OFFICIAL STATEMENTDated November 6, 2014

NEW ISSUE - Book-Entry-Only

Ratings:Moody’s: “Aaa”S&P: “AAA”PSF Guaranteed(See “OTHER INFORMATION - Ratings” and“THE PERMANENT SCHOOL FUNDGUARANTEE PROGRAM” herein.)

In the opinion of Bond Counsel (defined below) assuming continuing compliance by the District (defined below) after the date of initial deliveryof the Bonds (defined below) with certain covenants contained in the Order (defined herein) and subject to the matters set forth under “TAXMATTERS” herein, interest on the Bonds for federal income tax purposes under existing statutes, regulations, published rulings, and courtdecisions (1) will be excludable from the gross income of the owners thereof pursuant to section 103 of the Code (defined herein) and (2) will notbe included in computing the alternative minimum taxable income of the owners thereof, who are individuals or, except as hereinafter described,corporations (see “TAX MATTERS” herein).

$69,925,000NORTH EAST INDEPENDENT SCHOOL DISTRICT

(A political subdivision of the State of Texas located in Bexar County)UNLIMITED TAX REFUNDING BONDS,

SERIES 2014B

Dated Date: November 1, 2014 Due: February 1, as shown on page 2 hereofInterest to Accrue from Date of Delivery

PAYMENT TERMS . . . Interest on the $69,925,000 North East Independent School District Unlimited Tax Refunding Bonds, Series2014B (the “Bonds”) will accrue from their date of initial delivery to the Underwriters (defined below), will be payable on February 1and August 1 of each year, commencing February 1, 2015, and will be calculated on the basis of a 360-day year consisting of twelve30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository TrustCompany (“DTC”), pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired indenominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof.Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will makedistribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds(see “THE BONDS - Book-Entry-Only System” herein). The initial Paying Agent/Registrar is BOKF, NA dba Bank of Texas, Austin,Texas (see “THE BONDS - Paying Agent/Registrar”).

AUTHORITY FOR ISSUANCE . . . The Bonds are issued pursuant to the Constitution and general laws of the State of Texas (the “State”),including particularly, Texas Government Code, Chapter 1207, as amended (“Chapter 1207”), and an order (the “Order”) adopted by theBoard of Trustees (the “Board”) of the North East Independent School District (the “District”) on September 8, 2014 (see “THE BONDS -Authority for Issuance”). In the Order, as permitted by Chapter 1207, the Board delegated to certain District officials the authority toestablish the final sale terms of the Bonds and to execute an approval certificate (the “Approval Certificate”) to effectuate the sale of theBonds. The Approval Certificate was executed by a designated District official on November 6, 2014.

SECURITY . . . The Bonds are direct obligations of the District payable from a continuing direct annual ad valorem tax levied by theDistrict, without legal limit as to rate or amount, on all taxable property within the District (see “THE BONDS - Security and Source ofPayment”). The District has received conditional approval from the Texas Education Agency for the payment of the Bonds to beguaranteed by the Permanent School Fund of Texas (see “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”).

PURPOSE . . . Proceeds from the sale of the Bonds will be utilized to (i) refund certain maturities of the District’s currently outstandingindebtedness as disclosed in Schedule I hereto (the “Refunded Obligations”) for debt service savings, and (ii) pay the costs of issuance ofthe Bonds (see “PLAN OF FINANCING - Purpose”).

CUSIP PREFIX: 659155MATURITY SCHEDULE & 9 DIGIT CUSIP

See Schedule on Page 2

LEGALITY . . . The Bonds are offered for delivery when, as and if issued and received by the initial purchasers thereof named below (the“Underwriters”) and subject to the approving opinion of the Attorney General of Texas and the approval of certain legal matters byFulbright & Jaworski LLP of San Antonio, Texas, a member of Norton Rose Fulbright, Bond Counsel (see Appendix C, “FORM OFBOND COUNSEL’S OPINION”). Certain legal matters will be passed upon for the Underwriters by their legal counsel, McCall,Parkhurst & Horton L.L.P., San Antonio, Texas.

DELIVERY . . . It is expected that the Bonds will be available for delivery through DTC on or about Thursday, December 4, 2014 (the“Date of Delivery”).

STIFEL, NICOLAUS & COMPANY, INCORPORATED FROST BANK

PIPER JAFFRAY & CO. RAYMOND JAMES

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MATURITY SCHEDULE

CUSIP No. Prefix: 659155(1)

Stated Stated

Principal Maturity Interest Initial CUSIP Principal Maturity Interest Initial CUSIP

Amount (February 1) Rate Yield Suffix(1)

Amount (February 1) Rate Yield Suffix(1)

1,265,000$ 2015 1.000% 0.180% FS9 3,035,000$ 2027 5.000% 2.600%(2)

GE9

1,900,000 2016 3.000% 0.320% FT7 6,780,000 2028 4.000% 2.940%(2)

GF6

**** **** **** **** **** 7,085,000 2029 4.000% 2.990%(2)

GG4

2,040,000 2020 5.000% 1.440% FX8 3,420,000 2030 4.000% 3.100%(2)

GH2

2,160,000 2021 5.000% 1.700% FY6 3,560,000 2031 4.000% 3.150%(2)

GJ8

2,280,000 2022 5.000% 1.960% FZ3 8,115,000 2032 4.000% 3.200%(2)

GK5

2,410,000 2023 5.000% 2.130% GA7 3,635,000 2033 4.000% 3.250%(2)

GL3

2,545,000 2024 5.000% 2.260% GB5 3,790,000 2034 4.000% 3.280%(2)

GM1

5,810,000 2025 5.000% 2.380%(2)

GC3 3,955,000 2035 4.000% 3.330%(2)

GN9

6,140,000 2026 5.000% 2.480%(2)

GD1

(Interest accrues from the Date of Delivery)

REDEMPTION . . . The District reserves the right, at its option, to redeem Bonds having stated maturities on and after February 1,2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any datethereafter, at the par value thereof plus accrued interest to the date of redemption (see “THE BONDS - Redemption”)._______________(1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP

Global Services, managed by Standard and Poor’s Financial Services LLC on behalf of The American BankersAssociation and are included solely for convenience of the registered owners of the Bonds. This data is not intended tocreate a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, theCo-Financial Advisors, nor the Underwriters are responsible for the selection or correctness of the CUSIP Numbers setforth herein.

(2) Yield calculated based on the assumption that the Bonds denoted and sold at a premium will be redeemed onFebruary 1, 2024, the first optional call date for such Bonds, at a redemption price of par plus accrued interest to theredemption date.

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USE OF INFORMATION

This Official Statement, which includes the cover page, Schedule, and the Appendices hereto, does not constitute an offer to sellor the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation orsale.

No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other thanthose contained in this Official Statement, and, if given or made, such other information or representations must not be reliedupon.

The information set forth herein has been obtained from the District and other sources believed to be reliable, but suchinformation is not guaranteed as to accuracy or completeness and information obtained from sources other than the District isnot to be construed as the representation of the District. This Official Statement contains, in part, estimates and matters ofopinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates andopinions, 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 thisOfficial Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been nochange in the affairs of the District or other matters described.

THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGECOMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION,QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAWPROVISIONS OF THE JURISDICTIONS IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTEDSHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONSWHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHTPREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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

NONE OF THE DISTRICT, THE CO-FINANCIAL ADVISORS, NOR THE UNDERWRITERS MAKES ANY REPRESENTATIONOR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDINGTHE DEPOSITORY TRUST COMPANY (“DTC”) OR ITS BOOK-ENTRY-ONLY SYSTEM OR THE AFFAIRS OF THE TEXASEDUCATION AGENCY (“TEA”) DESCRIBED UNDER “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”, ASSUCH INFORMATION IS PROVIDED BY DTC AND TEA, RESPECTIVELY.

The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither thisOfficial Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constitutingan agreement with the purchasers of the Bonds. INVESTORS SHOULD READ THIS ENTIRE OFFICIAL STATEMENT,INCLUDING THE COVER PAGE, THE SCHEDULE AND ALL APPENDICES ATTACHED HERETO, TO OBTAININFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

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TABLE OF CONTENTS

OFFICIAL STATEMENT SUMMARY.........................5

DISTRICT OFFICIALS, STAFF ANDCONSULTANTS.....................................................8THE BOARD OF TRUSTEES...........................................8APPOINTED OFFICIALS ................................................8CONSULTANTS AND ADVISORS....................................8

INTRODUCTION ............................................................9

PLAN OF FINANCING ...................................................9

THE BONDS ................................................................... 10

THE PERMANENT SCHOOL FUNDGUARANTEE PROGRAM.................................. 15

STATE AND LOCAL FUNDING OF SCHOOLDISTRICTS IN TEXAS ........................................ 27

CURRENT PUBLIC SCHOOL FINANCESYSTEM ................................................................ 30

THE SCHOOL FINANCE SYSTEM ASAPPLIED TO THE NORTH EASTINDEPENDENT SCHOOL DISTRICT .............. 34

TAX INFORMATION ................................................... 34TABLE 1 - VALUATION, EXEMPTIONS AND

TAX SUPPORTED DEBT .................................... 39TABLE 2 - TAXABLE ASSESSED VALUATIONS

BY CATEGORY................................................. 40TABLE 3 - VALUATION AND TAX SUPPORTED

DEBT HISTORY................................................ 41TABLE 4 - TAX RATE, LEVY AND COLLECTION

HISTORY ......................................................... 41TABLE 5 - TEN LARGEST TAXPAYERS ...................... 41TABLE 6 - TAX ADEQUACY ..................................... 42TABLE 7 - ESTIMATED OVERLAPPING DEBT ............. 42

DEBT INFORMATION ................................................. 43TABLE 8 - TAX SUPPORTED DEBT SERVICE

REQUIREMENTS............................................... 43TABLE 9 - INTEREST AND SINKING FUND

BUDGET PROJECTION ...................................... 44TABLE 10 - AUTHORIZED BUT UNISSUED

UNLIMITED TAX BONDS .................................. 44TABLE 11- OTHER OBLIGATIONS .............................. 44

FINANCIAL INFORMATION......................................46TABLE 12 - CHANGES IN NET ASSETS ......................46TABLE 12-A - GENERAL FUND REVENUES

AND EXPENDITURE HISTORY............................47

INVESTMENTS..............................................................48TABLE 13 - CURRENT INVESTMENTS..........................50

TAX MATTERS..............................................................50

CONTINUING DISCLOSURE OFINFORMATION....................................................52

OTHER INFORMATION ..............................................53RATINGS ...................................................................53EFFECT OF SEQUESTRATION ......................................53LITIGATION ...............................................................54REGISTRATION AND QUALIFICATION OF

BONDS FOR SALE .............................................54LEGAL INVESTMENTS AND ELIGIBILITY TO

SECURE PUBLIC FUNDS IN TEXAS.....................54LEGAL MATTERS ......................................................54CO-FINANCIAL ADVISORS .........................................55UNDERWRITING ........................................................55FORWARD-LOOKING STATEMENTS

DISCLAIMER ....................................................55MISCELLANEOUS.......................................................56

SCHEDULE OF REFUNDEDOBLIGATIONS ............................... SCHEDULE I

APPENDICESGENERAL INFORMATION REGARDING THE

DISTRICT .............................................................AEXCERPTS FROM THE ANNUAL FINANCIAL

REPORT ...............................................................BFORM OF BOND COUNSEL’S OPINION .........................C

The cover page hereof, this page, the Schedule, and theappendices included herein and any addenda, supplementor 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 thisOfficial Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. Noperson is authorized to detach this summary from this Official Statement or to otherwise use it without the entire OfficialStatement.

THE DISTRICT.............................. The North East Independent School District (the “District”) is a political subdivision locatedin Bexar County, Texas. The District is approximately 144 square miles in area (see“INTRODUCTION - Description of the District”).

THE BONDS .................................. The District is issuing its $69,925,000 Unlimited Tax Refunding Bonds, Series 2014B (the“Bonds”). The Bonds mature on February 1 in each of the years identified in the tableappearing on page 2 hereof.

PAYMENT OF INTEREST ............... Interest on the Bonds accrues from the date of initial delivery to the Underwriters (anticipatedto occur on or about December 4, 2014), and is payable initially on February 1, 2015 and oneach August 1 and February 1 thereafter until stated maturity or prior redemption (see “THEBONDS - Description of the Bonds” and “THE BONDS - Redemption”).

AUTHORITY FOR ISSUANCE ......... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas,including particularly, Texas Government Code, Chapter 1207, as amended, and an order (the“Order”) adopted by the Board of Trustees of the District (the “Board”) on September 8, 2014.In the Order, pursuant to Chapter 1207, the Board delegated to certain District officials theauthority to establish the final sale terms of the Bonds and to execute an approval certificate(the “Approval Certificate”) to effectuate the sale of the Bonds (see “THE BONDS -Authority for Issuance”). The Approval Certificate was executed by a designated Districtofficial on November 6, 2014.

SECURITY FOR THE BONDS .......... The Bonds constitute direct obligations of the District payable from a continuing direct annualad valorem tax levied by the District, without legal limit as to rate or amount, on all taxableproperty within the District (see “THE BONDS - Security and Source of Payment”).Additionally, the District has received conditional approval from the Texas Education Agency(the “TEA”) for the payment of the Bonds to be guaranteed by the corpus of the PermanentSchool Fund of Texas (see “THE BONDS – Permanent School Fund Guarantee”).

PERMANENT SCHOOL FUND

GUARANTEE ................................. The District received conditional approval from the TEA for the Bonds to be guaranteed bythe corpus of the Permanent School Fund of the State of Texas (see “THE PERMANENTSCHOOL FUND GUARANTEE PROGRAM”).

REDEMPTION ............................... The District reserves the right, at its option, to redeem Bonds having stated maturities on andafter February 1, 2025, in whole or in part in principal amounts of $5,000 or any integralmultiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plusaccrued interest to the date of redemption (see “THE BONDS - Redemption”).

TAX EXEMPTION ............................ In the opinion of Bond Counsel, interest on the Bonds for federal income tax purposes, under andpursuant to statutes, regulations, published rulings, and court decisions existing on the datehereof, (1) will be excludable from the gross income of the owners thereof, and (2) will not beincluded in computing the alternative minimum taxable income of the owners thereof, who areindividuals or, except as hereinafter described, corporations (see “TAX MATTERS” herein).

USE OF PROCEEDS.......................... Proceeds from the sale of the Bonds will be utilized to (i) refund certain maturities of theDistrict’s currently outstanding indebtedness as disclosed in Schedule I hereto (the “RefundedObligations”) for debt service savings, and (ii) pay the costs of issuance of the Bonds (see“PLAN OF FINANCING – Purpose”).

RATINGS ...................................... The Bonds have been rated “Aaa” by Moody's Investors Service, Inc. (“Moody’s”) and“AAA” by Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLCbusiness (“S&P”) by virtue of the guarantee of the Permanent School Fund of the State ofTexas (see “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”). The Bondsand the presently outstanding unlimited tax-supported debt of the District are rated “Aa1” byMoody’s and “AA-” by S&P without regard to credit enhancement. The District has 11unlimited tax-supported issues outstanding which are rated “Aaa” by Moody’s and “AAA” byS&P by virtue of the guarantee of the Permanent School Fund of the State of Texas (see“OTHER INFORMATION – Ratings”). The District has one maintenance tax note issue (the

6

“Series 2010 Maintenance Tax Notes”) that is neither further secured by nor subject to thePermanent School Fund Guarantee. The District has received conditional approval from theTEA for the Bonds to be guaranteed by the corpus of the Permanent School Fund.

BOOK-ENTRY-ONLY

SYSTEM ...................................... The definitive Bonds will be initially registered and delivered only to Cede & Co., thenominee of the Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only Systemdescribed 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 thebeneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will bepayable by the Paying Agent/Registrar to Cede & Co., which will make distribution of theamounts so paid to the participating members of DTC for subsequent payment to thebeneficial owners of the Bonds (see “THE BONDS - Book-Entry-Only System”).

PAYMENT RECORD ..................... The District has never defaulted on the payment of its general obligation tax-supported debt.

OTHER DEBT ISSUES................... The District has no voter-authorized but unissued ad valorem tax-supported bonds.

SELECTED FINANCIAL INFORMATION

Net Tax Ratio Tax

Per Supported Per Supported

Fiscal Capita Debt Capita Debt

Year Estimated Taxable Taxable Outstanding Tax to Taxable % of

Ended District Assessed Assessed at End Supported Assessed Total Tax

6/30 Population(1)

Valuation(2)

Valuation of Year Debt Valuation Collections

2011 396,628 28,129,843,160$ 70,922 1,228,717,691$ 3,098$ 4.37% 99.50%

2012 410,746 28,019,059,238 68,215 1,184,767,690 2,884 4.23% 98.49%

2013 415,965 28,075,612,510 67,495 1,444,538,430 3,473 5.15% 100.02%

2014 432,834 29,429,536,333 67,993 1,450,519,128 3,351 4.93% 99.55%

2015 442,761 31,757,230,982 71,725 1,400,378,775(3)

3,163(3)

4.41%(3)

N/A

________________(1) Source: District Officials.(2) Source: District Comprehensive Annual Financial Reports for years ending 2011 through 2014, and Bexar Appraisal

District’s Certified Totals for Tax Year 2014, subject to change during the ensuing year.(3) Excludes the Series 2010 Maintenance Tax Notes and the Refunded Obligations; includes the Bonds.

CHANGES IN NET ASSETS CONSOLIDATED STATEMENT SUMMARY

2014 2013 2012 2011 2010

Beginning Net Assets 191,962,337$ 223,448,096$ 206,615,945$ 210,345,458$ 205,840,335$

Total Revenue 685,060,692 648,982,820 678,177,526 686,844,835 681,056,555

Total Expenditures (694,595,071) (680,468,579) (661,345,375) (688,549,262) (676,551,435)

Prior Period Adjustment (6,711,540) - - (2,025,086) -

Ending Net Assets 175,716,418$ 191,962,337$ 223,448,096$ 206,615,945$ 210,345,455$

Fiscal Year Ended June 30,

_______________Source: The District’s Comprehensive Annual Financial Reports.

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GENERAL FUND CONSOLIDATED STATEMENT SUMMARY

2014 2013 2012 2011 2010

Beginning Balance 113,878,198$ 116,753,975$ 89,680,721$ 71,894,269$ 61,002,284$

Total Revenue 493,326,195 471,328,861 483,372,199 488,231,126 476,553,839

Total Expenditures 490,393,260 471,910,625 455,164,878 468,687,096 466,822,696

Net Funds Available 2,932,935 (581,764) 28,207,321 19,544,030 9,731,143

Other Sources/Uses (2,692,619) (2,294,013) (1,134,067) (1,757,578) 1,160,842

Ending Balance 114,118,514$ 113,878,198$ 116,753,975$ 89,680,721$ 71,894,269$

For Fiscal Year Ended June 30,

_______________Source: The District’s Comprehensive Annual Financial Reports.

For additional information regarding the District, please contact:

Mr. Dan Villarreal, C.P.A. Raul Villaseñor

Associate Superintendent for Business Services/ or First Southwest Company

Chief Financial Officer 70 Northeast Loop 410, Suite 710

North East Independent School District San Antonio, Texas 78216

8961 Tesoro Drive Telephone: (210) 308-2200

San Antonio, Texas 78217 Fax: (210) 349-7585

Telephone: (210) 407-0495 raul.villasenor@firstsw.com

Fax: (210) 805-2798

dvilla2@neisd.net Ricardo Villaseñor

Cabrera Capital Markets, LLC

9901 IH 10 West, Suite 800

San Antonio, Texas 78230

Telephone: (210) 558-2876

Fax: (210) 558-2877

rvillasenor@cabreracapital.com

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DISTRICT OFFICIALS, STAFF AND CONSULTANTS

THE BOARD OF TRUSTEES

Board of TermTrustees Length of Service Expires Occupation

Letti BresnahanPresident, District 6

6 Years,6 Months

May 2016 Project Coordinator

Shannon GronaVice President, District 5

2 Years,6 Months

May 2016 Community Volunteer

Sandy HugheySecretary, District 1

14 Years,6 Months

May 2016 Community Volunteer

Brigitte PerkinsTrustee, District 7

16 Years,6 Months

May 2018 Realtor

Jim WheatTrustee, District 4

2 Years,6 Months

May 2016 Attorney

Edd WhiteTrustee, District 2

18 Years,6 Months

May 2018 Retired

Sandi WolffTrustee, District 3

6 Months May 2018 Public Affairs/Communications

APPOINTED OFFICIALS

ADMINISTRATIVE OFFICERS POSITION

Superintendent

Dr. Brian G. Gottardy, Ed.D. .....................................................................................................................Superintendent of Schools

Senior Leadership Team

Ronald Clary....................................................................................................................... Associate Superintendent for OperationsDan Villarreal .................................................................... Associate Superintendent for Business Services/Chief Financial Officer

CONSULTANTS AND ADVISORS

General Counsel.............................................................................................................................. Schulman, Lopez & Hoffer, LLPSan Antonio, Texas, Texas

Certified Public Accountants ............................................................................................. Alonso, Bacarisse, Irvine & Palmer, P.C.San Antonio, Texas

Bond Counsel .................................................................................Fulbright & Jaworski LLP, a member of Norton Rose FulbrightSan Antonio, Texas

Co-Financial Advisors ............................................................................................................................... First Southwest CompanySan Antonio, Texas

andCabrera Capital Markets, LLC

San Antonio, Texas

9

OFFICIAL STATEMENT

RELATING TO

$69,925,000NORTH EAST INDEPENDENT SCHOOL DISTRICT

(A political subdivision of the State of Texas located in Bexar County)UNLIMITED TAX REFUNDING BONDS,

SERIES 2014B

INTRODUCTION

This Official Statement, which includes the cover page, Schedule and the Appendices hereto, provides certain informationpertaining to the $69,925,000 North East Independent School District Unlimited Tax Refunding Bonds, Series 2014B (the“Bonds”). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Order (definedherein), except as otherwise indicated herein.

There follows in this Official Statement descriptions of the Bonds and certain information regarding the North East IndependentSchool District (the “District”) and its finances. All descriptions of documents contained herein are only summaries and arequalified in their entirety by reference to each such document. Copies of such documents may be obtained from the District’sCo-Financial Advisors, First Southwest Company, San Antonio, Texas and Cabrera Capital Markets, LLC, San Antonio, Texas,upon request by electronic mail or upon payment of reasonable copying, handling, and delivery charges.

This Official Statement speaks only as to its date, and the information contained herein is subject to change. A copy of the FinalOfficial Statement pertaining to the Bonds will be filed with the Municipal Securities Rulemaking Board through its ElectronicMunicipal Market Access (“EMMA”) system, see “CONTINUING DISCLOSURE OF INFORMATION” for a description ofthe District’s undertaking to provide certain information on a continuing basis.

DESCRIPTION OF THE DISTRICT . . . The District is a political subdivision of the State of Texas (the “State”) located in BexarCounty, Texas. The District covers approximately 144 square miles in area. The District is governed by a seven-member Board ofTrustees (the “Board”), the members of which serve staggered four-year terms, with elections being held in May of every other year.Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrativeresponsibilities to the Superintendent of Schools, who is the chief administrative officer of the District. Support services aresupplied by consultants and advisors.

PLAN OF FINANCING

PURPOSE . . . Proceeds from the sale of the Bonds will be utilized to (i) refund certain maturities of the District’s currentlyoutstanding indebtedness as disclosed in Schedule I hereto (the “Refunded Obligations”) for debt service savings, and (ii) pay thecosts of issuance of the Bonds.

REFUNDED OBLIGATIONS . . . The Refunded Obligations, and interest due thereon, are to be paid on their scheduled redemption datefrom cash and investments to be deposited with BOKF, NA dba Bank of Texas, Austin, Texas, a national banking association (the“Escrow Agent”) pursuant to an Escrow Deposit Letter dated as of September 8, 2014 (the “Escrow Agreement”) between theDistrict and the Escrow Agent.

The Order provides that the District will deposit certain proceeds of the sale of the Bonds, along with other lawfully available fundsof the District (if any), with the Escrow Agent in the amount necessary and sufficient to accomplish the discharge and final paymentof the Refunded Obligations at their scheduled date of early redemption (the “Redemption Date”). Such funds shall be held by theEscrow Agent in an escrow fund (the “Escrow Fund”) irrevocably pledged to the payment of principal of and interest on theRefunded Obligations. First Southwest Company, in its capacity as Co-Financial Advisor to the District, will certify as to thesufficiency of the amount initially deposited to the Escrow Fund, without regard to investment (if any), to pay the principal of andinterest on the Refunded Obligations, when due, at the Redemption Date (the “Certificate of Sufficiency”). Amounts on deposit inthe Escrow Fund shall, until such time as needed for their intended purpose, be (i) held uninvested in cash and/or (ii) invested incertain direct, noncallable obligations of the United States of America (including obligations unconditionally guaranteed by theUnited States of America). Cash and investments (if any) held in the Escrow Fund shall not be available to pay debt servicerequirements on the Bonds.

Prior to, or simultaneously with, the issuance of the Bonds, the District will give irrevocable instructions to provide notice to theowners of the Refunded Obligations that the Refunded Obligations will be redeemed prior to stated maturity on which date moneywill be made available to redeem the Refunded Obligations from money held under the Escrow Agreement.

By the deposit of the cash with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasanceof all of the Refunded Obligations in accordance with the law. It is the opinion of Bond Counsel that as a result of such defeasanceand in reliance upon the Certificate of Sufficiency provided by First Southwest Company, the Refunded Obligations will beoutstanding only for the purpose of receiving payments from the Escrow Fund held for such purpose by the Escrow Agent and such

10

Refunded Obligations will not be deemed as being outstanding obligations of the District payable from taxes nor for the purpose ofapplying any limitation on the issuance of debt.

The District has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds, ofany additional amounts required to pay the principal of and interest on the Refunded Obligations, if for any reason, the cash balanceson deposit or scheduled to be on deposit in the Escrow Fund be insufficient to make such payment.

Defeasance of the Refunded Obligations will cancel the Permanent School Fund Guarantee relating thereto.

THE BONDS

DESCRIPTION OF THE BONDS . . . The Bonds are dated November 1, 2014 and mature on February 1 in each of the years and inthe principal amounts shown in the table appearing on page 2 hereof. Interest accrues from the Bonds’ date of initial delivery tothe Underwriters (expected to occur on or about December 4, 2014) (“Date of Delivery”), will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on February 1 and August 1 of each year, commencing February 1, 2015until stated maturity or prior redemption. The definitive Bonds will be issued only in fully registered form in any integralmultiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of TheDepository Trust Company, New York, New York (“DTC”), pursuant to the Book-Entry-Only System described herein. Nophysical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bondswill be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to theparticipating members of DTC for subsequent payment to the beneficial owners of the Bonds (see “THE BONDS - Book-Entry-Only System” herein).

AUTHORITY FOR ISSUANCE . . . The Bonds are issued and the tax levied for their payment pursuant to authority conferred by theConstitution and the laws of the State, including Chapter 1207, Texas Government Code, as amended, (“Chapter 1207”), and anorder adopted by the Board on September 8, 2014 (the “Order”). In the Order, as permitted by Chapter 1207, the Board delegated tocertain District officials the authority to establish the final sale terms of the Bonds and to execute an approval certificate (the“Approval Certificate”) effectuating the sale of the Bonds. The Approval Certificate was executed by a designated District officialon November 6, 2014.

SECURITY AND SOURCE OF PAYMENT . . . All taxable property within the District is subject to a continuing direct annual ad valoremtax levied by the District, without legal limit as to rate or amount, sufficient to provide for the payment of principal of and interest onthe Bonds.

PERMANENT SCHOOL FUND GUARANTEE . . . In connection with the sale of the Bonds, the District has received from the TexasEducation Agency (“TEA”) conditional approval for guarantee of the Bonds under the Permanent School Fund Guarantee Program(Chapter 45, Subchapter C of the Texas Education Code). Subject to satisfying certain conditions discussed under the heading “THEPERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein, the Bonds will be absolutely and unconditionally guaranteedby the corpus of the Permanent School Fund of the State of Texas. In the event of default, registered owners will receive allpayments due on the Bonds from the corpus of the Permanent School Fund.

TAX RATE LIMITATION . . . For debt service of unlimited tax debt, there is no limitation on the tax rate (Sections 45.001 and45.003(b)(1), Texas Education Code, as amended); provided, however, with respect to “new debt”, the District must demonstrate to theAttorney General of Texas the ability to pay all such “new debt” with a debt service tax not to exceed $0.50 per $100 assessedvaluation in compliance with Section 45.0031, Texas Education Code, as amended. The Bonds are not “new debt” and are,therefore, not subject to the $0.50 threshold tax rate test. For a more detailed description of the $0.50 test, and the exceptionstherefrom, see “TAX INFORMATION – Tax Rate Limitations” herein.

FUTURE ISSUES . . . The District has no voter-authorized but unissued ad valorem tax-supported bonds.

REDEMPTION . . . The District reserves the right, at its option, to redeem Bonds having stated maturities on and after February 1,2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any datethereafter, 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 allthe Bonds of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Onlyform) shall determine by lot the Bonds, or portions thereof, within such maturity to be redeemed. If a Bond (or any portion of theprincipal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (orthe principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shallcease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interestthereon are held by the Paying Agent/Registrar on the redemption date.

NOTICE OF REDEMPTION . . . Not less than 30 days prior to a redemption date for the Bonds, the District shall cause a notice ofredemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Bonds to be redeemed, inwhole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at theclose of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BECONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER

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RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALLBECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANYBOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND ORPORTION THEREOF SHALL CEASE TO ACCRUE.

AMENDMENTS . . . The District, may, without the consent of or notice to any holders of the Bonds, from time to time and at anytime, amend the Order in any manner not detrimental to the interests of the holders of the Bonds, including the curing of anyambiguity, inconsistency, or formal defect or omission herein. In addition, the District may, with the written consent of holdersof the Bonds holding a majority in aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, orrescind any of the provisions of the Order; provided, however, that, without the consent of all holders of outstanding Bonds, nosuch amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of, premium, if any, andinterest on the Bonds, reduce the principal amount thereof, the redemption price therefor, or the rate of interest thereon, or in anyother way modify the terms of payment of the principal of, premium, if any, or interest on the Bonds, (2) give any preference toany Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required to be held by holders for consentto any such amendment, addition, or rescission.

DEFEASANCE . . . The Order provides for the defeasance of the Bonds when the payment of the principal of and premium, if any, onthe Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), isprovided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment, (2) GovernmentObligations (defined below), certified by an independent public accounting firm of national reputation to mature as to principal andinterest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make suchpayment, and all necessary and proper fees, compensation and expenses of the paying agent for the Bonds, or (3) a combination ofmoney and Government Obligations together so certified sufficient to make such payment; provided, however, that no certificationby an independent accounting firm of the sufficiency of deposits shall be required in connection with a gross defeasance of Bonds.The District has additionally reserved the right in the Order, subject to satisfying the requirements of (1) and (2) above, to substituteother Government Obligations for the Government Obligations originally deposited, to reinvest the uninvested money on deposit forsuch defeasance and to withdraw for the benefit of the District money in excess of the amount required for such defeasance. TheOrder provides that “Government Obligations” means (a) direct, noncallable obligations of the United States of America, includingobligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency orinstrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agencyor instrumentality and that, on the date the governing body of the District authorizes the defeasance, are rated as to investment qualityby a nationally recognized investment rating firm not less than “AAA” or its equivalent, (c) noncallable obligations of a state or anagency or a county, municipality, or other political subdivision of a state that on the date the governing body of the District adopts orapproves the proceedings authorizing the financial arrangements have been refunded and are rated as to investment quality by anationally recognized investment rating firm not less than “AAA” or its equivalent, or (d) any additional securities and obligationshereafter authorized by Texas law as eligible for use to accomplish the discharge of obligations such as the Bonds. There is noassurance that the ratings for United States Treasury securities acquired to defease any Bonds, or those for any other GovernmentObligations, will be maintained at any particular rating category. Further, there is no assurance that current State law will not beamended in a manner that expands or contracts the list of permissible defeasance securities (such list consisting of those securitiesidentified in clauses (a) through (c) above), or any rating requirement thereon, that may be purchased with defeasance proceedsrelating to the Bonds (“Defeasance Proceeds”), though the District has reserved the right to utilize any additional securities for suchpurpose in the event the aforementioned list is expanded. Because the Order does not contractually limit such permissibledefeasance securities and expressly recognizes the ability of the District to use lawfully available Defeasance Proceeds to defease allor any portion of the Bonds, registered owners of Bonds are deemed to have consented to the use of Defeasance Proceeds topurchase such other defeasance securities, notwithstanding the fact that such defeasance securities may not be of the same investmentquality as those currently identified under State law as permissible defeasance securities.

Upon such deposit as described above, such Bonds will no longer be regarded to be outstanding obligations for purposes ofapplying any limitation on indebtedness or for purposes of taxation. After firm banking and financial arrangements for thedischarge and final payment of the Bonds have been made as described above, all rights of the District to initiate proceedings tocall the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however,that, the District’s right to redeem Bonds defeased to stated maturity is not extinguished if the District has reserved the option, tobe exercised at the time of the defeasance of the Bonds, to call for redemption, at an earlier date, those Bonds which have beendefeased to their stated maturity date, if the District: (i) in the proceedings providing for the firm banking and financialarrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to theowners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs thatnotice of the reservation be included in any redemption notices that it authorizes.

Defeasance will cancel the Permanent School Fund Guarantee with respect to those defeased Bonds.

BOOK-ENTRY-ONLY SYSTEM . . . This section describes how ownership of the Bonds is to be transferred and how the principalof, premium, if any, and interest on the Bonds are to be paid to and accredited by DTC while the Bonds are registered in itsnominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC foruse in disclosure documents such as this Official Statement. The District, Underwriters, and Co-Financial Advisors believe thesource of such information to be reliable, but take no responsibility for the accuracy or completeness thereof.

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The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, orredemption or other notices, to DTC Participants (defined herein), (2) DTC Participants or others will distribute debt servicepayments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the BeneficialOwners (defined herein), or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in thisOfficial Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission,and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the nameof Cede & Co. (DTC’s partnership nominee). One fully-registered certificate will be issued for each maturity of the Bonds in theaggregate principal amount of each such maturity and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “bankingorganization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearingcorporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to theprovisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 millionissues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countriesthat DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among DirectParticipants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfersand 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 ofwhich are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system isalso available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearingcorporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly(“Indirect Participants” and, together with the Direct Participants, the “DTC Participants”). DTC has a Standard & Poor’s ratingof “AA+”. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission.More information about DTC can be found at www.dtcc.com.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for theBonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to berecorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC oftheir purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transactions,as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Ownerentered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the booksof Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificatesrepresenting their ownership interests in the Bonds, except in the event that use of the Book-Entry-Only System for the Bonds isdiscontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’spartnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The depositof Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change inbeneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only theidentity 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, subjectto any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to takecertain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions,tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish toascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. Inthe alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request thatcopies of 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 todetermine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds unless authorized by a Direct Participant inaccordance with DTC’s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possibleafter the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whoseaccounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

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Redemption proceeds and principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee asmay be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’sreceipt of funds and corresponding detail information from the District or the Paying Agent/Registrar, on payable dates inaccordance with their respective holdings shown on DTC’s records. Payments by DTC Participants to Beneficial Owners will begoverned by standing instructions and customary practices, as in the case with securities held for the accounts of customers inbearer form or registered in “street name,” and will be the responsibility of such DTC Participant and not of DTC, the PayingAgent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment ofredemption proceeds and principal and interest to Cede & Co., or such other nominee as may be requested by an authorizedrepresentative of DTC, is the responsibility of the District, disbursement of such payments to Direct Participants shall be theresponsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct andIndirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonablenotice to the District and the Paying Agent/Registrar. Under such circumstances, in the event that a successor securitiesdepository is not obtained, physical Bond certificates are required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securitiesdepository). In that event, physical Bonds will be printed and delivered.

Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understoodthat while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registeredowners should be read to include the person for which the DTC Participant acquires an interest in the Bonds, but (i) all rights ofownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that areto 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 accuracyor completeness by, and is not to be construed as a representation by the District, the Co-Financial Advisors or the Underwriters.

Effect of Termination of Book-Entry-Only System. In the event that the Book-Entry-Only System is discontinued by DTC orthe use of the Book-Entry-Only System is discontinued by the District, printed Bonds will be issued to the holders and the Bondswill be subject to transfer, exchange and registration provisions as set forth in the Order and summarized under “THE BONDS -Transfer, Exchange and Registration” below.

PAYING AGENT/REGISTRAR . . . The initial Paying Agent/Registrar is BOKF, NA dba Bank of Texas, Austin, Texas. In theOrder, the District retains the right to replace the Paying Agent/Registrar. The District covenants to maintain and provide aPaying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be acommercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legallyauthorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in thePaying Agent/Registrar for the Bonds, the District agrees to promptly cause a written notice thereof to be sent to each registeredowner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new PayingAgent/Registrar.

In the event the Book-Entry-Only System should be discontinued, interest on the Bonds will be paid to the registered ownersappearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (hereinafterdefined), and such interest will be paid (i) by check sent United States mail, first class postage prepaid to the address of theregistered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to thePaying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Bonds will be paid tothe registered owner at the stated maturity or earlier redemption upon presentation to the designated payment/transfer office ofthe Paying Agent/Registrar. If the date for the payment of the principal of or interest on the Bonds is a Saturday, Sunday, a legalholiday or a day when banking institutions are authorized to close, then the date for such payment will be the next succeeding daywhich is not such a day, and payment on such date will have the same force and effect as if made on the date payment was due.So long as Cede & Co. is the registered owner of the Bonds, payments of principal of and interest on the Bonds will be made asdescribed in “THE BONDS - Book-Entry-Only System,” above.

TRANSFER, EXCHANGE AND REGISTRATION . . . In the event the Book-Entry-Only System should be discontinued, the Bonds maybe transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to thePaying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, exceptfor any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bondsmay be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer andassignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of theBonds being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, firstclass, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange ortransfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three businessdays after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed bythe registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered anddelivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate

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principal amount as the Bonds surrendered for exchange or transfer. See “THE BONDS - Book-Entry-Only System” herein for adescription of the system to be utilized initially in regard to ownership and transferability of the Bonds. Neither the District northe Paying Agent/Registrar shall be required to transfer or exchange any Bond called for redemption, in whole or in part, within45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange bythe registered owner of the uncalled balance of a Bond.

RECORD DATE FOR INTEREST PAYMENT. . . The record date (“Record Date”) for determining the person to whom the interest onthe Bonds is payable on any interest payment date means the close of business on the 15th 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 suchinterest payment (a “Special Record Date”) will be established by the Paying Agent/Registrar, if and when funds for the paymentof such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date ofthe past due interest (the “Special Payment Date”, which shall be 15 days after the Special Record Date) shall be sent at least fivebusiness days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each holder ofa Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day nextpreceding the date of mailing of such notice.

BONDHOLDERS’ REMEDIES . . . If the District defaults in the payment of principal, interest, or redemption price on the Bondswhen due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation orperformance of any other covenants, conditions, or obligations set forth in the Order, and the State fails to honor the PermanentSchool Fund Guarantee as hereinafter discussed, the registered owners may seek a writ of mandamus to compel District officialsto carry out their legally imposed duties with respect to the Bonds, if there is no other available remedy at law to compelperformance of the Bonds or Order and the District’s obligations are not uncertain or disputed. The issuance of a writ ofmandamus is controlled by equitable principles, and rests with the discretion of the court, but may not be arbitrarily refused.There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have tobe relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of theBondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other conditionand accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by,the registered owners. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W. 3d 325 (Tex.2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in “clear and unambiguous”language. Because it is unclear whether the Texas legislature has effectively waived the District’s sovereign immunity from asuit for money damages, Bondholders may not be able to bring such a suit against the District for breach of the Bonds or Ordercovenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and executionagainst the District’s property. Further, the registered owners cannot themselves foreclose on property within the District or sellproperty within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds.Furthermore, the District is eligible to seek relief from its creditors under Chapter 9 of the United States Bankruptcy Code(“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged sourceof revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognizedas a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, withoutBankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has soughtprotection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability toenforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in BankruptcyCourt instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a BankruptcyCourt in administering any proceeding brought before it. See “THE PERMANENT SCHOOL FUND GUARANTEEPROGRAM” herein for a description of the procedures to be followed for payment of the Bonds by the Permanent School Fundin the event the District fails to make a payment on the Bonds when due. The opinion of Bond Counsel will note that all opinionsrelative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditorsand general principles of equity that permit the exercise of judicial discretion.

SOURCES AND USES OF FUNDS . . . The proceeds from the sale of the Bonds and the District’s cash contribution will be appliedapproximately as follows:

Sources of Funds:

Principal Amount of the Bonds 69,925,000.00$

Original Issue Reoffering Premium 8,254,208.95

District Cash Contribution 244,574.58

Total Sources of Funds 78,423,783.53$

Uses of Funds:

Deposit to Escrow Fund 77,775,523.75$

Total Underwriters' Discount 383,843.08

Cost of Issuance and Contingency 264,416.70

Total Uses of Funds 78,423,783.53$

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THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM

This disclosure statement provides information relating to the program (the “Guarantee Program”) administered by the TexasEducation Agency (the “TEA”) with respect to the Texas Permanent School Fund guarantee of tax-supported bonds issued byTexas school districts and the guarantee of revenue bonds issued by or for the benefit of Texas charter districts. The GuaranteeProgram was authorized by an amendment to the Texas Constitution in 1983 and by Subchapter C of Chapter 45 of the TexasEducation Code, as amended (the “Act”). While the Guarantee Program applies to bonds issued by or for both school districtsand charter districts, as described below, the Act and the program rules for the two types of districts have some distinctions. Forconvenience of description and reference, those aspects of the Guarantee Program that are applicable to school district bonds andto charter district bonds are referred to herein as the “School District Bond Guarantee Program” and the “Charter District BondGuarantee Program,” respectively.

Some of the information contained in this Section may include projections or other forward-looking statements regarding futureevents or the future financial performance of the Texas Permanent School Fund (the “PSF” or the “Fund”). Actual results maydiffer materially from those contained in any such projections or forward-looking statements.

HISTORY AND PURPOSE . . . The PSF was created with a $2,000,000 appropriation by the Texas Legislature (the “Legislature”) in1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 stipulated that certain lands and allproceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land andrights to the PSF. In 1953, the U.S. Congress passed the Submerged Lands Act that relinquished to coastal states all rights of theU.S. navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admissionto the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years of litigation(1957-1960), the U. S. Supreme Court on May 31, 1960, affirmed Texas’ historic three marine leagues (10.35 miles) seawardboundary. Texas proved its submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws andtreaties dating back to 1836. All lands lying within that limit belong to the PSF. The proceeds from the sale and the mineral-related rental of these lands, including bonuses, delay rentals and royalty payments, become the corpus of the Fund. Prior to theapproval by the voters of the State of an amendment to the constitutional provision under which the Fund is established andadministered, which occurred on September 13, 2003 (the “Total Return Constitutional Amendment”), and which is furtherdescribed below, the PSF had as its main sources of revenues capital gains from securities transactions and royalties from the saleof oil and natural gas. The Total Return Constitutional Amendment provides that interest and dividends produced by Fundinvestments will be additional revenue to the PSF. The State School Land Board (“SLB”) maintains the land endowment of theFund on behalf of the Fund and is authorized to manage the investments of the capital gains, royalties and other investmentincome relating to the land endowment. The SLB is a three member board, the membership of which consists of theCommissioner of the Texas General Land Office (the “Land Commissioner”) and two citizen members, one appointed by theGovernor and one by the Texas Attorney General (the “Attorney General”).

The Texas Constitution describes the PSF as “permanent” and “perpetual.” Prior to the approval by Total Return ConstitutionalAmendment, only the income produced by the PSF was to be used to complement taxes in financing public education.

On November 8, 1983, the voters of the State approved a constitutional amendment that provides for the guarantee by the PSF ofbonds issued by school districts. On approval by the State Commissioner of Education (the “Commissioner”), bonds properlyissued by a school district are fully guaranteed by the corpus of the PSF. See “The School District Bond Guarantee Program.”

In 2011, Senate Bill 1 (“SB 1”) was enacted by the Legislature. Among other provisions, SB 1 established the Charter DistrictBond Guarantee Program as a new component of the Guarantee Program, and authorized the use of the PSF to guarantee revenuebonds issued by or for the benefit of certain open-enrollment charter schools that are designated as “charter districts” by theCommissioner. On approval by the Commissioner, bonds properly issued by a charter district are fully guaranteed by the corpusof the PSF. As described below, the implementation of the Charter District Bond Guarantee Program was deferred pendingreceipt of guidance from the Internal Revenue Service (the “IRS”) which was received in September 2013, and the establishmentof regulations to govern the program, which regulations were published for public comment on December 20, 2013, approved onJanuary 30, 2014 and became effective on March 3, 2014. See “The Charter District Bond Guarantee Program.”

State law also permits charter schools to be chartered and operated by school districts and other political subdivisions, but bondfinancing of facilities for school district-operated charter schools is subject to the School District Bond Guarantee Program, notthe Charter District Bond Guarantee Program.

While the School District Bond Guarantee Program and the Charter District Bond Guarantee Program relate to different types ofbonds issued for different types of Texas public schools, and have different program regulations and requirements, a bondguaranteed under either part of the Guarantee Program has the same effect with respect to the guarantee obligation of the Fundthereto, and all guaranteed bonds are aggregated for purposes of determining the capacity of the Guarantee Program (see“Capacity Limits for the Guarantee Program”). The Charter District Bond Guarantee Program as enacted by State law has notbeen reviewed by any court, nor has the Texas Attorney General been requested to issue an opinion, with respect to itsconstitutional validity.

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The sole purpose of the PSF is to assist in the funding of public education for present and future generations. Prior to theadoption of the Total Return Constitutional Amendment, all interest and dividends produced by Fund investments flowed into theAvailable School Fund (the “ASF”), where they are distributed to local school districts and open-enrollment charter schoolsbased on average daily attendance. Any net gains from investments of the Fund accrue to the corpus of the PSF. Prior to theapproval by the voters of the State of the Total Return Constitutional Amendment, costs of administering the PSF were allocatedto the ASF. With the approval of the Total Return Constitutional Amendment, the administrative costs of the Fund have shiftedfrom the ASF to the PSF. In fiscal year 2013, distributions to the ASF amounted to $281.08 per student and the total amountdistributed to the ASF was $1.321 billion, including $300 million distributed to the ASF by the SLB.

Audited financial information for the PSF is provided annually through the PSF Annual Report (the “Annual Report”), which isfiled with the Municipal Securities Rulemaking Board (“MSRB”). The Annual Report includes the Message of the ExecutiveAdministrator of the Fund (the “Message”) and the Management’s Discussion and Analysis (“MD&A”). The Annual Report forthe year ended August 31, 2013, as filed with the MSRB in accordance with the PSF undertaking and agreement made inaccordance with Rule 15c2-12 (“Rule 15c2-12”) of the federal Securities and Exchange Commission (the “SEC”), as describedbelow, is hereby incorporated by reference into this disclosure. Information included herein for the year ended August 31, 2013is derived from the audited financial statements of the PSF, which are included in the Annual Report when it is filed and posted.Reference is made to the Annual Report for the complete Message and MD&A for the year ended August 31, 2013 and for adescription of the financial results of the PSF for the year ended August 31, 2013, the most recent year for which auditedfinancial information regarding the Fund is available. The 2013 Annual Report speaks only as of its date and the TEA has notobligated itself to update the 2013 Annual Report or any other Annual Report. The TEA posts each Annual Report, whichincludes statistical data regarding the Fund as of the close of each fiscal year, the most recent disclosure for the GuaranteeProgram, the Statement of Investment Objectives, Policies and Guidelines of the Texas Permanent School Fund, which iscodified at 19 Texas Administrative Code, Chapter 33 (the “Investment Policy”), monthly updates with respect to the capacity ofthe Guarantee Program (collectively, the “Web Site Materials”) on the TEA web site athttp://www.tea.state.tx.us/index4.aspx?id=3413&menu_id=2147483695 and with the MSRB at www.emma.msrb.org. Suchmonthly updates regarding the Guarantee Program are also incorporated herein and made a part hereof for all purposes. Inaddition to the Web Site Materials, the Fund is required to make quarterly filings with the SEC under Section 13(f) of theSecurities Exchange Act of 1934. Such filings, which consist of a list of the Fund’s holdings of securities specified in Section13(f), including exchange-traded (e.g., NYSE) or NASDAQ-quoted stocks, equity options and warrants, shares of closed-endinvestment companies and certain convertible debt securities, is available from the SEC at www.sec.gov/edgar.shtml. A list ofthe Fund’s equity and fixed income holdings as of August 31 of each year is posted to the TEA web site and filed with theMSRB. Such list excludes holdings in the Fund’s securities lending program. Such list, when filed, is incorporated herein andmade a part hereof for all purposes.

THE TOTAL RETURN CONSTITUTIONAL AMENDMENT . . . The Total Return Constitutional Amendment approved a fundamentalchange in the way that distributions are made to the ASF from the PSF. The Total Return Constitutional Amendment requiresthat PSF distributions to the ASF be determined using a total-return-based formula instead of the current-income-based formula,which was used from 1964 to the end of the 2003 fiscal year. The Total Return Constitutional Amendment provides that the totalamount distributed from the Fund to the ASF: (1) in each year of a State fiscal biennium must be an amount that is not more than6% of the average of the market value of the Fund, excluding real property (the “Distribution Rate”), on the last day of each ofthe sixteen State fiscal quarters preceding the Regular Session of the Legislature that begins before that State fiscal biennium (the“Distribution Measurement Period”), in accordance with the rate adopted by: (a) a vote of two-thirds of the total membership ofthe State Board of Education (“SBOE”), taken before the Regular Session of the Legislature convenes or (b) the Legislature bygeneral law or appropriation, if the SBOE does not adopt a rate as provided by clause (a); and (2) over the ten-year periodconsisting of the current State fiscal year and the nine preceding state fiscal years may not exceed the total return on allinvestment assets of the Fund over the same ten-year period (the “Ten Year Total Return”). In April 2009, the Attorney Generalissued a legal opinion, Op. Tex. Att’y Gen. No. GA-0707 (2009) (“GA-0707”), at the request of the Chairman of the SBOE withregard to certain matters pertaining to the Distribution Rate and the determination of the Ten Year Total Return. In GA-0707 theAttorney General opined, among other advice, that (i) the Ten Year Total Return should be calculated on an annual basis, (ii) acontingency plan adopted by the SBOE, to permit monthly transfers equal in aggregate to the annual Distribution Rate to behalted and subsequently made up if such transfers temporarily exceed the Ten Year Total Return, is not prohibited by State law,provided that such contingency plan applies only within a fiscal year time basis, not on a biennium basis, and (iii) that the amountdistributed from the Fund in a fiscal year may not exceed 6% of the average of the market value of the Fund or the Ten YearTotal Return. In accordance with GA-0707, in the event that the Ten Year Total Return is exceeded during a fiscal year, transfersto the ASF will be halted. However, if the Ten Year Total Return subsequently increases during that biennium, transfers may beresumed, if the SBOE has provided for that contingency, and made in full during the remaining period of the biennium, subject tothe limit of 6% in any one fiscal year. Any shortfall in the transfer that results from such events from one biennium may not bepaid over to the ASF in a subsequent biennium as the SBOE would make a separate payout determination for that subsequentbiennium.

In determining the Distribution Rate, the SBOE has adopted the goal of maximizing the amount distributed from the Fund in amanner designed to preserve “intergenerational equity.” Intergenerational equity is the maintenance of endowment purchasingpower to ensure that endowment spending keeps pace with inflation, with the ultimate goal being to ensure that current and futuregenerations are given equal levels of purchasing power. In making this determination, the SBOE takes into account variousconsiderations, and relies particularly upon its external investment consultant, which undertakes a probability analysis for longterm projection periods that includes certain assumptions. Among the assumptions used in the analysis are a projected rate of

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growth of the average daily scholastic attendance State-wide, the projected contributions and expenses of the Fund, projectedreturns in the capital markets and a projected inflation rate.

The SBOE established the Distribution Rate from the Fund to the ASF for fiscal years 2008 and 2009 at 3.5% and for fiscal years2010 and 2011 at 2.5% of the average of the PSF market value during the respective Distribution Measurement Periods. Thedecision of the SBOE regarding the Distribution Rate for 2008 through 2011 took into account a commitment by the SLB totransfer at least $100 million per year in fiscal years 2008 through 2011. The SBOE set the Distribution Rate for the 2012-13biennium at 4.2%, which rate was determined after the SLB authorized the release of a total of $500 million to the PSF inquarterly installments during the 2012-13 biennium. In November 2012, the SBOE set the Distribution Rate for the 2014-15biennium at 3.3%, which is expected to produce an effective rate of 3.5% taking into account the broadening of the calculationbase for the Fund that was effected by a 2011 State constitutional amendment, which amendment did not increase Fund revenues.That distribution rate represents $1.68 billion in transfers to the ASF during the current biennium. In September 2014, the SBOEadopted a 3.5% Distribution Rate for 2016 - 2017, which takes into account a commitment of the SLB to transfer $175 millionand $200 million to the PSF in fiscal years 2016 and 2017, respectively. The Distribution Rate for the 2016 - 2017 biennium issubject to change by the SBOE prior to the beginning of the 2015 Legislative Session in January 2015. See “2011 ConstitutionalAmendment” below for a description of amendments made to the Texas Constitution on November 8, 2011 that permit the SLBto make transfers directly to the ASF up to the amount of $300 million in each fiscal year.

Since the enactment of a prior amendment to the Texas Constitution in 1964, the investment of the Fund has been managed withthe dual objectives of producing current income for transfer to the ASF and growing the Fund for the benefit of futuregenerations. As a result of this prior constitutional framework, prior to the adoption of the 2004 Asset Allocation Policy (asdefined below) the investment of the Fund historically included a significant amount of fixed income investments and dividend-yielding equity investments, to produce income for transfer to the ASF.

With respect to the management of the Fund’s financial assets portfolio, the single most significant change made to date as aresult of the Total Return Constitutional Amendment has been new asset allocation policies adopted from time to time by theSBOE. The SBOE generally reviews the asset allocations during its summer meeting in even numbered years. The first assetallocation policy adopted by the SBOE following the Total Return Constitutional Amendment was in February 2004, and thepolicy was reviewed and modified or reaffirmed in the summers of 2006, 2008, 2010, 2012 and 2014. The Fund’s investmentpolicy provides for minimum and maximum ranges among the components of each of the three general asset classifications:equities, fixed income and alternative asset investments. The 2004 asset allocation policy decreased the fixed income target from45% to 25% of Fund investment assets and increased the allocation for equities from 55% to 75% of investment assets. In July2006, the SBOE modified its asset allocation to reduce the equity allocation, including both domestic and foreign equityportfolios, to a target of 53% of Fund assets, further reduced the fixed income allocation target to 19% and added an alternativeasset allocation, which included real estate, real return, absolute return and private equity components, totaling 28% of the Fund’sasset target. Alternative asset classes diversify the SBOE-managed assets and are not as correlated to traditional asset classes,which is intended to increase investment returns over the long run while reducing risk and return volatility of the portfolio. InJuly 2010, the SBOE decreased the equity allocation to 50%, and the fixed income allocation to 15%, while increasing thealternative asset allocation (which may include equity and fixed income investments as part of a variety of alternative investmentstrategies) to 35%. In July 2012, the SBOE modified the asset allocation policy by decreasing the equity allocation to 46%,increasing the fixed income allocation to 17%, and increasing the alternative asset allocation (which may include equity and fixedincome investments as part of a variety of alternative investment strategies) to 37%. The changes made to the asset allocation in2012 decreased the target for large cap equity investments from 21% to 18%, replaced a 4% allocation for international small capequities with a 3% allocation for emerging international equities, reduced core fixed income bond investments from 15% to 12%and added a new 5% allocation for emerging market debt in the fixed income portfolio. The 2014 changes (i) decreased theequity allocation to 40% (by decreasing the target for large cap equities from 18% to 16%, the target for small/mid cap equitiesfrom 7% to 5% and the target for emerging and international large cap equities from 18% to 16%), (ii) increased the fixed incomeallocation from 17% to 19% (by increasing the 5% allocation for emerging market debt to 7%) and (iii) increased the alternativeasset allocation from 37% to 41%, which included an increase in the private equity allocation of alternative assets from 6% to10%.

For a variety of reasons, each change in asset allocation for the Fund, including the 2014 modifications, have been, and are being,implemented in phases. At August 31, 2013, the Fund’s financial assets portfolio was invested as follows: 53.21% in publicmarket equity investments; 18.16% in fixed income investments; 10.33% in absolute return assets; 2.67% in private equity assets;3.16% in real estate assets; 6.46% in risk parity assets; 5.72% in real return assets; and 0.29% in cash.

In July 2012 and April 2013, the SBOE also realigned the management of certain of the investment portfolios within the absolutereturn allocation of the alternative investments and its private equity asset class. These alignments in investment portfolios havecreated strategic relationships between the external manager and investment staff of the PSF, which has reduced administrativecosts with respect to those portfolios. In response to a legal opinion request made by the Chair of the SBOE in October 2012, theAttorney General has advised the SBOE in Op. Tex. Att’y Gen. No. GA-0998 (2013) (“GA-0998”), that the PSF is not subject torequirements of certain State competitive bidding laws with respect to the selection of investments. In GA-0998, the AttorneyGeneral also advised that the SBOE generally must use competitive bidding for the selection of investment managers and otherthird party providers of investment services, such as record keeping and insurance, but excluding certain professional services,such as accounting services, as State law prohibits the use of competitive bidding for specified professional services. GA-0998provides guidance to the SBOE in connection with the direct management of alternative investments through investment vehicles

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to be created by the SBOE, in lieu of contracting with external managers for such services, as has been the recent practice of thePSF. The PSF Staff and the Fund’s investment advisor are tasked with advising the SBOE with respect to the implementation ofthe 2010 Asset Allocation Policy, including the timing and manner of the selection of any external managers and otherconsultants.

In accordance with the Texas Constitution, the SBOE views the PSF as a perpetual institution, and the Fund is managed as anendowment fund with a long-term investment horizon. Under the total-return investment objective, the Investment Policyprovides that the PSF shall be managed consistently with respect to the following: generating income for the benefit of the publicfree schools of Texas, the real growth of the corpus of the PSF, protecting capital, and balancing the needs of present and futuregenerations of Texas school children. As described above, the Total Return Constitutional Amendment restricts the annual payout from the Fund to the total-return on all investment assets of the Fund over a rolling ten-year period. State law provides thateach transfer of funds from the PSF to the ASF is made monthly, with each transfer to be in the amount of one-twelfth of theannual distribution. The heavier weighting of equity securities relative to fixed income investments has resulted in greatervolatility of the value of the Fund. Given the greater weighting in the overall portfolio of passively managed investments, it isexpected that the Fund will reflect the general performance returns of the markets in which the Fund is invested.

The asset allocation of the Fund’s financial assets portfolio is subject to change by the SBOE from time to time based upon anumber of factors, including recommendations to the SBOE made by internal investment staff and external consultants, changesmade by the SBOE without regard to such recommendations and directives of the Legislature. Fund performance may also beaffected by factors other than asset allocation, including, without limitation, the general performance of the securities markets inthe United States and abroad; political and investment considerations including those relating to socially responsible investing;application of the prudent person investment standard, which may eliminate certain investment opportunities for the Fund;management fees paid to external managers and embedded management fees for some fund investments; and limitations on thenumber and compensation of internal and external investment staff, which is subject to Legislative oversight. The GuaranteeProgram could also be impacted by changes in State or federal law or the implementation of new accounting standards.

MANAGEMENT AND ADMINISTRATION OF THE FUND . . . The Texas Constitution and applicable statutes delegate to the SBOE theauthority and responsibility for investment of the PSF’s financial assets. In investing the Fund, the SBOE is charged withexercising the judgment and care under the circumstances then prevailing which persons of ordinary prudence, discretion andintelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanentdisposition of their funds, considering the probable income therefrom as well as the probable safety of their capital. The SBOEhas adopted a “Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund,” which iscodified in the Texas Administrative Code beginning at 19 TAC section 33.1.

The Total Return Constitutional Amendment provides that expenses of managing the PSF are to be paid “by appropriation” fromthe PSF. In January 2005, at the request of the SBOE, the Attorney General issued a legal opinion, Op. Tex. Att’y Gen. No. GA-0293 (2005) (“GA-0293”), that the Total Return Constitutional Amendment requires that SBOE expenditures for managing oradministering PSF investments, including payments to external investment managers, be paid from appropriations made by theLegislature, but that the Total Return Constitutional Amendment does not require the SBOE to pay from such appropriated PSFfunds the indirect management costs deducted from the assets of a mutual fund or other investment company in which PSF fundshave been invested.

Texas law assigns control of the Fund’s land and mineral rights to the three-member SLB, which consists of the electedCommissioner of the General Land Office (“GLO”), an appointee of the Governor, and an appointee of the Attorney General.Administrative duties related to the land and mineral rights reside with the GLO, which is under the guidance of theCommissioner of the GLO. In 2007, the Legislature established the real estate special fund account of the PSF (the “Real EstateAccount”) consisting of the land, mineral or royalty interest, real estate investment, or other interest, including revenue receivedfrom those sources, that is set apart to the PSF under the Texas Constitution and laws, together with the mineral estate inriverbeds, channels, and the tidelands, including islands. The investment of the Real Estate Account is subject to the sole andexclusive management and control of the SLB and the Land Commissioner, who is also the head of the GLO. The 2007legislation presented constitutional questions regarding the respective roles of the SBOE and the SLB relating to the dispositionof proceeds of real estate transactions to the ASF, among other questions. Amounts in the investment portfolio of the PSF aretaken into account by the SBOE for purposes of determining the Distribution Rate. An amendment to the Texas Constitution wasapproved by State voters on November 8, 2011, which permits the SLB to make transfers directly to the ASF, see “2011Constitutional Amendment” below.

The SBOE contracts with its securities custodial agent to measure the performance of the total return of the Fund’s financialassets. A consultant is typically retained for the purpose of providing consultation with respect to strategic asset allocationdecisions and to assist the SBOE in selecting external fund management advisors. The SBOE also contracts with financialinstitutions for custodial and securities lending services. The SBOE has established the Committee of Investment Advisors,which consists of independent investment experts each appointed by a member of the SBOE to closely advise the respectiveSBOE member on investment issues.

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As noted above, the Texas Constitution and applicable statutes make the SBOE responsible for investment of the PSF’s financialassets. By law, the Commissioner is appointed by the Governor, with Senate confirmation, and assists the SBOE, but theCommissioner can neither be hired nor dismissed by the SBOE. The Executive Administrator of the Fund is also hired by andreports to the Commissioner. Moreover, although the Fund’s Executive Administrator and his staff implement the decisions ofand provide information to the School Finance/PSF Committee of the SBOE and the full SBOE, the SBOE can neither select nordismiss the Executive Administrator. TEA’s General Counsel provides legal advice to the Executive Administrator and to theSBOE. The SBOE has also engaged outside counsel to advise it as to its duties over the Fund, including specific actionsregarding the investment of the PSF to ensure compliance with fiduciary standards, and to provide transactional advice inconnection with the investment of Fund assets in non-traditional investments.

CAPACITY LIMITS FOR THE GUARANTEE PROGRAM . . . The capacity of the Fund to guarantee bonds under the GuaranteeProgram is limited in two ways: by State law (the “State Capacity Limit”) and by regulations and a notice issued by the IRS (the“IRS Limit”). Prior to May 20, 2003, the State Capacity Limit was equal to two times the lower of cost or fair market value ofthe Fund’s assets, exclusive of real estate. During the 78th Regular Session of the Legislature in 2003, legislation was enactedthat increased the State Capacity Limit by 25%, to two and one half times the lower of cost or fair market value of the Fund’sassets as estimated by the SBOE and certified by the State Auditor, and eliminated the real estate exclusion from the calculation.Prior to the issuance of the IRS Notice (defined below), the capacity of the program under the IRS Limit was limited to two andone-half times the lower of cost or fair market value of the Fund’s assets adjusted by a factor that excluded additions to the Fundmade since May 14, 1989. During the 2007 Texas Legislature, Senate Bill 389 (“SB 389”) was enacted providing for additionalincreases in the capacity of the Guarantee Program, and specifically providing that the SBOE may by rule increase the capacityof the Guarantee Program from two and one-half times the cost value of the PSF to an amount not to exceed five times the costvalue of the PSF, provided that the increased limit does not violate federal law and regulations and does not prevent bondsguaranteed by the Guarantee Program from receiving the highest available credit rating, as determined by the SBOE. SB 389further provides that the SBOE shall at least annually consider whether to change the capacity of the Guarantee Program. Since2005, the Guarantee Program has twice reached capacity under the IRS Limit, and in each instance the Guarantee Program wasclosed to new bond guarantee applications until relief was obtained from the IRS. The most recent closure of the GuaranteeProgram commenced in March 2009 and the Guarantee Program reopened in February 2010 on the basis of receipt of the IRSNotice.

On December 16, 2009, the IRS published Notice 2010-5 (the “IRS Notice”) stating that the IRS will issue proposed regulationsamending the existing regulations to raise the IRS limit to 500% of the total cost of the assets held by the PSF as of December 16,2009. In accordance with the IRS Notice, the amount of any new bonds to be guaranteed by the PSF, together with the thenoutstanding amount of bonds previously guaranteed by the PSF, must not exceed the IRS limit on the sale date of the new bondsto be guaranteed. The IRS Notice further provides that the IRS Notice may be relied upon for bonds sold on or afterDecember 16, 2009, and before the effective date of future regulations or other public administrative guidance affecting fundslike the PSF.

On September 16, 2013, the IRS published proposed regulations (the “Proposed IRS Regulations”) that, among other things,would enact the IRS Notice. The preamble to the Proposed IRS Regulations provides that issuers may elect to apply theProposed IRS Regulations, in whole or in part, to bonds sold on or after September 16, 2013, and before the date that finalregulations become effective.

The IRS Notice and the Proposed IRS Regulations establish a static capacity for the Guarantee Program based upon the costvalue of Fund assets on December 16, 2009 multiplied by five. On December 16, 2009, the cost value of the Guarantee Programwas $23,463,730,608 (estimated and unaudited), thereby producing an IRS Limit of approximately $117.3 billion. The StateCapacity Limit is determined on the basis of the cost value of the Fund from time to time multiplied by the capacity multiplierdetermined annually by the SBOE, but not to exceed a multiplier of five. The capacity of the Guarantee Program will be limitedto the lower of the State Capacity Limit and the IRS Limit. On May 21, 2010, the SBOE modified the regulations that govern theSchool District Bond Guarantee Program (the “SDBGP Rules”), and increased the State Law Capacity to an amount equal tothree times the cost value of the PSF. Such modified regulations, including the revised capacity rule, became effective on July 1,2010. The SDBGP Rules provide that the Commissioner may reduce the multiplier to maintain the AAA credit rating of theGuarantee Program, but provide that any changes to the multiplier made by the Commissioner are to be ratified or rejected by theSBOE at the next meeting following the change. See “Valuation of the PSF and Guaranteed Bonds,” below. The capacitylimitation included in the SDBGP Rules is incorporated into the proposed regulations for the Charter District Bond GuaranteeProgram that are described below.

Since July 1991, when the SBOE amended the Guarantee Program Rules to broaden the range of bonds that are eligible forguarantee under the Guarantee Program to encompass most Texas school district bonds, the principal amount of bondsguaranteed under the Guarantee Program has increased sharply. In addition, in recent years a number of factors have caused anincrease in the amount of bonds issued by school districts in the State. See the table “Permanent School Fund GuaranteedBonds” below. Effective September 1, 2009, the Act provides that the SBOE may annually establish a percentage of the costvalue of the Fund to be reserved from use in guaranteeing bonds. The capacity of the Guarantee Program in excess of anyreserved portion is referred to herein as the “Capacity Reserve.” The SDBGP Rules provide for a minimum Capacity Reserve forthe Guarantee Program of no less than 5%, and provide that the amount of the Capacity Reserve may be increased by a majorityvote of the SBOE. The Commissioner is authorized to change the Capacity Reserve, which decision must be ratified or rejectedby the SBOE at its next meeting following any change made by the Commissioner. The current Capacity Reserve is noted in the

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monthly updates with respect to the capacity of the Guarantee Program on the TEA web site athttp://www.tea.state.tx.us/index4.aspx?id=3413&menu_id=2147483695, which are also filed with the MSRB.

Based upon historical performance of the Fund, the legal restrictions relating to the amount of bonds that may be guaranteed hasgenerally resulted in a lower ratio of guaranteed bonds to available assets as compared to many other types of creditenhancements that may be available for Texas school district bonds and charter district bonds. However, changes in the value ofthe Fund due to changes in securities markets, investment objectives of the Fund, an increase in bond issues by school districts inthe State or legal restrictions on the Fund, the implementation of the Charter District Bond Guarantee Program, or an increase inthe calculation base of the Fund for purposes of making transfers to the ASF, among other factors, could adversely affect the ratioof Fund assets to guaranteed bonds and the growth of the Fund in general. It is anticipated that the issuance of the IRS Noticeand the Proposed IRS Regulations will likely result in a substantial increase in the amount of bonds guaranteed under theGuarantee Program. The implementation of the Charter School Bond Guarantee Program is also expected to increase the amountof guaranteed bonds.

The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program(the Annual Report). The State Auditor audits the financial statements of the PSF, which are separate from other State financialstatements.

THE SCHOOL DISTRICT BOND GUARANTEE PROGRAM . . . The School District Bond Guarantee Program requires an applicationbe made by a school district to the Commissioner for a guarantee of its bonds. If the conditions for the School District BondGuarantee Program are satisfied, the guarantee becomes effective upon approval of the bonds by the Attorney General andremains in effect until the guaranteed bonds are paid or defeased, by a refunding or otherwise.

In the event of default, holders of guaranteed school district bonds will receive all payments due from the corpus of the PSF.Following a determination that a school district will be or is unable to pay maturing or matured principal or interest on anyguaranteed bond, the Act requires the school district to notify the Commissioner not later than the fifth day before the statedmaturity date of such bond or interest payment. Immediately following receipt of such notice, the Commissioner must cause to betransferred from the appropriate account in the PSF to the Paying Agent/Registrar an amount necessary to pay the maturing ormatured principal and interest. Upon receipt of funds for payment of such principal or interest, the Paying Agent/Registrar mustpay the amount due and forward the canceled bond or evidence of payment of the interest to the State Comptroller of PublicAccounts (the “Comptroller”). The Commissioner will instruct the Comptroller to withhold the amount paid, plus interest, fromthe first State money payable to the school district. The amount withheld will be deposited to the credit of the PSF. TheComptroller must hold such canceled bond or evidence of payment of the interest on behalf of the PSF. Following fullreimbursement of such payment by the school district to the PSF with interest, the Comptroller will cancel the bond or evidenceof payment of the interest and forward it to the school district. The Act permits the Commissioner to order a school district to seta tax rate sufficient to reimburse the PSF for any payments made with respect to guaranteed bonds, and also sufficient to payfuture payments on guaranteed bonds, and provides certain enforcement mechanisms to the Commissioner, including theappointment of a board of managers or annexation of a defaulting school district to another school district.

If a school district fails to pay principal or interest on a bond as it is stated to mature, other amounts not due and payable are notaccelerated and do not become due and payable by virtue of the district’s default. The School District Bond Guarantee Programdoes not apply to the payment of principal and interest upon redemption of bonds, except upon mandatory sinking fundredemption, and does not apply to the obligation, if any, of a school district to pay a redemption premium on its guaranteedbonds. The guarantee applies to all matured interest on guaranteed school district bonds, whether the bonds were issued with afixed or variable interest rate and whether the interest rate changes as a result of an interest reset provision or other bond orderprovision requiring an interest rate change. The guarantee does not extend to any obligation of a school district under anyagreement with a third party relating to guaranteed bonds that is defined or described in State law as a "bond enhancementagreement" or a "credit agreement," unless the right to payment of such third party is directly as a result of such third party beinga bondholder.

In the event that two or more payments are made from the PSF on behalf of a district, the Commissioner shall request theAttorney General to institute legal action to compel the district and its officers, agents and employees to comply with the dutiesrequired of them by law in respect to the payment of guaranteed bonds.

The SBOE has approved and modified the SDBGP Rules in recent years, most recently in May 2010. Generally, the SDBGPRules limit guarantees to certain types of notes and bonds, including, with respect to refunding bonds issued by school districts, arequirement that the bonds produce debt service savings, and that bonds issued for capital facilities of school districts must havebeen voted as unlimited tax debt of the issuing district. The Guarantee Program Rules include certain accreditation criteria fordistricts applying for a guarantee of their bonds, and limit guarantees to districts that have less than the amount of annual debtservice per average daily attendance that represents the 90th percentile of annual debt service per average daily attendance for allschool districts, but such limitation will not apply to school districts that have enrollment growth of at least 25% over theprevious five school years. The SDBGP Rules are codified in the Texas Administrative Code at 19 TAC sections 33.65 et seq.,and are available on the TEA web site at http://ritter.tea.state.tx.us/rules/tac/chapter033/index.html.

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CHARTER DISTRICT BOND GUARANTEE PROGRAM . . . The Charter District Bond Guarantee Program became effective March 3,2014. The SBOE published final regulations in the Texas Register that provide for the administration of the Charter DistrictGuarantee Program (the “CDBGP Rules”). The CDBGP Rules are codified at 19 TAC sections 33.67 et seq., and are availableon the TEA web site at http://ritter.tea.state.tx.us/rules/tac/chapter033/index.html.

The Charter District Bond Guarantee Program has been authorized through the enactment of amendments to the Act, whichprovide that a charter holder may make application to the Commissioner for designation as a “charter district” and for a guaranteeby the PSF under the Act of bonds issued on behalf of a charter district by a non-profit corporation. If the conditions for theCharter District Bond Guarantee Program are satisfied, the guarantee becomes effective upon approval of the bonds by theAttorney General and remains in effect until the guaranteed bonds are paid or defeased, by a refunding or otherwise.

Subject to clarifying advice that the TEA anticipates may be received from the Attorney General in accordance with the opinionrequest described below, the capacity of the Charter District Bond Guarantee Program is limited to the amount that equals theresult of the percentage of the number of students enrolled in open-enrollment charter schools in the State compared to the totalnumber of students enrolled in all public schools in the State multiplied by the available capacity of the Guarantee Program.Available capacity is defined as the maximum amount under SBOE rules, less Capacity Reserve and minus existing guarantees.The CDBGP Rules authorize the Commissioner to determine that ratio based on information provided to the TEA by schooldistricts and open-enrollment charter schools, and the calculation will be made annually, on or about March 1 of each year. As ofOctober 2013 (the most recent date for which data is available), the percentage of students enrolled in open-enrollment charterschools (excluding charter schools authorized by school districts) to the total State scholastic census was approximately 3.95%.As of September 29, 2014, there were 201 active open-enrollment charter schools in the State, and there were 640 charter schoolcampuses operating under such charters. Section 12.101, Texas Education Code, as amended by the Legislature in 2013,provides that the Commissioner may grant not more than 215 charters through the end of fiscal year 2014, with the numberincreasing in each fiscal year thereafter through 2019 to a total number of 305 charters permitted by the statute. While legislationlimits the number of charters that may be granted, it does not limit the number of campuses that may operate under a particularcharter. For information regarding the capacity of the Guarantee Program, see “Capacity Limits for the Guarantee Program.”The Act provides that the Commissioner may not approve the guarantee of refunding or refinanced bonds under the CharterDistrict Bond Guarantee Program in a total amount that exceeds one-half of the total amount available for the guarantee ofcharter district bonds under the Charter District Bond Guarantee Program.

On September 16, 2014, the Commissioner submitted an opinion request to the Texas Attorney General regarding the mannerthat the capacity of the Charter District Bond Guarantee Program should be calculated. The opinion was requested in light ofstatutory language relating to the Charter District Bond Guarantee Program that is susceptible to different interpretations, whichcould substantially affect the amount of Charter District bonds that can be guaranteed, and to provide TEA staff with clarificationwith respect to the capacity of the Charter District Bond Guarantee Program. The request is available in its entirety athttps://www.texasattorneygeneral.gov/opinions/opinions/50abbott/rq/2014/pdf/RQ1223GA.pdf. Based on the question presentedto the Attorney General, the advice received could result in the capacity available for the Charter District Bond GuaranteeProgram substantially exceeding the relative percentage of the scholastic population of charter district students to the total publicschool scholastic population. The time line for receiving guidance from the Attorney General is uncertain.

In accordance with the Act, the Commissioner may not approve charter district bonds for guarantee if such guarantees will resultin lower bond ratings for public school district bonds that are guaranteed under the School District Bond Guarantee Program. Tobe eligible for a guarantee, the Act provides that a charter district's bonds must be approved by the Attorney General, have anunenhanced investment grade rating from a nationally recognized investment rating firm, and satisfy a limited investigationconducted by the TEA.

With respect to the Charter District Bond Guarantee Program, the Act establishes a bond guarantee reserve fund in the Statetreasury (the “Charter District Reserve Fund”). Each charter district that has a bond guaranteed must annually remit to theCommissioner, for deposit in the Charter District Reserve Fund, an amount equal to 10% (or such higher amount as may bedetermined by the Commissioner) of the savings to the charter district that result from the lower interest rate on the bond due tothe guarantee by the PSF. The Commissioner has approved a rule governing the calculation and payment of savings into theCharter District Reserve Fund. That rule has been codified at 19 TAC 33.1001, and is available on the TEA web site athttp://ritter.tea.state.tx.us/rules/tac/chapter033/index.html.

The Charter District Bond Guarantee Program does not apply to the payment of principal and interest upon redemption of bonds,except upon mandatory sinking fund redemption, and does not apply to the obligation, if any, of a charter district to pay aredemption premium on its guaranteed bonds. The guarantee applies to all matured interest on guaranteed charter district bonds,whether the bonds were issued with a fixed or variable interest rate and whether the interest rate changes as a result of an interestreset provision or other bond resolution provision requiring an interest rate change. The guarantee does not extend to anyobligation of a charter district under any agreement with a third party relating to guaranteed bonds that is defined or described inState law as a "bond enhancement agreement" or a "credit agreement," unless the right to payment of such third party is directlyas a result of such third party being a bondholder.

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The Act provides that immediately following receipt of notice that a charter district will be or is unable to pay maturing ormatured principal or interest on a guaranteed bond, the Commissioner is required to instruct the Comptroller to transfer from theCharter District Reserve Fund to the district's paying agent an amount necessary to pay the maturing or matured principal orinterest. If money in the Charter District Reserve Fund is insufficient to pay the amount due on a bond for which a notice ofdefault has been received, the Commissioner is required to instruct the Comptroller to transfer from the PSF to the district'spaying agent the amount necessary to pay the balance of the unpaid maturing or matured principal or interest. If a total of two ormore payments are made under the Charter District Bond Guarantee Program on charter district bonds and the Commissionerdetermines that the charter district is acting in bad faith under the program, the Commissioner may request the Attorney Generalto institute appropriate legal action to compel the charter district and its officers, agents, and employees to comply with the dutiesrequired of them by law in regard to the guaranteed bonds. As is the case with the School District Bond Guarantee Program, theAct obligates the Commissioner to instruct the Comptroller to withhold the amount paid with respect to the Charter District BondGuarantee Program, plus interest, from the first State money payable to a charter district that fails to make a guaranteed paymenton its bonds. The amount withheld will be deposited, first, to the credit of the PSF, and then to restore any amount drawn fromthe Charter District Reserve Fund as a result of the non-payment.

The CDBGP Rules provide that the PSF may be used to guarantee bonds issued for the acquisition, construction, repair, orrenovation of an educational facility for an open-enrollment charter holder and equipping real property of an open-enrollmentcharter school and/or to refinance promissory notes executed by an open-enrollment charter school, each in an amount in excessof $500,000 the proceeds of which loans were used for a purposes described above (so-called new money bonds) or forrefinancing bonds previously issued for the charter school that were approved by the attorney general (so-called refundingbonds). Refunding bonds may not be guaranteed under the Charter District Bond Guarantee Program if they do not result in apresent value savings to the charter holder.

The CDBGP Rules provide that an open-enrollment charter holder applying for charter district designation and a guarantee of itsbonds under the Charter District Bond Guarantee Program satisfy various provisions of the regulations, including the following:It must (i) have operated at least one open-enrollment charter school with enrolled students in the State for at least three years; (ii)agree that the bonded indebtedness for which the guarantee is sought will be undertaken as an obligation of all entities undercommon control of the open-enrollment charter holder, and that all such entities will be liable for the obligation if the open-enrollment charter holder defaults on the bonded indebtedness, provided, however, that an entity that does not operate a charterschool in Texas is subject to this provision only to the extent it has received state funds from the open-enrollment charter holder;(iii) have had completed for the past three years an audit for each such year that included unqualified or unmodified auditopinions; and (iv) have received an investment grade credit rating within the last year. Upon receipt of an application forguarantee under the Charter District Bond Guarantee Program, the Commissioner is required to conduct an investigation into thefinancial status of the applicant charter district and of the accreditation status of all open-enrollment charter schools operatedunder the charter, within the scope set forth in the CDBGP Rules. Such financial investigation must establish that an applyingcharter district has a historical debt service coverage ratio, based on annual debt service, of at least 1.1 for the most recentlycompleted fiscal year, and a projected debt service coverage ratio, based on projected revenues and expenses and maximumannual debt service, of at least 1.2. The failure of an open-enrollment charter holder to comply with the Act or the applicableregulations, including by making any material misrepresentations in the charter holder's application for charter districtdesignation or guarantee under the Charter District Bond Guarantee Program, constitutes a material violation of the open-enrollment charter holder's charter.

RATINGS OF BONDS GUARANTEED UNDER THE GUARANTEE PROGRAM . . . Moody’s Investors Service, Standard & Poor’sRating Service, a Standard & Poor’s Financial Service LLC business, and Fitch Ratings rate bonds guaranteed by the PSF “Aaa,”“AAA” and “AAA,” respectively. Not all districts apply for multiple ratings on their bonds, however. See “OTHERINFORMATION - Ratings” herein.

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VALUATION OF THE PSF AND GUARANTEED BONDS . . .

Permanent School Fund ValuationsFiscal YearEnded 8/31 Book Value(1) Market Value(1)

2009 $23,117,052,793 $25,443,104,6232010 23,653,185,489 27,066,200,2592011 24,701,156,685 29,643,439,7942012 25,161,994,845 31,284,851,2662013 25,596,193,826(2) 33,131,028,540(2)

________________(1) SLB managed assets are included in the market value and book value of the Fund. In determining the market value of

the PSF from time to time during a fiscal year, the TEA uses current, unaudited values for TEA managed investmentportfolios and cash held by the SLB. With respect to SLB managed assets shown in the table above, market values ofland and mineral interests, internally managed real estate, investments in externally managed real estate funds and cashare based upon information reported to the PSF by the SLB. Beginning in fiscal year 2009, the SLB reported thatinformation to the PSF on a quarterly basis. The valuation of such assets at any point in time is dependent upon avariety of factors, including economic conditions in the State and nation in general, and the values of these assets, and,in particular, the valuation of mineral holdings administered by the SLB, can be volatile and subject to material changesfrom period to period. At August 31, 2013, land, mineral assets, internally managed discretionary real estate, externaldiscretionary real estate investments and cash managed by the SLB had book values of approximately $19.8 million,$13.4 million, $343.8 million, $1.8 billion, and $1.2 billion respectively, and market values of approximately $366.2million, $2.3 billion, $348.9 million, $1.7 billion and $1.2 billion, respectively.

(2) At August 31, 2014, the PSF had a book value of $27,545,510,340 and a market value of $37,966,003,167 (in eachcase, based on unaudited data).

Permanent School Fund Guaranteed BondsAt 8/31 Principal Amount(1)

2009 $50,032,724,4392010 49,301,683,3382011 52,653,930,5462012 53,634,455,1412013 55,218,889,156(2)

________________(1) Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds

(zero coupon securities). The amount shown excludes bonds that have been refunded and released from the GuaranteeProgram. The TEA does not maintain records of the accreted value of capital appreciation bonds that are guaranteedunder the Guarantee Program.

(2) As of August 31, 2013, the TEA expected that the principal and interest to be paid by school districts over theremaining life of the bonds guaranteed by the Guarantee Program is $91,490,196,730, of which $36,271,307,574represents interest to be paid. At August 31, 2014, there were $58,364,600,784 of bonds guaranteed under theGuarantee Program and the capacity of the Guarantee Program was $82,636,531,020 based on the three times costvalue multiplier approved by the SBOE on May 21, 2010. Such capacity figures include the Reserve Capacity.

DISCUSSION AND ANALYSIS PERTAINING TO FISCAL YEAR ENDED AUGUST 31, 2013 . . . The following discussion is derived fromthe Annual Report for the year ended August 31, 2013, including the Message of the Executive Administrator of the Fund and theManagement’s Discussion and Analysis contained therein. Reference is made to the Annual Report, when filed, for the completeMessage and MD&A. Investment assets managed by the fifteen member SBOE are referred to throughout this MD&A as thePSF(SBOE) assets. As of August 31, 2013, the Fund’s land, mineral rights and certain real assets are managed by the three-member SLB and these assets are referred to throughout as the PSF(SLB) assets. The 2012 SBOE Asset Allocation Policyincludes an allocation for real estate investments, and as such investments are made, and become a part of the PSF investmentportfolio, those investments will be managed by the SBOE and not the SLB.

At the end of fiscal 2013, the total Fund balance was $30.6 billion. Fund balance increased $1.80 billion from the prior year,primarily attributable to the increase in the fair value of the PSF(SBOE) equities and alternative investments, the (PSF(SLB) realassets investments and the recovering markets. During the year, the SBOE continued implementing its revised long termstrategic asset allocation to diversify and strengthen the PSF(SBOE) investment assets of the Fund. The revised allocation isprojected to increase returns over the long run while reducing risk and return volatility of the portfolio. The one year, three year,five year and ten year annualized total returns for the PSF(SBOE) assets were 10.16%, 11.07%, 6.16% and 7.26% respectively(total return takes into consideration the change in the market value of the Fund during the year as well as the interest anddividend income generated by the Fund’s investments). In addition, the SLB continued its shift into externally managed realasset investment funds and the one year, three year, and five year annualized total returns for the PSF(SLB) real assets, includingcash, are 7.60%, 9.56%, and 1.04% respectively.

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The market value of the Fund’s assets is directly impacted by the performance of the various financial markets in which theassets are invested. The most important factors affecting investment performance are the asset allocation decisions made by theSBOE and SLB. The current SBOE long term asset allocation policy allows for diversification of the PSF(SBOE) portfolio intoalternative asset classes whose returns are not as correlated to traditional asset classes. The implementation of the long term assetallocation will occur over several fiscal years and is expected to provide incremental total return at reduced risk. As ofAugust 31, 2013, the PSF(SBOE) portion of the Fund had diversified into emerging market large cap international equities,absolute return funds, real estate, private equity, risk parity, real return Treasury Inflation-Protected Securities and real returncommodities. Other asset classes such as emerging market debt and emerging international equities securities will bestrategically added commensurate with the economic environment and the goals and objectives of the SBOE. As of August 31,2013, the SBOE had approved and the PSF(SBOE) made capital commitments to externally managed real estate funds in theamount of $1.25 billion and capital commitments to four private equity limited partnerships in the total amount of $2.2 billion.Unfunded commitments at August 31, 2013, were $513.0 million in real estate and $1.58 billion in private equity.

The PSF(SLB) portfolio is generally characterized by three broad categories: (1) discretionary real assets investments, (2)sovereign and other lands, and (3) mineral interests. Discretionary real assets investments consist of externally managed realestate, infrastructure, and energy/minerals investment funds; internally managed direct real estate investments, and cash.Sovereign and other lands consist primarily of the lands set aside to the PSF when it was created. Mineral interests consist of allof the minerals that are associated with PSF lands. The investment focus of PSF(SLB) discretionary real assets investments hasshifted from internally managed direct real estate investments to externally managed real assets investment funds. The PSF(SLB)makes investments in certain limited partnerships that legally commit it to possible future capital contributions. At August 31,2013, the remaining commitments totaled approximately $1.14 billion.

The PSF(SBOE)’s investment in public equity securities experienced a return of 17.709% during the fiscal year ended August 31,2013. The PSF(SBOE)’s investment in fixed income securities produced a return of -2.02% during the fiscal year and absolutereturn investments yielded a return of 10.23%. The PSF(SBOE) real estate and private equity investments returned 11.85% and26.89%, respectively. Risk parity assets produced a return of -3.28%, while real return assets yielded -7.99%. Combined, allPSF(SBOE) asset classes produced an investment return of 10.16% for the fiscal year ended August 31, 2013, underperformingthe target index by approximately 25 basis points. All PSF(SLB) real assets (including cash) returned 7.60% for the fiscal yearending August 31, 2013.

For fiscal year 2013, total revenues, inclusive of unrealized gains and losses and net of security lending rebates and fees, totaled$3.20 billion, an increase of $251.6 million from fiscal year 2012 earnings of $2.95 billion. This increase reflects theperformance of the securities markets in which the Fund was invested in fiscal year 2013. In fiscal year 2013, revenues earnedby the Fund included lease payments, bonuses and royalty income received from oil, gas and mineral leases; lease payments fromcommercial real estate; surface lease and easement revenues; revenues from the resale of natural and liquid gas supplies;dividends, interest, and securities lending revenues; the net change in the fair value of the investment portfolio; and, othermiscellaneous fees and income.

Expenditures are paid from the Fund before distributions are made under the total return formula. Such expenditures include thecosts incurred by the SLB to manage the land endowment, as well as operational costs of the Fund, including externalmanagement fees paid from appropriated funds. Total operating expenditures, net of security lending rebates and fees, increased11.6% for the fiscal year ending August 31, 2013. This increase is primarily attributable to the operational costs related tomanaging alternative investments.

The Fund supports the public school system in the State by distributing a predetermined percentage of its asset value to the ASF.For fiscal years 2012 and 2013, the distribution from the SBOE to the ASF totaled $1.021 billion and $1.021 billion, respectively.Additionally, the SLB provided $300 million to the ASF in fiscal year 2013.

At the end of the 2013 fiscal year, PSF assets guaranteed $55.219 billion in bonds issued by 810 local school districts. Since itsinception in 1983, the Fund has guaranteed 5,280 school district bond issues totaling $112.0 billion in principal amount. Duringthe 2013 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program increased by 155, or 5.9%. Thedollar amount of guaranteed school bond issues outstanding increased by $1.58 billion or 3.0%. The guarantee capacity of theFund increased by $1.312 billion, or 1.7%, during fiscal year 2013 due to the investment performance of the Fund.

2011 CONSTITUTIONAL AMENDMENT . . . During the Regular Session of the 82nd Legislature, which concluded May 30, 2011, ajoint resolution (“HJR 109”) was enacted proposing amendments to various sections of the Texas Constitution that pertain to thePSF. In accordance with HJR 109, a referendum was held in the State on November 8, 2011. At that referendum, voters of Stateapproved non-substantive changes to the Texas Constitution to clarify references to the Fund, and, in addition, approved anamendment that effects an increase to the base amount used in calculating the Distribution Rate from the Fund to the ASF. Theamendments approved at the referendum include an increase to the base used to calculate the Distribution Rate by adding to thecalculation base certain discretionary real assets and cash in the Fund that is managed by entities other than the SBOE (at present,by the SLB). The value of those assets were already included in the value of the Fund for purposes of the Guarantee Program,but prior to the amendment had not been included in the calculation base for purposes of making transfers from the Fund to theASF. While the amendment provides for an increase in the base for the calculation of approximately $2 billion, no new resourceswere provided for deposit to the Fund. As described under “The Total Return Constitutional Amendment” the SBOE isprevented from approving a Distribution Rate or making a pay out from the Fund if the amount distributed would exceed 6% of

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the average of the market value of the Fund, excluding real property in the Fund, but including discretionary real assetinvestments on the last day of each of the sixteen State fiscal quarters preceding the Regular Session of the Legislature thatbegins before that State fiscal biennium or if such pay out would exceed the Ten Year Total Return. The new calculation base isrequired to be used to determine all payments to the ASF from the Fund beginning with the 2012-13 biennium. As describedunder “The Total Return Constitutional Amendment” the SBOE approved a Distribution Rate of 4.2% in January 2011 based ona commitment of the SLB to transfer $500 million to the PSF during the biennium. In November 2012, the SBOE established a3.3% Distribution Rate for the 2014-15 biennium.

The constitutional amendments approved on November 8, 2011 also provides authority to the GLO or other entity other than theSBOE that has responsibility for the management of land or other properties of the Fund to determine in its sole discretionwhether to transfer each year from Fund assets to the ASF revenue derived from such land or properties, an amount not to exceed$300 million. Any amount transferred to the ASF by an entity other than the SBOE is excluded from the 6% Distribution Ratelimitation applicable to SBOE transfers.

The impact of the increase in the base against which the Distribution Rate is applied will be an increase in the distributions fromthe PSF to the ASF, provided that there are no reductions in the percentage established biennially by the SBOE to be theDistribution Rate. For the 2012-13 biennium, the Distribution Rate has been set by the SBOE at 4.2%. Given the increase in thecalculation base effected by the November 8, 2011 constitutional amendment, the effect on transfers made by the SBOE in 2012-13 will be an increase in the total return distribution by an estimated $73.7 million in each year of the biennium. Going forward,it may be necessary for the SBOE to reduce the Distribution Rate in order to preserve the corpus of the Fund in accordance withits management objective of preserving intergenerational equity, and the Distribution Rate for the 2014-15 biennium has beenreduced to 3.3%, as described above. If the SBOE were to maintain a Distribution Rate in future years at the level set for 2012-13, prior to the enactment of the 2011 constitutional amendment, as the value of the real assets investments increase annually,distributions to the ASF would increase in the out years. The increased amounts distributed from the Fund will be a loss to eitherthe investment corpus of the PSF managed by SBOE or, should the SLB increase its transfers to the SBOE to cover this share ofthe distribution, to the assets managed by the SLB. In addition, the changes made by the amendment will reduce thecompounding interest in the Fund that would be derived from these assets remaining in the corpus of the Fund. Other factors thatmay affect the corpus of the Fund that are associated with this change include the decisions that are made by the SLB or othersthat are or may in the future be authorized to make transfers of funds from the PSF to the ASF. While the SBOE has oversight ofthe Guarantee Program, it will not have the decision making power with respect to all transfers to the ASF, as it has had in thepast, which could adversely affect the ability of the SBOE to optimally manage its portion of the PSF assets.

OTHER EVENTS AND DISCLOSURES . . . The State Investment Ethics Code governs the ethics and disclosure requirements forfinancial advisors and other service providers who advise certain State governmental entities, including the PSF. In accordancewith the provisions of the State Investment Ethics Code, the SBOE periodically modifies its code of ethics, which occurred mostrecently in May 2010. The SBOE code of ethics includes prohibitions on sharing confidential information, avoiding conflict ofinterests and requiring disclosure filings with respect to contributions made or received in connection with the operation ormanagement of the Fund. The code of ethics applies to members of the SBOE as well as to persons who are responsible bycontract or by virtue of being a TEA PSF staff member for managing, investing, executing brokerage transactions, providingconsultant services, or acting as a custodian of the PSF, and persons who provide investment and management advice to amember of the SBOE, with or without compensation under certain circumstances. The code of ethics is codified in the TexasAdministrative Code at 19 TAC sections 33.5 et seq., and is available on the TEA web site athttp://ritter.tea.state.tx.us/rules/tac/chapter033/index.html.

Since 2007, TEA has made supplemental appropriation requests to the Legislature for the purpose of funding the implementationof the 2008 Asset Allocation Policy, but those requests have been denied or partly funded. In the 2011 legislative session, theLegislature approved an increase of 31 positions in the full-time equivalent employees for the administration of the Fund, whichwas funded as part of an $18 million appropriation for each year of the 2012-13 biennium, in addition to the operationalappropriation of $11 million for each year of the biennium. The TEA has begun increasing the PSF administrative staff inaccordance with the 2011 legislative appropriation, and the TEA received an appropriation of $30.0 million for the administrationof the PSF for each year of the 2014-15 biennium.

As of August 31, 2013, certain lawsuits were pending against the State and/or the GLO, which challenge the Fund’s title tocertain real property and/or past or future mineral income from that property, and other litigation arising in the normal course ofthe investment activities of the PSF. Reference is made to the Annual Report, when filed, for a description of such lawsuits thatare pending, which may represent contingent liabilities of the Fund.

The SBOE is a named defendant in litigation described in the Official Statement pertaining to the Bonds that has been filed inState District Court that has challenged the constitutionality of the Texas public school finance system, and which, among otherrelief requested, seeks an injunction to prohibit the State and its officials from distributing any funds under the current financesystem until a constitutional system is created. The TEA does not anticipate that the security for payment of bonds guaranteedunder the Guarantee Program would be adversely affected by such litigation.

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PSF CONTINUING DISCLOSURE UNDERTAKING . . . The SBOE has adopted an investment policy rule (the “TEA Rule”)pertaining to the PSF and the Guarantee Program. The TEA Rule is codified in Section I of the TEA Investment ProcedureManual, which relates to the Guarantee Program and is posted to the TEA web site athttp://www.tea.state.tx.us/index4.aspx?id=3413&menu_id=2147483695. The most recent amendment to the TEA Rule wasadopted by the SBOE on November 19, 2010, and is summarized below. Through the adoption of the TEA Rule and itscommitment to guarantee bonds, the SBOE has made the following agreement for the benefit of the issuers, holders andbeneficial owners of guaranteed bonds. The TEA (or its successor with respect to the management of the Guarantee Program) isrequired to observe the agreement for so long as it remains an “obligated person,” within the meaning of Rule 15c2-12, withrespect to guaranteed bonds. Nothing in the TEA Rule obligates the TEA to make any filings or disclosures with respect toguaranteed bonds, as the obligations of the TEA under the TEA Rule pertain solely to the Guarantee Program. The issuer or an“obligated person” of the guaranteed bonds has assumed the applicable obligation under Rule 15c-12 to make all disclosures andfilings relating directly to guaranteed bonds, and the TEA takes no responsibility with respect to such undertakings. Under theTEA agreement, the TEA will be obligated to provide annually certain updated financial information and operating data, andtimely notice of specified material events, to the MSRB.

The MSRB has established the Electronic Municipal Market Access (“EMMA”) system, and the TEA is required to file itscontinuing disclosure information using the EMMA system. Investors may access continuing disclosure information filed withthe MSRB at www.emma.msrb.org, and the continuing disclosure filings of the TEA with respect to the PSF can be found athttp://emma.msrb.org/IssueView/NonCUSIP9IssueDetails.aspx?id=ER355077 or by searching for “Texas Permanent SchoolFund Bond Guarantee Program” on EMMA.

ANNUAL REPORTS . . . The TEA will annually 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 GuaranteeProgram and the PSF of the general type included in this Official Statement under the heading “THE PERMANENT SCHOOLFUND GUARANTEE PROGRAM.” The information also includes the Annual Report. The TEA will update and provide thisinformation within six months after the end of each fiscal year.

The TEA may provide updated information in full text or may incorporate by reference certain other publicly-availabledocuments, as permitted by Rule 15c2-12. The updated information includes audited financial statements of, or relating to, theState or the PSF, when and if such audits are commissioned and available. Financial statements of the State will be prepared inaccordance with generally accepted accounting principles as applied to state governments, as such principles may be changedfrom time to time, or such other accounting principles as the State Auditor is required to employ from time to time pursuant toState law or regulation. The financial statements of the Fund were prepared to conform to U.S. Generally Accepted AccountingPrinciples as established by the Governmental Accounting Standards Board.

The Fund is reported by the State of Texas as a permanent fund and accounted for on a current financial resources measurementfocus and the modified accrual basis of accounting. Measurement focus refers to the definition of the resource flows measured.Under the modified accrual basis of accounting, all revenues reported are recognized based on the criteria of availability andmeasurability. Assets are defined as available if they are in the form of cash or can be converted into cash within 60 days to beusable for payment of current liabilities. Amounts are defined as measurable if they can be estimated or otherwise determined.Expenditures are recognized when the related fund liability is incurred.

The State’s current fiscal year end is August 31. Accordingly, the TEA must provide updated information by the last day ofFebruary in each year, unless the State changes its fiscal year. If the State changes its fiscal year, the TEA will notify the MSRBof the change.

MATERIAL EVENT NOTICES . . . The TEA will also provide timely notices of certain events to the MSRB. Such notices will beprovided not more than ten business days after the occurrence of the event. The TEA will provide notice of any of the followingevents with respect to the Guarantee Program: (1) principal and interest payment delinquencies; (2) non-payment related defaults,if such event is material within the meaning of the federal securities laws; (3) unscheduled draws on debt service reservesreflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution ofcredit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the IRS of proposed or finaldeterminations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations withrespect to the tax-exempt status of the Guarantee Program, or other material events affecting the tax status of the GuaranteeProgram; (7) modifications to rights of holders of bonds guaranteed by the Guarantee Program, if such event is material withinthe meaning of the federal securities laws; (8) bond calls, if such event is material within the meaning of the federal securitieslaws, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of bonds guaranteed bythe Guarantee Program, if such event is material within the meaning of the federal securities laws; (11) rating changes; (12)bankruptcy, insolvency, receivership, or similar event of the Guarantee Program (which is considered to occur when any of thefollowing occur: the appointment of a receiver, fiscal agent, or similar officer for the Guarantee Program in a proceeding underthe United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmentalauthority has assumed jurisdiction over substantially all of the assets or business of the Guarantee Program, or if such jurisdictionhas been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision andorders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, orliquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or businessof the Guarantee Program); (13) the consummation of a merger, consolidation, or acquisition involving the Guarantee Program or

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the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitiveagreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other thanpursuant to its terms, if material; and (14) the appointment of a successor or additional trustee with respect to the GuaranteeProgram or the change of name of a trustee, if such event is material within the meaning of the federal securities laws. (Neitherthe Act nor any other law, regulation or instrument pertaining to the Guarantee Program make any provision with respect to theGuarantee Program for bond calls, debt service reserves, credit enhancement, liquidity enhancement, early redemption or theappointment of a trustee with respect to the Guarantee Program.) In addition, the TEA will provide timely notice of any failureby the TEA to provide information, data, or financial statements in accordance with its agreement described above under “AnnualReports.”

AVAILABILITY OF INFORMATION . . . The TEA has agreed to provide the foregoing information only to the MSRB and totransmit such information electronically to the MSRB in such format and accompanied by such identifying information asprescribed by the MSRB. The information is available from the MSRB to the public without charge at www.emma.msrb.org.

LIMITATIONS AND AMENDMENTS . . . The TEA has agreed to update information and to provide notices of material events only asdescribed above. The TEA has not agreed to provide other information that may be relevant or material to a completepresentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided,except as described above. The TEA makes no representation or warranty concerning such information or concerning itsusefulness to a decision to invest in or sell Bonds at any future date. The TEA disclaims any contractual or tort liability fordamages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement madepursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the TEA to comply with itsagreement.

The continuing disclosure agreement of the TEA is made only with respect to the PSF and the Guarantee Program. The issuer ofguaranteed bonds or an obligated person with respect to guaranteed bonds may make a continuing disclosure undertaking inaccordance with Rule 15c2-12 with respect to its obligations arising under Rule 15c2-12 pertaining to financial and operatingdata concerning such entity and notices of material events relating to such guaranteed bonds. A description of such undertaking,if any, is included elsewhere in the Official Statement.

This continuing disclosure agreement may be amended by the TEA from time to time to adapt to changed circumstances thatarise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of theTEA, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell guaranteed bonds inthe primary offering of such bonds in compliance with Rule 15c2-12, taking into account any amendments or interpretations ofRule 15c2-12 since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregateprincipal amount of the outstanding bonds guaranteed by the Guarantee Program consent to such amendment or (b) a person thatis unaffiliated with the TEA (such as nationally recognized bond counsel) determines that such amendment will not materiallyimpair the interest of the holders and beneficial owners of the bonds guaranteed by the Guarantee Program. The TEA may alsoamend or repeal the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provision ofRule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to theextent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling bonds guaranteedby the Guarantee Program in the primary offering of such bonds.

COMPLIANCE WITH PRIOR UNDERTAKINGS . . . The TEA has not previously failed to substantially comply with its previouscontinuing disclosure agreements in accordance with Rule 15c2-12.

SEC EXEMPTIVE RELIEF . . . On February 9, 1996, the TEA received a letter from the Chief Counsel of the SEC that pertains tothe availability of the “small issuer exemption” set forth in paragraph (d)(2) of Rule 15c2-12. The letter provides that Texasschool districts which offer municipal securities that are guaranteed under the Guarantee Program may undertake to comply withthe provisions of paragraph (d)(2) of Rule 15c2-12 if their offerings otherwise qualify for such exemption, notwithstanding theguarantee of the school district securities under the Guarantee Program. Among other requirements established by Rule 15c2-12,a school district offering may qualify for the small issuer exemption if, upon issuance of the proposed series of securities, theschool district will have no more than $10 million of outstanding municipal securities.

STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS

LITIGATION RELATING TO THE TEXAS PUBLIC SCHOOL FINANCE SYSTEM . . . On April 9, 2001, four property wealthy districtsfiled suit in the 250th District Court of Travis County, Texas (the “District Court”) against the Texas Education Agency, theTexas State Board of Education, the Texas Commissioner of Education (the “Commissioner”) and the Texas Comptroller ofPublic Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. Theplaintiffs alleged that the $1.50 maximum maintenance and operations (“M&O”) tax rate had become in effect a state propertytax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them and other school districts fromhaving meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school financesystem (the “Finance System”) was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the TexasConstitution, because the State of Texas (the “State”) did not provide adequate funding. As described below, this case has twicereached 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

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West Orange-Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors intheir Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the FinanceSystem was inefficient.

On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issuesremanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffson all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System wasunconstitutional in that the Finance System violated Article VIII, Section 1-e of the Texas Constitution because the statutory limitof $1.50 per $100.00 of taxable assessed valuation on property taxes levied by school districts for maintenance and operationpurposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) theconstitutional mandate of adequacy set forth in Article VII, Section 1 of the Texas Constitution exceeded the maximum amountof funding available under the funding formulas administered by the State; and (3) the Finance System was financiallyinefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion ofknowledge as required by Article VII, Section 1, of the Texas Constitution.

The intervening school district groups contended that funding for school operations and facilities was inefficient in violation ofArticle VII, Section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equalaccess to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could notachieve “[a] general diffusion of knowledge” as required by Article VII, Section 1 of the Texas Constitution, because the FinanceSystem was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing thepositions of the school districts, as well as asserting that school districts did not have standing to challenge the State in thesematters.

In West Orange-Cove II, the Supreme Court’s holding was twofold: (1) that the local M&O tax had become a state property taxin violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amountto a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied onevidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&Otax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education systemwas “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 efficiencydoes not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate theconstitutional requirement of “suitability,” since the Finance System was suitable for adequately and efficiently providing apublic education.

In reversing the District Court’s holding that the Finance System was unconstitutional under Article VII, Section 1 of the TexasConstitution, the Supreme Court stated:

Although the districts have offered evidence of deficiencies in the public school finance system, we concludethat 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 systemexpose the system to constitutional challenge. Pouring more money into the system may forestall thosechallenges, 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-CoveII decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that resultsin gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, butreiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) (“Edgewood IV”) thatsuch 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.” TheSupreme Court also noted that “[e]fficiency requires only substantially equal access to revenue for facilities necessary for anadequate system,” and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to presentsufficient evidence to prove that there was an inability to provide for a “general diffusion of knowledge” without additionalfacilities.

FUNDING CHANGES IN RESPONSE TO WEST ORANGE-COVE II . . . In response to the decision in West Orange-Cove II, the TexasLegislature (the “Legislature”) enacted House Bill 1 (“HB 1”), which made substantive changes in the way the Finance System isfunded, as well as other legislation which, among other things, established a special fund in the State treasury to be used tocollect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O taxrates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use taxand increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the“Reform Legislation”). The Reform Legislation generally became effective at the beginning of the 2006–07 fiscal year of eachdistrict.

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POSSIBLE EFFECTS OF LITIGATION AND CHANGES IN LAW ON DISTRICT BONDS . . . The Reform Legislation and the changesmade by the State Legislature to the Reform Legislation since its enactment did not alter the provisions of Chapter 45, TexasEducation Code, that authorize districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service taxas security for payment of such bonds (including the Bonds). Reference is made, in particular, to the information under theheading “THE BONDS – Security and Source of Payment” in the Official Statement.

In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to aschool district depending upon a variety of factors, including the financial strategies that the district has implemented in light ofpast State funding systems. Among other possibilities, a district’s boundaries could be redrawn, taxing powers restricted, Statefunding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. In Edgewood IV, theSupreme Court stated that any future determination of unconstitutionality “would not, however, affect the district’s authority tolevy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system’sunconstitutionality 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 suchmodifications in the terms and conditions of contractual covenants related to the payment of the Bonds as are reasonable andnecessary 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 previouslyexisting contractual obligations under the Contract Clauses, the District can make no representations or predictions concerningthe effect of future legislation or litigation, or how such legislation or future court orders may affect the District’s financialcondition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation toaddress school funding in Texas could substantially adversely affect the financial condition, revenues or operations of theDistrict, as noted herein, the District does not anticipate that the security for payment of the Bonds, specifically, the District’sobligation to levy an unlimited debt service tax and the Permanent School Fund guarantee of the Bonds would be adverselyaffected by any such litigation or legislation. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM.”

CURRENT LITIGATION RELATED TO THE TEXAS PUBLIC SCHOOL FINANCE SYSTEM . . . As described below, during 2011 and2012, several lawsuits were filed in District Courts of Travis County, Texas, which alleged that the Finance System, as modifiedby legislation enacted by the Legislature since the decision in West Orange Cove II, and in particular, as modified by SenateBill 1 in 2011 (see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM - 2011 Legislation”), has resulted in a funding systemthat violates principles established in West Orange Cove I and West Orange Cove II, and prior decisions of the Supreme Courtrelating to the constitutionality of the Finance System, and several provisions of the Texas Constitution. In general, each suitpresented the legal perspectives and arguments of the different coalitions of school districts represented, but as a general matter,each group challenged the adequacy of funding provided by the Legislature for the Finance System, and the plaintiffs in each suitsought to have an injunction issued to the State and its officials to prevent the distribution of any funds under the current FinanceSystem until a constitutional system is created and sought a declaration that changes in funding for the Finance System since theenactment of HB 1 have effectively converted the local M&O tax into a State property tax in violation of the Texas Constitution.The defendants in the suits include State officials and the State Board of Education (the “State Defendants”). The first suit wasfiled on October 10, 2011, styled “The Texas Taxpayer & Student Fairness Coalition, et al. vs. Robert Scott, Commissioner ofEducation et al.” A second suit was filed on December 9, 2011, styled “Calhoun County Independent School District, et al. vRobert Scott, Commissioner of Education, et al.” A third suit was filed on December 13, 2011, styled “Edgewood IndependentSchool District, et al. v. Robert Scott, Commissioner of Education, et al.” A fourth suit was filed on December 23, 2011, styled“Fort Bend Independent School District, et al. v. Robert Scott, Commissioner of Education, et al.” (the “Fort Bend Suit”). TheState Defendants filed an answer with respect to each of the first four suits filed, denying the plaintiff’s allegations, and all ofsuch suits were assigned to the 250th District Court of Travis County. On February 24, 2012 a plea of intervention to the FortBend Suit was filed by seven parents and a group named “Texans for Real Efficiency and Equity in Education.” The intervenorsasserted that the Finance System is qualitatively inefficient, and that the Finance System is unconstitutional, in part based onarguments made by other plaintiffs. A fifth suit was filed on June 26, 2012 by individuals and the Texas Charter SchoolAssociation, styled “Flores, et al. v. Robert Scott, Commissioner of Education, et al.” (the “Charter School Suit”). The petitionfor the Charter School Suit agreed with the arguments of the school districts in the first four suits filed that the Finance System isunconstitutional and also sought to have an injunction issued against the State Defendants in the same manner as the first foursuits. The Charter School Suit added additional grounds that relate to the circumstances of charter schools as a basis for holdingthe Finance System unconstitutional, including that charter schools receive no funding for facilities and that the statutory cap oncharter schools is unconstitutionally arbitrary. The State Defendants also filed a general denial in the Charter School Suit.

All five suits were consolidated by the 250th District Court of Travis County (the “District Court”), and the trial commenced onOctober 22, 2012. On February 4, 2013, the District Court rendered a preliminary ruling (the substance of which was ultimatelyincluded in a final judgment rendered by the District Court on August 28, 2014, as further described below), but withheldrendering a final judgment until the conclusion of the 83rd Regular Session of the Texas Legislature. The 83rd Regular Sessionof the Texas Legislature concluded on May 27, 2013, and on June 19, 2013, a hearing was held by the District Court at which thePresiding Judge directed the parties to the suits to provide supplemental evidence to the District Court pertaining to new fundingprovided by the Legislature for the Finance System during the 83rd Regular Session. A trial to consider this evidence began onJanuary 21, 2014 and concluded on February 7, 2014.

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On August 28, 2014, the District Court rendered its final ruling, finding the current Finance System unconstitutional for thefollowing reasons: (i) the Finance System effectively imposes a Statewide property tax in violation of the Texas Constitutionbecause school districts lack “meaningful discretion” in the levy, assessment and disbursement of property taxes; (ii) the FinanceSystem is structured, operated and funded in such a manner that prevents it from providing “a constitutionally adequate educationfor all Texas schoolchildren”; (iii) the Finance System “is constitutionally inadequate because it cannot accomplish, and has notaccomplished, a general diffusion of knowledge for all students due to insufficient funding”; and (iv) the Finance System “isfinancially inefficient because all Texas students do not have substantially equal access to the educational funds necessary toaccomplish a general diffusion of knowledge.”

In the final ruling, the District Court enjoined the State from (i) enforcing Chapters 41 and 42 and Section 12.106 of theEducation Code and (ii) distributing any money under the current Finance System until the constitutional violations are remedied.However, the District Court stayed the injunction until July 1, 2015, to give the 84th Texas Legislature, which convenes onJanuary 13, 2015, an opportunity to cure the constitutional deficiencies in the Finance System. The injunction does not and willnot impair the District's ability to levy, assess and collect ad valorem taxes, at the full rate and in the full amount authorized bylaw, necessary to make payments on the Bonds and, to the extent the District is entitled to receive State funding assistance for thepayment of the Bonds under the current Finance System, the District will continue to be entitled to receive such State fundingassistance. In addition, in response to arguments on behalf of the State's charter schools, the District Court held in its final rulingthat it is within the discretion of the Legislature, and not unconstitutional, to fund charter schools differently from other publicschools.

The State defendants filed a Notice of Direct Appeal to the Supreme Court on September 26, 2014. A preliminary statement ofjurisdiction to the Supreme Court has not been filed. Once filed, the Court has the option to note probable jurisdiction, in whichthe parties must then file briefs. If the Supreme Court does not note probable jurisdiction over the direct appeal, the appeal willbe dismissed. There is no deadline for the Supreme Court to decide probable jurisdiction.

The District can make no representations or predictions concerning the effect this litigation or the current ruling by the DistrictCourt, and any appeals, may have on the District’s financial condition, revenues or operations. See “STATE AND LOCALFUNDING OF SCHOOL DISTRICTS IN TEXAS – Possible Effects of Litigation and Changes in Law on District Bonds.”

2013 LEGISLATIVE SESSION . . . The 83rd Texas Legislature concluded on May 27, 2013. During the session, the Legislatureadopted a biennial budget that “restored” $3.2 billion of the $4 billion that was cut from basic state aid for the Finance Systemduring the 2011 legislative session and some $100 million of the $1.3 billion cut from grant programs during the 2011 LegislativeSession. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM – 2011 Legislation.” The revenues that were added back tothe Finance System do not take into account growing student enrollments in the State. The District’s share of the “restored”funding is approximately $14.9 million in 2013-14 and $32.2 million in 2014-15. This is still $27.3 million and $9.9 million lessthan what the District would have received in 2013-14 and 2014-15, respectively, based on the formula for State aid that existedprior to the 2011 cuts.

CURRENT PUBLIC SCHOOL FINANCE SYSTEM

OVERVIEW . . . The following description of the Finance System is a summary of the Reform Legislation and the changes madeby the State Legislature to the Reform Legislation since its enactment, including modifications made during the regular throughthird called sessions of the 79th Texas Legislature (collectively, the “2006 Legislative Session”), the regular session of the 81stTexas Legislature (the “2009 Legislative Session”), the regular and first called sessions of the 82nd Texas Legislature(collectively, the “2011 Legislative Session”) and the regular session of the 83rd Texas Legislature (the “2013 LegislativeSession”). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon’sTexas Codes Annotated, Education Code, Chapters 41 through 46, as amended.

Funding for school districts in the State is provided primarily from State and local sources. State funding for all school districtsis provided through a set of funding formulas comprising the “Foundation School Program,” as well as two facilities financingprograms. Generally, the Finance System is designed to promote wealth equalization among school districts by balancing Stateand local sources of funds available to school districts. In particular, because districts with relatively high levels of propertywealth per student can raise more local funding, such districts receive less State aid, and in some cases, are required to disburselocal funds to equalize their overall funding relative to other school districts. Conversely, because districts with relatively lowlevels of property wealth per student have limited access to local funding, the Finance System is designed to provide more Statefunding to such districts. Thus, as a school district’s property wealth per student increases, State funding to the school district isreduced. As a school district’s property wealth per student declines, the Finance System is designed to increase its State funding.A similar equalization system exists for facilities funding wherein districts with the same tax rate for debt service raise the sameamount of combined State and local funding. Facilities funding for debt incurred in prior years is expected to continue in futureyears; however, State funding for new school facilities was not appropriated by the 83rd Texas Legislature for the 2014–15 Statebiennium.

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Local funding is derived from collections of ad valorem taxes levied on property located within each district’s boundaries.School districts are authorized to levy two types of property taxes: a limited maintenance and operations (“M&O”) tax to paycurrent expenses and an unlimited interest and sinking fund (“I&S”) tax to pay debt service on bonds. Under current law, M&Otax rates are subject to a statutory maximum rate of $1.17 per $100 of taxable value for most school districts. Current law alsorequires school districts to demonstrate their ability to pay debt service on outstanding indebtedness through the levy of an advalorem tax at a rate of not to exceed $0.50 per $100 of taxable property at the time bonds are issued. Once bonds are issued,however, districts may levy a tax to pay debt service on such bonds unlimited as to rate or amount (see “TAX INFORMATION –Tax Rate Limitations” herein). As noted above, because property values vary widely among school districts, the amount of localfunding generated by the same tax rate is also subject to wide variation among school districts.

The Reform Legislation, which generally became effective at the beginning of the 2006–07 fiscal year of each school district inthe State, made substantive changes to the Finance System, which are summarized below. While each school district’s fundingentitlement was calculated based on the same formulas that were used prior to the 2006–07 fiscal year, the Reform Legislationmade changes to local district funding by reducing each districts’ 2005 M&O tax rate by one-third over two years through theintroduction of the “State Compression Percentage,” with M&O tax levies declining by approximately 11% in fiscal year 2006–07 and approximately another 22% in fiscal year 2007–08. (Prior to the Reform Legislation, the maximum M&O tax rate formost school districts was $1.50 per $100 of taxable assessed valuation. Because most school districts levied an M&O rate of$1.50 in 2005, the application of the Reform Legislation compression formula reduced the majority of school districts’ M&O taxrates to $1.00). Subject to local referenda, a district may increase its local M&O tax levy up to $0.17 above the district’scompressed tax rate. Based on the current State Compression Percentage, the maximum possible M&O tax rate is $1.17 per $100of taxable value for most school districts (see “TAX INFORMATION – Tax Rate Limitations” herein).

LOCAL FUNDING FOR SCHOOL DISTRICTS . . . The primary source of local funding for school districts is collections from advalorem taxes levied against the taxable property located in each school district. As noted above, prior to the Reform Legislation,the maximum M&O tax rate for most school districts was generally limited to $1.50 per $100 of taxable value, and the majorityof school districts were levying an M&O tax rate of $1.50 per $100 of taxable value at the time the Reform Legislation wasenacted. The Reform Legislation required each school district to “compress” its tax rate by an amount equal to the “StateCompression Percentage.” For fiscal years 2007–08 through 2014–15, the State Compression Percentage has been set at 66.67%,effectively setting the maximum compressed M&O tax rate for most school districts at $1.00 per $100 of taxable value. TheState Compression Percentage is set by legislative appropriation for each State fiscal biennium or, in the absence of legislativeappropriation, by the Commissioner. School districts are permitted, however, to generate additional local funds by raising theirM&O tax rate by $0.04 above the compressed tax rate without voter approval (for most districts, up to $1.04 per $100 of taxablevalue). In addition, if the voters approve the tax rate increase, districts may, in general, increase their M&O tax rate by anadditional two or more cents and receive State equalization funds for such taxing effort up to a maximum M&O tax rate of $1.17per $100 of taxable value (see “TAX INFORMATION – Public Hearing and Rollback Tax Rate” herein). Elections authorizingthe levy of M&O taxes held in certain school districts under older laws, however, may subject M&O tax rates in such districts toother limitations (see “TAX INFORMATION – Tax Rate Limitations” herein).

STATE FUNDING FOR SCHOOL DISTRICTS . . . State funding for school districts is provided through the Foundation SchoolProgram, which provides each school district with a minimum level of funding (a “Basic Allotment”) for each student in averagedaily attendance (“ADA”). The Basic Allotment is calculated for each school district using various weights and adjustmentsbased on the number of students in average daily attendance and also varies depending on each district’s compressed tax rate.This Basic Allotment formula determines most of the allotments making up a district’s Tier One entitlement. This basic level offunding is referred to as “Tier One” of the Foundation School Program. The basic level of funding is then “enriched” withadditional funds known as “Tier Two” of the Foundation School Program. Tier Two provides a guaranteed level of funding foreach cent of local tax effort that exceeds the compressed tax rate (for most districts, M&O tax rates above $1.00 per $100 oftaxable value). The Finance System also provides an Existing Debt Allotment (“EDA”) to subsidize debt service on eligibleoutstanding school district bonds and an Instructional Facilities Allotment (“IFA”) to subsidize debt service on newly issuedbonds. IFA primarily addresses the debt service needs of property-poor school districts. A New Instructional FacilitiesAllotment (“NIFA”) also is available to help pay operational expenses associated with the opening of a new instructional facility;however, NIFA awards were not funded by the Legislature for either the 2012–13 or the 2014-15 State fiscal bienniums. The2013 Legislative Session did appropriate funds in the amount of $1,268,000 for the 2014-15 State fiscal biennium for continuedEDA and IFA support.

Tier One and Tier Two allotments represent the State’s share of the cost of M&O expenses of school districts, with local M&Otaxes representing the district’s local share. EDA and IFA allotments supplement a school district’s local I&S taxes levied fordebt service on eligible bonds issued to construct, acquire and improve facilities. Tier One and Tier Two allotments and existingEDA and IFA allotments are generally required to be funded each year by the Legislature. Since future-year IFA awards werenot funded by the Legislature for the 2014–15 fiscal biennium, and debt service assistance on school district bonds that are notyet eligible for EDA is not available, debt service on new bonds issued by districts to construct, acquire and improve facilitiesmust be funded solely from local I&S taxes. For the 2014-15 State biennium, prior awards for IFA debt support will continue tobe made but the Legislature set aside no funds for new IFA awards. State funding allotments may be adjusted in certaincircumstances to account for shortages in State appropriations or to allocate available funds in accordance with wealthequalization goals.

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Tier One allotments are intended to provide all districts a basic level of education necessary to meet applicable legal standards.Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions describedbelow an opportunity to supplement that basic program at a level of its own choice; however, Tier Two allotments may not beused for the payment of debt service or capital outlay.

As described above, the cost of the basic program is based on an allotment per student known as the “Basic Allotment”. Forfiscal year 2013-14, the Basic Allotment is $4,950 and for fiscal year 2014-15, the Basic Allotment is $5,040 for each student inaverage daily attendance. The Basic Allotment is then adjusted for all districts by several different weights to account for inherentdifferences between school districts. These weights consist of (i) a cost adjustment factor intended to address varying economicconditions that affect teacher hiring known as the “cost of education index”, (ii) district-size adjustments for small and mid-sizedistricts and (iii) an adjustment for the sparsity of the district’s student population. The cost of education index and district-sizeadjustments applied to the Basic Allotment, create what is referred to as the “Adjusted Allotment”. The Adjusted Allotment isused to compute a “regular program allotment,” as well as various other allotments associated with educating students with otherspecified educational needs.

Tier Two supplements the basic funding of Tier One and provides two levels of enrichment with different guaranteed yieldsdepending on the district’s local tax effort. The first six cents of tax effort that exceeds the compressed tax rate (for mostdistricts, M&O tax rates ranging from $1.01 to $1.06 per $100 of taxable value) will, for most districts, generate a guaranteedyield of $59.97 and $61.86 per penny of tax effort per weighted student in average daily attendance (“WADA”) for the fiscal year2013-14 and fiscal year 2014-15, respectively. The second level of Tier Two is generated by tax effort that exceeds the district’scompressed tax rate plus six cents (for most districts eligible for this level of funding, M&O tax rates ranging from $1.07 to $1.17per $100 of taxable value) and has a guaranteed yield per cent per WADA of $31.95 for fiscal years 2013-14 and 2014-15.Property-wealthy school districts that have an M&O tax rate that exceeds the district’s compressed tax rate plus six cent aresubject to recapture above this tax rate level at the equivalent wealth per student of $319,500 (see “Wealth Transfer Provisions”below).

In addition to the operations funding components of the Foundation School Program discussed above, the Foundation SchoolProgram provides a facilities funding component consisting of the Instructional Facilities Allotment (IFA) program and theExisting Debt Allotment (EDA) program. These programs assist school districts in funding facilities by, generally, equalizing adistrict’s I&S tax effort. The IFA guarantees each awarded school district a specified amount per student (the “IFA GuaranteedYield”) in State and local funds for each cent of tax effort to pay the principal of and interest on eligible bonds issued toconstruct, acquire, renovate or improve instructional facilities. The guaranteed yield per cent of local tax effort per student inADA has been $35 since this program first began. To receive an IFA award, a school district must apply to the Commissioner inaccordance with rules adopted by the Commissioner before issuing the bonds to be paid with IFA state assistance. The totalamount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actualdebt 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 ADA. The IFA is also available for lease-purchase agreements and refundingbonds meeting certain prescribed conditions. Once a district receives an IFA award for bonds, it is entitled to continue receivingState assistance for such bonds without reapplying to the Commissioner. The guaranteed level of State and local funds perstudent per cent of local tax effort applicable to the bonds may not be reduced below the level provided for the year in which thebonds were issued. For the 2014–15 State biennium, however, no funds are appropriated for new IFA awards, although allcurrent obligations are funded through the biennium.

State financial assistance is provided for certain existing eligible debt issued by school districts through the EDA program. TheEDA guaranteed yield (the “EDA Yield”) is the same as the IFA Guaranteed Yield ($35 per cent of local tax effort per student inADA), subject to adjustment as described below. For bonds that became eligible for EDA funding after August 31, 2001, andprior to August 31, 2005, EDA assistance was less than $35 in revenue per student for each cent of debt service tax, as a result ofcertain administrative delegations granted to the Commissioner under State law. The portion of a district’s local debt service ratethat qualifies for EDA assistance is limited to the first 29 cents of debt service tax (or a greater amount for any year provided byappropriation by the Legislature). In general, a district’s bonds are eligible for EDA assistance if (i) the district made paymentson the bonds during the final fiscal year of the preceding State fiscal biennium or (ii) the district levied taxes to pay the principalof and interest on the bonds for that fiscal year. Each biennium, access to EDA funding is determined by the debt service taxescollected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on aseries of otherwise eligible bonds for which the district receives IFA funding.

Prior to the 2012–13 biennium, a district could also qualify for a NIFA allotment, which provided assistance to districts foroperational expenses associated with opening new instructional facilities. As previously mentioned, this program was not fundedfor either the 2012–13 or 2014-15 State fiscal bienniums.

2006 LEGISLATION . . . Since the enactment of the Reform Legislation in 2006, most school districts in the State have operatedwith a “target” funding level per student (“Target Revenue”) that is based upon the “hold harmless” principles embodied in theReform Legislation. This system of Target Revenue was superimposed on the Foundation School Program and made existingfunding formulas substantially less important for most school districts. As noted above, the Reform Legislation was intended tolower M&O tax rates in order to give school districts “meaningful discretion” in setting their M&O tax rates, while holdingschool districts harmless by providing them with the same level of overall funding they received prior to the enactment of theReform Legislation. Under the Target Revenue system, each school district is generally entitled to receive the same amount of

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revenue per student as it did in either the 2005–2006 or 2006–07 fiscal year (under existing laws prior to the enactment of theReform Legislation), as long as the district adopted an M&O tax rate that was at least equal to its compressed rate. The reductionin local M&O taxes resulting from the mandatory compression of M&O tax rates under the Reform Legislation, by itself, wouldhave significantly reduced the amount of local revenue available to fund the Finance System. To make up for this shortfall, theReform Legislation authorized Additional State Aid for Tax Reduction (“ASATR”) for each school district in an amount equal tothe difference between the amount that each district would receive under the Foundation School Program and the amount of eachdistrict’s Target Revenue funding level.

2009 LEGISLATION . . . During the 2009 Legislative Session, legislation was enacted that increased the Basic Allotment for the2009–10 fiscal year from $3,218 to $4,765. In addition, each district’s Target Revenue was increased by $120 per WADA.Target Revenue amounts were also adjusted to provide for mandatory employee pay raises and to account for changes intransportation and NIFA costs since the original Target Revenues were set. Overall, the Legislature allocated approximately $1.9billion in new State aid for school districts.

2011 LEGISLATION . . . During the 2011 Legislative Session, the Legislature enacted a budget that cut $4 billion from theFoundation School Program for the 2012–13 State fiscal biennium, as compared to the funding level school districts were entitledto under the current formulas, including Target Revenue, and also cut approximately $1.3 billion in various grants (i.e., pre-kindergarten grant program, student success initiative, etc.) that were previously available. Such cuts were made in light of aprojected State deficit of up to $27 billion for the 2012–13 State fiscal biennium. In order to reduce formula funding, a RegularProgram Adjustment Factor (“RPAF”) was applied to the formula that determines a district’s regular program allotment. RPAFis multiplied by a school district’s count of students in ADA (not counting the time a student spends in special education andcareer & technology education) and its Adjusted Allotment, which is the $4,765 Basic Allotment adjusted for the cost ofeducation index and the small- and mid-sized district adjustments. The RPAF is set at 0.9239 for the 2011–12 fiscal year and0.98 for the 2012–13 fiscal year. In order to balance these reductions across the two years for formula funded districts, suchdistricts had the option to request that an RPAF value of 0.95195 be applied for both the 2011–12 and 2012–13 fiscal years. Inorder to be granted the request by the Commissioner, the district must demonstrate that using the 0.9239 RPAF would havecaused the district a financial hardship in 2011–12. By applying the RPAF only to the Adjusted Allotment, other Tier Oneallotments, such as special education, career and technology, gifted and talented, bilingual and compensatory education, were notaffected. The State Board of Education however, was directed to decrease funding for these programs in proportion to thereductions to the Basic Allotment. The Legislature also established an RPAF value of 0.98 for the 2013–15 State fiscalbiennium, subject to increases by subsequent legislative appropriation not to exceed an RPAF value of 1.0. The RPAF factor andits related provisions are scheduled to expire on September 1, 2015.

The RPAF was the primary mechanism for formula reductions in the 2011–12 fiscal year. However, the 2011 Legislation alsocreated the hold harmless reduction percentage to school district entitlement through the application of ASATR. Because it onlyapplies to ASATR, its impact is generally felt only by school districts for which the formula funding system does not provide thedistrict with its Target Revenue. In the 2012–13 fiscal year, the RPAF of 0.98 is combined with a percentage reduction in eachschool district’s hold harmless Target Revenue per WADA to 92.35% of its formula amount. For the 2013–14 and 2014-15fiscal years, the percentage reduction of each district’s hold harmless formula amount is 92.63%. With regard to this adjustment,the ASATR relief that funds the Target Revenue system is phased out between the 2013–14 and 2017–18 fiscal years.

2013 LEGISLATION . . . No significant modifications were made to the underlying school finance structure during the 2013Legislative Session. However, several of the revenue reduction formulas, notably the RPAF, were eliminated. As stated above,the 2011 Legislation created the RPAF as the primary mechanism for formula reductions in the 2012–13 State biennium. For the2013–14 and 2014-15 fiscal years, the State Legislature set the RPAF to 1.00 which restores the regular program allotmentfunding at 100% of which each district is entitled. The RPAF expires at the end of fiscal year 2014-15. The 2013 Legislaturealso continued the reduction in each district’s ASATR payment but changed the reduction from 92.35% to 92.63% of what thedistrict would have received in hold harmless ASATR funding for the 2013-14 and 2014-15 school years. The 2013 Legislationalso increased the Basic Allotment for the 2013-14 fiscal year to $4,950 and for the 2014-15 fiscal year to $5,040. See “STATEAND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS – 2013 Legislative Session.”

WEALTH TRANSFER PROVISIONS . . . Some districts have sufficient property wealth per student in WADA (“wealth per student”)to generate their statutory level of funding through collections of local property taxes alone. Districts whose wealth per studentgenerates local property tax collections in excess of their statutory level of funding are referred to as “Chapter 41” districtsbecause they are subject to the wealth equalization provisions contained in Chapter 41 of the Texas Education Code. Chapter 41districts may receive State funds for certain competitive grants and a few programs that remain outside the Foundation SchoolProgram, as well as receiving ASATR until their overall funding meets or exceeds their Target Revenue level of funding.Otherwise, Chapter 41 districts are not eligible to receive State funding. Furthermore, Chapter 41 districts must exercise certainoptions in order to reduce their wealth level to equalized wealth levels of funding, as determined by formulas set forth in theReform Legislation. For most Chapter 41 districts, this equalization process entails paying the portion of the district’s local taxescollected in excess of the equalized wealth levels of funding to the State (for redistribution to other school districts) or directly toother school districts with a wealth per student that does not generate local funds sufficient to meet the statutory level of funding;a process known as “recapture”.

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The equalized wealth levels that subject Chapter 41 districts to wealth equalization measures for fiscal year 2013–14 are set at (i)$495,000 per student in WADA with respect to that portion of a district’s M&O tax effort that does not exceed its compressed taxrate (for most districts, the first $1.00 per $100 of taxable value) and (ii) $319,500 per WADA with respect to that portion of adistrict’s M&O tax effort that is beyond its compressed rate plus $0.06 (for most districts, M&O taxes levied above $1.06 per$100 in taxable value). For the 2014-15 fiscal year, the first equalized wealth level increases from $495,000 to $504,000,however the second equalized wealth level remains at $319,500. M&O taxes levied above $1.00 but below $1.07 per $100 oftaxable value are not subject to the wealth equalization provisions of Chapter 41. Chapter 41 districts with a wealth per studentabove the lower equalized wealth level but below the higher equalized wealth level must equalize their wealth only with respectto the portion of their M&O tax rate, if any, in excess of $1.06 per $100 of taxable value. Chapter 41 districts may be entitled toreceive ASATR from the State in excess of their recapture liability, and such districts may use their ASATR funds to offset theirrecapture liability.

Under Chapter 41, a district has five options to reduce its wealth per student so that it does not exceed the equalized wealthlevels: (1) a district may consolidate by agreement with one or more districts to form a consolidated district; all property and debtof the consolidating districts vest in the consolidated district; (2) a district may detach property from its territory for annexationby a property-poor district; (3) a district may purchase attendance credits from the State; (4) a district may contract to educatenonresident students from a property-poor district by sending money directly to one or more property-poor districts; or (5) adistrict may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy anddistribute either M&O taxes or both M&O taxes and I&S taxes. A Chapter 41 district may also exercise any combination ofthese remedies. Options (3), (4) and (5) require prior approval by the transferring district’s voters; however, Chapter 41 districtsmay apply ASATR funds to offset recapture and to achieve the statutory wealth equalization requirements, as described above,without approval from voters.

A district may not adopt a tax rate until its effective wealth per student is at or below the equalized wealth level. If a district failsto exercise a permitted option, the Commissioner must reduce the district’s property wealth per student to the equalized wealthlevel 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 theCommissioner do not provide for assumption of any of the transferring district’s existing debt. The Commissioner has not beenrequired to detach property in the absence of a district failing to select another wealth-equalization option.

THE SCHOOL FINANCE SYSTEM AS APPLIED TO THE NORTH EAST INDEPENDENT SCHOOL DISTRICT

The District’s wealth per student for the 2014-15 school year is more than the equalized wealth value. The District first exceededthe wealth per student equalized wealth level in 2007-2008. Section 41.0041, as amended, Texas Education Code (“Section41.0041”) states that if a school district’s wealth per student exceeds the equalized wealth level for the first time in the 2006-2007school year or later, that district’s board of trustees may authorize the Commissioner to withhold from certain State revenues towhich such district is otherwise entitled an amount equal to that district’s cost to purchase attendance credits in an amountsufficient to reduce its wealth per student to the equalized wealth level for the subject school year. The Board has authorized theCommissioner to withhold State revenues pursuant to Section 41.0041; however, as a result of the “hold harmless” provisions ofthe Reform Legislation and modifications to school district funding enacted through legislation enrolled in 2013, thisauthorization has not resulted in State funding to which the District is otherwise entitled being withheld.

A district’s wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must bereduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District’s wealth per student shouldexceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealthreduction 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 theDistrict’s ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion ofits outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timelypayment of the Bonds could become dependent in part on the financial performance of the annexing district.

TAX INFORMATION

AD VALOREM TAX LAW . . . The appraisal of property within the District is the responsibility of the Bexar Appraisal District (the“Appraisal District”). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the AppraisalDistrict is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of its marketvalue and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal maybe used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and themethod considered most appropriate by the chief appraiser is to be used. State law requires the appraised value of a residencehomestead to be based solely on the property’s value as a residence homestead, regardless of whether residential use isconsidered to be the highest and best use of the property. State law further limits the appraised value of a residence homestead for atax year to an amount not to exceed the lesser of (1) the market value of the property, or (2) the sum of (a) 10% of the appraised value ofthe property for the last year in which the property was appraised for taxation times the number of years since the property was lastappraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of allnew improvements to the property. The value placed upon property within the Appraisal District is subject to review by an AppraisalReview Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is

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required to review the value of property within the Appraisal District at least every three years. The District may require annual review atits own expense, and is entitled to challenge the determination of appraised value of property within the District by petition filed with theAppraisal Review Board.

Reference is made to the VTCA, Property Tax Code, for identification of property subject to taxation; property exempt or which may beexempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitationsapplicable 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 ofagricultural 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, andState 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 $10,000exemption, and only one such exemption may be received per family, per residence homestead. State law also mandates a freeze on taxespaid on residence homesteads of persons 65 years of age or older which receive the $10,000 exemption. Such residencehomesteads shall be appraised and taxes calculated as on any other property, but taxes shall never exceed the amount imposed inthe first year in which the property received the $10,000 exemption. The freeze on ad valorem taxes on the homesteads ofpersons 65 years of age or older and the disabled is also transferable to a different residence homestead. Also, a surviving spouseof a taxpayer who qualifies for the freeze on ad valorem taxes is entitled to the same exemption so long as (i) the taxpayer died ina year in which he qualified for the exemption, (ii) the surviving spouse was at least 55 years of age when the taxpayer died and(iii) the property was the residence homestead of the surviving spouse when the taxpayer died and the property remains theresidence homestead of the surviving spouse. A constitutional amendment was approved by the voters on May 12, 2007, andimplementing legislation subsequently passed and signed into law, that reduces the school property tax limitation (commonlyreferred to as a “freeze” on ad valorem taxes) on residence homesteads of persons 65 years of age or over or of disabled personsto correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 taxyear to the 2007 tax year (see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM - Overview” herein). The school propertytax 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 andthe 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.

After the exemption described in (i) above is authorized, such exemption may be repealed or decreased or increased in amount(a) by the governing body of the political subdivision or (b) by a favorable vote of a majority of the qualified voters at an electioncalled by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by atleast 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of adecrease, the amount of the exemption may not be reduced to less than $3,000 of the market value.

The surviving spouse of an individual who qualifies for the exemption listed in (i) above for the residence homestead of a person65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption forwhich the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for theexemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual’s spouse and (iii) theproperty was the residence homestead of the surviving spouse when the deceased spouse died and remains the residencehomestead of the surviving spouse.

In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to belevied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt ifcessation of the levy would impair the obligation of the contract by which the debt was created.

State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse orchildren of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal propertywith the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000.

The freeze on taxes paid on residence homesteads of persons 65 years of age and older was extended to include the resident homesteads of“disabled” persons, including the right to transfer the freeze to a different residence homestead. A “disabled” person is one who is “under adisability for purposes of payment of disability insurance benefits under the Federal Old Age, Survivors and Disability Insurance”.

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Section 11.131 of the Texas Property Tax Code states that a disabled veteran who receives from the United States Department ofVeterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabledor of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran’s residencehomestead. Furthermore, following the approval by the voters at a November 8, 2011 statewide election, effective January 1, 2012,the surviving spouse of a deceased veteran who had received a disability rating of 100% is entitled to receive a residential homesteadexemption equal to the exemption received by the deceased spouse until such surviving spouse remarries.

Following the approval by the voters at a November 5, 2013 statewide election, a partially disabled veteran or the survivingspouse of a partially disabled veteran is entitled to an exemption equal to the percentage of the veteran’s disability, if theresidence was donated at no cost to the veteran by a charitable organization.

Also approved by the November 5, 2013 election, was a constitutional amendment providing that the surviving spouse of amember of the armed forces who is killed in action is entitled to a property tax exemption for all or part of the market value ofsuch surviving spouse’s residences homestead, if the surviving spouse has not remarried since the service member’s death andsaid property was the service member’s residence homestead at the time of death. Such exemption is transferable to a differentproperty of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on theprior residence in the last year in which such exemption was received.

Article VIII provides that eligible owners of both agricultural land (Section l-d) and open-space land (Section l-d-l), including open-spaceland devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised forproperty taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1.

The freeze on ad valorem taxes on the homesteads of persons 65 years of age or older for general elementary and secondarypublic school purposes is also transferable to a different residence homestead.

Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of apolitical subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation.

Article VIII, Section 1-j of the Texas Constitution provides for “freeport property” to be exempted from ad valorem taxation. Freeportproperty is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing orfabrication. Notwithstanding such exemption, counties, school districts, junior college districts and cities may tax such tangible personalproperty provided official action to tax the same was taken before April 1, 1990. Decisions to continue to tax may be reversed in thefuture; decisions to exempt freeport property are not subject to reversal.

Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in-transit” is defined by the Texas Property Tax Code as personal property acquired or imported into Texas and transported toanother 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 andout-board motor, heavy equipment and manufactured housing inventory. The Property Tax Code provision permits localgovernmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding apublic hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeportexemptions or the goods-in-transit exemptions for items of personal property.

A city may create a tax increment financing district (“TIF”) within the city with defined boundaries and establish a base value oftaxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with thecity to contribute all or part of future ad valorem taxes levied and collected against the “incremental value” (taxable value inexcess 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 taxingunits. Effective September 1, 2001, school districts may not enter into tax abatement agreements under the general statute thatpermits municipalities and counties to initiate tax abatement agreements. Credit will not be given by the Commissioner ofEducation in determining a district’s property value wealth per student for (1) the appraisal value, in excess of the “frozen” value,of property that is located in a tax increment financing zone created after May 31, 1999 (except in certain limited circumstanceswhere the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units thatlevy ad valorem taxes in the zone of its intention to create the zone and the zone is created and has its final project and financingplan approved by the municipality prior to August 31, 1999) or (2) for the loss of value of abated property under any abatementagreement entered into after May 31, 1993. Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known asthe Texas Economic Development Act, which provides incentives for certain school districts to grant tax abatements on certaineligible property to encourage economic development in their tax base and provides additional State funding for each year ofsuch tax abatement in the amount of the tax credit provided to the taxpayer by the district.

TAX RATE LIMITATIONS . . . A school district is authorized to levy an M&O Tax subject to approval of a proposition submitted todistrict voters under Section 45.003(d) of the Texas Education Code, as amended. The maximum M&O Tax rate that may belevied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. Themaximum voted M&O Tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an electionheld on October 3, 1995 under Section 45.003, Texas Education Code.

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The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50and (B) the sum of (1) the rate of $0.17, and (2) the product of the “State Compression Percentage” multiplied by $1.50. TheState Compression Percentage has been set, and will remain, at 66.67% for fiscal years 2007–08 through 2014–15. The StateCompression Percentage is set by legislative appropriation for each State fiscal biennium or, in the absence of legislativeappropriation, by the Commissioner. For a more detailed description of the State Compression Percentage, see “CURRENTPUBLIC SCHOOL FINANCE SYSTEM - Local Funding for School Districts.” Furthermore, a school district cannot annuallyincrease its tax rate in excess of the district’s “rollback tax rate” without submitting such tax rate to a referendum election and amajority of the voters voting at such election approving the adopted rate (see “TAX INFORMATION – Public Hearing andRollback Tax Rate”).

A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of a propositionsubmitted to the voters under Section 45.003(b)(1), Texas Education Code, as amended, which provides a tax unlimited as to rateor amount for the support school district bonded indebtedness (see “THE BONDS - Security and Source of Payment”).

Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it hasthe prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding “newdebt” of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. Indemonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the districtwhich effectively reduces the district’s local share of debt service. Once the prospective ability to pay such tax has been shownand the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt service on bondsapproved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued torefund such bonds) are not subject to the foregoing threshold tax rate test. In addition, taxes levied to pay refunding bonds issuedpursuant to Chapter 1207 are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds areincluded in the calculation of the $0.50 tax rate test as applied to subsequent issues of “new debt.” The Bonds are issued as“refunding bonds” under Chapter 1207 and are, therefore, not subject to the $0.50 threshold tax rate test. Under current law, adistrict may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amountequal 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 thebonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequentlyimposes a tax at a rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bondissues, the Attorney General must find that the district has the projected ability to pay principal and interest on the proposedbonds 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 generallycannot adopt a tax rate exceeding the district’s “rollback tax rate” without approval by a majority of the voters voting at an electionapproving the higher rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expendituresand (2) a rate for debt service. 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 taxrate 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 effectivemaintenance 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 – Local Funding for SchoolDistricts”) for a description of the “State Compression Percentage”. If for the preceding tax year a district adopted an M&O tax ratethat was less than its effective M&O tax rate for that preceding tax year, the district’s rollback tax for the current year is calculated asif 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, wouldprovide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 ofthe Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available tothe district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been ineffect for the preceding year.

Section 26.05 of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate forthe 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 afailure 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 theeffective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting itsannual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of publicmeeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section 44.004 ofthe Texas Education Code. Section 44.004(e) of the Texas Education Code provides that a person who owns taxable property in aschool district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with suchnotice requirements or the language and format requirements of such notice as set forth in Section 44.004(b), (c) and (d) and if suchfailure to comply was not in good faith. Section 44.004(e) further provides the action to enjoin the collection of taxes must be filedbefore the date the district delivers substantially all of its tax bills. A district may adopt its budget after adopting a tax rate for the taxyear in which the fiscal year covered by the budget begins if the district elects to adopt its tax rate before receiving the certifiedappraisal roll. A district that adopts a tax rate before adopting its budget must hold a public hearing on the proposed tax ratefollowed 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 thebasis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become dueOctober 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older arepermitted by State law to pay taxes on homesteads in four installments with the first installment due on February 1 of each yearand 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(b) Total

February 6% 1% 7%

March 7 2 9

April 8 3 11

May 9 4 13

June 10 5 15

July 27(a) 6 33

________________(a) Includes additional penalty of up to 20% assessed after July 1 in order to defray attorney and collection expenses.(b) Interest continues to accrue after July 1 at the rate of 1% per month until paid.

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 toproperty to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favorof 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 taxliens 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 theproperty encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property undercertain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any time after taxes onproperty become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for thetax, 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 delinquenttaxes against all or part of the same property. The ability of the District to collect delinquent taxes by foreclosure may be adverselyaffected by the amount of taxes owed to other taxing units, adverse market conditions, taxpayer redemption rights, or bankruptcyproceedings which restrain the collection of a taxpayer’s debt. Federal bankruptcy law provides that an automatic stay of actions bycreditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. Theautomatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attachingto property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcycourt. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of thebankruptcy court.

DISTRICT APPLICATION OF TAX CODE . . . The Appraisal District has the responsibility for appraising property in the District aswell as other taxing units in Bexar County, Texas. The Appraisal District is governed by a board of directors appointed bymembers of the governing bodies of various political subdivisions within the county.

Property within the District is assessed as of January 1 of each year, taxes become due October 1 of the same year and becomedelinquent on February 1 of the following year.

The Board has elected to grant an additional exemption of residence homestead of a person 65 years of age or older and certaindisabled persons in the amount of $10,000.

The Board has elected to grant an additional local option exemption of residence homestead of a person 65 years of age or olderin the amount of $13,330.

The District has taken official action to tax “freeport property” located within the District.

The District does not currently tax goods-in-transit.

The District does not tax personal property not used in the production of income, such as personal automobiles.

The District’s taxes are collected by the Bexar County Tax Assessor-Collector.

The District does not give discounts for early payment.

The District does not participate in any tax increment financing zones. The District has not granted any tax abatements.

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TABLE 1 - VALUATION, EXEMPTIONS AND TAX SUPPORTED DEBT

2014/15 Market Valuation Established by Bexar Appraisal District

(includes exempt property) 35,315,540,092$

Less Exemptions/Reductions at 100% Market Value:

$15,000 Residential Homestead Exemptions (State Mandated) 1,216,256,182$

Over-65/Disabled Exemptions 640,851,264

Disabled Veterans 366,495,371

Disabled Persons 17,045,968

Productivity Loss 158,460,549

Leased Vehicles 116,920,730

Community Housing Development 160,686,366

Value Lost to 10% Residential Cap 126,001,555

Exempt 729,387,686

Low Income Housing 11,695,500

Other 2,849,299

Pollution Control 11,658,640 3,558,309,110

2014/15 Taxable Assessed Valuation 31,757,230,982$

Debt Payable from Unlimited Ad Valorem Taxes as of August 31, 2014

Unlimited Tax Bonds(1)

1,335,268,775$

The Bonds 69,925,000

Debt Payable from Unlimited Ad Valorem Taxes 1,405,193,775$

Interest and Sinking Fund as of August 31, 2014(2)

16,551,721$

Ratio of Tax Supported Debt to Taxable Assessed Valuation 4.42%

2015 Estimated Population - 442,761

Per Capita Taxable Assessed Valuation - $71,725

Per Capita Debt Payable from Unlimited Ad Valorem Taxes - $3,174________________(1) Excludes the Refunded Obligations.(2) Unaudited.

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TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY

Taxable Appraised Value for Fiscal Year Ended June 30,

2015 2014 2013

% of % of % of

Category Amount Total Amount Total Amount Total

Real, Residential, Single-Family 20,743,684,118$ 58.74% 19,277,960,031$ 58.43% 18,768,937,527$ 59.35%

Real, Residential, Multi-Family 3,028,422,617 8.58% 2,692,611,631 8.16% 2,225,875,274 7.04%

Real, Vacant Lots/Tracts 408,107,058 1.16% 415,773,801 1.26% 406,800,196 1.29%

Real, Acreage (Land Only) 163,982,616 0.46% 359,102,724 1.09% 357,831,890 1.13%

Real, Farm and Ranch Improvements 172,030,780 0.49% 244,404 0.00% 11,356,313 0.04%

Real, Commercial 6,825,040,416 19.33% 6,346,984,240 19.24% 6,071,637,168 19.20%

Real, Industrial 79,099,754 0.22% 90,009,457 0.27% 78,532,524 0.25%

Real, Oil, Gas and Other Mineral Reserves 13,096,246 0.04% - 0.00% - 0.00%

Real and Tangible Personal, Utilities 104,709,538 0.30% 98,000,894 0.30% 104,459,750 0.33%

Tangible Personal, Commercial 2,230,038,088 6.31% 2,158,995,798 6.54% 2,137,904,991 6.76%

Tangible Personal, Industrial 258,571,288 0.73% 250,843,170 0.76% 257,237,891 0.81%

Tangible Personal, Mobile Homes 26,006,282 0.07% 25,214,279 0.08% 27,110,584 0.09%

Special Inventory 143,102,420 0.41% 142,902,500 0.43% 123,331,650 0.39%

Real Property, Inventory(1)

99,622,370 0.28% 105,719,947 0.32% 101,115,787 0.32%Exempt 1,020,026,501 2.89% 1,026,360,932 3.11% 950,770,467 3.01%Total Appraised Value Before

Exemptions 35,315,540,092$ 100.00% 32,990,723,808$ 100.00% 31,622,902,012$ 100.00%Adjustments - (164,999,066) (172,021,246)

Less: Total Exemptions/Reductions (3,558,309,110) (3,396,188,409) (3,375,268,256)Taxable Assessed Value 31,757,230,982$ 29,429,536,333$ 28,075,612,510$

Taxable Appraised Value for Fiscal Year Ended June 30,2012 2011

% of % ofCategory Amount Total Amount Total

Real, Residential, Single-Family 18,703,567,078$ 59.49% 18,760,246,489$ 59.37%Real, Residential, Multi-Family 2,238,168,301 7.12% 2,199,461,058 6.96%Real, Vacant Lots/Tracts 419,644,010 1.33% 425,383,204 1.35%Real, Acreage (Land Only) 361,755,428 1.15% 371,508,031 1.18%Real, Farm and Ranch Improvements 11,260,035 0.04% 11,316,609 0.04%Real, Commercial 6,020,048,655 19.15% 6,115,625,211 19.35%Real, Industrial 56,632,684 0.18% 56,435,317 0.18%Real and Tangible Personal, Utilities 112,927,196 0.36% 118,158,510 0.37%Tangible Personal, Commercial 2,158,454,613 6.87% 2,163,374,075 6.85%Tangible Personal, Industrial 253,395,978 0.81% 270,862,550 0.86%Tangible Personal, Mobile Homes 27,369,065 0.09% 27,281,493 0.09%Special Inventory 116,593,920 0.37% 102,564,970 0.32%

Real Property, Inventory(1)

96,038,077 0.31% 75,801,395 0.24%Exempt 861,990,909 2.74% 901,020,285 2.85%Total Appraised Value Before

Exemptions 31,437,845,949$ 100.00% 31,599,039,197$ 100.00%Adjustments (138,924,583) (179,075,581)

Less: Total Exemptions/Reductions (3,279,862,128) (3,290,120,456)Taxable Assessed Value 28,019,059,238$ 28,129,843,160$

_________________(1) Real property, inventory in the hands of developers or builders; each group of properties in this category is appraised

on the basis of its value as a whole as a sale to another developer or builder.

NOTE: Valuations shown are certified taxable assessed values reported by the Appraisal District. Certified values are subject tochange throughout the year as contested values are resolved and the Appraisal District updates records.

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TABLE 3 - VALUATION AND TAX SUPPORTED DEBT HISTORY

Ratio of

Net Tax Net Tax

Supported Supported Net Tax

Fiscal Taxable Debt Debt Supported

Year Taxable Assessed Outstanding to Taxable Debt

Ended Estimated Assessed Valuation at End Assessed Per

6/30 Population(1)

Valuation(2)

Per Capita of Year Valuation Capita

2011 396,628 28,129,843,160$ 70,922$ 1,228,717,691$ 4.37% 3,098$

2012 410,746 28,019,059,238 68,215 1,184,767,690 4.23% 2,884

2013 415,965 28,075,612,510 67,495 1,444,538,430 5.15% 3,473

2014 432,834 29,429,536,333 67,993 1,450,519,128 4.93% 3,351

2015 442,761 31,757,230,982 71,725 1,400,378,775(3)

4.41%(3)

3,163(3)

________________(1) Source: District Officials.(2) Source: District Comprehensive Annual Financial Reports for years ending 2011 through 2014, and the Appraisal

District’s Certified Totals for Tax Year 2014, subject to change during the ensuing year.(3) Excludes the Series 2010 Maintenance Tax Notes and the Refunded Obligations; includes the Bonds.

TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY

Fiscal Interest

Year and

Ended Tax Local Sinking % Current % Total

6/30 Rate Maintenance Fund Tax Levy Collections Collections

2011 1.40290$ 1.04000$ 0.36290$ 381,253,778$ 95.86% 99.50%

2012 1.40290 1.04000 0.36290 380,983,917 95.24% 98.49%

2013 1.42500 1.04000 0.38500 388,505,226 96.07% 100.02%

2014 1.44060 1.04000 0.40060 411,976,768 96.57% 100.10%

2015 1.44060 1.04000 0.40060 441,529,715 In process of collection

TABLE 5 - TEN LARGEST TAXPAYERS

2014/15

Taxable

Assessed

Name of Taxpayer Nature of Property Valuation

VHS San Antonio Partners LP Real Estate 240,147,572$ 0.76 %

Methodist Healthcare System Medical 237,281,819 0.75 %

H.E.B. Grocery Company LP Grocery Stores 171,969,408 0.54 %

North Star Mall Inc. Retail 150,728,243 0.47 %

Wal-Mart Stores Inc #2404 Retail 121,919,480 0.38 %

DDR DB SA Ventures LP Real Estate 98,520,440 0.31 %

Frankel Family Trust Investment 85,517,450 0.27 %

PN Plaza Investment LP Real Estate 75,334,385 0.24 %

Santikos Legacy Ltd Real Estate 68,810,370 0.22 %

AT&T Telephone Utility 64,452,732 0.20 %

1,314,681,899$ 4.14 %

% of Total

Taxable

Assessed

Valuation

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TAX-SUPPORTED DEBT LIMITATION . . . Section 45.0031, Texas Education Code, as amended, requires a district to demonstrateto the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together withdebt service on other outstanding “new debt” of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuationbefore bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into accountState allotments to the district which effectively reduce the district’s local share of debt service. Once the prospective ability topay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied topay debt service on bonds approved by district voters at an election held on or before April 1, 1991 and issued beforeSeptember 1, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. The Bonds,issued as refunding bonds pursuant to Chapter 1207, are, therefore, not subject to the $0.50 tax rate test.

TABLE 6 - TAX ADEQUACY

Principal and Interest Requirements for the Period Ended August 31, 2015………….……………………….....……. 111,809,327$

$0.4006 Interest and Sinking Fund Tax Rate @ 98% Collections(1)

……………………………………………...………. 124,675,078$________________(1) Assumes an estimated $31,757,230,982 Net Taxable Value in 2014-2015.

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 suchentities on properties within the District. Such entities are independent of the District and may incur borrowings to finance theirexpenditures. This statement of direct and estimated overlapping ad valorem tax obligations (“Tax Debt”) was developed frominformation contained in “Texas Municipal Reports” published by the Municipal Advisory Council of Texas. Except for theamounts relating to the District, the District has not independently verified the accuracy or completeness of such information, andno person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may haveissued additional obligations since the date hereof, and such entities may have programs requiring the issuance of substantialamounts of additional obligations, the amount of which cannot be determined. The following table reflects the estimated share ofoverlapping Tax Debt of the District.

District's

2014/2015 Total Overlapping Authorized

Taxable 2014/2015 Tax Estimated Tax Supported But Unissued

Assessed Tax Supported % Debt Debt As Of

Taxing Jurisdiction Value Rate Debt Applicable As of 8/31/2014 8/31/2014

Alamo Community College District 114,941,730,149$ 0.1492$ 488,040,000$ 27.58% 134,601,432$ -$

Balcones Heights, City of 216,852,988 0.5722 429,000 52.62% 225,740 -

Bexar County 98,320,192,777 0.3207 1,432,475,000 31.03% 444,496,993 37,265,887

Bexar County Hospital District 114,244,229,953 0.2762 709,120,000 31.03% 220,039,936 -

Cibolo Canyons Special Improvement -

District 624,810,284 0.5657 19,870,000 100.00% 19,870,000 151,980,000

Hill Country Village, City of 294,122,818 0.0950 848,000 100.00% 848,000 -

Live Oak, City of 890,022,166 0.5100 13,940,000 35.22% 4,909,668 -

San Antonio, City of 76,757,532,520 0.5657 1,494,770,000 31.80% 475,336,860 234,585,596

San Antonio River Authority(1)

112,120,680,022 0.0175 - 26.95% - -

Terrell Hills, City of 1,203,298,076 0.3705 9,785,000 10.97% 1,073,415 -

North East Independent School -

District 31,757,230,982 1.4406 1,405,193,775(2)

100.00% 1,405,193,775(2)

-(3)

Total Direct and Overlapping Net Tax Supported Debt 2,706,595,818$

Ratio of Direct and Overlapping Net Tax Supported Debt to Taxable Assessed Valuation 8.52%

Per Capita Overlapping Net Tax Supported Debt 6,113

________________(1) Bexar County levies a Flood Control Tax, included in the Bexar County tax rate, to provide for the payment of certain

debt issued by the San Antonio River Authority.(2) Excludes the Series 2010 Maintenance Tax Notes and the Refunded Obligations; includes the Bonds.(3) See “Table 10 – Authorized but Unissued Unlimited Tax Bonds” herein.

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DEBT INFORMATION

TABLE 8 - TAX SUPPORTED DEBT SERVICE REQUIREMENTS

Period Percent of

Ending Total Principal

8/31(1)

Principal Interest Total Principal Interest Total Debt Service Retired

2015 45,763,775$ 62,809,079$ 108,572,854$ 1,265,000$ 1,971,473$ 3,236,473$ 111,809,327$

2016 48,680,000 61,407,788 110,087,788 1,900,000 2,963,100 4,863,100 114,950,888

2017 46,470,000 59,014,725 105,484,725 - 2,934,600 2,934,600 108,419,325

2018 43,290,000 56,919,000 100,209,000 - 2,934,600 2,934,600 103,143,600

2019 45,835,000 57,749,925 103,584,925 - 2,934,600 2,934,600 106,519,525 16.60%

2020 45,685,000 58,523,400 104,208,400 2,040,000 2,883,600 4,923,600 109,132,000

2021 47,840,000 56,167,650 104,007,650 2,160,000 2,778,600 4,938,600 108,946,250

2022 50,660,000 53,624,725 104,284,725 2,280,000 2,667,600 4,947,600 109,232,325

2023 53,220,000 50,925,294 104,145,294 2,410,000 2,550,350 4,960,350 109,105,644

2024 62,225,000 48,246,894 110,471,894 2,545,000 2,426,475 4,971,475 115,443,369 35.89%

2025 55,505,000 45,505,438 101,010,438 5,810,000 2,217,600 8,027,600 109,038,038

2026 58,805,000 42,380,656 101,185,656 6,140,000 1,918,850 8,058,850 109,244,506

2027 65,305,000 39,143,550 104,448,550 3,035,000 1,689,475 4,724,475 109,173,025

2028 65,080,000 35,726,725 100,806,725 6,780,000 1,478,000 8,258,000 109,064,725

2029 68,535,000 32,215,556 100,750,556 7,085,000 1,200,700 8,285,700 109,036,256 60.23%

2030 62,300,000 28,776,906 91,076,906 3,420,000 990,600 4,410,600 95,487,506

2031 54,025,000 25,771,800 79,796,800 3,560,000 851,000 4,411,000 84,207,800

2032 52,275,000 23,024,163 75,299,163 8,115,000 617,500 8,732,500 84,031,663

2033 59,230,000 20,141,300 79,371,300 3,635,000 382,500 4,017,500 83,388,800

2034 54,800,000 17,042,225 71,842,225 3,790,000 234,000 4,024,000 75,866,225 81.95%

2035 46,045,000 14,380,856 60,425,856 3,955,000 79,100 4,034,100 64,459,956

2036 44,800,000 11,981,250 56,781,250 - - - 56,781,250

2037 47,000,000 9,555,250 56,555,250 - - - 56,555,250

2038 17,630,000 7,009,550 24,639,550 - - - 24,639,550

2039 18,470,000 5,922,150 24,392,150 - - - 24,392,150 94.61%

2040 19,345,000 4,782,000 24,127,000 - - - 24,127,000

2041 20,275,000 3,586,950 23,861,950 - - - 23,861,950

2042 19,275,000 2,333,400 21,608,400 - - - 21,608,400

2043 12,480,000 1,156,800 13,636,800 - - - 13,636,800

2044 4,420,000 309,400 4,729,400 - - - 4,729,400 100.00%

1,335,268,775$ 936,134,404$ 2,271,403,179$ 69,925,000$ 38,704,323$ 108,629,323$ 2,380,032,502$

Outstanding Debt(2)

The Bonds

________________(1) The District’s fiscal year is June 30, however for purposes of tax rate levy the table shown above utilizes the period ending August 31.(2) Excludes the Refunded Obligations and excludes the District’s Series 2010 Maintenance Tax Notes (see “Other Obligations” appearing under Table 11 herein). Interest

calculated at an initial “term” rate of 2.000% through July 31, 2015 and at the “stepped rate” of 8.000% per annum thereafter for the Series 2013B Variable RateUnlimited Tax School Building Bonds. Interest calculated at a “term” rate of 2.000% through July 31, 2018 and at the “stepped rate” of 7.000% per annum thereafter forthe Series 2013A Variable Rate Unlimited Tax School Building Bonds. Interest calculated at an initial “term” rate of 2.000% through July 31, 2019 and at the “steppedrate” of 7.000% per annum thereafter for the Series 2014 Variable Rate Unlimited Tax School Building Bonds.

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TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION

Principal and Interest Requirements for the Period Ended August 31, 2016……………………………………. 114,950,888$

$0.40060 Interest and Sinking Fund Tax Rate @ 98% Collection(1)

………………..………….…………….…… 124,258,784$________________(1) Assumes an estimated $31,651,192,653 Net Taxable Value in 2015-2016.

TABLE 10 - AUTHORIZED BUT UNISSUED UNLIMITED TAX BONDS

The District has no voter-authorized but unissued ad valorem tax-supported bonds.

ANTICIPATED ISSUANCE OF UNLIMITED TAX DEBT . . . Though the District currently has no authorized but unissued unlimited advalorem tax bonds from any bond election, it may incur other financial obligations payable from its collection of taxes and othersources of revenue, including maintenance tax notes payable from its collection of maintenance taxes, public property financecontractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplusmaintenance taxes. (See “Table 11 – Other Obligations” below.)

TABLE 11- OTHER OBLIGATIONS

GENERAL . . . In addition to voter authorized ad valorem tax-supported debt, the District may also enter into other financialobligations, including maintenance tax notes payable from its collection of maintenance taxes, public property financecontractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplusmaintenance taxes. The District currently has no other such debt outstanding. On November 17, 2010, the District initiallydelivered its $37,545,000 Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2010 (Direct PaySubsidy Notes) (hereinbefore defined as the “Series 2010 Maintenance Tax Notes”) to provide funds for certain capitalmaintenance items to District facilities. The Series 2010 Maintenance Tax Notes were issued as “qualified school constructionbonds” and “qualified bonds” under that Code and, as such, the District is entitled to receive from the United States Departmentof the Treasury (the “Treasury”) a debt service subsidy payment in the form of a refundable tax credit (the “Subsidy”) in anamount equal to the scheduled interest on the Series 2010 Maintenance Tax Notes when due. The Series 2010 Maintenance TaxNotes mature on August 1, 2027. No sinking fund has been established for payment of the Series 2010 Maintenance Tax Noteswhen due. An amortization schedule for the Series 2010 Maintenance Tax Notes is provided as follows:

Period

Ending

8/31 Principal Interest Less: Subsidy(1)

Total

2015 -$ 1,967,358$ (1,823,741)$ 143,617$

2016 - 1,967,358 (1,967,358) -

2017 - 1,967,358 (1,967,358) -

2018 - 1,967,358 (1,967,358) -

2019 - 1,967,358 (1,967,358) -

2020 - 1,967,358 (1,967,358) -

2021 - 1,967,358 (1,967,358) -

2022 - 1,967,358 (1,967,358) -

2023 - 1,967,358 (1,967,358) -

2024 - 1,967,358 (1,967,358) -

2025 - 1,967,358 (1,967,358) -

2026 - 1,967,358 (1,967,358) -

2027 37,545,000 1,967,358 (1,967,358) 37,545,000

37,545,000$ 25,575,654$ (25,432,037)$ 37,688,617$

Series 2010 Maintenance Tax Notes

________________(1) Subsidy shown in an amount that takes into account the automatic 7.3% reduction in federal spending for fiscal year

2015 (known as “Sequestration”), but does not take into account the potential impact of future reductions (which arepossible and were recently approved by Congress). See “OTHER INFORMATION – Effect of Sequestration” herein.The District has determined that the reduced amount of the Subsidy to be received from the Treasury in relation to theNotes as a result of Sequestration will not have a material impact on the financial condition of the District or its abilityto pay regularly scheduled debt service on Series 2010 Maintenance Tax Notes when and in the amounts due andowing.

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EMPLOYEE RETIREMENT PLAN AND OTHER POST-EMPLOYMENT BENEFITS . . . The District’s employees participate in aretirement plan (the “Plan”) with the State that is administered by the Teacher Retirement System of Texas (“TRS”). Statecontributions are made to cover costs of the TRS retirement plan up to certain statutory limits. The District is obligated for aportion of TRS costs relating to employee salaries that exceed the statutory limit. For the fiscal year ended June 30, 2014, theState contributed $20,909,329 to TRS on behalf of the District’s employees and the District paid an additional $5,139,287 forsalaries above the statutory minimum. The District no longer offers a post-employment retirement benefit and, as a result, hasestablished unfunded liabilities for “Other Post Employment Retirement Benefits” as defined in GASB Statement No. 45 in theamount of $184,224 as of June 30, 2014. (For more detailed information concerning the TRS retirement plan, see APPENDIX B,“Excerpts from the District’s Comprehensive Annual Financial Report” - Note H and Note J.)

The District contributes to the Texas Public School Retired Employees Group Insurance Program (“TRS-Care”), a cost-sharingmultiple-employer defined benefit postemployment health care plan administered by TRS. TRS-Care provides health carecoverage for certain persons (and their dependents) who retired under TRS. For the fiscal year ended June 30, 2014, the Statecontributed $2,057,205 to TRS-Care, District employees paid $2,544,375 and other contributions to the plan made from privategrants and from the District were $2,152,932 (see APPENDIX B, “Excerpts from the District’s Comprehensive Annual FinancialReport” - Note I).

The District also offers medical, dental, and life insurance coverage to certain retirees who have continued their coverage with theDistrict’s insurance plans since their retirement. The option to continue coverage is no longer offered; thereby, participation in theplan is limited to those who retired prior to August 31, 2004. The District’s annual cost of the Other Post-Employment Benefits(“OPEB”) and net OPEB obligations for the fiscal years ended June 30, 2014, 2013, and 2012 are included in the following table.(For more information regarding the District’s OPEB liability (see APPENDIX B, “Excerpts from the District’s ComprehensiveAnnual Financial Report” - Note J).

June 30, 2014 June 30, 2013 June 30, 2012

Annual Required Contribution ("ARC") 205,114$ 314,448$ 310,863$

Interest on Prior Year Net OPEB (Benefit)/Obligation 8,422 5,579 2,973

Adjustment to the ARC (8,045) (7,652) (3,903)

Annual OPEB Cost 205,491 312,375 309,933

Retiree Claims Paid (231,811) (227,380) (251,201)

Increase/(Decrease) in Net OPEB Obligation (26,320)$ 84,995$ 58,732$

Net OPEB (Benefit)/Obligation at June 30 184,224$ 210,544$ 125,549$

Percentage of ARC Contributed 112.8% 72.8% 81.1%

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FINANCIAL INFORMATION

TABLE 12 - CHANGES IN NET ASSETS

Revenues: 2014 2013 2012 2011 2010

Program Revenues:

Charges for Services 23,009,831$ 23,307,999$ 22,783,928$ 22,628,635$ 21,825,109$

Operating Grants and Contributions 76,009,927 74,047,791 93,390,025 102,842,030 103,315,872

General Revenues:

Maintenance and Operations Taxes 296,557,826 280,377,773 280,835,492 280,283,586 284,667,647

Debt Service Taxes 114,290,273 103,892,617 98,024,700 97,815,240 99,452,311

State Aid - Formula Grants 160,877,564 154,227,030 169,075,359 171,635,705 159,950,184

Grants and Contributions Not Restricted 7,427,927 7,396,355 7,146,480 5,308,935 1,830,445

Investment Earnings 1,541,215 739,398 3,008,213 2,210,106 4,008,550

Miscellaneous Local & Intermediate 4,879,436 4,905,166 3,865,677 4,042,857 5,960,395

Special Item - Litigation Settlement - - - - -

Transfers In (Out) 466,693 88,691 47,652 77,741 46,042

Total Revenues 685,060,692$ 648,982,820$ 678,177,526$ 686,844,835$ 681,056,555$

Expenses:

Instruction 362,123,810$ 353,732,386$ 362,214,813$ 376,479,406$ 371,284,490$

Instructional Resources & Media Services 11,199,028 11,901,993 11,264,201 12,323,296 11,927,161

Curriculum and Staff Development 16,126,028 16,249,269 15,741,780 17,301,176 18,148,005

Instructional Leadership 6,834,558 6,699,437 6,421,877 7,179,781 7,334,921

School Leadership 33,846,679 32,016,145 31,110,802 33,019,232 32,584,901

Guidance, Counseling & Evaluation Services 19,573,975 18,910,505 18,826,969 19,843,188 20,141,865

Social Work Services 3,929,030 4,005,192 3,910,851 4,300,158 4,220,795

Health Services 7,790,141 7,562,427 7,304,746 7,921,828 7,264,301

Student (Pupil) Transportation 20,603,626 19,450,575 19,620,934 20,182,957 18,536,672

Food Services 33,148,289 33,459,342 31,703,494 30,085,326 28,443,629

Co-curricular/Extracurricular Activities 15,678,891 15,278,416 15,185,517 15,038,573 14,947,235

General Administration 10,952,520 10,113,105 10,239,863 11,020,485 11,274,090

Plant Maintenance and Operations 58,851,185 56,631,517 55,143,500 58,741,653 58,389,526

Security and Monitoring Services 2,912,196 4,300,053 3,697,076 4,467,534 3,899,077

Data Processing Services 22,803,154 25,374,479 4,304,519 6,420,067 3,992,606

Community Services 381,850 448,031 2,490,482 575,511 575,229

Debt Service 64,949,036 61,547,471 59,725,519 60,916,646 61,001,977

Instructional Shared Service Arrangements 623,242 554,734 395,184 375,125 200,986

Juvenile Justice Alternative Ed. Prg. 70,506 103,654 129,060 176,333 128,650

Property Appraisal Services 2,197,327 2,129,848 1,914,188 2,180,987 2,255,319

Total Expenses 694,595,071$ 680,468,579$ 661,345,375$ 688,549,262$ 676,551,435$

Increase (Decrease) in Net Assets (9,534,379) (31,485,759) 16,832,151 (1,704,427) 4,505,120

Net Assets - July 1 (Beginning) 191,962,337 223,448,096 206,615,945 210,345,458 205,840,335

Prior Period Adjustment (6,711,540) - - (2,025,086) -

Net Assets - June 30 (Ending) 175,716,418$ 191,962,337$ 223,448,096$ 206,615,945$ 210,345,455$

Fiscal Years Ended June 30,

________________Source: The District’s Comprehensive Annual Financial Reports.

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TABLE 12-A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY

2014 2013 2012 2011 2010

Revenues:

Local and Intermediate Sources 303,821,814$ 289,488,980$ 286,737,278$ 286,859,952$ 290,260,949$

State Sources 182,466,492 174,595,432 190,250,771 195,325,617 182,210,081

Federal Sources 7,037,889 7,244,449 6,384,150 6,045,557 4,082,809

Total Revenues 493,326,195$ 471,328,861$ 483,372,199$ 488,231,126$ 476,553,839$

Expenditures:

Instruction 303,216,383$ 294,197,105$ 280,669,015$ 287,261,498$ 288,914,138$

Inst. Resources and Media 8,380,874 8,055,426 7,979,421 9,105,059 8,718,206

Curriculum and Instructional

Staff Development 12,326,672 11,996,204 10,266,198 9,289,388 7,054,657

Instructional Leadership 5,802,769 5,714,637 5,397,822 5,930,620 5,934,568

School Leadership 32,394,789 30,429,782 29,313,593 30,678,510 30,848,183

Guidance, Counseling and

Evaluation Services 17,855,451 16,968,761 16,754,183 17,369,335 17,738,632

Social Work Services 2,355,176 2,273,258 2,369,370 2,546,938 2,592,485

Health Services 7,374,174 7,162,197 6,700,956 7,114,071 6,787,135

Student (Pupil) Transportation 18,168,457 16,927,410 17,090,119 17,238,935 16,479,348

Food Services 27,195 6,142 20,962 42,492 -

Cocurricular/Extracurricular

Activities 9,696,938 9,419,305 8,999,769 9,250,711 9,459,493

General Administration 10,923,229 9,922,156 10,204,973 10,641,994 11,232,452

Facilities Maintenance and Operation 50,166,609 47,998,644 49,017,586 51,399,271 50,274,144

Security and Monitoring Services 4,305,349 3,951,590 3,919,013 4,376,263 4,324,714

Data Processing Services 4,362,428 3,953,172 3,821,576 3,486,930 3,607,563

Community Services 172,820 170,890 196,890 214,636 272,023

Debt Service - - - - -

Facility Acquisition and

Construction - - 5,000 8,000 -

Instructional Shared Service

Arrangements 596,114 530,444 395,184 375,125 200,986

Payments to Juvenile Justice

Alternative Education Program 70,506 103,654 129,060 176,333 128,650

Other Integovernmental Charges 2,197,327 2,129,848 1,914,188 2,180,987 2,255,319

Total Expenditures 490,393,260$ 471,910,625$ 455,164,878$ 468,687,096$ 466,822,696$

Other Resources and (Uses) (2,692,619)$ (2,294,013)$ (1,134,067)$ (1,757,578)$ 1,160,842$

Excess (Deficiency) of

Revenues Over Expenditures 240,316$ (2,875,777)$ 27,073,254$ 17,786,452$ 10,891,985$

Beginning Fund Balance on

July 1 113,878,198$ 116,753,975$ 89,680,721$ 71,894,269$ 61,002,284$

Ending Fund Balance on

June 30 114,118,514$ 113,878,198$ 116,753,975$ 89,680,721$ 71,894,269$

Fiscal Years Ended June 30,

________________Source: The District’s Comprehensive Annual Financial Reports.

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INVESTMENTS

The District invests its investable funds in investments authorized by Texas law in accordance with investment policies approved bythe Board. Both State law and the District’s investment policies are subject to change.

LEGAL INVESTMENTS . . . Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agenciesand 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 securityfor which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of whichis guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respectiveagencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state ratedas 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 meeting the requirements of the Texas Public FundsInvestment Act (Chapter 2256, Texas Government Code, as amended) that are issued by or through an institution that either has itsmain office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National CreditUnion Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other mannerand amount provided by law for District deposits; (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 financialinstitution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is eithersecured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state ornational 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 investmentpool; (ii) securities held as collateral under a loan are pledged to the District, held in the District’s name and deposited at the time theinvestment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed througheither a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement tolend securities has a term of one year or less, (10) certain bankers’ acceptances with the remaining term of 270 days or less, if theshort-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 nationallyrecognized 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 ifthe paper is fully secured by an irrevocable letter of credit issued by a United States or state bank, (12) no-load money market mutualfunds registered with and regulated by the United States Securities and Exchange Commission that have a dollar weighted averagestated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for eachshare, and (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an averageweighted maturity of less than two years, invest exclusively in obligations described in the this paragraph (except for those describedin clause (6)), and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of notless than “AAA” or its equivalent, and conform to the requirements relating to the eligibility of investment pools to receive andinvest funds. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination dateand are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount atleast equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the nextsucceeding paragraph.

The District may invest in such obligations directly or through government investment pools that invest solely in such obligationsprovided that the pools are rated no lower than “AAA” or “AAA-m” or an equivalent by at least one nationally recognized ratingservice. The District may also contract with an investment management firm registered under the Investment Advisers Act of1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of itspublic funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciaryof its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District isspecifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstandingprincipal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose paymentrepresents 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 mortgageobligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

Governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under theprogram are collateralized, a loan made under the program allows for termination at any time and a loan made under the programis either secured by (a) obligations that are described in clauses (1) through (6) of the first paragraph under this subcaption, (b)irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investmentrating firm not less than “A” or its equivalent, or (c) cash invested in obligations that are described in clauses (1) through (6) and(10) through (12) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateralunder a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time theinvestment is made with the Agency or a third party designated by the Agency; (iii) a loan made under the program is placedthrough either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) theagreement to lend securities has a term of one year or less.

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As a school district that qualifies as an “issuer” under Chapter 1371, as amended, Texas Government Code, the District is alsoauthorized to purchase, sell, and invest its funds in corporate bonds. State law defines “corporate bonds” as senior secured debtobligations issued by a domestic business entity and rated not lower than “AA-” or the equivalent by a nationally recognizedinvestment rating firm. The term does not include a bond that is convertible into stocks or shares in the entity issuing the bond(or an affiliate or subsidy thereof) or any unsecured debt. Corporate bonds must finally mature not later than 3 years from theirdate of purchase by the school district. A school district may not (1) invest more than 15% of its monthly average fund balance(excluding bond proceeds, reserves, and other funds held for the payment of debt service) in corporate bonds; or (2) invest morethan 25% of the funds invested in corporate bonds in any one domestic business entity (including subsidiaries and affiliatesthereof). Corporate bonds held by a school district must be sold if they are at any time downgraded below “AA-” (or theequivalent thereof) or, with respect to a corporate bond rated “AA-” (or the equivalent thereof), such corporate bond is placed onnegative credit watch. Corporate bonds are not an eligible investment for a public funds investment pool. To invest in corporatebonds, an eligible school district must first (i) amend its investment policy to authorize corporate bonds as an eligible investment,(ii) adopt procedures for monitoring rating changes in corporate bonds and liquidating an investment in corporate bonds, and (iii)identify funds eligible to be invested in corporate bonds. As of the date of this Official Statement, the District has taken the stepsnecessary to allow for investing in corporate bonds but has not made any investments in that type of instrument.

INVESTMENT POLICIES . . . Under Texas law, the District is required to invest its funds under written investment policies thatprimarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality andcapability of investment management; and that include a list of authorized investments for District funds, maximum allowable statedmaturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. AllDistrict funds must be invested consistent with a formally adopted “Investment Strategy Statement” that specifically addresses eachfunds’ 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.

Under Texas law, District investments must be made “with judgment and care, under prevailing circumstances, that a person ofprudence, discretion, and intelligence would exercise in the management of the person’s own affairs, not for speculation, but forinvestment, considering the probable safety of capital and the probable income to be derived.” At least quarterly the investmentofficers of the District shall submit an investment report detailing: (1) the investment position of the District, (2) that all investmentofficers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and theending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and endof the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for whicheach individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investmentstrategy statements and (b) state law. No person may invest District funds without express written authority from the Board ofTrustees.

ADDITIONAL PROVISIONS . . . Under Texas law, the District is additionally required to: (1) annually review its adopted policiesand strategies, (2) adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investmentstrategies and records any changes made to either its investment policy or investment strategy in the respective rule, order,ordinance or resolution, (3) require any investment officers with personal business relationships or relatives with firms seeking tosell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board ofTrustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to:(a) receive and review the District’s investment policy, (b) acknowledge that reasonable controls and procedures have beenimplemented to preclude investment transactions conducted between the District and the business organization that are notauthorized by the District’s investment policy (except to the extent that this authorization is dependent on an analysis of themakeup of the District’s entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a writtenstatement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annualaudit of the management controls on investments and adherence to the District’s investment policy; (6) provide specificinvestment training for the Treasurer, Chief Financial Officer and investment officers; (7) restrict reverse repurchase agreementsto not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of thereverse purchase agreement; (8) restrict the investment in no load mutual funds in the aggregate to no more than 15% of theDistrict’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) requirelocal government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory boardrequirements, and (10) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage ininvestment transactions with the District.

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TABLE 13 - CURRENT INVESTMENTS(1)

As of September 30, 2014, the District’s investable funds were invested in the following categories:

% of

Funds Book

Description Invested Value

Certificate of Deposit 0.36% 1,445,000$

Commercial Paper 6.23% 24,984,327

FAMCA 1.01% 4,064,128

FFCB 10.03% 40,249,949

FHLB 7.62% 30,568,796

FHLMC 1.74% 7,000,920

FNMA 5.88% 23,587,202

Municipal Bond 21.17% 84,970,653

Mutual Fund - Money Market 0.40% 1,604,557

Local Government Investment Pools 45.56% 182,813,250

Total 100.00% 401,288,782$

As of September 30, 2014, 85.8% of the District’s investment portfolio will mature within 12 months. The market value of theinvestment portfolio was approximately $401,487,788, 99.7% of its purchase price. No funds of the District are invested inderivative securities; i.e, securities whose rate of return is determined by reference to some other instrument, index, or commodity.________________(1) Unaudited.

Local Government Investment Cooperative (“LOGIC”) is a local government investment pool for which First Southwest AssetManagement, Inc. provides customer service and marketing. LOGIC currently maintains a “AAAm” rating from S&P and has aninvestment objective of achieving and maintaining a stable net asset value of $1.00 per share. Daily investments or redemptionsof funds are allowed by the participants. LOGIC operates in a manner consistent with the SEC’s Rule 2a-7 of the InvestmentCompany Act of 1940, to the extent such rule is applicable to its operations. Accordingly, LOGIC uses the amortized costmethod permitted by SEC Rule 2a-7 to report net assets and share prices since that amount approximates fair value. Theinvestment activities of LOGIC are administered by third party advisors. There is no regulatory oversight by the State overLOGIC.

TAX MATTERS

TAX EXEMPTION . . . The delivery of the Bonds is subject to the opinion of Fulbright & Jaworski LLP of San Antonio, Texas, amember of Norton Rose Fulbright, Bond Counsel, to the effect that interest on the Bonds for federal income tax purposes (1) isexcludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof(the “Code”), of the owners thereof pursuant to section 103 of the Code and existing regulations, published rulings, and courtdecisions, and (2) will not be included in computing the alternative minimum taxable income of the owners thereof who areindividuals or, except as described herein, corporations. The statute, regulations, rulings, and court decisions on which suchopinion is based are subject to change. A form of Bond Counsel’s opinion appears in Appendix C hereto.

Interest on all tax-exempt obligations, including the Bonds, owned by a corporation will be included in such corporation’sadjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an Scorporation, a qualified mutual fund, a real estate investment trust (REIT), a financial asset securitization investment trust(FASIT), or a real estate mortgage investment conduit (REMIC). A corporation’s alternative minimum taxable income is thebasis on which the alternative minimum tax imposed by section 55 of the Code will be computed.

In rendering the foregoing opinions, Bond Counsel will rely upon the Certificate of Sufficiency and upon representations and certificationsof the District made in a certificate dated the date of delivery of the Bonds pertaining to the use, expenditure, and investment of theproceeds of the Bonds and will assume continuing compliance by the District with the provisions of the Order subsequent to the issuanceof the Bonds. The Order contains covenants by the District with respect to, among other matters, the use of the proceeds of the Bonds, themanner in which the proceeds of the Bonds are to be invested, the reporting of certain information to the United States Treasury, andrebating any arbitrage profits to the United States Treasury. Failure to comply with any of these covenants would cause interest on theBonds to be includable in the gross income of the owners thereof from date of the issuance of the Bonds.

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Except as described above, Bond Counsel will express no other opinion with respect to any other federal, state or local taxconsequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition ordisposition of, the Bonds. Bond Counsel’s opinion is not a guarantee of a result, but represents its legal judgment based upon itsreview of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Districtdescribed above. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to the matters addressed inthe opinion of Bond Counsel, and Bond Counsel’s opinion is not binding on the IRS. The IRS has an ongoing program of auditingthe tax-exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures theIRS is likely to treat the District as the “taxpayer,” and the owners of the Bonds would have no right to participate in the auditprocess. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the District may have differentor conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds may adversely affect thevalue and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome.

TAX CHANGES . . . Existing law may change to reduce or eliminate the benefit to registered owners of the exclusion of interest on theBonds from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken,could also affect the value and marketability of the Bonds. Prospective purchasers of the Bonds should consult with their own taxadvisors with respect to any proposed or future changes in tax law.

ANCILLARY TAX CONSEQUENCES . . . Prospective purchasers of the Bonds should be aware that the ownership of tax-exemptobligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, property andcasualty insurance companies, life insurance companies, certain foreign corporations doing business in the United States, Scorporations with subchapter C earnings and profits, owners of an interest in a FASIT, individual recipients of Social Security orRailroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit and taxpayers who may be deemed tohave incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exemptobligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to theirparticular circumstances.

TAX ACCOUNTING TREATMENT OF DISCOUNT BONDS . . . The initial public offering price to be paid for certain Bonds may beless than the amount payable on such Bonds at maturity (the “Discount Bonds”). An amount equal to the difference between theinitial public offering price of a Discount Bond (assuming that a substantial amount of the Discount Bonds of that maturity aresold to the public at such price) and the amount payable at maturity constitutes original issue discount to the initial purchaser ofsuch Discount Bonds. A portion of such original issue discount, allocable to the holding period of a Discount Bond by the initialpurchaser, will be treated as interest for federal income tax purposes, excludable from gross income on the same terms andconditions as those for other interest on the Bonds. Such interest is considered to be accrued actuarially in accordance with theconstant interest method over the life of a Discount Bond, taking into account the semiannual compounding of accrued interest, atthe yield to maturity on such Discount Bond and generally will be allocated to an initial purchaser in a different amount from theamount of the payment denominated as interest actually received by the initial purchaser during his taxable year.

However, such accrued interest may be required to be taken into account in determining the alternative minimum taxable income of acorporation, for purposes of calculating a corporation’s alternative minimum tax imposed by section 55 of the Code, and the amountof the branch profits tax applicable to certain foreign corporations doing business in the United States, even though there will not be acorresponding cash payment. In addition, the accrual of such interest may result in certain other collateral federal income taxconsequences to, among others, financial institutions, property and casualty insurance companies, life insurance companies, Scorporations with subchapter C earnings and profits, owners of an interest in a FASIT, individual recipients of Social Security orRailroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, and taxpayers who may be deemedto have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations.

In the event of the sale or other taxable disposition of a Discount Bond prior to maturity, the amount realized by such owner inexcess of the basis of such Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discountallocable to the period for which such Discount Bond was held) is includable in gross income.

Owners of Discount Bonds should consult with their own tax advisors with respect to the determination for federal income taxpurposes of accrued interest upon disposition of Discount Bonds and with respect to the state and local tax consequences of owningDiscount Bonds. It is possible that, under applicable provisions governing determination of state and local income taxes, accruedinterest on the Discount Bonds may be deemed to be received in the year of accrual even though there will not be a correspondingcash payment.

TAX ACCOUNTING TREATMENT OF PREMIUM BONDS . . . The initial public offering price to be paid for certain Bonds may be greaterthan the stated redemption price on such Bonds at maturity (the “Premium Bonds”). An amount equal to the difference between theinitial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are soldto the public at such price) and its stated redemption price at maturity constitutes premium to the initial purchaser of such PremiumBonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced eachyear by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis foramortizable bond premium with respect to the Premium Bonds. Such reduction in basis will increase the amount of any gain (ordecrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a

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Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using suchpurchaser’s yield to maturity.

Purchasers of Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bondpremium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owningand disposing of Premium Bonds.

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 obligated to advance funds to pay the Bonds. Underthe agreement, the District will be obligated to provide certain updated financial information and operating data annually, andtimely notice of specified events, to the Municipal Securities Rulemaking Board (the “MSRB”) through its EMMA system,where it will be available to the general public, free of charge, at www.emma.msrb.com.

ANNUAL REPORTS . . . The District will file certain updated financial information and operating data with the MSRB. Theinformation to be updated includes all quantitative financial information and operating data with respect to the District of thegeneral type included in this Official Statement under Tables numbered 1 through 6 and 8 through 13 and in Appendix B. TheDistrict will update and provide this information within six months after the end of each fiscal year ending in and after 2015.

The financial information and operating data to be provided may be set forth in full in one or more documents or may be includedby specific reference to any document available to the public on the MSRB’s EMMA Internet Web site or filed with the SEC, aspermitted by SEC Rule 15c2-12 (the “Rule”). The updated information will include audited financial statements, if the Districtcommissions an audit and it is completed by the required time. If audited financial statements are not available by the requiredtime, the District will provide unaudited financial statements by the required time and audited financial statements when and ifsuch audited financial statements become available. Any such financial statements will be prepared in accordance with theaccounting principles described in Appendix B or such other accounting principles as the District may be required to employfrom 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 in each year,unless the District changes its fiscal year. If the District changes its fiscal year, it will file notice of the change with the MSRB.

NOTICES OF CERTAIN EVENTS . . . The District will file with the MSRB notice of any of the following events with respect to theBonds in a timely manner (and not more than 10 business days after occurrence of the event): (1) principal and interest paymentdelinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financialdifficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidityproviders, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or finaldeterminations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations withrespect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights ofholders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or saleof property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, orsimilar event of the District, which shall occur as described below; (13) the consummation of a merger, consolidation, oracquisition involving the District or the sale of all or substantially all of its assets, other than in the ordinary course of business,the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to anysuch actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional paying agent/registraror the change of name of a paying agent/registrar, if material. Neither the Bonds nor the Order make any provision for debtservice reserves, credit enhancement (except with respect to the Permanent School Fund guarantee), or liquidity enhancement. Inaddition, the District will provide timely notice of any failure by the District to provide information, data, or financial statementsin accordance with its agreement described above under “Annual Reports”. The District will provide each notice described in thisparagraph to the MSRB.

For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any ofthe following occur: the appointment of a receiver, fiscal agent, or similar officer for the District in a proceeding under the UnitedStates Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority hasassumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leavingthe existing governing body and officials or officers in possession but subject to the supervision and orders of a court orgovernmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court orgovernmental authority having supervision or jurisdiction over substantially all of the assets or business of the District.

AVAILABILITY OF INFORMATION . . . Effective July 1, 2009 (the “EMMA Effective Date”), the SEC implemented amendments to theRule which approved the establishment by the MSRB of EMMA, which is now the sole successor to the national municipalsecurities information repositories with respect to filings made in connection with undertakings made under the Rule after theEMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be madeby the District in accordance with its undertaking made for the Bonds will be made with the MSRB in electronic format inaccordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB.

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With respect to debt of the District issued prior to the EMMA Effective Date, the District remains obligated to make annual requiredfilings, as well as notices of material events, under its continuing disclosure obligations relating to those debt obligations (whichincludes a continuing obligation to make such filings with the Texas state information depository (the “SID”)). Prior to the EMMAEffective Date, the Municipal Advisory Council of Texas (the “MAC”) had been designated by the State and approved by the SECstaff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRBpursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documentsand related information posted to EMMA’s website simultaneously with such posting. Until the District receives notice of a changein this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, theDistrict has determined, in reliance on guidance from the MAC, that making its continuing disclosure filings solely with the MSRBwill satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to theEMMA Effective Date.

LIMITATIONS AND AMENDMENTS . . . The District has agreed to update information and to provide notices of certain events onlyas described above. The District has not agreed to provide other information that may be relevant or material to a completepresentation 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 itsusefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability fordamages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement madepursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the District to comply with itsagreement.

The District may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise froma 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 incompliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, aswell as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstandingBonds 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. TheDistrict may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals theapplicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, butonly if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or sellingBonds in the primary offering of the Bonds. If the District so amends the agreement, it has agreed to include with the nextfinancial information and operating data provided in accordance with its agreement described above under “Annual Reports” anexplanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financialinformation and operating data so provided.

COMPLIANCE WITH PRIOR UNDERTAKINGS . . . During the past five years, the District has complied in all material respects withall continuing disclosure agreements made by it in accordance with the Rule.

OTHER INFORMATION

RATINGS

The Bonds have been rated “Aaa” by Moody's Investors Service, Inc. (“Moody’s”) and “AAA” by Standard & Poor’s RatingsServices, a Standard & Poor’s Financial Services LLC business (“S&P”) by virtue of the guarantee of the Permanent SchoolFund of the State of Texas (see “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”). The Bonds and thepresently outstanding unlimited tax-supported debt of the District are rated “Aa1” by Moody’s and “AA-” by S&P without regardto credit enhancement. The District has 11 unlimited tax-supported issues outstanding which 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 “THE PERMANENTSCHOOL FUND GUARANTEE PROGRAM”). The District has one maintenance tax note issue (hereinbefore defined as the“Series 2010 Maintenance Tax Notes”) that is neither further secured by nor subject to the Permanent School Fund Guarantee.The District has received conditional approval for the Bonds to be guaranteed by the corpus of the Permanent School Fund. Anexplanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only therespective views of such organizations and the District makes no representation as to the appropriateness of the ratings. There is noassurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely byany or all of such rating companies, if in the judgment of any or all of such companies, circumstances so warrant. Any such downwardrevision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Bonds.

EFFECT OF SEQUESTRATION

The District has determined that the reduced amount of refundable tax credit payments to be received from the United StatesTreasury in relation to its outstanding Series 2010 Maintenance Tax Notes designated as “qualified school construction bonds”and “qualified bonds” under the Code as a result of the automatic reductions in federal spending effective March 1, 2013pursuant to the Budget Control Act of 2011 (commonly referred to as “Sequestration”), and extensions thereof pursuant to theBipartisan Budget Act of 2013, signed into law by the President on December 26, 2013, will not have a material impact on thefinancial condition of the District or its ability to pay regularly scheduled debt service on its outstanding obligations when and inthe amounts due and owing.

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LITIGATION

Except as disclosed in this Official Statement 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 havea material adverse effect on the financial statements of the District.

At the time of the initial delivery of the Bonds, the District will provide the Underwriters with a certificate to the effect that nolitigation of any nature has been filed or is then pending challenging the issuance of the Bonds or that affects the payment andsecurity of the Bonds or in any other manner questioning the issuance, sale or delivery of said 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 exemptionprovided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon variousexemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The District assumes noresponsibility 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 Bondsshall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registrationprovisions.

LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS

Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds arenegotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investmentsfor insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions orpublic agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions orpublic agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that theBonds be assigned a rating of at least “A” or its equivalent as to investment quality by a national rating agency (see “OTHERINFORMATION - Ratings” herein). In addition, various provisions of the Texas Finance Code provide that, subject to a prudentinvestor standard, the Bonds are legal investments for state banks, savings banks, trust companies with capital of at least onemillion dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of theState, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. Noreview by the District has been made of the laws in other states to determine whether the Bonds are legal investments for variousinstitutions in those states.

LEGAL MATTERS

The District will furnish the Underwriters with a complete transcript of proceedings incident to the authorization and issuance of theBonds, including the unqualified approving legal opinion of the Attorney General of the State of Texas to the effect that the Bondsare valid and legally binding obligations of the District payable from the proceeds of an annual ad valorem tax levied, without legallimit as to rate or amount, upon all taxable property in the District, and based upon examination of such transcript of proceedings, theapproval of certain legal matters by Bond Counsel, to the effect that the Bonds are valid and legally binding obligations of theDistrict and, subject to the qualifications set forth herein under “TAX MATTERS,” the interest on the Bonds is excludable from thegross income of the owners thereof for federal income tax purposes under existing statutes, published rulings, regulations, and courtdecisions. Bond Counsel has been retained by and only represents the District. A form of Bond Counsel’s opinion appears inAppendix C attached hereto.

Though it represents the Underwriters and the Co-Financial Advisors from time to time in matters unrelated to the issuance of theBonds, Bond Counsel was engaged by, and only represents, the District in connection with the issuance of the Bonds. Except asnoted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed anyresponsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in itscapacity as Bond Counsel, such firm has (other than any financial, technical or statistical data herein) reviewed the information inthis Official Statement appearing under the captions and subcaptions “PLAN OF FINANCING – Refunded Obligations”, “THEBONDS” (excluding the information under the subcaptions “Permanent School Fund Guarantee”, “Future Issues”, “Book-Entry-Only-System”, “Bondholders’ Remedies”, and “Sources and Uses of Funds”, as to which no opinion is expressed), “STATE ANDLOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS”, “CURRENT PUBLIC SCHOOL FINANCE SYSTEM”, “TAXMATTERS”, “CONTINUING DISCLOSURE OF INFORMATION” (except under the subcaption “Compliance with PriorUndertakings”, as to which no opinion is expressed), “OTHER INFORMATION - Legal Investments and Eligibility to SecurePublic Funds in Texas”, and “OTHER INFORMATION - Legal Matters” (excluding the last two sentences of the secondparagraph thereof), and such firm is of the opinion that the information contained under such captions and subcaptions is anaccurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such informationconforms to the Order. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bondsis contingent on the sale and delivery of the Bonds. The legal opinion will accompany the Bonds deposited with DTC or will beprinted on the Bonds in the event of the discontinuance of the Book-Entry-Only System. Certain legal matters will be passedupon for the Underwriters by their legal counsel McCall, Parkhurst & Horton L.L.P., San Antonio, Texas, whose fee iscontingent on the sale and delivery of the Bonds. McCall, Parkhurst & Horton L.L.P. also advises the TEA in connection with its

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disclosure obligations under the Federal securities laws, but such firm has not passed upon any TEA disclosures contained in thisOfficial Statement.

The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of theattorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney doesnot become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the futureperformance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal disputethat may arise out of the transaction.

CO-FINANCIAL ADVISORS

First Southwest Company and Cabrera Capital Markets, LLC are employed as Co-Financial Advisors to the District in connection with theissuance of the Bonds. The Co-Financial Advisors’ fee for services rendered with respect to the sale of the Bonds is contingent upon theissuance and delivery of the Bonds. First Southwest Company and Cabrera Capital Markets, LLC, in their capacity as Co-FinancialAdvisors, have not verified and do not assume any responsibility for the information, covenants and representations contained in any of thelegal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actionstaken by any legislative or judicial bodies.

The Co-Financial Advisors to the District have provided the following sentence for inclusion in this Official Statement. TheCo-Financial Advisors have reviewed the information in this Official Statement in accordance with, and as part of, theirresponsibilities to the District and, as applicable, to investors under the federal securities laws as applied to the facts andcircumstances of this transaction, but the Co-Financial Advisors do not guarantee the accuracy or completeness of suchinformation.

UNDERWRITING

The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the District at the prices indicated on page 2hereof, less an underwriting discount of $383,843.08, and no accrued interest. The Underwriters will be obligated to purchase all ofthe Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (includingthe Underwriters and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of suchBonds, and such public offering prices may be changed, from time to time, by the Underwriters.

Piper Jaffray & Co. and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement(the “Agreement”) which enables Pershing LLC to distribute certain new issue municipal securities underwritten by or allocatedto Piper Jaffray & Co., including the Bonds. Under the Agreement, Piper Jaffray & Co. will share with Pershing LLC a portionof the fee or commission paid to Piper.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewedthe information in this official Statement in accordance with, and as part of, their responsibility to investors under federalsecurities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy orcompleteness of such information.

FORWARD-LOOKING STATEMENTS DISCLAIMER

The statements contained in this Official Statement, and in any other information provided by the District, that are not purelyhistorical, are forward-looking statements, including statements regarding the District’s expectations, hopes, intentions, orstrategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-lookingstatements included in this Official Statement are based on information available to the District on the date hereof, and theDistrict assumes no obligation to update any such forward-looking statements. The District’s actual results could differmaterially from those discussed in such forward-looking statements.

The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherentlysubject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlyingassumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, andregulatory 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 relatedto the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions andfuture business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the controlof the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-lookingstatements included in this Official Statement will prove to be accurate.

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MISCELLANEOUS

The financial data and other information contained herein have been obtained from the District’s records, audited financialstatements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimatescontained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this OfficialStatement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport tobe complete statements of such provisions and reference is made to such documents for further information. Reference is made tooriginal documents in all respects.

References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlinksolely for the reader’s convenience. Unless specified otherwise, such web sites and the information or links contained therein arenot incorporated into, and are not part of, this Official Statement for purposes of, and as that term is defined in, SEC Rule15c2-12.

The Order approved the form and content of this Official Statement, and any addenda, supplement or amendment thereto, andauthorized its further use in the reoffering of the Bonds by the Underwriters. This Official Statement has been approved by theBoard of the District for distribution in accordance with the provisions of the United States Securities and Exchange CommissionRule codified at 17C.F.R. Section 240.15c2-12.

/s/ Letti BresnahanPresident, Board of Trustees

North East Independent School District

ATTEST:

/s/ Sandy HugheySecretary, Board of Trustees

North East Independent School District

SCHEDULE I

SCHEDULE OF REFUNDED OBLIGATIONS

Original Maturity Interest

Dated Date (February 1) Rate Amount

July 15, 2005 2016 4.250% 1,750,000$

2017 4.000% 1,835,000

2018 4.200% 1,935,000

2019 4.300% 2,030,000

2020 4.375% 2,135,000

2021 4.400% 2,245,000

2022 4.450% 2,360,000

2023 4.500% 2,480,000

2024 4.500% 2,605,000

2025 4.375% 5,850,000

2026 4.600% 6,150,000

2027 5.000% 3,030,000

2028 4.625% 6,795,000

2029 4.500% 7,145,000

2030 5.000% 3,515,000

2031 5.000% 3,695,000

2032 4.500% 8,300,000

2035 4.750% 12,180,000(1)

Unlimited Tax School Building Bonds, Series 2005

These Refunded Obligations are to be called on February 1, 2015 at par.________________(1) Term Bonds.

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APPENDIX A

GENERAL INFORMATION REGARDING THE DISTRICT

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A-1

GENERAL INFORMATION REGARDING THE DISTRICT

THE DISTRICT

The information contained in this Appendix relating to the District is intended solely to provide certain generalinformation concerning the District.

The District presently operates the following campus:

AVERAGE DAILY

HIGH SCHOOLS SIZE (acres) ATTENDANCE(2)

CHURCHILL 39.50 2,752

JOHNSON 130.27 2,748

LEE 27.60 2,306

MACARTHUR 37.90 2,464

MADISON 75.00 3,111

REAGAN 83.40 2,846

ROOSEVELT 35.00 2,663

ACADEMY OF CREATIVE EDUCATION (1) 92

INTERNATIONAL SCHOOL OF THE AMERICAS (1) 458

ALTERNATIVE HIGH SCHOOL (1) 71

MIDDLE SCHOOLS

BRADLEY 20.00 1,187

BUSH 39.20 1,560

DRISCOLL 24.80 904

EISENHOWER 21.00 1,116

GARNER 22.00 937

HARRIS 40.00 1,344

JACKSON 18.00 911

KRUEGER 21.70 1,143

LOPEZ 35.00 1,468

NIMITZ 19.00 973

TEJEDA 39.90 1,452

WHITE 20.00 890

WOOD 31.70 1,032

ALTERNATIVE MIDDLE SCHOOL (1) 54________________(1) Sites without listed acreage share sites with other facilities.(2) Average daily attendance for the 2013-2014 school year.

[The remainder of this page intentionally left blank]

A-2

AVERAGE DAILY

ELEMENTARY SCHOOLS SIZE (acres) ATTENDANCE(2)

BULVERDE CREEK 19.30 861

CAMELOT 10.00 516

CANYON RIDGE 17.42 592

CASTLE HILLS 9.10 469

CIBOLO GREEN 20.18 974

CLEAR SPRING 9.10 427

COKER 10.00 828

COLONIAL HILLS 8.80 747

DELLVIEW 10.00 491

EAST TERRELL HILLS 13.10 641

EL DORADO 11.00 672

ENCINO PARK 12.00 631

FOX RUN 11.70 803

HARDY OAK 19.00 750

HARMONY HILLS 10.00 650

HIDDEN FOREST 13.20 537

HUEBNER 14.40 754

JACKSON-KELLER 10.00 830

LARKSPUR 10.00 813

LAS LOMAS 34.83 549

LONGS CREEK 13.50 647

MONTGOMERY 10.00 590

NORTHERN HILLS 11.00 611

NORTHWOOD 10.00 467

OAK GROVE 13.50 402

OAK MEADOW 11.40 437

OLMOS 10.90 651

REDLAND OAKS 10.00 440

REGENCY PLACE 8.00 613

RIDGEVIEW 10.00 642

ROAN FOREST 32.80 669

ROYAL RIDGE 10.60 644

SERNA 12.30 536

STAHL 10.00 861

STEUBING RANCH 20.34 889

STONE OAK 17.80 608

THOUSAND OAKS 11.10 734

TUSCANY HEIGHTS 24.51 857

VINEYARD RANCH 22.47 700

WALZEM 11.00 665

WEST AVENUE 6.60 354

WETMORE 15.70 721

WILDERNESS OAK 16.18 726

WILSHIRE 8.00 317

WINDCREST 10.00 655

WOODSTONE 10.00 828

ALTERNATIVE ELEMENTARY (1) 7

OTHER PROGRAMS 20

TOTAL 64,308

________________(1) Sites without listed acreage share sites with other facilities.(2) Average daily attendance for the 2013-2014 school year.

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District Attendance

Average daily attendance in the District in recent years has been as follows:

1993/94 ...................................................................... 40,255 2004/05 ......................................................................53,8431994/95 ...................................................................... 40,627 2005/06 ......................................................................55,8661995/96 ...................................................................... 41,502 2006/07 ......................................................................57,3071996/97 ...................................................................... 42,262 2007/08 ......................................................................58,2901997/98 ...................................................................... 43,382 2008/09 ......................................................................59,7441998/99 ...................................................................... 44,544 2009/10 ......................................................................61,4801999/00 ...................................................................... 46,160 2010/11 ......................................................................62,2982000/01 ...................................................................... 47,745 2011/12 ......................................................................63,6422001/02 ...................................................................... 49,732 2012/13 ......................................................................63,9352002/03 ...................................................................... 50,890 2013/14 ......................................................................64,3082003/04 ...................................................................... 52,287 2014/15(1) ...................................................................64,286________________(1) Estimated.

The District encompasses approximately 144 square miles in north and northeast Bexar County, Texas (the “County”). TheDistrict was founded in 1949 and has been operating as an independent school district since 1955. The District is now in the topten largest districts in the State of Texas with an enrollment of 68,200 for the 2014-2015 school year. The District is an urban-suburban community with a household population of over 442,000 and a strong business-commercial-residential base. All gradesand campuses are fully accredited by the Texas Education Agency (“TEA”). The District tailors its instructional programs toenrich and expand student learning and exposure to the tenets of responsible citizenship. The Board of Trustees sets the tone forinstruction and service to students and patrons with its mission statement and goals.

The District’s achievements continue to be heralded in local, state and national publications. The success of the District isevidenced in high standardized test scores, Advanced Placement Program participation and abundant scholarships and awardspresented to the District’s students. The District enjoys a well-deserved reputation for academic and financial excellence andcontinues to receive numerous accolades for the performance of its students. Most recently, the District has been recognized forthe following:

The District has received a rating of Superior on the School FIRST (Financial Integrity Rating System of Texas)financial accountability system every year since the rating system was established during the 77th legislature in 2001.

Academic accountability ratings issued by the TEA for 2013-2014 show that the District Met Standard on each of thefour Performance Indices – Student Achievement, Student Progress, Closing Performance Gaps and PostsecondaryReadiness. The District consistently exceeds State averages in almost every standardized testing score, as well as forattendance rates, retention rates, graduation rates, Advanced Placement rates, Advanced Placement Scores, SAT scoresand ACT scores.

The National Merit Scholarship Corporation notified the District that 16 were chosen as National Merit Semifinalistsfor 2013-2014. Of these students, 15 became National Merit Scholars. Additionally, the District had 57 CommendedScholars, 69 National Hispanic Scholars, and two National Achievement Scholars.

In 2013-2014, the District had 4,426 graduates who received close to $79 million in scholarship offers. The Districtalso had nine military academy placements. Nearly 95% of the 2014 graduating class was college bound to a two- orfour-year institution or a technical/trade school. The District had 763 Summa Cum Laude graduates who wererecognized for having a perfect average of 100.

BEXAR COUNTY

The County was organized in 1836 as one of the original counties of the Republic of Texas and is now the fourth most populous ofthe 254 counties in the State. The County has an area of approximately 1,248 square miles and is located in south central Texas andis a component of the San Antonio-New Braunfels MSA. The principal city within the County is San Antonio, which is the countyseat.

The diversified economic base of the County is composed of financial services, healthcare, agriculture, manufacturing, construction,military, and tourism. The County’s proximity to Mexico provides favorable conditions for international business relations with thecountry in the areas of agriculture, tourism, manufacturing, wholesale and retail markets. Industry ranges from the manufacturing ofapparel, food products, aircraft, electronics and pharmaceuticals to iron and steel products and oil well equipment. San Antonio is amajor insurance center in the southwest, serving as the headquarters for several insurance companies, including United ServicesAutomobile Association.

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EMPLOYMENT AND WAGES BY INDUSTRY - BEXAR COUNTY(1)(2)

2014 2013 2012 2011 2010

Natural Resources and Mining 5,575 4,040 3,030 2,662 3,310

Construction 33,897 32,070 32,225 33,341 36,092

Manufacturing 33,977 35,169 35,309 34,682 33,369

Trade, Transportation & Utilities 130,343 123,986 120,437 117,649 116,442

Information 19,459 19,294 18,620 17,513 17,417

Financial Activities 68,944 67,368 64,176 62,205 60,574

Professional and Business Services 103,681 101,052 95,896 94,496 94,911

Education and Health Services 121,284 117,635 112,857 109,612 105,592

Leisure and Hospitality 99,966 97,035 92,418 88,825 85,112

Other Services 22,319 21,961 23,272 22,385 22,149

Unclassified 150 239 154 189 235

State Government 17,244 18,467 18,301 18,213 17,976

Local Government 87,458 85,771 85,259 87,466 87,576

Total Employment 744,297 724,087 701,954 689,242 680,757

Total Wages 8,680,221,858$ 8,193,746,715$ 7,896,155,727$ 7,374,532,109$ 6,803,477,510$

First Quarter

________________(1) Source: Texas Workforce Commission.(2) Statistics do not include Federal employees or their wages.

LABOR FORCE STATISTICS FOR BEXAR COUNTY(1)

2014(2)

2013(3)

2012(3)

2011(3)

2010(3)

Civilian Labor Force 842,928 831,841 819,930 811,045 797,613

Total Employed 799,319 781,721 765,526 749,614 737,650

Total Unemployed 43,609 50,120 54,404 61,431 59,963

Unemployment Rate 5.2% 6.0% 6.6% 7.6% 7.5%

% Unemployed (Texas) 5.5% 6.3% 6.8% 7.9% 8.2%

% Unemployed (U.S.) 6.3% 7.4% 8.1% 8.9% 9.6%________________(1) Source: Texas Employment Commission.(2) As of August 2014.(3) Average annual statistics.

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APPENDIX B

EXCERPTS FROM THE

NORTH EAST INDEPENDENT SCHOOL DISTRICT

COMPREHENSIVE ANNUAL FINANCIAL REPORT

For the Year Ended June 30, 2014

The information contained in this Appendix consists of excerpts from the North EastIndependent School District Comprehensive Annual Financial Report for the Year EndedJune 30, 2014, and is not intended to be a complete statement of the District’s financialcondition. Reference is made to the complete report for further information.

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APPENDIX C

FORM OF BOND COUNSEL’S OPINION

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40939776.3

Fulbright & Jaworski LLP 300 Convent Street, Suite 2100 San Antonio, Texas 78205-3792 United States

Tel +1 210 224 5575 Fax +1 210 270 7205 nortonrosefulbright.com

Fulbright & Jaworski LLP is a limited liability partnership registered under the laws of Texas.

Fulbright & Jaworski LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz, Inc.), each of which is a separate legal entity, are members of Norton Rose Fulbright Verein, a Swiss Verein. Details of each entity, with certain regulatory information, are at nortonrosefulbright.com. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

FINAL

IN REGARD to the authorization and issuance of the “North East Independent School District Unlimited Tax Refunding Bonds, Series 2014B” (the Bonds), dated November 1, 2014, in the aggregate original principal amount of $69,925,000.00 we have reviewed the legality and validity of the issuance thereof by the North East Independent School District (the Issuer). The Bonds are issuable in fully registered form only, in denominations of $5,000 or any integral multiple thereof (within a Stated Maturity). The Bonds have Stated Maturities of February 1 in each of the years 2015 through 2016 and February 1, 2020 through 2035, unless redeemed prior to Stated Maturity in accordance with the terms on the face of the Bonds. Interest on the Bonds accrues from the dates, at the rates, in the manner, and is payable on the dates, all as provided in the order (the Order) authorizing the issuance of the Bonds. Capitalized terms used herein without definition shall have the meanings ascribed thereto in the Order.

WE HAVE SERVED AS BOND COUNSEL for the Issuer solely to pass upon the legality and validity of the issuance of the Bonds under the laws of the State of Texas, the defeasance and discharge of the Issuer’s obligations being refunded by the Bonds, and with respect to the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes and for no other purpose. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Bonds. We express no opinion and make no comment with respect to the sufficiency of the security for or the marketability of the Bonds. Our role in connection with the Issuer’s Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein.

WE HAVE EXAMINED the applicable and pertinent laws of the State of Texas and the United States of America. In rendering the opinions herein we rely upon (1) original or certified copies of the proceedings of the Issuer in connection with the issuance of the Bonds, including the Order and the Escrow Deposit Letter (the Escrow Agreement) between the Issuer and BOKF, NA dba Bank of Texas, Austin, Texas (the Escrow Agent), and the certification by First Southwest Company, as the co-financial advisor to the Issuer, concerning the sufficiency of cash and investments deposited with the Escrow Agent (the Sufficiency Certification); (2) customary certifications and opinions of officials of the Issuer; (3) certificates executed by officers of the Issuer relating to the expected use and investment of proceeds of the Bonds and certain other funds of the Issuer, and to certain other facts solely within the knowledge and control of the Issuer; and (4) such other documentation, including an examination of the Bond executed and delivered initially by the Issuer, and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents

Legal Opinion of Fulbright & Jaworski LLP of San Antonio, Texas, a member of Norton Rose Fulbright, in connection with the authorization and issuance of “NORTH EAST INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX REFUNDING BONDS, SERIES 2014B”

40939776.3

submitted to us as certified copies, and the accuracy of the statements and information contained in such certificates. We express no opinion concerning any effect on the following opinions which may result from changes in law effected after the date hereof.

BASED ON OUR EXAMINATION, IT IS OUR OPINION that the Escrow Agreement has been duly authorized, executed, and delivered by the Issuer and, assuming due authorization, execution, and delivery thereof by the Escrow Agent, is a valid and binding obligation, enforceable in accordance with its terms (except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors’ rights or the exercise of judicial discretion in accordance with general principles of equity), and that the outstanding obligations refunded, discharged, paid, and retired with the proceeds of the Bonds have been defeased and are regarded as being outstanding only for the purpose of receiving payment from the funds held in trust with the Escrow Agent, pursuant to the Escrow Agreement, the order authorizing their issuance, and in accordance with the provisions of Chapter 1207, as amended, Texas Government Code. In rendering this opinion, we have relied upon the Sufficiency Certification concerning the sufficiency of cash deposited with the Escrow Agent for the purposes of paying the outstanding obligations refunded and to be retired with the proceeds of the Bonds and the interest thereon.

BASED ON OUR EXAMINATION, IT IS FURTHER OUR OPINION that the Bonds have been duly authorized and issued in conformity with the laws of the State of Texas now in force and that the Bonds are valid and legally binding obligations of the Issuer enforceable in accordance with the terms and conditions described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors’ rights or the exercise of judicial discretion in accordance with general principles of equity. The Bonds are payable from the proceeds of an ad valorem tax levied, without legal limit as to rate or amount, upon all taxable property in the Issuer.

IT IS FURTHER OUR OPINION THAT, assuming continuing compliance after the date hereof by the Issuer with the provisions of the Order and in reliance upon the Sufficiency Certification concerning the sufficiency of cash and investments deposited with the Escrow Agent pursuant to the Escrow Agreement and upon the representations and certifications of the Issuer made in a certificate of even date herewith pertaining to the use, expenditure, and investment of the proceeds of the Bonds under existing statutes, regulations, published rulings, and court decisions (1) interest on the Bonds will be excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof (the Code), of the owners thereof for federal income tax purposes, pursuant to section 103 of the Code, and (2) interest on the Bonds will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations.

WE CALL YOUR ATTENTION TO THE FACT THAT, with respect to our opinion in clause (2) above, interest on all tax-exempt obligations, such as the Bonds, owned by a corporation will be included in such corporation’s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a mutual

Legal Opinion of Fulbright & Jaworski LLP of San Antonio, Texas, a member of Norton Rose Fulbright, in connection with the authorization and issuance of “NORTH EAST INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX REFUNDING BONDS, SERIES 2014B”

40939776.3

fund, a financial asset securitization investment trust, a real estate mortgage investment conduit, or a real estate investment trust. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed.

WE EXPRESS NO OTHER OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of an interest in a financial asset securitization investment trust, individual recipients of Social Security or Railroad Retirement Benefits, individuals otherwise qualifying for the earned income credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations.

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

Fulbright & Jaworski LLP

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