The Unique Alternative to the Big Four ® PROPOSITION 39 BONDS LEGAL, AUDIT and CBOC REQUIREMENTS

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 1 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements History  November 7, 2000 Voters Approved Proposition 39 “Smaller Classes, Safer Schools and Financial Accountability Act” Amended portions of the California Constitution (Article 13A) Added Education Code Sections – – “Strict Accountability in Local School Construction Bonds Act of 2000”

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 2 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Constitution – Article 13A  Bond proceeds can only be used for  Construction  Reconstruction  Rehabilitation  Replacement of facilities  Acquisition or lease of real property for facilities

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 3 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Constitution – Article 13A  Bond proceeds cannot be used for:  Teacher salaries  Administrator salaries  School operating expenses

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 4 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Constitution – Article 13A  School Board must formulate a projects list  School Board must certify that they have:  Evaluated safety needs  Evaluated class-size reduction needs  Evaluated information technology needs

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 5 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Constitution – Article 13A  School Board must conduct an annual, independent performance audit to ensure that the funds have been expended only on the specific projects listed

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 6 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Constitution – Article 13A  School Board must conduct an annual, independent financial audit of the proceeds from the sale of the bonds until all of those proceeds have been expended for the school facilities projects

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 7 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Requires establishment of a Citizens’ Oversight Committee  Requires annual independent audits “to assure that funds are spent only on school and classroom improvements and for no other purposes”

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 8 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Establishes purpose of the Citizens’ Oversight Committee, which shall:  Inform the public concerning the expenditure of bond revenues  Actively review and report on the proper expenditure of funds for school construction  Advise the public about compliance with Article 13A of the State Constitution

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 9 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Establishes purpose of the Citizens’ Oversight Committee, which shall (continued):  Provide oversight for:  Ensuring that bond revenues are expended only for the purposes described in paragraph (3) of subdivision (b) of Section 1 of Article 13A; and  Ensuring that no funds are used for teacher or administrative salaries or other school operating expenses

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 10 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Citizens’ Oversight Committee may do the following:  Receive and review copies of the annual independent financial and performance audits  Inspect school facilities to ensure bond funds are spent in accordance with Article 13A  Receive and review copies of deferred maintenance proposals or plans  Review efforts by the District to maximize bond revenues by implementing cost-saving measures:  Reduce costs of professional fees  Reduce costs of site preparation  Joint use of core facilities  Incorporating efficiencies in schoolsite design  Cost-effective and reusable facility plans

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 11 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Citizens’ Oversight Committee may do the following:  Receive and review copies of the annual independent financial and performance audits  Education Code Section has been added to require the annual financial and performance audits be submitted to the Citizens’ Oversight Committee by March 31 of each year

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 12 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  School District Governing Board shall provide to the citizen’s oversight committee (without expending bond funds):  Necessary technical assistance  Administrative assistance  Citizen’s Oversight Committee:  Meetings open to the public; properly noticed  Report to the Governing Board at least once per year  Minutes of meetings are public records  Minutes of meetings shall be available on an Internet website maintained by the District

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 13 Audit | Tax | Advisory | Risk | Performance Proposition 39 Requirements  California Education Code Section  Describes the composition of the Citizens’ Oversight Committee  Minimum of seven members, of which five must be: 1.Active Business member 2.Active Senior Citizens’ Organization 3.Active Bona Fide Taxpayers’ Organization 4.Parent or Guardian of a child enrolled in the District 5.Parent or Guardian of a child enrolled in the District, active in Parent-Teacher Organization  District Employees, Officials, Vendors, Contractors and Consultants are prohibited from serving on the Committee

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 14 Audit | Tax | Advisory | Risk | Performance SCUSD CBOC Bylaws (1/16/2007)  Establishes purpose of the Citizens’ Oversight Committee, which shall (Section 3):  Inform the public concerning the District’s expenditure of bond proceeds (3.1)  Review expenditure reports produced by the District to ensure (3.2):  Bond proceeds are expended only for the purposed set forth in the ballot measure  No bond proceeds are used for any teacher or administrative salaries or other operating expenses

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 15 Audit | Tax | Advisory | Risk | Performance SCUSD CBOC Bylaws (1/16/2007)  Establishes purpose of the Citizens’ Oversight Committee, which shall (Section 3)(continued):  Present to the Board, in public session an annual written report which shall contain the following (3.3):  A statement whether the District is in compliance with the requirements of Article XIIIA, Section 1(b)(3) of the California Constitution; and  A summary of the Committee’s proceedings and activities for the preceding year

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 16 Audit | Tax | Advisory | Risk | Performance SCUSD CBOC Bylaws (1/16/2007)  Citizens’ Oversight Committee may do the following (Section 4.1):  Receive and review copies of the annual independent financial and performance audits  Inspect some of the facilities and grounds for which bond proceeds have been or will be expended  Receive and review copies of deferred maintenance proposals or plans developed by the District  Provide input and advise to District staff and the Board regarding the selection of an independent auditor for performance audit of bond funds  Make requests for copies or inspection of District records in writing to the Chief Financial Officer

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 17 Audit | Tax | Advisory | Risk | Performance SCUSD CBOC Bylaws (1/16/2007)  Citizens’ Oversight Committee is not empowered to do any of the following (Section 3.4):  Approval of construction contracts  Approval of construction change orders  Appropriation of construction funds  Handling of legal matters  Approval of construction plans and schedules  Approval of Deferred Maintenance Plans  Approval for sale of bonds

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 18 Audit | Tax | Advisory | Risk | Performance SCUSD CBOC Bylaws (1/16/2007)  Citizens’ Oversight Committee is not responsible for any of the following (Section 3.5):  Projects financed through the State of California, developer fees, COPs, lease/revenue bonds or sale of surplus property (all sources not involving Proposition 39 bond proceeds)  Establishment of priorities and order of construction for bond projects  Selection of architects, engineers, soils engineers, construction managers, project managers, CEQA consultants and other professional service firms required to complete the bond projects  Approval of design for bond projects  Selection of independent audit firm, performance audit consultants and other consultants necessary to support the activity of the committee  Approval of an annual budget for the Committee necessary for the committee to carry out its activities

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 19 Audit | Tax | Advisory | Risk | Performance Performance Audit Standards  Performance Audit Standards  Described in Generally Accepted Government Auditing Standards (GAGAS), issued by the Comptroller General of the United States (the “Yellow Book”)  Did not exist in GAGAS in 2000 when Proposition 39 was passed  Added to GAGAS in 2003; further enhanced in 2007

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 20 Audit | Tax | Advisory | Risk | Performance Performance Audit Standards  Recent Developments:  SB 1473 (EC 15286)  Introduced 2/19/10  Amended 3/25/10 and 4/12/10  First hearing 4/14/10  Passed Assembly 8/16/10; Passed Senate 8/26/10  Signed by Governor 9/22/10  Became effective January 1, 2011  EC clarifies Education Code to state that the Performance Audit required under Proposition 39 must be done in accordance with Generally Accepted Governmental Auditing Standards

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 21 Audit | Tax | Advisory | Risk | Performance Performance Audit Standards  GAGAS General Standards  Independence  Professional Judgment  Competence  Continuing Professional Education  Quality Control

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 22 Audit | Tax | Advisory | Risk | Performance Performance Audit Standards  GAGAS Fieldwork Standards  Reasonable Assurance  Significance  Audit Risk  Planning  Supervision and Review  Sufficient, Appropriate Evidence  Audit Documentation

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 23 Audit | Tax | Advisory | Risk | Performance Performance Audit Standards  GAGAS Reporting Standards  Reporting  Report Contents

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 24 Audit | Tax | Advisory | Risk | Performance Performance Audits  What will the Auditor look for?  Internal Controls  Documentation of the control environment  Verification that the controls work  Compliance with laws and regulations  Compliance with District controls

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 25 Audit | Tax | Advisory | Risk | Performance Performance Audits  What will the Auditor look for?  Bond Expenditures  Expenditure details agree with District’s financial statements / General Ledger  Sample of expenditures  District procedures are followed  Compliance with Bond provisions  Compliance with project list  School / classroom improvements; not teacher or administrator salaries

The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 26 Audit | Tax | Advisory | Risk | Performance Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2012 Crowe Horwath LLP Performance Audits  What will the Auditor look for?  Oversight Committee  Relationship to the Governing Board  Compliance with oversight responsibilities  Reports to the Board  Committee meeting minutes  Accessibility of website information