statement, signed under penalty of perjury, that the TIN provided to the payor is correct and that such beneficial owner is not subject to backup withholding.

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Backup withholding will not apply, however, with respect to payments made to certain beneficial owners of the Bonds. Beneficial owners of the Bonds should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedures for obtaining such exemption.

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 Rule. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and timely 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 the MSRB. 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, being the information described in the section titled “TAX INFORMATION – SOURCES OF DISTRICT REVENUES”, under Tables numbered 1 through 6 and 8 through 12 and in Appendix A. The District will update and provide this information within six months after the end of each fiscal year. The financial information and operating data to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB’s Internet Web site (www.emma.msrb.org) or filed with the United States Securities and Exchange Commission (the “SEC”), as permitted by SEC Rule 15c2-12 (the “Rule”). The updated information will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix A or such other accounting 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 June 30. Accordingly, it must provide updated information by December 31 of each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify the MSRB of the change. MATERIAL EVENT NOTICES The District will also provide timely notices of certain events to the MSRB. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. (Neither the Bonds nor the Order make any provision for debt service reserves or liquidity enhancement.) In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under “ANNUAL REPORTS.” AVAILABILITY OF INFORMATION The District has agreed to provide the foregoing information only to the MSRB. Such information will be available free of charge from the MSRB at www.emma.msrb.org. 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 as described above. The District makes no representation or warranty 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 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 District to comply with its agreement.

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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 consent to the amendment or (b) any person unaffiliated with the District (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The District may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule 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 in the primary offering of the Bonds. If 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 reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS For the past five years, the District has complied in all material respects with its continuing disclosure obligations in accordance with the Rule.

OTHER INFORMATION RATINGS The Bonds are rated “Aa2” by Moody’s and “AA+” by S&P. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the District makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by both of such rating companies, if in the judgment of either company, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Bonds. LITIGATION The District is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the District’s financial position or the District’s ability to issue and deliver the Bonds. 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); 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, Texas Government Code, as amended (the Texas Public Security Procedures Act), provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Texas Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, requires that the Bonds be assigned a rating of “A” or its equivalent as to investment quality by a national rating agency. See “OTHER INFORMATION - RATINGS” herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure 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. No review by the District has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states.

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LEGAL MATTERS The delivery of the Bonds is subject to the approving opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the District payable from the proceeds of an annual ad valorem tax levied, within the limits prescribed by law, upon all taxable property in the District, and the approving legal opinion of Andrews Kurth LLP, Houston, Texas, and Burney & Foreman, Houston, Texas, Co-Bond Counsel to the District, in substantially the form attached as Appendix B. The legal fee to be paid Co-Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. In their capacity as Co-Bond Counsel, Andrews Kurth LLP and Burney & Foreman have not independently verified any of the factual information contained in this Official Statement nor have they conducted an investigation of the affairs of the District for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon such firm’s limited participation as an assumption of responsibility for, or an expression of opinion of any kind with regard to, the accuracy or completeness of any of the information contained herein. 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. CO -FINANCIAL ADVISORS First Southwest Company and Rice Financial Products (the “Co-Financial Advisors”) are employed by the District as financial advisors in connection with the issuance of the Bonds. The Co-Financial Advisors’ fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. Although the Co-Financial Advisors have read and participated in the preparation of this Official Statement, they have not independently verified any of the information set forth herein. The information contained in this Official Statement has been obtained primarily from the District’s records and from other sources which are believed to be reliable, including financial records of the District and other entities which may be subject to interpretation. No guarantee is made as to the accuracy or completeness of any such information. No person, therefore, is entitled to rely upon the participation of the Co-Financial Advisors as an implicit or explicit expression of opinion as to the completeness and accuracy of the information contained in this Official Statement. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the District at a price of $183,750,000.00 less an underwriting discount of $948,150.00. The Underwriters will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Underwriters. FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various 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 and possible changes or developments in social, economic, business, industry, market, legal, and 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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AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that 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 such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Order authorizing the issuance of the Bonds will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds by the Underwriters.

/s/ Lawrence Marshall President, Board of Education

Houston Independent School District ATTEST:

/s/ Carol Mims Galloway Secretary, Board of Education

Houston Independent School District

APPENDIX A EXCERPTS FROM THE HOUSTON INDEPENDENT SCHOOL DISTRICT ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2008

The financial information contained in this Appendix consists of excerpts from the Houston Independent School District Annual Financial Report for the Year Ended June 30, 2008, as prepared by:

Deloitte & Touche LLP Houston, Texas

This information is not intended to be a complete statement of the District’s financial condition. A complete Audit Report is available upon request from:

First Southwest Company Co-Financial Advisor to the District

(This Page Left Blank Intentionally)

MANAGEMENT’S DISCUSSION AND ANALYSIS (Unaudited)

Our discussion and analysis of Houston Independent School District’s (the “District”) financial performance provides an overview of the District’s financial activities for the fiscal year ended June 30, 2008. It should be read in conjunction with the transmittal letter at the front of this report and the basic financial statements which follow this section.

The Management’s Discussion and Analysis is a combination of both government-wide financial statements and fund financial statements.

FINANCIAL HIGHLIGHTS

On the government-wide financial statements, the assets of the District exceeded liabilities by $1.315 billion. Of this amount, $687.8 million is unrestricted. Total net assets of the District increased from $1.237 billion in fiscal year 2007 to $1.315 billion in fiscal year 2008, an increase of approximately $78.2 million. Total revenues decreased $20.3 million from $2.073 billion in fiscal year 2007 to $2.053 billion in fiscal year 2008.

The District’s governmental funds financial statements reported a combined ending fund balance in fiscal year 2008 of $1.265 billion. Of this amount, $42.5 million is reserved in the General Fund for restricted purposes and $197.2 million is unreserved, undesignated in the General Fund and is available for spending at the District’s discretion. The combined ending fund balance of the District increased $387.9 million from $877.4 million in fiscal year 2007. This is due to the sale of bonds for authorized construction.

The District prepared a budget for the 2007-08 fiscal year that was based upon reducing expenditures by $27 million which included reductions for central office operations, Hurricane Katrina education needs, reserve adjustments, and operating costs. Increases for the budget totaled $159.8 million due to salary and benefits increases, utilities, transfers to debt service, transfers to the “pay as you go” program for capital projects, maintenance needs, technology, security, transportation, and one-time funds for schools in the areas of fine arts and capital outlay.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the District’s basic financial statements. The District’s basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains required supplementary information and other supplementary information in addition to the basic financial statements themselves.

Government-Wide Financial Statements

All of the District’s services are reported in the government-wide financial statements, including instruction, student support services, student transportation, general administration, school leadership, facilities acquisition and construction and food services. Property taxes, state and federal aid, and investment earnings finance most of the activities. Additionally, all capital and debt financing activities are reported here.

The government-wide financial statements are designed to provide readers a broad overview of the District’s finances, in a manner similar to a private-sector business.

The statement of net assets presents information on all of the District’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the District’s financial position is improving or deteriorating.

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The statement of activities details how the District’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave).

Both of the government-wide financial statements distinguish functions of the District that are principally supported by taxes and intergovernmental revenues (governmental activities) as opposed to business-type activities that are intended to recover all or a significant portion of their costs through user fees and charges.

The government-wide financial statements include not only the District itself, but also a legally separate entity for which the District is financially accountable. Financial information for this component unit is reported separately as a nonmajor governmental fund.

Fund Financial Statements

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

All of the funds of the District can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. Most of the District’s activities 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. However, unlike the government-wide financial statements, governmental fund financial statements provide a detailed short-term view that helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District’s programs. Because this information does not encompass the additional long-term focus of the government-wide statements, we provide additional information on the subsequent page that explains the relationship (or differences) between them.

The District maintains five governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, the Special Revenue Fund, the Debt Service Fund, and the Capital Renovation Fund, all of which are considered to be major funds. Data from the Capital Renovation Fund - Public Facility Corporation is presented as a non-major governmental fund on the same statements.

Proprietary funds are used to account for operations that are financed similar to those found in the private sector. These funds provide both long- and short-term financial information. The District maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The District uses enterprise funds to account for its food service, business development, and medicaid programs. The Food Service Fund is considered a major proprietary fund. We use internal service funds to report activities that provide services for the District’s other programs and activities, i.e., health insurance, workers’ compensation, print shop, and internal services. Because these services predominately benefit governmental rather than business-type functions, they have been included within governmental activities within the government-wide financial statements.

Fiduciary funds are used to account for assets held by the District in a trustee capacity or as an agent for individuals, private organizations and/or other funds. No fiduciary funds are used as clearing accounts to

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distribute financial resources to other funds. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of 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 financial statements because the District cannot use these assets to finance its operations.

Notes to the Basic Financial Statements

The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements.

Other Information

In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information that further explains and supports the information in the financial statements. Immediately following the required supplementary information, combining statements are included for the nonmajor enterprise funds, the internal service funds, and the agency funds.

The remainder of this overview section of management’s discussion and analysis explains the structure and contents of each of the statements. Figure A-1 summarizes the major features of the District’s financial statements, including the portion of the District’s government they cover and the types of information they contain.

Type of Statements Government-wide Governmental Funds Proprietary Funds Fiduciary Funds

Scope

All activities of the District(except fiduciary funds)and the Agency's componentunits

The activities of the districtthat are not proprietary orfiduciary

Activities the districtoperates similar to privatebusinesses

Instances in which thedistrict is the trustee oragent for someone else'sresources

Statement of net assets Balance sheet Statement of net assets Statement of fiduciary net assets

Statement of revenues, expenses and changes in fund net assets

Statement of cash flows

Accounting basisand measurement focus

Accrual accounting andeconomic resources focus

Modified accrualaccounting and currentfinancial resources focus



Type ofasset/liabilityinformation

All assets and liabilities,both financial and capital,short-term and long-term

Only assets expected tobe used up and liabilitiesthat come due during theyear or soon thereafter;no capital assets included

All assets and liabilities,both financial and capital,and short-term and long-term

All assets and liabilities,both short-term and long-term; the Agency's funds donot currently containcapital assets, althoughthey can

Type of inflow/outflowinformation

All revenues andexpenses during year, regardless of when cashis received or paid

Revenues for which cashis received during or soonafter the end of the year;expenditures when goodsor services have been received and payment isdue during the year orsoon thereafter

All revenues and expensesduring year, regardless ofwhen cash is received orpaid

All revenues andexpenses during year,regardless of when cashis received or paid

Figure A-1. Major Features of the District's Government-wide and Fund Financial Statements

Required financialstatements Statement of activities Statement of revenues,

expenditures & changes in fund balances

Statement of changes in fiduciary net assets

Fund Statements

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net assets may serve over time as a useful indicator of the District’s financial position. The District’s total net assets were approximately $1.315 billion at June 30, 2008. Net assets of the District’s governmental activities increased by $90.4 million. Net assets of the District’s business–type activities decreased by $19.4 million.

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2008 2007 2008 2007 2008 2007 Difference

Current and other assets $ 1,797,560 $ 1,385,476 $ 17,063 $ 38,471 $ 1,814,623 $ 1,423,947 $ 390,676

Capital assets 2,270,537 2,219,262 23,316 18,506 2,293,853 2,237,768 56,085

Total assets 4,068,097 3,604,738 40,379 56,977 4,108,476 3,661,715 446,761

Current liabilities 446,954 401,739 6,701 3,912 453,655 405,651 48,004

Long term liabilities 2,339,478 2,018,883 293 317 2,339,771 2,019,200 320,571

Total liabilities 2,786,432 2,420,622 6,994 4,229 2,793,426 2,424,851 368,575

Net assets:

Invested in capital assets,

net of related debt 519,175 457,203 23,316 18,506 542,491 475,709 66,782

Restricted 84,771 83,230 - 16,172 84,771 99,402 (14,631)

Unrestricted 677,719 643,683 10,069 18,070 687,788 661,753 26,035

Total net assets $ 1,281,665 $ 1,184,116 $ 33,385 $ 52,748 $ 1,315,050 $ 1,236,864 $ 78,186

The District's Condensed Statement of Net Assets

TotalGovernmental Activities

Business-type

Activities

(in thousands of dollars)

Investment in capital assets (e.g. land, buildings, furniture, and equipment) less any related debt used to acquire those assets that is still outstanding is $542.5 million. The District uses these capital assets to provide services to students; consequently, these assets are not available for future spending. Although the District’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the District’s net assets of $84.8 million represent resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets $687.8 million may be used to meet the District’s ongoing obligations.

Changes in net assets. The District’s total revenues were $2.053 billion. A significant portion, approximately 52 percent, of the District’s revenue comes from property taxes. Operating grants & contributions provided revenue of 21 percent, 21 percent comes from state aid - formula grants, while only 1 percent relates to charges for services. (See Figure A-2) The total cost of all programs and services was $1.982 billion.

Figure A-2 District Sources of Revenue

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Governmental Activities

The net assets of the District’s governmental activities increased by $90.4 million due to increases in debt service property taxes and state aid. The total cost of all governmental activities for the fiscal year ended June 30, 2008 was $1.861 billion. Funding for these governmental activities is by specific program revenue or through general revenues such as property taxes and investment earnings. The following is a summary of the governmental activities:

The cost of all governmental activities this year was $1.861 billion.

Some of the governmental activities cost was funded by program revenues directly attributable to specific activities. These program revenues amounted to $344.8 million.

The remaining cost of governmental activities not directly funded by program revenues was $1.517 billion of which $1.077 billion was funded by property taxes and $435.8 million was funded by state aid - not restricted to specific programs.

Business-type Activities

The net assets of the District’s business-type activities decreased by $19.4 million due to an increase in Food Service operating expenses, a decrease in investment earnings, and transfers out to the General Fund. Funding for these business-type activities is by specific program revenue or through general revenues such as investment earnings. The following is a summary of the business-type activities:

The cost of all business-type activities this year was $120.5 million.

The majority of the business-type activities cost was funded by program revenues directly attributable to specific activities. These program revenues amounted to $112.3 million.

Changes in Net Assets

The total net assets of District increased by $78.2 million due to the following activities:

Operating grants and contributions increased $9.6 million due to an increase in entitlements received from governmental agencies.

State aid increased partially due to salary increases for teachers.

Earnings on investments decreased due to a decrease of daily average interest rates of 1.02 percent.

Instruction expenses increased $45.6 million due to increases in funding for the performance pay program, library upgrades, and fine arts program.

Food service expenses increased due to increases in salaries, food, and supplies.

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Revenues 2008 2007 2008 2007 2008 2007 Difference

Program Revenues

Charges for services $ 1,756 $ 1,328 $ 25,943 $ 28,854 $ 27,699 $ 30,182 $ (2,483)

Operating grants and contributions 343,082 339,591 86,398 80,288 429,480 419,879 9,601

General Revenues

Property taxes 1,077,008 1,235,819 - - 1,077,008 1,235,819 (158,811)

State aid - not restricted to specific programs 435,758 286,433 - - 435,758 286,433 149,325

Earnings on investments 48,973 56,967 1,056 2,510 50,029 59,477 (9,448)

Other 32,068 40,325 982 1,219 33,050 41,544 (8,494)

Total revenues 1,938,645 1,960,463 114,379 112,871 2,053,024 2,073,334 (20,310)

Expenses

Instruction 1,069,344 1,023,780 - - 1,069,344 1,023,780 45,564

Instructional resources and media services 14,693 14,614 - - 14,693 14,614 79

Instructional staff development 59,860 51,047 - - 59,860 51,047 8,813

Curriculum development 4,241 3,884 - - 4,241 3,884 357

Instructional leadership 23,267 21,142 - - 23,267 21,142 2,125

School leadership 124,181 110,863 - - 124,181 110,863 13,318

Guidance, counseling, and evaluation services 50,166 43,581 - - 50,166 43,581 6,585

Social work services 2,174 2,249 - - 2,174 2,249 (75)

Health services 19,443 18,402 - - 19,443 18,402 1,041

Student transportation 47,791 41,697 - - 47,791 41,697 6,094

Food service 1,462 332 - - 1,462 332 1,130

Co-curricular/extracurricular activities 15,657 13,257 - - 15,657 13,257 2,400

General administration 37,274 33,028 - - 37,274 33,028 4,246

Plant maintenance and operations 184,483 177,780 - - 184,483 177,780 6,703

Security and monitoring services 19,813 18,718 - - 19,813 18,718 1,095

Data processing services 52,847 52,925 - - 52,847 52,925 (78)

Community services 5,454 5,776 - - 5,454 5,776 (322)

Interest and fiscal charges 95,792 104,070 - - 95,792 104,070 (8,278)

Juvenile justice alternative education program 762 330 - - 762 330 432

Tax reinvestment zone payments 32,754 32,222 - - 32,754 32,222 532

Food service - - 109,520 98,727 109,520 98,727 10,793

Other - - 11,022 10,820 11,022 10,820 202

Total expenses 1,861,458 1,769,697 120,542 109,547 1,982,000 1,879,244 102,756

Change in net assets before transfers 77,187 190,766 (6,163) 3,324 71,024 194,090 (123,066)

Transfers 13,200 13,200 (13,200) (13,200) - - -

Change in net assets 90,387 203,966 (19,363) (9,876) 71,024 194,090 (123,066)

Beginning net assets 1,184,116 980,150 52,748 62,624 1,236,864 1,042,774 194,090

Change in beginning net assets-

Prior Period Adjustment (Note 13) 7,162 - - - 7,162 - 7,162

Ending net assets $ 1,281,665 $ 1,184,116 $ 33,385 $ 52,748 $ 1,315,050 $ 1,236,864 $ 78,186

The District's Changes in Net Assets

(in thousands of dollars)

Business-type ActivitiesGovernmental Activities Total

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The following table presents the cost of the District’s largest governmental functions as well as their related netcost (total cost less fees generated by the activities and intergovernmental aid). The net cost reflects what was funded by local tax dollars, state revenues, and other miscellaneous general revenues.

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100

2008

2007

Total Cost for Select Functions(in millions of dollars)

Instruction

Plant maintenance &operations

School leadership

Interest & fiscal charges

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900

2008

2007

Net Cost for Select Functions (in millions of dollars)

Instruction

Plant maintenance & operations

School leadership

Interest & fiscal charges

2008 2007 2008 2007

Instruction 1,069.3 1,023.8 864.6 812.2

Plant maintenance & operations 184.5 177.8 177.9 171.2

School leadership 124.2 110.9 114.7 102.6

Interest & fiscal charges 95.8 104.1 95.8 104.1

Total Cost of Services Net Cost of Services

Net Cost of Selected District Functions(in million of dollars)

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FINANCIAL ANALYSIS OF THE DISTRICT’S FUNDS

Governmental Funds The District's accounting records for general governmental operations are maintained on a modified accrual basis as prescribed by the Financial Accountability System Resource Guide, Texas Education Agency, with the revenues being recorded when available and measurable to finance expenditures of the fiscal period. Expenditures are recorded when services or goods are received and the fund liabilities are incurred. The general governmental operations include the following major funds: General, Special Revenue, Debt Service, Capital Renovation, and the other nonmajor governmental fund (Public Facility Corporation).

Revenues for general governmental functions totaled $1.934 billion for the fiscal year ended June 30, 2008, a decrease of .72 percent from the prior fiscal year. Property taxes were the largest source of revenue received by the District. The District's total tax levy decreased by $137.8 million from the prior year as a result of House Bill 1 (HB1) lowering of the maintenance and operations 2005-2006 tax rate of $1.45 to the current rate of $1.0067. As a result of the lower rate, state revenues increased by 44.1 percent from fiscal year 2007. The hold-harmless provisions of HB1 allowed districts to either earn the higher of the 2006-2007 or the 2007-2008 amount of revenue generated per weighted average daily attendance (WADA) with the state making up the difference between the hold-harmless provisions and the amount collected from property taxes. Federal revenues decreased 3.7 percent from fiscal year 2007 primarily due to a decrease in various federal funds distributed by the Texas Education Agency.

Expenditures for general governmental operations totaled $1.992 billion during fiscal year 2008, a decrease of .50 percent from fiscal year 2007. While there is an overall decrease in expenditures, increases occurred in expenditures for the functional areas of instructional resources and media services, social work services, student transportation, food services, data processing services, community services, debt service interest and fiscal charges, and facilities acquisition and construction.

The governmental funds reported a combined fund balance of $1.265 billion, an increase of $387.9 million. The net increase of the combined fund balances was comprised of a fund balance increase in the General Fund, Special Revenue Fund, Debt Service Fund, and Capital Renovation Fund of $38.9 million, $9.5 million, $4.6 million, and $340.6 million, respectively, and a decrease in the nonmajor governmental fund of $5.7 million. Out of the combined fund balances, $206.6 million constitutes unreserved, undesignated fund balance.The remainder of the fund balance is reserved or designated to indicate that it is not available for new spending because it has already been committed.

The General Fund is the primary operating fund of the District. The fund balance of the General Fund increased $38.9 million during the fiscal year primarily due to lower than expected expenditures. At the end of the current fiscal year, unreserved, undesignated fund balance of the general fund was $197.2 million. Unreserved, undesignated fund balance represents 13.8 percent of the total general fund expenditures, while total fund balance represents 34.8 percent of that same amount.

The Special Revenue Fund accounts for all grants received by the District. The ending fund balance of $9.5 million consists of a prior period adjustment of $7.2 million of accumulated revenues collected in prior years and $2.3 million of revenues collected in the current year from the E-rate program.

The Debt Service Fund has a total fund balance of $104.2 million all of which is reserved for the payment of debt service. The net increase in fund balance during the period in the debt service fund was $4.6 million. The District makes semi-annual debt service payments in December/June, January/July, February/August, and September of each year. Debt service payments for the period ended June 30, 2008 included all scheduled payments/accruals due within 30 days of year end.

The Capital Renovation Fund has a total fund balance of $651.7 million. The majority, $530.8 million dollars, is designated for future construction while $119.6 million is reserved for encumbrances. The remaining $1.3 million is designated for arbitrage. The fund balance increased by $340.6 million as a result of the sale of bonds for the District’s new Rebuild HISD 2007 program and the completion of projects in the Rebuild HISD program.

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The Capital Renovation Fund – Public Facility Corporation has a total fund balance of $3.3 million, all of which is designated for construction of the food service warehouse facility. The fund balance decreased by $5.7 million as a result of increased expenditures for the food service warehouse facility.

Proprietary Funds The District maintains both enterprise funds and internal service funds. Information is presented separately in the proprietary fund statement of net assets and in the proprietary fund statement of revenues, expenses, and changes in fund net assets for the Food Service Fund, which is considered to be a major fund. Net assets in the Food Service Fund as of June 30, 2008 were $17.7 million. Of this amount, $23.3 million represented the investment in capital assets, which is offset by ($5.6 million) in unrestricted assets. For the fiscal year, net assets decreased by $17.1 million due primarily to a $9.7 million increase in total operating expenses.

General Fund Budgetary Highlights

Over the course of the year, the District revised its budget several times. As a result, actual expenditures were $62.6 million less than the appropriated budgeted amounts which resulted in positive variances. These variances are the result of salaries, benefits, performance pay, consultants, and contracted services being budgeted at a greater amount than expenditures. Following were the key variances:

$27.4 million resulted from staffing $13.7 million school reserves $8.3 million campus funding $6.4 million data processing services

Staffing is budgeted at one hundred percent of actual salary. Budget amounts for vacant positions are monitored to ensure that only limited revisions are allowed for departments. Schools have a more flexible revision policy but cannot take excess salary budgets for non-salary uses.

The final budgeted amount for revenues was $1.543 billion. Actual revenues exceeded the revised budget by $487,323. This positive variance was mainly attributed to federal revenue collections exceeding budgeted amounts by approximately $613,224.

CAPITAL ASSETS AND DEBT ADMINISTRATION

CAPITAL ASSETS

The District had invested $2.271 billion, net of depreciation, in a broad range of capital assets, including land, buildings and improvements, furniture and equipment, and vehicles. This amount represents a net increase (including additions, deductions, and depreciation) of $51.3 million over last year.

District's Capital Assets

(net of depreciation, in thousands of dollars)

Total Governmental Business-type Percentage

Activities Activities Total Change 2008 2007 2008 2007 2008 2007 2008-2007

Land $ 203,526 $ 198,599 $ - $ - $ 203,526 $ 198,599 2.48%

Buildings and Improvements 1,758,060 1,650,280 13,030 3,088 1,771,090 1,653,368 7.12%

Vehicles 28,132 32,776 706 1,185 28,838 33,961 -15.09%

Furniture and equipment 72,968 80,258 9,580 5,736 82,548 85,994 -4.01%

Construction in progress 207,851 257,349 - 8,497 207,851 265,846 -21.82%

Total $ 2,270,537 $ 2,219,262 $ 23,316 $ 18,506 $ 2,293,853 $ 2,237,768 2.51%

The District opened the largest group of newly replaced campuses at one time including Bastian Elementary School, Briargrove Elementary School, Bruce Elementary School, Lantrip Elementary School, Longfellow

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Elementary School, Pilgrim Academy, Thompson Elementary School, and Walnut Bend Elementary School. Two of the schools, Thompson Elementary School and Walnut Bend Elementary School are the District’s first “green” schools, and the District is also seeking LEED certification for the “green” building design of Walnut Bend Elementary School. A LEED certified school is one that meets the criteria of the U.S. Green Building Council for building performance and sustainability. As of June 30, 2008, the District had fully funded construction commitments of $89,694,742. More detailed information about the District’s capital assets is presented in Note 6 to the financial statements.

Long Term Debt

As of June 30, 2008, the District had total bonded debt outstanding of $2.003 billion. The District debt totals included $237 million in Variable Rate Bonds outstanding at fiscal year end. The ratio of net general bonded debt to assessed valuation and the amount of bonded debt per student are useful indicators of the District's debt position. These data are presented in the schedule “Ratio of Net General Bonded Debt to Assessed Values and Net Bonded Debt per Student” in the statistical section and reflect a minor increase in the ratio of net bonded debt to assessed value of 1.97 percent, as compared to 1.88 percent last year.

The District reduced total variable debt by choosing to redeem $42,000,000 of Variable Rate Bonds Series 2004 in June 2008. Variable rate debt as a percentage of total bonded debt outstanding is 11.8%. The variable rate debt will be remarketed again in June 2009.

In March 2008 the District issued $389,825,000 in Limited Tax Schoolhouse Bonds Series 2008 with a premium of $11,975,015. The sale was the first segment of an $805 million bond referendum passed in November 2007. Proceeds of the sale will be utilized for a combination of projects including new school construction, major repair and remodeling of existing facilities, acquisition of future sites, and to pay costs associated with issuance of the bonds.

Interest earnings on proceeds from debt issued since May 15, 1989, are subject to arbitrage regulations contained in the Federal Tax Reform Act of 1986. The District records the liability as a designated part of its unreserved fund balance, if needed, on an annual basis. As of June 30, 2008, arbitrage rebate in the amount of $1,857,019 has been included as part of the unreserved fund balance on the Governmental Funds Balance Sheet.

In October 2007, the District issued $23,500,000 in Contractual Obligations Series 2007 with a premium of $99,064. Contractual obligations, with a remaining balance of $63,405,000, are issued for the purpose of acquiring personal property assets and are authorized pursuant to the laws of the State of Texas, including the Public Property Finance Act, Section 271.001 of the Texas Local Government Code.

More detailed information about the District’s long term debt is presented in Note 8 to the financial statements.

ECONOMIC FACTORS AND NEXT YEAR’S BUDGETS AND RATES

Increases for the 2008-09 General Fund operating budget total $183.9 million. These increases include the following major factors:

$36.2 million salary package

$126.9 million Chapter 41 Recapture Payment

$11.2 million per unit allocations and other subsidies

$2.1 million Aspiring Principals Institute

$3.6 million four new charter schools

$1.4 million charter school enrollment, Per Unit Allocation & Cost Of Living Adjustments

Also included were reductions of $35.6 million that included reductions primarily to Districtwide reserve accounts, transfers to other funds, closure of charter schools, reduction in refined units from decreasing enrollment, and property insurance.

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CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, customers, investors, and creditors with a general overview of the District’s finances and to demonstrate the District’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Chief Financial Officer, at 4400 West 18

th Street, Houston, Texas 77092, or call (713) 556-6600.

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Governmental Business-type

Activities Activities Total

ASSETS

Cash and cash equivalents $ 5,468,364 $ 107,420 $ 5,575,784

Investments 1,500,986,404 12,689,679 1,513,676,083

Delinquent taxes receivable - net of

estimated uncollectible taxes 106,954,639 - 106,954,639

Accounts receivable 166,069,170 2,524,872 168,594,042

Internal balances 2,678,789 (2,678,789) -

Inventories 2,113,158 4,419,816 6,532,974

Other assets 13,289,437 607 13,290,044

Land 203,526,192 - 203,526,192

Construction in progress 207,850,869 - 207,850,869

Buildings and improvements 2,508,307,573 13,275,766 2,521,583,339

Furniture and equipment 253,697,957 20,644,154 274,342,111

Vehicles 82,593,235 4,448,520 87,041,755

Accumulated depreciation (985,438,652) (15,052,767) (1,000,491,419)

Total assets 4,068,097,135 40,379,278 4,108,476,413

LIABILITIES

Accounts payable 48,606,105 5,824,837 54,430,942

Accrued salaries and related expenses 110,546,694 678,434 111,225,128

Other liabilities 121,235,251 - 121,235,251

Unearned revenues 13,487,586 - 13,487,586

Interest payable 38,626,702 - 38,626,702

Long-term liabilities:

Portion due or payable within one year:

Bonds payable 37,284,084 - 37,284,084

Contractual obligations payable 14,305,000 - 14,305,000

Notes payable 4,305,000 - 4,305,000

Premium/discount 7,962,190 - 7,962,190

Deferred loss on refunding of bonds (519,869) - (519,869)

Lease purchases 68,916 - 68,916

Arbitrage rebate payable 49,155 - 49,155

Accretion payable 22,439,767 - 22,439,767

Compensated absences payable 2,937,214 197,822 3,135,036

Claims payable 25,619,978 - 25,619,978

Portion due or payable after one year:

Bonds payable 1,965,929,043 - 1,965,929,043

Contractual obligations payable 49,100,000 - 49,100,000

Notes payable 76,045,000 - 76,045,000

Premium/discount 52,122,449 - 52,122,449

Deferred loss on refunding of bonds (6,088,183) - (6,088,183)

Lease purchases 57,128 - 57,128

Arbitrage rebate payable 1,807,864 - 1,807,864

Accretion payable 172,568,582 - 172,568,582

Compensated absences payable 20,978,224 293,178 21,271,402

Claims payable 6,958,347 - 6,958,347

Total liabilities 2,786,432,227 6,994,271 2,793,426,498

NET ASSETS

Invested in capital assets, net of related debt 519,175,036 23,315,673 542,490,709

Restricted for:

Contractual obligations 6,376,679 - 6,376,679

Debt service 78,394,428 - 78,394,428

Unrestricted 677,718,765 10,069,334 687,788,099

Total net assets $ 1,281,664,908 $ 33,385,007 $ 1,315,049,915

The notes to the basic financial statements are an integral part of this statement.

HOUSTON INDEPENDENT SCHOOL DISTRICT

STATEMENT OF NET ASSETS

JUNE 30, 2008

17

Op

era

tin

g

Ch

arg

es f

or

Gra

nts

an

dG

overn

men

tal

Bu

sin

ess-t

yp

e

Fu

ncti

on

s/P

rog

ram

sE

xp

en

ses

Serv

ices

Co

ntr

ibu

tio

ns

Acti

vit

ies

Acti

vit

ies

To

tal

Govern

menta

l activitie

s:

Instr

uction

$1,0

69,3

43,6

18

$863,0

05

$203,9

11,0

79

$(8

64,5

69,5

34)

$$

(864,5

69,5

34)

Instr

uctional re

sourc

es a

nd m

edia

serv

ices

14,6

93,2

79

-1,3

74,7

54

(13,3

18,5

25)

(13,3

18,5

25)

Instr

uctional sta

ff d

evelo

pm

ent

59,8

59,5

78

-46,2

82,8

21

(13,5

76,7

57)

(13,5

76,7

57)

Curr

iculu

m d

evelo

pm

ent

4,2

40,7

88

-4,8

99

(4,2

35,8

89)

(4,2

35,8

89)

Instr

uctional le

aders

hi p

23,2

66,5

95

-8,7

53,3

32

(14,5

13,2

63)

(14,5

13,2

63)

School le

aders

hi p

124,1

81,1

61

-9,4

65,2

91

(114,7

15,8

70)

(114,7

15,8

70)

Guid

ance, counselin

g, and e

valu

ation s

erv

ices

50,1

66,3

10

-11,5

05,6

30

(38,6

60,6

80)

(38,6

60,6

80)

Socia

l w

ork

serv

ices

2,1

73,7

52

-983,0

56

(1,1

90,6

96)

(1,1

90,6

96)

Health s

erv

ices

19,4

42,9

83

-2,1

19,9

60

(17,3

23,0

23)

(17,3

23,0

23)

Stu

dent tr

ansport

ation

47,7

90,7

24

-20,4

76,4

51

(27,3

14,2

73)

(27,3

14,2

73)

Food s

erv

ice

1,4

62,4

42

-50,8

81

(1,4

11,5

61)

(1,4

11,5

61)

Co-c

urr

icula

r/extr

acurr

icula

r activitie

s15,6

57,3

29

389,7

23

3,6

25,7

50

(11,6

41,8

56)

(11,6

41,8

56)

Genera

l adm

inis

tration

37,2

74,1

87

-4,9

89,9

60

(32,2

84,2

27)

(32,2

84,2

27)

Pla

nt m

ain

tenance a

nd o

pera

tions

184,4

83,1

75

502,9

87

6,1

01,9

36

(177,8

78,2

52)

(177,8

78,2

52)

Security

and m

onitoring s

erv

ices

19,8

12,8

80

-1,5

58,8

60

(18,2

54,0

20)

(18,2

54,0

20)

Data

pro

cessin

g s

erv

ices

52,8

46,7

92

-18,4

89,0

33

(34,3

57,7

59)

(34,3

57,7

59)

Com

munity s

erv

ices

5,4

53,7

24

-3,3

87,4

20

(2,0

66,3

04)

(2,0

66,3

04)

Inte

rest and fis

cal charg

es

95,7

91,5

71

-1,1

02

(95,7

90,4

69)

(95,7

90,4

69)

Juvenile

justice a

ltern

ative e

ducation p

rogra

m762,0

71

--

(762,0

71)

(762,0

71)

Tax r

ein

vestm

ent zone p

aym

ent s

32,7

54,5

33

--

(32,7

54,5

33)

(32,7

54,5

33)

Tota

l govern

menta

l activitie

s1,8

61,4

57,4

92

1,7

55,7

15

343,0

82,2

15

(1,5

16,6

19,5

62)

(1,5

16,6

19,5

62)

Busin

ess-t

ype a

ctivitie

s:

Food s

erv

ice

109,5

20,2

38

14,5

12,4

44

76,2

75,0

76

-(1

8,7

32,7

18)

(18,7

32,7

18)

Busin

ess d

evelo

pm

ent

9,7

59,3

85

10,2

86,2

53

--

526,8

68

526,8

68

Medic

aid

1,2

62,9

40

1,1

44,8

19

10,1

23,3

85

-10,0

05,2

64

10,0

05,2

64

Tota

l busin

ess-t

ype a

ctivitie

s120,5

42,5

63

25,9

43,5

16

86,3

98,4

61

-(8

,200,5

86)

(8,2

00,5

86)

Tota

l activitie

s$

1,9

82,0

00,0

55

$27,6

99,2

31

$429,4

80,6

76

(1,5

16,6

19,5

62)

(8,2

00,5

86)

(1,5

24,8

20,1

48)

Genera

l re

venues:

Taxes:

Main

tenance &

opera

tions p

ropert

y taxes

936,3

78,2

61

-936,3

78,2

61

Debt serv

ice p

ropert

y taxes

140,6

29,7

66

-140,6

29,7

66

Sta

te a

id -

not re

str

icte

d to s

pecific

pro

gra

ms

435,7

58,3

03

-435,7

58,3

03

Tax incre

ment re

investm

ent zone

18,9

54,9

29

-18,9

54,9

29

Unre

str

icte

d investm

ent earn

ings

48,9

72,9

05

1,0

55,5

50

50,0

28,4

55

Mis

cella

neous

13,1

12,5

62

981,6

46

14,0

94,2

08

Tra

nsfe

rs13,2

00,0

00

(13,2

00,0

00)

-

Tota

l genera

l re

venues a

nd tra

nsfe

rs1,6

07,0

06,7

26

(11,1

62,8

04)

1,5

95,8

43,9

22

Change in n

et assets

90,3

87,1

64

(19,3

63,3

90)

71,0

23,7

74

Net assets

—begin

nin

g1,1

84,1

15,5

48

52,7

48,3

97

1,2

36,8

63,9

45

Change in b

egin

nin

g n

et assets

-

Prior

Period A

dju

stm

ent (N

ote

13)

7,1

62,1

96

-7,1

62,1

96

Net assets

—endin

g$

1,2

81,6

64,9

08

$33,3

85,0

07

$1,3

15,0

49,9

15

The n

ote

s to the b

asic

fin

ancia

l sta

tem

ents

are

an inte

gra

l part

of th

is s

tate

ment

Ch

an

ges in

Net

Assets

Net

(Exp

en

se)

Reven

ue a

nd

HO

US

TO

N IN

DE

PE

ND

EN

T S

CH

OO

L D

IST

RIC

T

ST

AT

EM

EN

T O

F A

CT

IVIT

IES

FO

R T

HE

FIS

CA

L Y

EA

R E

ND

ED

JU

NE

30, 2008

Pro

gra

m R

even

ues

19

NO

NM

AJO

RSp

ecia

lD

ebt

Cap

ital

Cap

ital

Tota

lG

ener

alR

even

ueSe

rvic

eR

enov

atio

nR

enov

atio

nG

over

nmen

tal

Fund

Fund

Fund

Fund

Fund

- PF

CFu

nds

ASS

ETS

Cas

h an

d ca

sh e

quiv

alen

ts$

316,

782

$13

9,46

4$

42$

4,47

8$

4,81

2,11

6$

5,27

2,88

2 I

nves

tmen

ts58

1,91

3,25

716

,634

,615

126,

317,

014

664,

430,

440

-1,

389,

295,

326

Del

inqu

ent t

axes

rece

ivab

le -

net o

f

est

imat

ed u

ncol

lect

ible

taxe

s96

,276

,695

-10

,677

,944

--

106,

954,

639

Acc

ount

s re

ceiv

able

120,

130,

579

44,9

32,7

29-

788,

535

-16

5,85

1,84

3 D

ue fr

om o

ther

fund

s16

,353

,687

-12

,682

892,

099

-17

,258

,468

Inv

ento

ries

2,11

3,15

8-

--

-2,

113,

158

Oth

er a

sset

s1,

152,

125

-30

0,25

01,

657,

264

-3,

109,

639

T

otal

ass

ets

$81

8,25

6,28

3$

61,7

06,8

08$

137,

307,

932

$66

7,77

2,81

6$

4,81

2,11

6$

1,68

9,85

5,95

5

LIA

BIL

ITIE

S A

ND

FU

ND

BA

LAN

CES

Li

abili

ties:

Acc

ount

s pa

yabl

e$

18,0

50,9

23$

8,19

8,71

9$

-$

16,0

11,7

78$

1,52

0,38

5$

43,7

81,8

05 D

ebt p

ayab

le w

ithin

one

yea

r-

-23

,371

,650

--

23,3

71,6

50 A

ccru

ed s

alar

ies

and

expe

nditu

res

101,

080,

943

9,02

8,51

7-

68,9

78-

110,

178,

438

Oth

er li

abili

ties

119,

225,

531

2,00

9,72

0-

--

121,

235,

251

Due

to o

ther

fund

s-

19,5

30,3

48-

--

19,5

30,3

48 D

efer

red

reve

nues

83,2

14,3

3313

,487

,586

9,71

2,16

1-

-10

6,41

4,08

0

Tot

al li

abili

ties

321,

571,

730

52,2

54,8

9033

,083

,811

16,0

80,7

561,

520,

385

424,

511,

572

Fund

bal

ance

s:

Res

erve

d: R

eser

ved

for e

ncum

bran

ces

34,3

03,7

18-

-11

9,59

3,69

2-

153,

897,

410

Res

erve

d fo

r inv

estm

ent i

n in

vent

orie

s2,

113,

158

--

--

2,11

3,15

8 R

eser

ved

for c

apita

l acq

uisi

tion

prog

ram

6,09

6,23

8-

--

-6,

096,

238

Res

erve

d fo

r ret

irem

ent o

f fun

ded

inde

bted

ness

--

104,

224,

121

--

104,

224,

121

Unr

eser

ved:

Des

igna

ted

for a

rbitr

age

515,

879

--

1,30

4,01

037

,130

1,85

7,01

9 D

esig

nate

d fo

r aut

horiz

ed c

onst

ruct

ion

--

-53

0,79

4,35

83,

254,

601

534,

048,

959

Des

igna

ted

for i

ncen

tive

pay

prog

ram

33,5

23,2

80-

--

-33

,523

,280

Des

igna

ted

for i

nsur

ance

pro

gram

s11

,842

,420

--

--

11,8

42,4

20 D

esig

nate

d fo

r aut

o/ge

nera

l lia

bilit

y2,

744,

453

--

--

2,74

4,45

3 D

esig

nate

d fo

r pay

as

you

go60

,000

,000

--

--

60,0

00,0

00 D

esig

nate

d fo

r ope

ratio

ns84

,278

,447

--

--

84,2

78,4

47 D

esig

nate

d fo

r sch

ool c

arry

forw

ard

64,1

09,3

45-

--

-64

,109

,345

Und

esig

nate

d19

7,15

7,61

59,

451,

918

--

-20

6,60

9,53

3

Tot

al fu

nd b

alan

ces

496,

684,

553

9,45

1,91

810

4,22

4,12

165

1,69

2,06

03,

291,

731

1,26

5,34

4,38

3

Tota

l lia

bilit

ies

and

fund

bal

ance

s$

818,

256,

283

$61

,706

,808

$13

7,30

7,93

2$

667,

772,

816

$4,

812,

116

$1,

689,

855,

955

The

note

s to

the

basi

c fin

anci

al s

tate

men

ts a

re a

n in

tegr

al p

art o

f thi

s st

atem

ent.

MA

JOR

HO

UST

ON

IND

EPEN

DEN

T SC

HO

OL

DIS

TRIC

TB

ALA

NC

E SH

EET

- GO

VER

NM

ENTA

L FU

ND

SJU

NE

30, 2

008

20

Total Fund Balances— Governmental Funds $ 1,265,344,383

Amounts reported for governmental activities in the statement of net assets are

different because:

Capital assets used in governmental activities are not financial resources, and

therefore, are not reported as assets in governmental funds. The cost of the assets is $3,255,975,826 and the accumulated depreciation is $985,438,652. 2,270,537,174

Property taxes receivable are not available soon enough to pay for the current

period's expenditures, and therefore, are deferred in the funds. 92,926,494

Proceeds collected in the current year from the sale of capital assets deferred in

the prior fiscal year. -

Internal service funds are used by the District's management to charge the costs of

workers' compensation, health insurance, and print shop activities to the funds.

A portion of the assets and liabilities of the internal service funds are included

with governmental activities. 114,134,433

Long-term liabilities, including bonds payable, are not due and payable

in the current period and therefore, are not reported as liabilities in

in the funds. Long term liabilities at year-end consist of:

Bonds payable 2,003,213,127Accretion of interest payable 195,008,349Contractual obligations payable 49,100,000Notes payable 76,045,000Claims payable 32,578,325Compensation absences payable 23,915,438Lease purchases payable 126,044Premium on bonds payable 60,084,639Deferred loss on refunding of bonds (6,608,052)Arbitrage payable 1,807,864Issue costs (9,254,572)Accrued interest payable 35,261,414

(2,461,277,576)

Total Net Assets of Governmental Activities $ 1,281,664,908



RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET

TO THE STATEMENT OF NET ASSETS

JUNE 30, 2008

21

NO

NM

AJ

OR

Sp

ec

ial

De

bt

Ca

pit

al

Ca

pit

al

To

tal

Ge

ne

ral

Re

ve

nu

eS

erv

ice

Re

no

va

tio

n

Re

no

va

tio

nG

ov

ern

me

nta

l

Fu

nd

Fu

nd

Fu

nd

Fu

nd

Fu

nd

- P

FC

Fu

nd

s

RE

VE

NU

ES

P

rop

ert

y t

axe

s$

95

0,1

70

,42

0$

-$

14

0,9

54

,82

8$

-$

-$

1,0

91

,12

5,2

48

E

arn

ing

s o

n in

ve

stm

en

ts2

3,9

78

,68

9

-3

,30

4,5

46

1

5,8

34

,69

93

69

,80

8

43

,48

7,7

42

M

isce

llan

eo

us lo

ca

l so

urc

es

10

,78

3,1

07

1

3,3

48

,46

4-

18

,61

4,5

73

1,0

67

42

,74

7,2

11

S

tate

so

urc

es

51

6,5

71

,35

84

3,8

77

,64

7-

--

56

0,4

49

,00

5

F

ed

era

l so

urc

es

5,7

76

,36

31

90

,39

1,2

39

--

-1

96

,16

7,6

02

T

ota

l re

ve

nu

es

1,5

07

,27

9,9

37

24

7,6

17

,35

01

44

,25

9,3

74

34

,44

9,2

72

37

0,8

75

1,9

33

,97

6,8

08

EX

PE

ND

ITU

RE

S

Cu

rre

nt

Inst

ruct

ion

84

9,7

32

,80

31

56

,39

2,7

00

--

-1

,00

6,1

25

,50

3

Inst

ruct

iona

l res

ourc

es a

nd m

edia

ser

vice

s1

3,9

69

,59

16

06

,50

4-

--

14

,57

6,0

95

Inst

ruct

iona

l sta

ff de

velo

pmen

t1

2,9

51

,38

54

5,8

32

,79

0-

--

58

,78

4,1

75

Cur

ricul

um d

evel

opm

ent

4,2

18

,55

64

,89

9-

--

4,2

23

,45

5

Inst

ruct

iona

l lea

ders

hip

15

,02

0,4

35

7,9

36

,17

5-

--

22

,95

6,6

10

Sch

ool l

eade

rshi

p1

20

,96

6,6

99

2,5

95

,93

4-

--

12

3,5

62

,63

3

Gui

danc

e, c

ouns

elin

g an

d ev

alua

tion

serv

ices

39

,46

7,5

66

9,9

16

,75

7-

--

49

,38

4,3

23

Soc

ial w

ork

serv

ices

1,2

72

,70

48

91

,30

3-

--

2,1

64

,00

7

Hea

lth s

ervi

ces

18

,34

0,3

51

1,0

05

,64

0-

--

19

,34

5,9

91

Stu

dent

tran

spor

tatio

n4

0,8

66

,83

81

,57

5,3

75

--

-4

2,4

42

,21

3

Food

ser

vice

s1

72

,37

33

9,7

95

--

-2

12

,16

8

Co-

curr

icul

ar/e

xtra

curr

icul

ar a

ctiv

ities

11

,36

4,9

81

3,4

08

,42

7-

--

14

,77

3,4

08

Gen

eral

adm

inis

tratio

n3

2,5

12

,12

23

,05

2,2

63

--

-3

5,5

64

,38

5

Pla

nt m

aint

enan

ce a

nd o

pera

tions

18

1,1

57

,43

82

,02

4,2

49

--

-1

83

,18

1,6

87

Sec

urity

and

mon

itorin

g se

rvic

es1

8,9

70

,81

95

80

,20

1-

--

19

,55

1,0

20

Dat

a pr

oces

sing

ser

vice

s2

8,4

17

,65

95

,27

4,6

99

--

-3

3,6

92

,35

8

Com

mun

ity s

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Total Net Change in Fund Balances—Governmental Funds $ 380,761,890

Amounts reported for governmental activities in the statement of activities are

different because:

Governmental funds report capital outlays as expenditures. However, in

the statement of activities, the cost of those assets is allocated over their

estimated useful lives as depreciation expense. This is the amount

by which capital outlays exceeded depreciation in the current period. 51,275,279

Repayment of principal is an expenditure in the governmental funds, but the

repayment reduces long-term liabilities in the statement of net assets. Proceeds from

sale of bonds is a source of financing in the governmental funds, but the

statement of net assets recognizes it as an increase in the long term

liabilities. The changes in long term liabilities at year end consist of:

Bonds payable (389,825,000)

Contractual obligations payable (23,500,000)Bonds payable 83,934,296

Contractual obligations payable 14,305,000

Notes payable 4,305,000

Arbitrage payable 49,155

Premium on bonds payable (12,074,079)

Amortization of premium on bonds payable 48,320,321

Amortization of deferred loss on refunding of bonds (519,869)

Issuance costs 1,885,828

Amortization of issuance costs (501,404)

Lease purchase payable, net (22,325)

Arbitrage expenditure, net 872,412

Accretion payable, net (46,933,743)

(319,704,408)

Property taxes, that will not be collected until after the District's fiscal year end,

are not considered "available" revenues and are deferred in the governmental

funds. Deferred tax revenues, net of allowance for bad debt, decreased by

this amount this year. (17,977,503)

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

reported in the governmental funds because interest is recognized as an

expenditure in the funds when it is due, and thus, requires the use of current financial

resources. In the statement of activities, however, interest expense is recognized as

the interest accrues, regardless of when it is due. (3,231,569)

In the statement of activities, compensated absences (sick pay and vacations)

are measured by the amounts earned during the year. In the governmental

funds, however, expenditures for these items are measured by the amount

of financial resources used (essentially, the amounts actually paid).

This year, the amounts used exceeded the compensated absences earned. 612,325

Internal service funds - changes in claims payable 833,596

Internal service funds are used by management to charge the costs of

certain activities, such as workers' compensation, health insurance, and print

shop activities, to individual funds. A portion of the net revenue (expense) of

the internal service funds is reported with governmental activities. (2,182,446)

Change in Net Assets of Governmental Activities $ 90,387,164


FOR THE FISCAL YEAR ENDED JUNE 30, 2008

TO THE STATEMENT OF ACTIVITIES


RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF

REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES

23

Governmental

Food Nonmajor Activities

Service Enterprise Internal Service

Fund Fund Totals Fund

ASSETS

Current assets:

Cash and cash equivalents $ 85,122 $ 22,298 $ 107,420 $ 195,482

Investments 350,918 12,338,761 12,689,679 111,691,078

Receivables 509,621 2,015,251 2,524,872 217,327

Due from other funds - - - 9,313,783

Accrued interest - - - 925,226

Inventories 4,419,816 - 4,419,816 -

Other assets - 607 607 -

Total current assets 5,365,477 14,376,917 19,742,394 122,342,896

Noncurrent assets:

Buildings and improvements 13,275,766 - 13,275,766 558,545

Furniture and equipment 20,524,946 119,208 20,644,154 795,766

Vehicles 4,448,520 - 4,448,520 111,068

Less accumulated depreciation (14,970,680) (82,087) (15,052,767) (730,204)

Total noncurrent assets 23,278,552 37,121 23,315,673 735,175

Total assets 28,644,029 14,414,038 43,058,067 123,078,071

LIABILITIES

Current liabilities:

Accounts payable 3,606,741 1,975,451 5,582,192 3,477,094

Due to other funds 6,036,129 53,848 6,089,977 951,926

Due to State of Texas 242,645 - 242,645 -

Accrued salaries payable 649,688 28,746 678,434 368,256

Compensated absences payable 178,224 19,598 197,822 -

Claims and judgments payable - - - 25,619,978

Total current liabilities 10,713,427 2,077,643 12,791,070 30,417,254

Noncurrent liabilities:

Compensated absences payable 251,606 41,572 293,178 791,634

Claims and judgments payable - - - 6,958,347

Total noncurrent liabilities 251,606 41,572 293,178 7,749,981

Total liabilities 10,965,033 2,119,215 13,084,248 38,167,235

NET ASSETS

Invested in capital assets 23,278,552 37,121 23,315,673 735,175

Unrestricted (5,599,556) 12,257,702 6,658,146 84,175,661

Total net assets $ 17,678,996 $ 12,294,823 29,973,819 $ 84,910,836

Some amounts reported for business-type activities in the statement

of net assets are different because certain internal service fund assets

and liabilities are included with business-type activities. 3,411,188

Net assets of business-type activities $ 33,385,007


Business-type Activities-Enterprise Funds


STATEMENT OF NET ASSETS

PROPRIETARY FUNDS

JUNE 30, 2008

24

Governmental

Food Nonmajor Activities

Service Enterprise Internal Service

Fund Funds Totals Fund

OPERATING REVENUES:

Charges for sales and services:

Sales to customers $ 14,512,444 $ - $ 14,512,444 $ 26,670,137

Consulting services - 11,431,072 11,431,072 -

Charges to other funds - - - 114,193,571

Miscellaneous 981,646 - 981,646 1,276,711

Total operating revenues 15,494,090 11,431,072 26,925,162 142,140,419

OPERATING EXPENSES:

Payroll costs 41,947,043 1,096,672 43,043,715 19,809,199

Purchased and contracted services 12,318,987 9,716,229 22,035,216 7,146,228

Supplies and materials 50,546,369 56,610 50,602,979 3,241,209

Other operating expenses 1,770,225 138,084 1,908,309 1,717,961

Claims and judgments - - - 118,745,838

Depreciation 2,601,581 14,730 2,616,311 97,147

Total operating expenses 109,184,205 11,022,325 120,206,530 150,757,582

Operating income (loss) (93,690,115) 408,747 (93,281,368) (8,617,163)

NONOPERATING REVENUES (EXPENSES):

Earnings on investments 334,691 720,859 1,055,550 5,485,163

Grants from federal agencies:

Child nutrition program 66,742,268 - 66,742,268 -

Donated commodities 4,447,518 - 4,447,518 -

Summer food program 4,460,139 - 4,460,139 -

School health services (SHARS) - 3,993,545 3,993,545 -

Star health - 6,129,840 6,129,840 -

State matching and other 625,151 - 625,151 -

Total nonoperating revenue 76,609,767 10,844,244 87,454,011 5,485,163

Income (loss) before transfers (17,080,348) 11,252,991 (5,827,357) (3,132,000)

Transfers in - - - 1,443,527

Transfers out - (13,200,000) (13,200,000) -

Change in net assets (17,080,348) (1,947,009) (19,027,357) (1,688,473)

Total net assets—beginning 34,759,344 14,241,832 86,599,309

Total net assets—ending $ 17,678,996 $ 12,294,823 $ 84,910,836

Some amounts reported for business-type activities in the statement

of activities are different because a portion of the net revenue (expense)

of certain internal service funds is reported with business-type activities. 336,033

Change in net assets of business-type activities $ (19,363,390)





STATEMENT OF REVENUES, EXPENSES,

AND CHANGES IN FUND NET ASSETS

PROPRIETARY FUNDS

25

Governmental

Food Nonmajor Activities-

Service Enterprise Internal

Fund Funds Totals Service Funds

CASH FLOWS FROM OPERATING ACTIVITIES

Receipts from customers $ 15,284,166 $ 11,617,068 $ 26,901,234 $ 140,788,861

Receipts from other funds 2,305,766 60,904 2,366,670 73,112

Other receipts 862,398 - 862,398 989,851

Payments to suppliers (58,299,660) (9,799,816) (68,099,476) (10,394,935)

Payments to employees (41,265,171) (1,064,957) (42,330,128) (19,367,162)

Payments to other funds - (8,375) (8,375) (2,583,821)

Claims paid - - - (120,729,819)

Other payments - (607) (607) -

Net cash provided (used) by operating activities (81,112,501) 804,217 (80,308,284) (11,223,913)

CASH FLOWS FROM NONCAPITAL

FINANCING ACTIVITIES

Child nutrition program 66,742,268 - 66,742,268 -

State matching and other 625,151 - 625,151 -

Summer food program 4,460,139 - 4,460,139 -

Grants from federal agencies - 10,123,385 10,123,385 -

Transfers from other funds - - - 1,443,527

Transfers to other funds - (13,200,000) (13,200,000) -

Net cash provided (used) by noncapital financing activities 71,827,558 (3,076,615) 68,750,943 1,443,527

CASH FLOWS FROM CAPITAL AND RELATED

FINANCING ACTIVITIES

Purchases of capital assets (7,425,675) - (7,425,675) (93,556)

Net cash used by capital and related

financing activities (7,425,675) - (7,425,675) (93,556)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investments (62,788,658) (15,160,860) (77,949,518) (423,357,922)

Sales and maturities of investments 79,093,253 16,563,100 95,656,353 427,855,370

Interest and dividends 334,691 720,860 1,055,551 5,485,163

Net cash provided by investing activities 16,639,286 2,123,100 18,762,386 9,982,611

Net increase (decrease) in cash and cash equivalents (71,332) (149,298) (220,630) 108,669

Balances—beginning of the year 156,454 171,596 328,050 86,813

Balances—end of the year $ 85,122 $ 22,298 $ 107,420 $ 195,482

Reconciliation of operating income (loss) to net cash

provided (used) by operating activities:

Operating income (loss) $ ($93,690,115) $ 408,747 $ (93,281,368) $ (8,617,163)

Adjustments to reconcile operating income (loss) to net cash

provided (used) by operating activities:

Depreciation expense 2,601,581 14,730 2,616,311 97,147

Donated commodities 4,447,518 - 4,447,518 -

Change in assets and liabilities:

Receivables 409,829 185,997 595,826 (74,847)

Inventories 190,634 - 190,634 -

Accounts payables 1,940,414 111,106 2,051,520 1,198,445

Due to other funds 2,298,298 52,529 2,350,827 (2,583,820)

Due from other funds 7,468 - 7,468 73,112

Accrued interest - - - (925,226)

Accrued salaries payable 648,431 31,715 680,146 365,423

Compensated absences payable 33,441 - 33,441 76,612

Other assets - (607) (607) -

Current portion of claims and judgments - - - 465,256

Other long term claims and judgments - - - (1,298,852)

Net cash provided (used) by operating activities $ (81,112,501) $ 804,217 $ (80,308,284) $ (11,223,913)

Noncash financing activities:

The District received donated commodities valued at $4,447,518 from the U.S. Department of Agriculture for use in the National School Lunch Program.




STATEMENT OF CASH FLOWS

PROPRIETARY FUNDS


26

Private-Purpose Agency

Trust Funds Funds

ASSETS

Cash and cash equivalents $ - $ 4,818,056

Investments 11,913,194 8,209,688

Total assets 11,913,194 $ 13,027,744

LIABILITIES

Accounts payable - $ 1,153,215

Accrued salaries payable - 27,761

Due to student/school/administrative groups - 11,846,768

Total liabilities - $ 13,027,744

NET ASSETS

Held in trust for scholarships 11,913,194

Total net assets $ 11,913,194



STATEMENT OF FIDUCIARY NET ASSETS

JUNE 30, 2008

FIDUCIARY FUNDS

28

Private-Purpose

Trust Funds

ADDITIONS

Gifts and contributions $ 8,795

Earnings on investments 471,592

Total additions 480,387

DEDUCTIONS

Scholarships awarded 368,229

Total deductions 368,229

Change in net assets 112,158

Net assets—beginning of the year 11,801,036

Net assets—end of the year $ 11,913,194



STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS


FIDUCIARY FUNDS

29

HOUSTON INDEPENDENT SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS


NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

The Houston Independent School District (“District”) is an independent school district created and incorporated through legislation enacted by the Thirty-Eighth Texas State Legislature in 1923. The District is the largest school district in Texas and is governed by the Board of Education, composed of nine Board Members, all of whom are elected officials.

In accordance with Governmental Accounting Standards Board (“GASB”) Statement No. 14, The Financial Reporting Entity, (“GASB Statement No. 14”), a financial reporting entity consists of the primary government and its component units. Component units are legally separate organizations for which the elected officials of the District are financially accountable, or for which the relationship to the District is such that exclusion would cause the District’s financial statements to be misleading or incomplete. Discretely presented component units, on the other hand, are reported in a separate column in the basic financial statements to emphasize they are legally separate from the School District. The District’s blended component unit, although a legally separate entity, is in substance part of the District’s operations, and so data from this unit is combined with data of the primary government.

The criteria used to determine whether an organization is a component unit of the District includes: financial accountability of the District for the component unit, appointment of a voting majority, fiscal dependency, ability to impose the District’s will on the component unit, and whether there is a financial benefit or burden to the District.

For financial reporting purposes, the Houston Independent School District Public Facility Corporation (“Public Facility Corporation”) is included in the operations and activities of the District because of the fiscal dependency criteria whereby the Public Facility Corporation serves the District exclusively.

For financial reporting purposes, the Houston Independent School District GEAR UP Trust (“GEAR UP Trust”) is included in the operations and activities of the District because of the financial accountability of the District, the appointment of a voting majority, and the fiscal dependency criteria whereby the GEAR UP Trust serves the District’s students exclusively. The GEAR UP Trust was incorporated to ensure that the scholarship funds are properly spent and to guarantee a college scholarship to the eligible students at the participating schools of the Gear Up program. The GEAR UP financial information is blended with that of the District in the Statement of Fiduciary Net Assets for Private-Purpose Trust Funds. Separate financial statements for GEAR UP Trust are not issued.

NEW ACCOUNTING STANDARD

During the fiscal year 2008, the District adopted GASB Statement No. 45, Accounting and Financial Reporting for Employers for Postemployment Benefits Other Than Pensions. Implementation of this standard had no significant effect on the District. Please refer to Note 11 for required disclosures.

GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

The Statement of Net Assets and the Statement of Activities of the government-wide financial statements report information on all of the nonfiduciary activities of the District and its blended component unit. The effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support.

The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, (2) operating grants and contributions, and (3) capital grants and contributions. Program

30



revenues included in the Statement of Activities reduce the cost of the function to be financed from general revenues. Taxes and other items not properly identified as program revenues are reported instead as general revenues.

The District reports all direct expenses by function in the Statement of Activities. Direct expenses are those clearly identifiable with a function. Depreciation expense is specifically identified by function and is included in the direct expense to each function.

Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds. In accordance with the provisions of GASB Statement No. 34, the fiduciary funds are excluded from the government-wide financial statements. Major individual governmental funds and major enterprise funds are reported as separate columns in the fund financial statements.

MEASUREMENT FOCUS, BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION

Government-wide Financial Statements -- The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place, regardless of the timing of the related cash flows. Revenues, expenses, gains, losses, assets, and liabilities resulting from nonexchange transactions are recognized in accordance with GASB Statement No. 33. Property taxes are recognized as revenues in the year for which they are levied. Grants, and similar items, are recognized as revenue as soon as all eligibility requirements have been met and funds are available to meet current expenditures.

Fund Financial Statements -- Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. State aid and miscellaneous revenues, other than property taxes, are considered to be available when they are collected within the current period or within 90 days of the fiscal year end to pay liabilities of the current period. Property taxes are considered to be available if collected within 60 days of the fiscal year end. Expenditures are generally recognized under the modified accrual basis of accounting in the accounting period in which the fund liability is incurred, if measurable. However, debt service expenditures are recognized in the current fiscal period for debt service principal and interest payments due within 30 days in the subsequent fiscal period as these funds have been set aside for that purpose. Compensated absences and claims and judgments are recorded only when payment is due. Proprietary fund statements are reported using the economic resources measurement focus and the accrual basis of accounting.

Funds

The District reports its financial activities through the use of “fund accounting.” The activities of the District are organized on the basis of funds. The operations of each fund are accounted for within a separate set of self-balancing accounts to reflect results of activities. Fund accounting segregates funds according to their intended purpose and is used to assist management in demonstrating compliance with finance-related legal and contractual provisions. As required by the Texas Education Agency, the following fund types are included in the financial statements:

Governmental Funds

Governmental Funds are those through which most governmental functions of the District are financed. The acquisition, use and balances of the District's expendable financial resources, and the related liabilities are accounted for through the Governmental Fund Types. The following are the District's major governmental funds:

• General Fund -- The General Fund is the general operating fund of the District and accounts for all revenues and expenditures of the District not encompassed within other funds.

31



• Special Revenue Fund -- The Special Revenue Fund is used to account for the proceeds of specific revenue sources (other than private-purpose trust funds or capital projects) such as federal, state or locally financed programs where unused balances are returned to the grantor at the close of specified project periods. Funds are legally restricted to expenditures for specified purposes.

• Debt Service Fund -- The Debt Service Fund is used to account for the accumulation of resources for, and the retirement of, general long-term debt and related costs.

• Capital Renovation Fund -- The Capital Renovation Fund is used to account for financial resources to be used for the acquisition, renovation or construction of major capital facilities other than those financed by proprietary funds.

Proprietary Funds

Proprietary Funds are used to account for operations that are financed in a manner similar to those found in the private sector, where the determination of net income is appropriate for sound financial administration.

• Enterprise Funds -- The Enterprise Funds are used to account for operations that are financed and operated in a manner similar to a private enterprise where the District's intent is to provide services financed primarily through user charges. The Food Service Fund is considered a major proprietary fund as defined by GASB Statement No. 34. The Food Service Fund accounts for food services provided to students of the District and include all federal and state funds for such services.

• Internal Service Funds -- The Internal Service Funds are used to account for operations related to the Print Shop, Professional Development, Media Services, Alternative Certification Program, Athletics, University Interscholastic League, and risk financing activities of the District.

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the District’s proprietary funds are charges to customers and other funds for sales and services. Operating expenses for proprietary funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the GASB. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this limitation. The District has elected not to follow subsequent private-sector guidance.

Fiduciary Funds

Fiduciary Funds are used to account for assets held by the District in a trustee capacity or as an agent for individuals, private organizations and/or other funds.

• Private-Purpose Trust Funds -- Private-purpose trust funds are used to account for resources legally held in trust under which principal and income benefit individuals, private organizations or other governments. The District’s private-purpose trust funds represent scholarship funds being held in trust for students.

• Agency Funds -- Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The District’s agency funds represent school class and club activity

32



funds. The District does not use clearing accounts to distribute financial resources to other funds of the District.

ASSETS, LIABILITIES, AND NET ASSETS OR EQUITY

Cash and Cash Equivalents

The District’s Cash Management and Investment Policy requires all deposits to be fully collateralized with depository insurance; obligations of the United States of America or its agencies and instrumentalities (excluding those mortgage backed securities prohibited by the Public Funds Investment Act); public funds investment pools; or in any other manner and amount provided by law for deposits of the District. At all times, such securities are to have a fair value of not less than 110 percent of the amount of the deposits collateralized thereby, adjusted by the amount of applicable depository insurance.

The District considers cash and cash equivalents to be cash on hand and demand deposits. All other monetary assets are treated as investments including certificates of deposit, investment pools, money market instruments, and other securities defined under the Public Funds Investment Act.

Investments

Investments are stated at fair value, which is the amount at which the investment can be exchanged in a current transaction between willing parties. Management of the District believes that in the areas of investment practice, management reports, and establishment of appropriate policies, the District adhered to the requirements of the State of Texas Public Funds Investment Act. Additionally, management of the District believes that investment practices of the District were in accordance with local policies.

Receivables and Payables

All trade and property tax receivables are shown net of allowance for uncollectibles. The property tax receivable allowance is 29.14 percent of outstanding property taxes at June 30, 2008.

Inventories

Under the consumption method of accounting for inventories, materials and supplies are carried in an inventory account on the basis of the last invoice cost, which approximates the first-in, first-out method, and are subsequently charged to expenses/expenditures when consumed. Inventories include plant maintenance and operating supplies as well as instructional supplies. Revenue for donated commodities is recognized when the commodities are received. Other inventories are offset at year end by a reservation of fund balance in the governmental fund financial statements.

Grant Fund Accounting

The Special Revenue Fund includes programs that are financed on a project grant basis. These projects have grant periods that range from less than twelve months to in excess of two years. Grants are recorded as revenues when earned, which the District considers to be earned to the extent expenditures have been incurred, the District has met all eligibility requirements, and funds are available. Funds received, but not earned, are recorded as deferred revenue until earned.

Indirect costs earned from grant programs are recorded as revenues of the General Fund. These indirect costs are determined by applying approved indirect cost rates to actual expenditures of the programs.

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Encumbrances

Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of funds are recorded in the accounting system in order to reserve the portion of the applicable appropriation, is employed in the Governmental Fund Types on the governmental fund financial statements. Encumbrances, which have not been liquidated, are reported as reservations of fund balance since they do not constitute expenditures or liabilities. District policy requires that such amounts be re-appropriated in the following fiscal year.

Capital Assets

Capital assets, which include land, buildings and improvements, furniture and equipment, and vehicles are reported in the applicable governmental and business-type activities columns in the government-wide financial statements and proprietary fund financial statements. Capital acquisition and construction are reflected as expenditures in governmental funds. Land, buildings and improvements, furniture and equipment, and vehicles are recorded at historical cost or estimated historical cost if purchased or constructed. The capitalization threshold is a unit cost of $5,000. Donated capital assets are recorded at estimated fair value at the date of donation. Depreciation on all depreciable capital assets begins on the date the asset is placed into service using the straight-line method of depreciation.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the life of the asset are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed.

Capital assets are depreciated over the following estimated useful lives:

Useful Life

Buildings and improvements 40 years

Vehicles:

Buses 12 years

Medium 7 years

Small 5 years

Furniture 5 years

Equipment 5 years

Computer Laptops 3 years

Asset Classification

Interfund Transactions

Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as “due to/from other funds.” All other balances between funds are reported as transfers. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide statements as “internal balances.”

A description of the basic types of interfund transactions and the related accounting policies are as follows:

• Charges for services are reported as revenues for the performing fund and expenditures/expenses of the requesting fund.

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• Transactions to reimburse a fund for expenditures made by it for the benefit of another fund are recorded as expenditures or expenses in the reimbursing fund and as a reduction of expenditures or expenses in the fund that is reimbursed.

• All other interfund transfers, such as legally authorized transfers from a fund receiving revenue to the fund through which the resources are to be expended, are transfers. Transfers are classified as other financing sources or uses in the Statement of Revenues, Expenditures, and Changes in Fund Balances.

For reporting at the government-wide financial statement level, the District eliminates direct interfund charges for services and the balances created within the same activity categories (i.e. governmental vs. business-type). This process ensures neither governmental nor business-type activities report direct internal revenue/expenditures. Interfund activity and balances resulting from transactions with the fiduciary funds are not eliminated. Instead, the fiduciary interfund activity and balances are treated as transactions with an external party. The Internal Service Funds are essentially repositories for income, expenses, assets and liabilities of the District’s health insurance, worker’s compensation, print shop, professional development, alternative certification, athletics, UIL, regional offices, and media services programs.

Compensated Absences

The District's contract employees earn one day of sick leave per month for all months under contract, which may either be taken or accumulated with no limitation. Accumulated sick leave balances are not paid upon termination from the District, except those paid on retirement or death of employees who meet certain eligibility requirements and were hired prior to October 9, 1972.

Twelve-month employees earn vacation ranging from two to four weeks per year based on length of service. Vacation days may be carried over from one contract year to another with a maximum limit of 30 days. For twelve-month employees, the contract runs from September 1

st through August 31

st.

The District accrues vacation and eligible sick leave in the government-wide and proprietary fund financial statements. A liability and related expenditure for these amounts is reported in the governmental funds only if they have matured as a result of employee retirements or resignations and are due.

The District's compensatory time policy requires that compensatory time be taken by the end of the school year in which it was earned. At June 30, 2008, the District had no material liability for compensatory time.

Long-term Liabilities

In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Assets. Bond premiums and discounts are deferred and amortized over the life of the bonds.

In the fund financial statements, governmental funds recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

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RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

Explanation of certain differences between the governmental fund statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities

The governmental fund statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes in fund balances – total governmental funds and changes in net assets of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains that “Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense.” The details of this $51,275,279 difference are as follows:

Facilities acquisition and construction $ 127,692,090Other acquisitions and disposals 20,389,664Depreciation expense (96,806,475)

Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities . $ 51,275,279

FUND BALANCES AND NET ASSETS

Government-wide Financial Statements

Net assets on the Statement of Net Assets include the following:

Invested in capital assets, net of related debt -- the component of net assets that reports capital assets less both the accumulated depreciation and the outstanding balance of debt and is directly attributable to the acquisition, construction, or improvement of these capital assets.

Restricted for contractual obligations -- the component of net assets that reports the difference between assets and liabilities of the capital acquisition program that consists of assets with constraints placed on their use by the bond contracts and covenants contained therein.

Restricted for debt service -- the component of net assets that reports the difference between assets and liabilities adjusted on a government-wide basis that consists of assets with constraints placed on their use by the bond covenants.

Restricted for food service -- the component of net assets that reports the difference between assets and liabilities of the Food Service Fund that consists of assets with constraints placed on their use by the Department of Agriculture.

Unrestricted -- the difference between the assets and liabilities that are not reported in net assets invested in capital assets, net of related debt, or restricted net assets.

The District applies restricted resources before unrestricted resources when an expense is incurred for which restricted net assets are available.

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Governmental Fund Financial Statements

In the fund financial statements, governmental funds report fund balances as either a reserved fund balance or an unreserved fund balance.

Reserved Fund Balance

Reserved fund balance is that portion of fund balance which is not available for appropriation or which has been legally segregated for specific purposes. Reserved fund balance on the balance sheet for the governmental funds includes:

Reserved for encumbrances -- the component of reserved fund balance that represent purchase orders and contractual commitments that do not constitute expenditures or liabilities as of the fiscal year end.

Reserved for investment in inventories -- the component of reserved fund balance that represents the materials and supplies purchased as an asset that do not constitute an expenditure until the period in which the inventories are actually consumed.

Reserved for capital acquisition program -- the component of the fund balance reserved for the acquisition of capital items as authorized under the Public Property Finance Act, Section 271.001 of the Texas Local Government Code.

Reserved for retirement of funded indebtedness -- the component of the fund balance reserved for the retirement of the District’s funded indebtedness.

Unreserved Fund Balance

Unreserved fund balance is composed of designated and undesignated portions. Designated fund balances represent tentative plans for future use of financial resources. The undesignated portion of the unreserved fund balance represents that portion of fund balance that is available for budgeting in future periods. Components of the unreserved fund balance include:

Designated for arbitrage -- the component of the unreserved fund balance designated for the investment income received at yields exceeding the District’s tax-exempt borrowing rate due at the end of the fifth year to the Internal Revenue Service of the United States Treasury.

Designated for authorized construction -- the component of the unreserved fund balance designated for voter approved construction projects with constraints placed on them by the bond covenants.

Designated for incentive pay program -- the component of the unreserved fund balance designated for the teacher-performance-pay system. For teachers to receive the bonuses, their students must make strong progress on state and national achievement tests.

Designated for insurance programs -- the component of the unreserved fund balance designated for the district’s property insurance program. In prior years, the District increased its deductibles for property losses in an effort to reduce premiums. The designated amount would then cover losses up to the deductible limits.

Designated auto/general liability -- the component of the unreserved fund balance designated for meeting financial obligations due to self-insurance for automobile, professional liability and general liability losses.

Designated for pay as you go -- the component of the unreserved fund balance designated for repairs, renovations, and preventive maintenance of the district’s infrastructure.

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Designated for operations -- the component of the unreserved fund balance designated by the Board of Education as a set aside for the minimum fund balance reserve. These designated funds are not available for use or appropriation, except in emergency circumstances, and such appropriation requires a two-thirds vote of the Board of Education.

Designated for school carryforward -- the component of the unreserved fund balance designated to allow schools to carryover unexpended funds at the end of a fiscal year to the next fiscal year. The total amount of the carryover for all schools for a fiscal year shall be included as part of the budget adoption process for that fiscal year.

Undesignated -- the component of the unreserved fund balance that is available for budgeting in future periods.

Stewardship, Compliance, and Accountability

The Board of Education adopts an appropriated budget for the General Fund, Special Revenue Fund, Debt Service Fund and Capital Renovation Fund. The District is required to present the adopted and final amended budgeted revenues and expenditures and actual revenues and expenditures for the General Fund and Special Revenue Fund, which are considered major funds as defined by GASB Statement No. 34. Both the General Fund Budget and the Special Revenue Fund Budget appear in the required supplementary information section where the District compares the final amended budget to actual revenues and expenditures.

Management’s Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates.

NOTE 2: HISD PUBLIC FACILITY CORPORATION

The Public Facility Corporation is a public non-profit corporation, the creation of which was sponsored by the District pursuant to the Public Facility Corporation Act, Article 717s, Vernon’s Texas Civil Statutes, as amended (the “Public Facility Corporation Act”). The Public Facility Corporation Act authorizes the creation and utilization by school districts of public facility corporations to issue bonds to provide for the acquisition, construction, rehabilitation, renovation, repair, equipping, furnishing and placing in service of public facilities of its governmental sponsor and further authorizes the governmental sponsor to incur lease purchase obligations in favor of the corporation to serve as security for the bonds issued by the Public Facility Corporation.

Lease revenue bonds in the principal amount of $95,798,020 were issued in 1997-98, pursuant to a resolution by the Board of Directors of the Public Facility Corporation and a Master Trust Indenture dated as of May 1, 1998, as supplemented by a first Supplemental Indenture and a Second Supplemental Indenture each dated May 1, 1998, (the “Trust Indenture”) between the Public Facility Corporation and Chase Bank of Texas, National Association, as trustee to finance for the benefit of the District the acquisition and construction of two new shared educational facilities.

Lease revenue bonds in the principal amount of $33,600,000 were issued in 2005-06, pursuant to a resolution by the Board of Directors of the Public Facility Corporation and a Third Supplemental Trust Indenture dated as of April 1, 2006, (the “Trust Indenture”) between the Public Facility Corporation and JP Morgan Chase Bank of

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Texas, National Association, as trustee to finance, for the benefit of the District, the construction of a new Food Service Warehouse facility.

To accomplish the financing, the Public Facility Corporation and the District entered into a “Lease With An Option to Purchase Relating to the Houston Independent School District Shared Educational Facility and Food Service Warehouse Facility,” pursuant to the terms of which the District will pay to the Public Facility Corporation such lease payments at such times and in such amounts as will be required to pay the principal and premium, if any, and interest on the lease revenue bonds as they become due.

NOTE 3: CASH DEPOSITS AND INVESTMENTS

Statutes of the State of Texas and policies mandated by the District’s Board of Education authorize the District to invest in obligations of the U.S. Government or its agencies, repurchase agreements, commercial paper, public fund investment pools, mutual funds and money market accounts. All cash balances and investments are held separately in each of its funds.

Funds held at the depository bank were properly secured at all times with one exception and the following was disclosed:

a. Name of depository bank: JP Morgan Chase Bank

b. Amount of bond or security pledged as of the date of the highest combined balance on deposit was $59,289,846.

c. Highest cash, savings and time deposits combined account balances amounted to $52,027,055 and occurred during the month of February 2008.

d. Total amount of Federal Deposit Insurance Corporation (“FDIC”) coverage at the time of highest combined balance was $200,000.

Cash Deposits

As of June 30, 2008, the carrying amount of the District’s demand and time deposits and cash on hand was $5,386,038. The $14,807,415 bank balance was covered by federal deposit insurance through the FDIC or was collateralized by securities held by the District’s depository in joint safekeeping at the Federal Reserve Bank in the District’s name. The HISD Public Facility Corporation’s $4,782,960 was held in a money market account (Morgan Stanley Government Portfolio) at the Bank of New York Trust Company, N. A.

Investments

In accordance with the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (“GASB Statement No. 31”), the District’s investments have been recorded at fair value based upon quoted market prices as of June 30, 2008, with the increase or decrease in fair value being recorded as a component of earnings on investments. None of the District’s investments have been reported at amortized cost.

The District’s investments in public funds investment pools and money market mutual funds include those with the Lone Star Investment Pool (“LSIP”), TexSTAR, and TexPool.

LSIP is a public funds investment pool created pursuant to the Interlocal Cooperation Act of the State of Texas, Article 4413(32c), Vernon’s Texas Civil Statutes, as amended, and is designed to provide participating local governments with investment vehicles for (1) local funds that are not required to be spent immediately and are

39



available for investment in securities with maturities and returns generally greater than those for money market instruments and (2) local funds which provide daily liquidity. The objective of the LSIP is to provide participating local governments with the highest possible rate of return for such funds, while maintaining safety of principal and providing participants with access to funds no less frequently than once per month. To achieve its objective, the LSIP invests primarily in obligations issued or secured by the U.S. Government and its agencies and instrumentalities and in commercial paper. Investment advisory services are provided by American Beacon Advisors and Standish Mellon Asset Management. The custodial account is managed by The Bank of New York while RBC Dain Rauscher, Inc. provides investment advisory service. LSIP has been rated AAAf/S1+ by Standard & Poor’s.

The District’s investment in LSIP’s Liquidity Plus Fund and the Liquidity Corporate Fund, as of June 30, 2008, was $130,397,618 and $433,282,294, respectively, for a total of $563,679,912. The market value share of the District in the LSIP was $563,679,912, representing 36.75 percent of the total portfolio.

TexPool is a public funds investment pool administered by the State Comptroller of Texas. The portfolio of TexPool is managed by Lehman Brothers Holdings, Inc. (Lehman Brothers) and Federated Investors, Inc., and the assets are kept in a separate custodial account at the State Street Bank in the name of TexPool. TexPool is rated as an AAAm money market fund by Standard & Poor’s.

As of June 30, 2008, the District’s investment in TexPool and TexPool Prime was $197,390,627 and $337,615,033 respectively, with a value of $535,005,660, representing 34.88 percent of the portfolio value. All income from investments associated with each fund has been recognized and recorded as income in each of the District’s funds.

TexSTAR was created in April 2003, also under the Interlocal Cooperation Act. It is administered by First Southwest Asset Management, Inc. and JP Morgan Chase. The fund is rated AAAm by Standard & Poor’s.

As of June 30, 2008, the District’s investment in TexSTAR was $90,374,814, or 5.89 percent of the portfolio. As with all the investment pools, funds are readily available to support daily cash requirements, while maintaining yields slightly higher than standard bank deposit accounts.

The District has invested in negotiable certificates of deposit issued by Metro Bank and Unity Bank, $500,000 and $95,000, respectively, as of June 30, 2008, for a total of $595,000, or 0.04 percent of the portfolio. The collateral for the Metro Bank certificate is held at the Federal Home Loan Bank of Dallas in the District’s name. Unity Bank’s certificate is covered in full by Federal Deposit Insurance Corporation (FDIC); therefore, it requires no additional collateral under the Public Funds Investment Act Section 2257.022.

The District has invested in U.S. Agency Discount Notes (DN) and Coupon Notes, issued by Federal National Mortgage Association (FNMA), Federal Farm Credit Bank (FFCB), Federal Home Loan Mortgage Corporation (FHLMC), and Federal Home Loan Bank (FHLB). Investments in these securities total $344,143,581 and represent 22.44 percent of the value of the total portfolio.

GASB Statement No. 40, Deposit and Investment Risk Disclosures, an amendment to GASB Statement No. 3, establishes and modifies disclosure requirements related to deposits and investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk.

To ensure compliance with the various risk factors addressed in GASB Statement No. 40, the District’s Investment Advisory Committee reviewed the Cash Management and Investment Policy. The Cash Management and Investment Policy is reviewed by the Investment Advisory Committee at least annually and presented to the Board of Education for approval. The Investment Officers submit a Quarterly Investment Report to the Board of Education certifying that all investments were purchased in compliance with the Cash Management and Investment Policy.

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The District’s Cash Management and Investment Policy contains the following objectives:

(1) assure the safety of District's funds; (2) maintain sufficient liquidity to provide adequate and timely working funds; (3) match the maturity of investment instruments to the daily cash flow requirements; (4) attain a market average rate of return consistent with (1) and (2) above; (5) diversify investments as to maturity, instrument, and financial institution, where permitted, under the laws of the State of Texas; (6) actively pursue portfolio management techniques; and (7) avoid investments for speculation.

All objectives are approached with the judgment and care, under the circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the safety of the capital, as well as the probable income to be derived. Preservation of District capital is of highest importance. All participants in the investment process seek to act responsibly as custodians of the public trust. Investment officials avoid any transaction that might impair public confidence in the District's ability to govern effectively.

Interest Rate Risk

As a means of limiting its exposure to fair value losses that could occur from rising interest rates, the District’s investment policy limits the maturities of investments and prohibits any investment for speculative gains. The available funds in the General Operating Fund may be invested for greater than one year provided that all cash flow requirements have been met. Available monies in all other funds, except for bond proceeds, can be invested for a period of up to ten years provided that cash flow needs are met. Bond proceeds can be invested for a period up to five years provided that the drawdown schedules permit such maturities.

The District recognizes that investment risks can result from market price changes. Portfolio diversification is employed as a way to control risk. Investment officers are expected to display prudence in the selection of securities, as a way to minimize risk. No individual investment transaction shall be undertaken which jeopardizes the total capital position of the overall portfolio.

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At June 30, 2008, the District’s exposure to interest rate risk as measured by the segmented time distribution by investment type is summarized below:

6/30/2008Fair

Value Less than 1 1-5 6-7

FFCB $ 40,190,556 $ - $ 23,108,786 $ 17,081,770

FHLB 74,416,166 14,084,685 40,161,187 20,170,294

FHLMC 147,347,889 - 90,966,802 56,381,087

FNMA 82,188,970 - 78,080,223 4,108,747

Total US Agency

Investments 344,143,581 14,084,685 232,316,998 97,741,898

Lone Star Investment Pool 563,679,912 563,679,912 - -

TexPool 535,005,660 535,005,660 - -

TexStar 90,374,814 90,374,814 - -

Total Investment Pools 1,189,060,386 1,189,060,386 - -

Certificates of Deposit 595,000 595,000 - -

Total Investments $ 1,533,798,967 $ 1,203,740,071 $ 232,316,998 $ 97,741,898

Investment Maturities in Years

As of June 30, 2008 the dollar weighted average maturity of the total portfolio was 286 days. The modified duration as of June 30, 2008 was .6942 years.

Credit Risk

The District’s Cash Management and Investment Policy allows for investments in commercial paper provided it meets the following criteria:

1. the maximum maturity does not exceed 270 days from the date of issuance; 2. it is rated at least A1 or P1 by two nationally recognized credit rating agencies or by one agency when

fully secured by an irrevocable letter of credit from a United States (nationally associated) or state (state associated) bank;

3. be issued for a specific face amount; 4. be issued either through a direct placement or through broker dealers; 5. the District will diversify its investment in commercial paper by issuer and by length of maturity; and 6. the maximum the District will have in commercial paper at any time is 30 percent of the District’s portfolio.

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As of June 30, 2008, the District did not have any investments in commercial paper. The District’s exposure to credit risk at June 30, 2008 is presented below by investment category as rated by Standard & Poor’s:

6/30/2008Fair Value Rating

FFCB $ 40,190,556 AAA/A-1+FHLB 74,416,166 AAA/A-1+FHLMC 147,347,889 AAA/A-1+ FNMA 82,188,970 AAATotal US Agency Investments 344,143,581

Lone Star Investment Pool 563,679,912 AAAf/S1+TexPool 535,005,660 AAAmTexSTAR 90,374,814 AAAmTotal Investment Pools 1,189,060,386

Certificates of Deposit 595,000 Not rated

Total Investments $ 1,533,798,967

Federal Farm Credit Bank, Federal Home Loan Bank, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation are instrumentalities of U.S. Government; otherwise known as government sponsored corporations. These instrumentalities are established by law to implement the Federal Government’s various lending programs.

Custodial Credit Risk - Funds on deposit with the depository bank are collateralized by pledged approved securities as specified by Section 45.208, Subchapter G, of Texas Education Code and/or a surety bond as in Section 45.208, Subchapter G, of the Texas Education Code to adequately protect the funds of the District. Further, the District will require pledged securities at least equal to that set forth in Texas Government Code Chapter 2257.022, Subchapter B, Depository: Security For Deposit of Public Funds (currently 110 percent of the amount of the deposit). The District has the right to designate the amount of approved securities and/or the aggregate amount of the bond to adequately protect the District. The District may not designate an amount less than the balance of school district funds on deposit with the depository bank from day to day, less any applicable Federal Deposit Insurance Corporation insurance. The approved securities shall be valued at market value for purposes of calculating the designated amount of collateral required. The bank shall have the right and privilege of substituting approved securities upon obtaining the approval of the District.

With the exception of one day, cash deposits of the District at the Depository Bank were covered by pledged securities held as collateral at a third party bank. On June 19, 2008, an electronic deposit was received after normal business hours causing a temporary under-collateralization of District balances for one night.

All investments are made in the name of the Houston Independent School District. All investments are purchased with the delivery versus payment method and are recorded in the District's name on the Federal Reserve's book entry system and confirmed to the District via safekeeping receipt maintained on the books of the depository bank's safekeeping department.

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Concentration of Credit Risk - The investment portfolio is diversified to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, a specific issue, or a specific class of securities. Within the cash flow requirement constraints, investment maturities are staggered in a way that avoids undue concentration of assets in a specific maturity sector.

The maximum asset mix approved by the investment policy is as follows:

District IssuerType Limit Limit

Money Market Accounts 7% 7% Certificates of Deposit 50% 10% U.S. Government Securities 100% 100% U.S. Agency Securities 80% 40% Municipal Securities 20% 5% Repurchase Agreements 8% 8% Investment Pools* 100% 40% Money Market Mutual Funds 15% 5% Mutual Funds 15% 5% Commercial Paper 30% 5%

*The District does not invest its portfolio in any single investment pool. Funds are subdivided between various pools for diversification and security reasons. Investments in any pool will be limited to 25% of the average Net Asset Value of that pool.

The District is prohibited from investing in the following types of investments:

a. obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal;

b. obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest;

c collateralized mortgage obligations that have a stated final maturity date of greater than 10 years; d collateralized mortgage obligations whose interest rate is determined by an index that adjusts opposite to

the changes in a market index; and e. banker’s acceptances.

The District neither enters into reverse repurchase agreements nor trades in options or future contracts. Additionally, the District does not participate in any Securities Lending Program.

As of June 30, 2008, the following was the composition of the District’s investment portfolio:

Lone Star Investment Pool 36.75%TexPool 34.88%U.S. Agency Securities 22.44%TexSTAR 5.89%Certificates of Deposit 0.04%

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Foreign Currency Risk

The District does not engage in any deposit or investment transactions involving foreign currency.

NOTE 4: PROPERTY TAXES AND STATE AID REVENUE

Property Taxes

The appraisal of property within the District is the responsibility of the Harris County Appraisal District ("Appraisal District"). The District's property taxes are levied annually in October on the basis of the Appraisal District's assessed values of property as of January 1 of that calendar year and are due by January 31 of the next calendar year. Such taxes are applicable to the fiscal year in which they are levied and become delinquent with an enforceable lien on property after January 31 of the subsequent calendar year. Delinquent taxes receivable on the government-wide statement of net assets and the governmental fund balance sheet is net of estimated uncollectible taxes.

The District is permitted to levy taxes up to $1.70 per $100 of assessed valuation for general governmental services and for the payment of principal and interest on general obligation long-term debt. For the current fiscal year, the Board of Education set a tax rate of $1.1567 per $100 of assessed valuation. The maintenance and debt service portions of such rate are $1.0067 and $0.15, respectively. The 2007 assessed valuation was $96,574,625,420 which resulted in a gross tax levy of $1,117,078,692 for the current fiscal year. The 2007 net tax levy of $1,080,025,653 reflects an adjustment of $37,053,039 of frozen homestead exemptions for taxpayers 65 years and older as mandated by state property tax laws.

Property taxes which are measurable (quantifiable) and available (collectible within the current period or soon enough thereafter to finance expenditures of the current period, which the District has estimated to be collected in the two months after the fiscal year end) are recognized as revenue in the year of levy in the governmental fund financial statements. Property taxes, which are measurable but not available, are recorded net of estimated uncollectible amounts, as deferred revenues in the year of the levy in the governmental financial statements. Such deferred revenues are recognized in the fund financial statements as revenue in the fiscal year in which they become available. In the government-wide financial statements, property taxes are recognized as revenues in the year for which the taxes are levied. Uncollectible property taxes in the current period increased the allowance for uncollectible property taxes in the government-wide and fund financial statements by $3,860,282.

Delinquent taxes receivable and the related allowance for uncollectible taxes in the governmental fund financial statements as of June 30, 2008 are as follows:

Delinquent Taxes Allowance for Delinquent Taxes

Receivables, Gross Uncollectible Taxes Receivable, Net

General Fund $ 136,382,174 $ 40,105,479 $ 96,276,695

Debt Service Fund 14,557,435 3,879,491 10,677,944

Total $ 150,939,609 $ 43,984,970 $ 106,954,639

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State Aid Revenue

The Texas Education Agency, through its application of state law, allocates state revenues to school districts by formula allocation. The District receives two allocations—a per capita allocation and a foundation program allocation. The District also recognizes revenues for the state’s share of the contributions to the Teacher Retirement System of Texas (TRS). See Note 11 for additional information on the employee’s retirement plan. Other state revenues are received through other state miscellaneous programs on an allocated basis. The components of state aid as shown in the governmental fund financial statements are as follows:

Revenues Amount

Per Capita Revenues $ 50,818,130Foundation Fund Revenues 413,305,736Other Foundation 6,135,891Other State 22,530,549TRS on Behalf 66,124,556Shared Services Arrangement 1,534,143

Total State Aid $ 560,449,005

As of June 30, 2008, the District also received state matching funds of $625,151 in the Food Service Fund.

NOTE 5: RECEIVABLES/PAYABLES

Receivables as of June 30, 2008 for the District’s individual major funds, nonmajor enterprise funds, and internal service funds in the aggregate are as follows:

Special Capital Food NonmajorGeneral Revenue Renovation Service and Other

Fund Fund Fund Fund Funds Total

Due from the State of Texas $ 117,952,552 $ 41,101,875 $ - $ - $ - $ 159,054,427Due from the Federal government 211,824 1,638,430 - - - 1,850,254Due from Other Funding Agencies - 1,198,992 344,140 - 2,015,251 3,558,383Due from Coca Cola - - 444,395 176,355 - 620,750Other 1,966,203 993,432 - 333,266 217,327 3,510,228

Gross Receivables 120,130,579 44,932,729 788,535 509,621 2,232,578 168,594,042

Less Allowance for Uncollectibles - - - - - -

Total Net Receivables $ 120,130,579 $ 44,932,729 $ 788,535 $ 509,621 $ 2,232,578 $ 168,594,042

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Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. At June 30, 2008, the various components of deferred revenue reported in the governmental funds are as follows:

Deferred property taxes, General Fund $ 83,015,286

Deferred property taxes, Debt Service Fund 9,712,161

Deferred restitution, General Fund 199,047

Grant advances, Special Revenue Fund 13,487,586

Total Deferred Revenues $ 106,414,080

Payables as of June 30, 2008 for the District’s individual major funds, nonmajor enterprise funds, and internal service funds in the aggregate are as follows:

Special Capital Food NonmajorGeneral Revenue Renovation Service and Other

Fund Fund Fund Fund Funds Total

Vendors Payable $ 17,715,983 $ 7,862,399 $ 5,102,772 $ 3,281,187 $ 5,451,645 $ 39,413,986Retainage Payable 306,651 322,575 12,429,345 324,645 - 13,383,216Other 28,289 13,745 46 909 900 43,889

Total Payables $ 18,050,923 $ 8,198,719 $ 17,532,163 $ 3,606,741 $ 5,452,545 $ 52,841,091

47



NOTE 6: CAPITAL ASSETS

A summary of capital asset activity during the fiscal year ended June 30, 2008 follows:

Beginning Ending

Balance Increases Decreases Balance

Capital assets not being depreciated:

Land $ 198,598,665 $ 4,969,617 $ (42,090) $ 203,526,192

Construction in progress 257,348,611 115,721,215 (165,218,957) 207,850,869

Total capital assets not being depreciated 455,947,276 120,690,832 (165,261,047) 411,377,061

Capital assets being depreciated:

Buildings and improvements 2,344,019,292 165,218,957 (930,676) 2,508,307,573

Furniture and equipment 229,540,104 26,906,483 (2,748,630) 253,697,957

Vehicles 83,793,868 1,100,724 (2,301,357) 82,593,235

Total capital assets being depreciated 2,657,353,264 193,226,164 (5,980,663) 2,844,598,765

Less accumulated depreciation for:

Buildings and improvements 693,739,486 57,155,266 (647,186) 750,247,566

Furniture and equipment 149,281,746 33,952,178 (2,504,085) 180,729,839

Vehicles 51,017,413 5,699,031 (2,255,197) 54,461,247

Total accumulated depreciation 894,038,645 96,806,475 (5,406,468) 985,438,652

Governmental activities capital assets, net $ 2,219,261,895 $ 217,110,521 $ (165,835,242) $ 2,270,537,174

Capital assets not being depreciated:

Construction in progress $ 8,496,648 $ 1,659,495 $ (10,156,143) $ -Total capital assets not being depreciated 8,496,648 1,659,495 (10,156,143) -

Capital assets being depreciated:

Buildings and improvements 3,119,623 10,156,143 - 13,275,766

Furniture and equipment 15,026,649 5,766,180 (148,675) 20,644,154

Vehicles 4,531,692 - (83,172) 4,448,520

Total capital assets being depreciated 22,677,964 15,922,323 (231,847) 38,368,440

Less accumulated depreciation for:

Buildings and improvements 31,406 214,566 - 245,972

Furniture and equipment 9,289,917 1,922,776 (148,675) 11,064,018

Vehicles 3,346,980 478,969 (83,172) 3,742,777

Total accumulated depreciation 12,668,303 2,616,311 (231,847) 15,052,767

Business-type activities capital assets, net $ 18,506,309 $ 14,965,507 $ (10,156,143) $ 23,315,673

Governmental activities:

Business-type activities:

Internal Service Fund capital assets are included in the Governmental activities table above. Additionally, the Business-type activities table includes the Food Service Fund and the $37,121 net capital assets of the nonmajor Medicaid Fund.

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Depreciation expense was charged to functions/programs of the primary government as follows:

Governmental activities:

Instruction $ 60,452,985

Instructional resources and media services 82,287

Curriculum development 577,798

Instructional leadership 204,293

School leadership 39,878

Guidance, counseling and evaluation services 48,174

Student transportation 5,220,307

Food service 1,222,590

Co-curricular/extracurricular activities 855,426

General administration 1,570,523

Plant maintenance and operations 1,527,780

Security and monitoring services 480,651

Data processing services 24,523,783

Total depreciation expense, governmental activities $ 96,806,475


Food service $ 2,601,581

Other nonmajor business-type activities 14,730

Total depreciation expense, business-type activities $ 2,616,311

Construction Commitments

The District has projects that have significant construction work in progress as of June 30, 2008. These projects include renovation, replacement and expansion of existing schools, playgrounds, non-school facilities, and other projects. At June 30, 2008, the District had fully funded commitments for the following categories:

Remaining

Spent-To-Date Commitment

Renovated schools $ 132,961,792 $ 1,507,986

Replacement schools 374,811,113 3,156,811

Expanded schools 61,688,025 721,849

Playgrounds 9,246,678 242,071

Non-school facilities 18,071,999 431,245

Other projects 339,291,506 83,634,780

Total $ 936,071,113 $ 89,694,742

Project

49



NOTE 7: INTERFUND RECEIVABLES, PAYABLES, AND TRANSFERS

The composition of interfund balances in the fund financial statements as of June 30, 2008 was as follows.

GENERAL FUND Capital Renovation Fund $ (462,788) Debt Service Fund (12,682) Special Revenue Fund 14,305,405 Food Service Fund 10,598,557 Other Enterprise Funds 57,762 Internal Service Funds (8,132,567) DUE FROM OTHER FUNDS $ 16,353,687 SPECIAL REVENUE FUND General Fund (14,305,405) Capital Renovation Fund (432,085) Food Service Fund (4,563,288)

Other Enterprise Funds (4,083) Internal Service Funds (225,487)

DUE TO OTHER FUNDS $ (19,530,348) DEBT SERVICE FUND General Fund 12,682 DUE FROM OTHER FUNDS $ 12,682 CAPITAL RENOVATION FUND General Fund 462,788 Special Revenue Fund 432,085 Food Service Fund (138) Internal Service Funds (2,636) DUE FROM OTHER FUNDS $ 892,099 FOOD SERVICE FUND General Fund (10,598,557)

Capital Renovation Fund 138 Special Revenue Fund 4,563,288

Internal Service Funds (998) DUE TO OTHER FUNDS $ (6,036,129)

OTHER ENTERPRISE FUNDS General Fund (57,762)

Special Revenue Fund 4,083 Internal Service Funds (169) DUE TO OTHER FUNDS $ (53,848)

INTERNAL SERVICE FUNDS General Fund 8,132,567

Capital Renovation Fund 2,636 Special Revenue Fund 225,487 Food Service Fund 998 Other Enterprise Funds 169

DUE FROM OTHER FUNDS $ 8,361,857

These balances resulted from the time lag between the dates that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments from funding agencies are received. The primary interfund transactions included amounts due from the Special Revenue Fund for payroll and related expenditures covered throughout the year that the General Fund expects to collect in the subsequent year.

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The following is a summary of the District’s transfers for the fiscal year ended June 30, 2008:

TRANSFERS OUT TRANSFERS IN Debt Capital Internal

General Service Renovation Service Fund Fund Fund Fund TOTAL

General Fund $ - $ 46,047,528 $ 32,303,680 $ 1,443,527 $ 79,794,735 Capital Renovation Fund - 8,690,000 - - 8,690,000Non-major Enterprise Fund 13,200,000 - - - 13,200,000

TOTAL $ 13,200,000 $ 54,737,528 $ 32,303,680 $ 1,443,527 $ 101,684,735

Transfers are used to (1) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations.

As of June 30, 2008, the District made operating transfers of $54.7 million from the General Fund and Capital Renovation Fund to the Debt Service Fund in order to cover lease payments of the Capital Renovation Fund -Public Facility Corporation and principal and interest payments on debt and debt notes.

At June 30, 2008, the Internal Service Fund Print Shop had a deficit of $122,368. The District plans to continue growing external business and expand product offerings in an effort to decrease the deficit.

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NOTE 8: LONG-TERM LIABILITIES

The following is a summary of the District’s long-term liabilities for the fiscal year ended June 30, 2008:

Amortizable/

Payable

Balance Balance Within

Governmental Activities: July 1, 2007 Increases Decreases June 30, 2008 One year

Bonds payable $ 1,697,322,423 $ 389,825,000 $ 83,934,296 $ 2,003,213,127 $ 37,284,084Contractual obligations 55,455,000 23,500,000 15,550,000 63,405,000 14,305,000Notes payable 89,320,000 - 8,970,000 80,350,000 4,305,000

Total debt payable - principal 1,842,097,423 413,325,000 108,454,296 2,146,968,127 55,894,084

Premium/discount 96,330,881 12,074,079 48,320,321 60,084,639 7,962,190Deferred loss on refunding of bonds (7,127,921) - (519,869) (6,608,052) (519,869)

Accretion on capital appreciation bonds 148,074,606 85,208,743 38,275,000 195,008,349 22,439,767

Total amortizations and accretions 237,277,566 97,282,822 86,075,452 248,484,936 29,882,088

Total debt payable 2,079,374,989 510,607,822 194,529,748 2,395,453,063 85,776,172

Arbitrage payable 2,729,431 263,934 1,136,346 1,857,019 49,155Capital leases payable 103,719 93,514 71,189 126,044 68,916

Compensated absences payable 24,451,151 2,753,045 3,288,758 23,915,438 2,937,214

Claims payable 33,411,921 117,912,242 118,745,838 32,578,325 25,619,978

Total other long-term liabilities payable 60,696,222 121,022,735 123,242,131 58,476,826 28,675,263

Total governmental activities long-term liabilities $ 2,140,071,211 $ 631,630,557 $ 317,771,879 $ 2,453,929,889 $ 114,451,435


Compensated absences payable $ 454,592 $ 311,290 $ 274,882 $ 491,000 $ 197,822

Total business-type activit ieslong-term liabilities $ 454,592 $ 311,290 $ 274,882 $ 491,000 $ 197,822

Internal Service Funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. At year end, $791,634 of Internal Service Funds’ compensated absences payable and $32,578,325 of claims payable is included in the above governmental activities amounts. For the governmental activities, claims and judgments, and compensated absences are generally liquidated by the General Fund. The above business-type activities include the Food Service Fund and the $61,170 of compensated absences payable from nonmajor enterprise funds.

Debt Payable-Governmental Activities

At June 30, 2008, the District had outstanding $2,395,453,063 of general obligation and lease revenue bonds, public property finance contractual obligations, asbestos abatement notes, and delinquent maintenance tax notes. Of the $2,395,453,063 debt payable, $195,008,349 was attributable to the accretion on capital appreciation bonds. These debt obligations, whose original issuance value was $3,364,497,603, were issued at various dates from May 15, 1989 through March 1, 2008, with interest rates ranging from 3.25 percent to 7.0 percent for the purpose of new construction and maintenance of facilities. All debt obligations fully mature at various dates through August 15, 2033. At June 30, 2008, outstanding bonds from Series 1999 and delinquent maintenance tax notes from the Series 2001 Refunding in the amount of $713,234,696 are considered defeased and are not included in the District’s government-wide financial statements or the fund financial statements.

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Of the District’s $2,395,453,063 total debt payable outstanding at June 30, 2008, $82,614,714 is attributable to lease revenue bonds issued by the Public Facility Corporation.

The Variable Rate Bonds Series 2004, with interest at the initial offering rate of 1.62 percent for the Initial Rate Period, which is defined as beginning on the date of initial delivery of bonds and ending on June 9, 2005, were issued on May 25, 2004. Following the initial rate period, the Variable Rate Bonds Series 2004 were remarketed annually for one year rate re-set periods of 2.77, 3.63, and 3.75 percent respectively. On June 14, 2008, the Bonds were remarketed at a rate of 1.85 percent for the period extending through June 15, 2009. Variable Rate Bonds bear interest in a flexible rate or variable rate effective for periods selected and approved by the District.

In March 2008, the District issued $389,825,000 in Limited Tax Schoolhouse Bonds, Series 2008 with interest rates ranging from 4.25 to 5 percent. The District received a premium of $11,975,015 on the issuance of Series 2008 bonds. The total proceeds less the issuance costs and underwriter’s discount of $1,149,007 and $651,008 respectively, are to be used for additional construction and renovation. This was the first segment of an $805 million bond referendum passed in November 2007.

The following table provides details of the related debt transactions during the fiscal year:

Underwriter's Issue

Face Value Premium Total Discount Cost

CAP Series 2007 $ 23,500,000 $ 99,064 $ 23,599,064 $ - $ 85,814

Bond Series 2008 389,825,000 11,975,015 401,800,015 651,008 1,149,007

Total $ 413,325,000 $ 12,074,079 $ 425,399,079 $ 651,008 $ 1,234,821

The District received $12,074,079 in premiums from the sale of bonds and notes during the year. Premium on each bond or note issue will be amortized individually over the life of the said bond or note and the amortization payable has been added to this note. Additionally, underwriter’s discount and issue cost related to the transactions of $651,008 and $1,234,821, respectively, have been added to Other Assets on the Statement of Net Assets and will be amortized over the life of the bonds.

Contractual Obligations are issued for the purpose of acquiring personal property assets and are authorized pursuant to the laws of the State of Texas, including the Public Property Finance Act, Section 271.001 of the Texas Local Government Code. The District issued $23,500,000 in Contractual Obligation Series 2007 in October 2007. The District received $99,064 in premium and paid $85,814 in issuance costs. The notes issued by the District include both Maintenance Tax Notes and Asbestos Abatement Notes. The maintenance tax notes were issued to provide funding for improvements to and rehabilitation of school facilities and the asbestos abatement notes were issued to pay costs for the District’s environmental cleanup and asbestos removal programs. Both maintenance tax notes and asbestos abatement notes are authorized under Section 45.108 of the Texas Education Code.

Premiums on Capital Appreciation Bonds are included in the accreted value of the bonds. A reclassification was made in fiscal year 2008 between bonds payable, premium/discount, and accretion on capital appreciation bonds in order to properly reflect each category. Additionally, the effective interest method of premium/discount amortizations and accretions has been implemented. The net effect of the adjustments was an increase in total debt payable of $3,066,387.

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The following table displays total principal debt outstanding by issuance as of June 30, 2008. Accreted values as of June 30, 2008 are included for each applicable debt issuance.

Original Final

Date of Interest Issue Maturity Bond CAB Total Bonds

Issue Description Rates Amount Date Principal Accretion Payable 05-15-89 Series 1989 6.7 to 7.0 $ 190,012,895 8/15/2010 $ 12,785,094 $ 36,716,348 $ 49,501,442

10-15-92 Refunding Series 1992 3.5 to 6.35 71,905,037 8/15/2014 33,330,037 47,595,162 80,925,199

01-01-97 Refunding Series 1997 5.2 to 5.375 31,435,000 8/15/2017 1,765,000 7,786,864 9,551,864

01-01-99 Series 1999A 4.0 to 5.3 698,830,000 2/15/2026 30,899,701 18,190,278 49,089,979

01-01-99 Series 1999B 4.5 to 4.65 10,680,000 2/15/2009 3,375,002 1,949,750 5,324,752

07-22-99 Series 1999C (QZAB) 1.54 8,000,000 8/1/2012 8,000,000 -

8,000,000

08-01-05 Series 2003 4.0 TO 5.0 262,535,000 2/15/2033 239,085,000 -

239,085,000

05-25-04 Vaiable Rate Series 2004 VARIABLE 300,000,000 6/15/2031 237,000,000 -

237,000,000

02-10-05 Series 2005 3.25 TO 6.0 193,300,000 2/15/2032 180,650,000 -

180,650,000

02-10-05 Refunding Series 2005A 4.25 to 4.46 198,078,577 2/15/2020 198,078,578 37,621,312 235,699,890

09/21/05 Refunding Series 2005B 5.0 173,140,000 2/15/2024 173,140,000 -

173,140,000

12/08/05 Series 2005A 4.0 to 5.0 104,700,000 2/15/2032 104,700,000 -

104,700,000

11/21/06 Refunding Series 2006 5.0 28,100,000 8/15/2017 28,100,000 -

28,100,000

03/22/07 Refunding Series 2007 3.85 to 5.0 279,865,000 2/15/2026 279,865,000 11,406,428 291,271,428

03/01/08 Series 2008 5.0 389,825,000 2/15/2033 389,825,000 -

389,825,000

05/01/98 Lease Revenue Series 1998A (PFC) 4.45 TO 5.43 46,246,108 9/15/2022 23,216,877 15,837,582 39,054,459

05/01/98 Lease Revenue Series 1998B (PFC) 4.45 TO 5.38 47,999,985 9/15/2022 26,622,838 17,904,625 44,527,463

04/01/06 Lease Revenue Series 2006 (PFC Food)

4.25 TO 5.50 33,600,000 9/15/2030 32,775,000 - 32,775,000

Bonds Payable 2,003,213,127 195,008,349 2,198,221,476

11/16/00 Contractual Obligations Series 2000 4.75 TO 5.0 37,000,000 7/15/2008 2,705,000 -

2,705,000

10/09/03 Contractual Obligations Series 2003 3.0 20,000,000 7/15/2008 2,000,000 -

2,000,000


4,200,000


18,000,000


13,000,000


23,500,000

Contractual Obligations 63,405,000 -

63,405,000

04/19/01 Maintenance Notes Series 2001 3.9 TO 5.45 100,000,000 7/15/2011 19,105,000 -

19,105,000

05/15/05 Maintenance Notes Refunding Series 2005

3.9 TO 5.45 61,245,000 7/15/2020 61,245,000 - 61,245,000

Notes Payable 80,350,000 - 80,350,000

Total Debt Payable - Principal $ 2,146,968,127 $ 195,008,349 $ 2,341,976,476

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The following table summarizes by type the annual debt service requirements of the outstanding debt issues at June 30, 2008 to maturity:

Bond Bond

Principal Interest Totals

2009 $ 37,284,084 $ 106,362,009 $ 143,646,093

2010 40,274,608 115,213,472 155,488,080

2011 45,342,243 114,981,594 160,323,837

2012 39,782,178 129,158,798 168,940,976

2013 57,091,800 112,597,512 169,689,312

2014-2018 330,480,944 515,709,744 846,190,688

2019-2023 500,177,270 312,453,889 812,631,159

2024-2028 556,650,000 173,180,418 729,830,418

2029-2033 396,130,000 52,010,560 448,140,560

$ 2,003,213,127 $ 1,631,667,996 $ 3,634,881,123

Contractual Contractual

Obligations Obligations


2009 $ 14,305,000 $ 2,275,066 $ 16,580,066

2010 11,245,000 1,615,418 12,860,418

2011 11,605,000 1,179,230 12,784,230

2012 11,970,000 744,593 12,714,593

2013 7,080,000 401,640 7,481,640

2014-2016 7,200,000 308,663 7,508,663

$ 63,405,000 $ 6,524,610 $ 69,929,610

Notes Notes


2009 $ 4,305,000 $ 3,902,825 $ 8,207,825

2010 5,025,000 3,670,700 8,695,700

2011 5,135,000 3,419,000 8,554,000

2012 5,345,000 3,159,400 8,504,400

2013 5,055,000 2,900,625 7,955,625

2014-2018 25,350,000 10,712,500 36,062,500

2019-2021 30,135,000 2,255,625 32,390,625$ 80,350,000 $ 30,020,675 $ 110,370,675

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Total Total

Principal Interest

Requirements Requirements Totals

2009 $ 55,894,084 $ 112,539,900 $ 168,433,984

2010 56,544,608 120,499,590 177,044,198

2011 62,082,243 119,579,824 181,662,067

2012 57,097,178 133,062,791 190,159,969

2013 69,226,800 115,899,777 185,126,577

2014-2018 363,030,944 526,730,907 889,761,851

2019-2023 530,312,270 314,709,514 845,021,784

2024-2028 556,650,000 173,180,418 729,830,418

2029-2033 396,130,000 52,010,560 448,140,560

$ 2,146,968,127 $ 1,668,213,281 $ 3,815,181,408

Other long-term debt

Arbitrage -- The Federal Tax Reform Act of 1986 requires issuers of tax-exempt debt to make payments to the United States Treasury of investment income received at yields that exceed the issuer’s tax-exempt borrowing rates. The U.S. Treasury requires payment for each issue every five years. Arbitrage liability for tax-exempt debt subject to the Tax Reform Act issued through June 30, 2008, amounted to $1,857,019. The estimated liability is updated annually for any tax-exempt issuances or changes in yields until such time payment of the calculated liability is due. Liabilities resulting from issuances in the General Fund are typically liquidated in the General Fund. Liabilities resulting from issuances in the Capital Renovation Fund are liquidated in the Capital Renovation Fund if unspent proceeds are remaining.

Compensated Absences -- On retirement or death of certain employees who meet eligibility requirements, the District pays any accumulated sick leave as an employer contribution to a 403(b) plan in the employee’s name to such employees or the estates of the employees. Individuals employed after October 9, 1972 are not eligible to receive the lump-sum cash payments. Additionally, certain employees are entitled to receive accrued vacation pay in a lump-sum cash payment upon termination of employment with the District. The net decrease of $535,714 over the prior fiscal year represents the recorded liability for employees vesting in the accumulated sick leave program adjusted by the amounts paid employees retiring from the District.

Capital Leases -- In 2002, the District entered into capital leases with Apple Lease Financing and Compaq Lease Financing. Each lease meets the criteria of a capital lease as defined by Statement of Financial Accounting Standards No. 13, Accounting for Leases, which defines a capital lease generally as one which transfers benefits and risks of ownership to the lessee.

Capital assets acquired by lease have been capitalized in an amount equal to the present value of the future minimum lease payments at the time of acquisition. Principal payments in fiscal year 2008 totaled $71,189. The General Fund has typically been used in prior years to liquidate capital lease liabilities. Capital assets, net of depreciation, acquired through capital leases and recorded in the government-wide financial statements for governmental activities amounted to $93,514.

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The future minimum lease obligations and the net present value of these minimum lease payments as of June 30, 2008 were as follows:

Year Ending Governmental

June 30th Activities

2009 $ 77,488

2010 51,796

Total m inimum lease payments 129,284

Am ount Representing Interest at 2.51% (3,240)

Present Value of m inim um lease paym ents $ 126,044

NOTE 9: OPERATING LEASES

The District leases office facilities and instructional educational facilities under noncancellable operating leases. Total cost for such leases was $1,240,378 for the fiscal year ended June 30, 2008. The future minimum lease payments for these leases are as follows:

NOTE 10: RISK MANAGEMENT

The District is exposed to various risks related to torts: theft of, damage to and destruction of assets; errors and omissions; and natural disasters. The District’s risk management program encompasses various means of protecting the District against losses through policies with commercial insurance carriers or through self-insurance.

Workers’ Compensation

The District maintains a self-insurance program for workers’ compensation. Contributions are paid from all governmental and proprietary funds to the Workers’ Compensation Internal Service Fund from which all claims and administrative expenses are paid. Claims administration, loss control, and consultant services are provided by a third party administrator. The District maintains a catastrophic loss insurance policy for catastrophic losses exceeding $1,500,000 per occurrence up to statutory limit of liability.

An accrual for incurred but not reported claims in the amount of $14,647,325 (discounted at 3 percent), of which $8,153,676 is the current portion, has been recorded in the fund as of June 30, 2008. Claims payable, including

Year Ending

June 30 Amount

2009 $ 773,352

2010 469,766

2011 123,706

2012 8,610

$ 1,375,434

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an estimate of claims incurred but not reported, was actuarially determined based on the District’s historical claims experience and an estimate of the remaining liability on known claims.

At June 30, 2008, the fund had net assets of $32,270,102. Changes in claims payable for the fiscal years ended June 30, 2007 and 2008 are as follows:

2008 2007

Claims payable, beginning of fiscal year $ 17,150,921 $ 21,358,828

Incurred claims and claim adjustment expenses

for insured events of the current fiscal year 6,456,209 7,838,388

Decrease in provision for insured events of

prior fiscal year (845,832) (7,150,399)

5,610,377 687,989

Payments:

Claims and claim adjustment expenses attributable

to insured events of the current fiscal year 8,113,973 4,895,896


to insured events of the prior fiscal year - -

8,113,973 4,895,896

Claims payable, end of fiscal year $ 14,647,325 $ 17,150,921

Total incurred claims and claim adjustment expenses

Total payments

Health Insurance

Effective January 1, 2002, the District established a self-insurance program for health insurance. Contributions are paid from all governmental and proprietary funds to the Health Insurance Internal Service Fund from which all claims and administrative expenses are paid. Claims administration and consultant services are provided by a third party administrator. The District maintains both aggregate and individual stop loss coverage. Individual stop loss coverage is for catastrophic losses exceeding $300,000 per claim.

The District is insured for covered medical paid and incurred during the plan year by Aetna and pharmacy costs paid and incurred during the plan year by Caremark under an annual aggregate insurance contract. The coverage provides that the insurer will reimburse the District for such paid claims that exceed an annual aggregate attachment point that is determined by a monthly amount per covered employee based on the tier of coverage enrolled.

An accrual for incurred but not reported claims in the amount of $17,931,000, of which $17,466,300 is the current portion, has been recorded in the fund as of June 30, 2008. Claims payable, including an estimate of claims incurred but not reported, was actuarially determined based on an estimate of the remaining liability on known claims.

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At June 30, 2008, the fund had net assets of $49,442,671. Changes in claims payable for the fiscal years ended June 30, 2007 and 2008 are as follows:

2008 2007

Claims payable, beginning of fiscal year $ 16,261,000 $ 16,094,000

Incurred claims and claim adjustment expenses

for insured events of the current fiscal year 106,686,772 87,023,492

Increase in provision for insured events of prior

fiscal year 5,615,093 4,580,184

112,301,865 91,603,676

Payments:


to insured events of the current fiscal year 105,100,272 86,864,842


to insured events of the prior fiscal year 5,531,593 4,571,834

110,631,865 91,436,676

Claims payable, end of fiscal year $ 17,931,000 $ 16,261,000

Total payments

Total incurred claims and claim adjustment expenses

Property, Casualty, General and Professional Liability

The District purchases All-Risk Property Insurance with limits of $200,000,000. Due to market conditions, the property insurance coverage limits were increased from $150,000,000 to $200,000,000. National Flood Insurance Program policies are purchased for those facilities in the 100-year and 500-year flood plain. Casualty, General and Professional Liability risks are insured with limits of $10,000,000. Within these policy limits, the District’s exposure for covered losses is limited to the policy deductibles and self-insured retentions. Automobile liability exposures are self-insured in Texas and insurance coverage is purchased for out of state risks. The District has not had any claims in excess of its policy limits in the past three years.

NOTE 11: EMPLOYEES’ RETIREMENT PLAN

Plan Description

The District’s employees are covered by the Teacher Retirement System of Texas (“TRS”). TRS, a public employee retirement system (“PERS”), is a multiple-employer defined pension plan. It is a cost sharing PERS with one exception: all risks and costs are not shared by the District but are the liability of the State of Texas. By statute, the State of Texas contributes to the retirement system an amount equal to the current authorized rate multiplied by the aggregate annual compensation of all members of the retirement system during that fiscal year. The District’s covered payroll and the total payroll for the year ended June 30, 2008 were $1,108,879,392 and $1,160,273,914, respectively. For members of the retirement system entitled to the State’s statutory minimum salary for school personnel, the District pays the State’s contribution on the part of the member’s salary that exceeds the statutory minimum.

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 TRS. TRS-Care Retired Plan provides health care coverage for certain persons (and their dependents) who retired under TRS. The statutory authority for the program is Texas Insurance Code, Chapter 1575.

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Types of Employees Covered

All members of public state-supported educational institutions in Texas who are employed for one-half or more of the standard workload and who are not exempted from membership under the Texas Government Code are covered by the plan.

Benefit Provisions and Service Requirements

TRS administers retirement and disability annuities and death and survivor benefits to employees and beneficiaries of employees of the public school system of Texas. It operates primarily under the provisions of the Texas Constitution Article XVI, Section 67 and the Texas Government Code, Title 8, Subtitle C, Chapter 803 and 805, respectively. Service requirements are as follows:

Normal -- Age 65 with 5 years of credited service, or when the sum of member’s age and years of credit equals or exceeds 80.

Reduced -- Age 55 with at least 5 years of credited service, or any age below 50 with 30 or more years of credited service.

Members are fully vested after five years of creditable service and are entitled to any benefit for which eligibility requirements have been met.

Effective September 1, 2005, new employees no longer have the 90-day waiting period for TRS pension plan membership.

Funding Policy

Contribution requirements are not actuarially determined, but are legally established each biennium pursuant to the following state funding policy: (1) the state contribution requires the legislature to establish a member contribution rate of not less than 6 percent of the member’s annual compensation and a state contribution of not less than 6 percent of the member’s annual compensation rate and not more than 10 percent of the aggregate annual compensation of all members of the system during the fiscal year, (2) a state statute prohibits benefit improvements or contribution reductions if, as a result of the particular actions, the time required to amortize TRS’s unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or if the amortization period exceeds 31 years, the period would be increased by such action.

State law provides for a state contribution rate of 6.58 percent and member contribution rate of 6.4 percent for fiscal year 2008. The State of Texas contributes 6.58 percent of all employees’ eligible gross earnings, except for those District employees subject to the statutory minimum rules and those employees being paid from and participating in federally funded programs for the fiscal year 2008. The statutory minimum requirements are based on the State of Texas minimum teacher schedule and then adjusted based on local tax rates. For employees paid by federal programs, the federal programs are required to contribute the state’s portion.

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 2008, 2007, 2006, and 2005. 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, 2007, 2006, and 2005, the total contributions paid to the pension plan were $3,615,804,936, $3,299,916,519, and $3,057,170,112 respectively; the active member contributions were $1,862,595,865, $1,700,415,419, and $1,578,339,475, respectively; contributions from the state of Texas were $1,471,131,358, $1,332,101,481, and $1,257,671,695, respectively; and contributions from reporting employers were

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$282,077,713, $267,399,619, and $221,158,942, respectively. The District’s contributions for the years ended August 31, 2007, and August 31, 2006, were $3,026,730, and $2,062,491, respectively, and the estimated contribution for the year ending August 31, 2008 is $2,306,405.

Contributions Required and Made

Employees of the District were required to pay 6.65 percent of their eligible gross earnings to TRS. Of the 6.65 percent, .25 percent was a contribution towards TRS-Care retiree health insurance. Effective September 1, 2003, the Texas legislature enacted legislation related to the funding of TRS-Care. House Bill 3459 of the 78

th

Legislature increased the .25 percent active member contribution to 0.5 percent of salary and added a new contribution from school districts for 0.4 percent of salary of each active employee. Effective September 1, 2005, the 79

th Legislature enacted changes to increase the 0.5 percent of salary of each active member contribution to

TRS-Care to 0.65 percent of salary and increased the 0.4 percent contributions from school districts to 0.55 percent of salary of each active employee. The State of Texas contributes 6.0 percent for all District employees except for employees’ salaries paid from federal or local grants since their contributions are paid by the District from funds received from grantor agencies. Both of those rates are set by state statutes. The statutory minimum requirements are based on the State of Texas teacher schedule adjusted by local tax rates. For members funded by federal programs, the federal programs are required to contribute 7 percent. Effective September 1, 2007, the Texas legislature enacted legislation to increase the state contribution rate from 6% to 6.58% and to increase the contribution rate for federal funded programs from 7% to 7.58%. Contributions made by the State, the District, and its employees; and the District’s covered payroll for fiscal years ended June 30, 2006, June 30, 2007, and June 30, 2008 are equal to required contributions and were made as follows:

Pension Contributions

Contributions Required Required Member's State Employee

Made on Behalf Contributions Contributions Contributions Covered Contribution Contribution

of the District to TRS to Active Care to TRS Payroll Rate Rate

2006 $53,119,273 $9,415,480 $5,138,571 $68,630,562 $975,754,935 6.00% 7.05%

2007 $57,370,533 $2,312,873 $5,763,264 $74,352,376 $1,054,643,626 6.00% 7.05%

*2008 $65,463,311 $19,829,892 - $70,968,281 $1,108,879,392 5.58% 6.40%

* For fiscal year ended June 30, 2008, the Contributions Made on Behalf of the District and the Member’s Contributions to TRS do not reflect

contributions for the TRS-Care.

Contributions to TRS - Active Care

State District

Contribution Required Member's State Member's

Made on Behalf Contributions Contributions Covered Contribution Contribution

of the District to Active Care to Active Care Payroll Rate Rate

2008 $661,245 $6,045,801 $7,207,716 $1,108,879,392 1.00% 0.65%

The contributions made by the State on behalf of the District have been recorded in the government-wide financial statements and in the fund financial statement of the General Fund as both state revenues and payroll expenditures. These contributions are the legal responsibility of the State.

TRS issues a publicly available financial report that includes financial statements and required supplementary information for the defined benefit pension plan and TRS-Care. That report may be visiting the TRS Web site at

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www.trs.state.tx.us, by writing to the TRS Communications Department, 1000 Red River Street, Austin, Texas 78701, or by calling 1-800-223-8778.

NOTE 12: COMMITMENTS AND CONTINGENCIES

The District received significant financial assistance from numerous federal and state governmental agencies in the form of grants. The disbursements of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies and the Texas Education Agency. Any disallowed claims resulting from such audits could become a liability of the General Fund. However, in the opinion of management, any such disallowed claims, if any, will not have a material effect on any of the financial statements of the individual fund types included herein or on the overall financial position of the District at June 30, 2008.

NOTE 13: PRIOR PERIOD ADJUSTMENT

The District adjusted it beginning fund balance for its Special Revenue Fund to account for cash received for prior year reimbursements that were recorded as deferred revenues. The recognition of revenue resulted in an adjustment to beginning fund balance of $7,162,196.

NOTE 14: SUBSEQUENT EVENTS

In October 2008, the District issued $14,500,000 of Public Property Finance Contractual Obligations, Series 2008. Proceeds from the issuance of the contractual obligations will be used to provide funds for the acquisition of certain capital items.

On September 12, 2008, the District was impacted by Hurricane Ike. Any damage to district facilities is covered under the district’s property casualty insurance subject to a $2.5 million deductible. The district plans to request reimbursement of its deductible from the Federal Emergency Management Agency.

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy. Lehman Brothers had provided certain management services (marketing and client services) to TexPool, a local government pool, in which the District has funds invested. The services provided by Lehman Brothers were transferred to Federated Investors Inc. There was no loss incurred by the District in connection with this event.

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APPENDIX B

FORM OF CO-BOND COUNSEL'S OPINION

ANDREWS KURTH LLP 600 Travis, Suite 4200 Houston, Texas 77002

BURNEY & FOREMAN 5445 Almeda, Suite 400 Houston, Texas 77004

B-1 Austin Beijing Dallas Houston London New York The Woodlands Washington, DC HOU:2970062.1

__________, 2009

WE HAVE ACTED as Co-Bond Counsel for the Houston Independent School District (the “District”) in connection with an issue of bonds (the “Bonds”) described as follows:

HOUSTON INDEPENDENT SCHOOL DISTRICT LIMITED TAX SCHOOLHOUSE BONDS, TAXABLE SERIES 2009A-3 (Build America Bonds- Direct Payment to Issuer), dated November 1, 2009, in the aggregate principal amount of $183,750,000, maturing on February 15 in the years 2019 through and including 2022, 2024 and 2028. The Bonds are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Bonds and in the order (the “Order”) adopted by the Board of Education of the District authorizing their issuance.

WE HAVE ACTED as Co-Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Bonds, as described in the Order. The transcript contains certified copies of certain proceedings of the District; certain certifications and representations and other material facts within the knowledge and control of the District, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Bonds. We have also examined executed Bond No. T3-1.

WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the District or the disclosure thereof in connection with the sale of the Bonds. Our role in connection with the District’s Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein.

BASED ON SUCH EXAMINATION, it is our opinion as follows:

(1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently in effect; the Bonds constitute valid and legally binding obligations of the District enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion

B-2

HOU:2970062.1

in appropriate cases; and the Bonds have been authorized and delivered in accordance with law; and

(2) The Bonds are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, within the limits prescribed by law, upon taxable property located within the District, which taxes have been pledged irrevocably to pay the principal of and interest on the Bonds.

WE CALL TO YOUR ATTENTION THAT interest on the Bonds is not excludable from gross income for federal income tax purposes under existing law. We express no other opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Bonds.

EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to 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 Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

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