Keystone Central School District

Financial Statements and Supplementary Information

Table of Contents Page Independent Auditors' Report Management's Discussion and Analysis 1 3 Basic Financial Statements Government-Wide Financial Statements Statement of Net Assets Statement of Activities 12 13 Fund Financial Statements: Balance Sheet - Governmental Funds Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds Reconciliation of the Statement of Revenues,. Expenditures and Change in Fund Balances of Governmental Funds to the Statement of Activities Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund Balance Sheet - Proprietary Fund Statement of Revenues, Expenses and Change in Fund Net Assets - Proprietary Fund Statement of Cash Flows - Proprietary Fund Statement of Fiduciary Net Assets - Fiduciary Funds Notes to Financial Statements 14 15 16 17 18 19 20 21 22 23

Table of Contents Required Supplementary Information Schedule of Funding Progress - Other Postemployment Benefits 44 Supplementary Information Schedule of Expenditures of Federal Awards 45 Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed inaccordance With Government Auditing Standards. 47 Independent Auditors' report on Compliance With Requirements That Could. Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 49 Schedule of Findings and Questioned Costs 51 Schedule of Prior Audit Findings 54

'P'ParenteBeard Independent Auditors' Report Board of Directors Keystone Central School District We have audited the accompanying financial statements of the governmental activities, the business-type activity, each major fund and the aggregate remaining fund information of Keystone Central School District (the "District") as of and for the year ended, which collectively comprise the District's basic financial statements',as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activity, each major fund and the aggregate remaining fund information of Keystone Central School District as of, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. As disclosed in Notes 1 and 19 to the financial statements, the District adopted the provisions of Governmental Accounting Standards Board ("GASB") Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions in 2011. The District restated the beginning fund balances of its Capital Reserve and Capital Projects Funds. In accordance with Government Auditing Standards, we have also issued our report dated December 27, 2011 on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1

The Management's Discussion and Analysis on pages 3 through 11 and Schedule of Funding Progress - Other Postemployment Benefits on page 44 are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of. the required supplementary information. However, we did not audit this information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District's basic financial statements. The accompanying schedule of expenditures of federal awards on pages 45 and 46 is presented for purposes of additional analysis as required by OMB Circul.ar A-133, Audits of States, Local Governments and Non-Profit Organizations, and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.. Williamsport, Pennsylvania December 27,2011 2

Management's Discussion and Analysis (Unaudited) This Management's Discussion and Analysis (MD&A) is intended to provide a narrative overview and analysis of the financial activities of the Keystone Central School District (the "District") for the year ended. The District's financial performance is discussed and analyzed within the context of the financial statements and the disclosures that follow. This discussion focuses on the District's financial performance as a whole; readers should also review the basic financial statements and the notes thereto to enhance their understanding of the District's financial performance. Financial Highlights Total net assets of the District increased $5,012,452 in 2011. Net assets of governmental activities increased $4,954,084, a 21.2% increase over 2010. Net assets of the business-type activity increased $58,368, a 13.9% increase over 2010. The District had $61,415,045 in expenses related to governmental activities in 2011; only $23,029,211 of these expenses were offset by program specific charges for services, grants or contributions. General revenues (primarily taxes and state subsidies) of $43,339,918 were adequate to provide for these programs. In the District's business-type activity, net assets increased by $58,368 as a result of the net income of the food service operation. As of, $12,525,296 of unrestricted net assets within its governmental activities was available to meet the District's ongoing obligations to employees and creditors. This amount indicates that the District has a solid financial condition. As of, $3,040,000 of General Fund unreserved fund balance has been committed for the purpose of mitigating and financially planning for imminent increases in the Pennsylvania School Employees Retirement System in the future and, $4,048,988 of General Fund fund balance has been committed for Capital Projects throughout the district, including the upgrade of the District wide telephone system. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the District's basic financial statements. The District's basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. Government-Wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the District's finances, in a manner similar to a private-sector business. These statements are prepared using the accrual basis of accounting. The focus of these statements is long-term. The statement of net assets presents information on all of the District's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the District is improving or deteriorating. 3

Management's Discussion and Analysis (Unaudited) The statement of activities presents information showing how the District's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused compensated absences). Both of the governmental-wide financial statements distinguish functions of the District that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a portion of their costs through user fees and charges (business-type activities). The governmental activities include all of the District's instructional programs and support services except for its food service operation, which is considered a business-type activity. The government-wide financial statements can be found on pages 12 through 13 of this report. Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The focus of fund financial statements is short-term. Fund financial statements are prepared using the modified accrual basis of accounting. The District uses several different types of funds but the two most significant types are the governmental and proprietary fund types. Governmental Funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the District's near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the District's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The District maintains several individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the District's major fund, which is the General Fund. The District's other funds, Capital Projects, Tax Office, and Debt Service, are reported under the caption "Other". 4

Management's Discussion and Analysis (Unaudited) The District adopts an annual budget for its General Fund. A budgetary comparison statement for the General Fund has been provided on page 18 of this report to demonstrate compliance with this budget. The basic governmental fund financial statements (including certain statements reconciling the balance sheet of governmental funds to the statement of net assets of the governmentwide statements, and the statement of revenues, expenditures and change in fund balance of the governmental funds to the statement of activities of the government-wide statements) can be found on pages 14 through 17 of this report. Proprietary Funds The District accounts for its food service operation in a proprietary fund, which reports the same functions presented as business-type activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The basic proprietary fund financial statements can be found on pages 19 through 21 of this report. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 23 through 43 of this report. General Fund Budgetary Highlights The District prepares a budget each year for its General Fund according to Pennsylvania law. The budget complied with all applicable state laws and financial policies approved by the School Board of Directors. The General Fund's originally approved budget for 2011 included $65,872,581 of revenues and $65,339,360 of expenditures. The final actual revenues received for 2011 were $65,884,750 or 0.02% higher than the original budget. The final expenditure budget was under-spent by approximately $3,650,000. A majority of this was due to budgeting PSERS at the Certified rate of 8.22% plus an additional 2% for planned PSERS increases in the future and the Governor revising the rate after the budget was passed to only 5.64%. This change netted the District over $1.6 million dollars to commit to future PSERS increases. In addition to PSERS the Districts' self-funded health insurance plan implemented in the 2009-2010 year realized a savings of approximately $600,000 compared to budgeted projections provided by the actuary. Contracted services, attorney fees, and advertising were among several accounts under spent. When the Governor released his 2011-2012 budget in March with drastic cuts to educational funding the District took immediate action to restrict spending, which saved dollars but reduced services, equipment, and supply needs. 5

Management's Discussion and Analysis (Unaudited) Entity-Wide Financial Analysis The District's condensed government-wide financial statements are presented comparatively as follows: Condensed Statement of Net Assets (In Thousands). Governmental Activities Business-Type Activity Total 2011 2010 2011 2010 2011 2010 Current and other assets $ 22,333 $ 19,465 $ 571 $ 498 $ 22,904 $ 19,963 Capital assets 48,731 50,575 22 32 48,753 50,607 Total $ 71,064 $ 70,040 $ 593 $ 530 $ 71,657 $ 70,570 Current liabilities $ 5,648 $ 6,087 $ 38 $ 38 $ 5,686 $ 6,125 Long-term liabilities: Due within one year 3,815 3,640 3,815 3,640 Due after one year 33,261 36,926 76 71 33,337 36,997 Total liabilities 42,724 46,653 114 109 42,838 46,762 Net assets: Invested in capital assets, net of related debt 15,815 14,745 22 32 15,837 14,777 Unrestricted 12,525 8,642 457 389 12,982 9,031 Total net assets 28,340 23,387 479 421 28,819 23,808 Total $ 71,064 $ 70,040 $ 593 $ 530 $ 71,657 $ 70,570 :! 6

Management's Discussion and Analysis (Unaudited) Condensed Statement of Activities (In Thousands) Governmental Activities Business-Type Activity 2011 2010 2011 2010 Total 2011 2010 Program revenues: Charges for services $ 283 $ 258 $ 997 $ 930 $ Operating grants and contributions 22,701 21,305 Capital grants and contributions 48 123 General revenues: Taxes levied for general purposes, net 19,290 18,326 Grants, subsidies and contributions not restricted 17,469 18,326 1,240 1,233 Other 6,581 6,447 Total revenues 66,372 64,785 2,237 2,163 Program expenses: Instruction 37,271 39,547 Instructional student support 4,276 4,760 Administration and financial support services 5,409 4,671 Operation and maintenance of plant services 4,731 4,447 Pupil transportation 3,399 3,345 Student activities 1,188 1,150 Community services 1,366 742 Interest on long-term debt 979 1,111 Unallocated depreciation 2,799 2,875 Food service 2,179 2,052 Total expenses 61,418 62,648 2,179 2,052 Special item, Change in accounting estimate - capital assets (2,418) 1,280 $ 1,188 22,701 21,305 48 123 19,290 18,326 18,709 19,559 6,581 6,447 68,609 66,948 37,271 39,547 4,276 4,760 5,409 4,671 4,731 4,447 3,399 3,345 1,188 1,150 1,366 742 979 1,111 2,799 2,875 2,179 2,052 63,597 64,700 (2,418) Change in net assets 4,954 (281) 58 111 Net assets, beginning 23,387 23,668 421 310 Net assets, ending $ 28,341 $ 23,387 $ 479 $ 421 $ 5,012 (170) 23,808 23,978 28,820 $ 23,808 7

Management's Discussion and Analysis (Unaudited) Governmental Activities The increase of $4,954,000 in net assets of governmental activities was due to changes in expenditure requirements, i.e. PSERS, a successful year with our health insurance selffunding plan, and other budget variances identified above. Business-Type Activity The District's food service operation net assets increased by approximately $58,000 in 2011, primarily due to increases in state and federal subsidies.. Financial Analysis of the Major Funds General Fund The following represents a summary of General Fund revenue, by source, along with changes from 2010. 2011 2010 Increase % Amount Amount (Decrease) Change Local sources $ 26,794,519 $ 25,453,473 $ 1,341,046 5.3 % State sources 31,515,950 31,400,895 115,055 0.3 % Federal sources 7,571,281 6,486,956 1,084,325 16.7 % Total $ 65,881,750 $ 63,341,324 $ 2,540,426 4.0 % Local Sources The $1,341,046 increase in local revenue can be mostly attributed to the real estate millage increase but also includes revenues from the Athletic Fund now reported in the General Fund of $123,000, an increase in interest earnings of $70,000, and additional Earned Income Tax receipts of $96,000. State Sources Despite the numerous reductions in State subsidy revenues, State revenues increased by $115,055. Such reductions in State funding included Basic Education funding of $680,000, Vocational Education funding of $123,000, Special Education funding of $20,000, Charter School reimbursement reduction of $50,000, and the reduction of $55,000 for our Accountability Block Grant. The largest offset to these reductions came in the way of one-time increases in debt subsidy reimbursements in the amount of $736,000. Prior year payment reimbursements were unable to be collected until PLANCON's were completed. The 2011-2012 year and future years will be more in line with the 2009-2010 years' reimbursements. Additional PSERS subsidy reimbursement in the amount of $137,000 was received, however, an increase in PSERS expenditures is tied to the increase in reimbursement. 8

Management's Discussion and Analysis (Unaudited) Federal Sources The $1,084,325 increase in Federal sources is a net result of the reclassifying of $1,375,000 Education Jobs Stimulus dollars from the State Basic Education Subsidy to a Federal subsidy, the addition of over $500,000 in 21 st Century funds, the reduction of over $560,000 in regular Title Grants, and $260,000 in ARRA reductions from the previous year. General Fund expenditures and other financing uses (transfers out) totaled $62,420,984, which represents an increase of $122,754 or 0.2% over 2009-2010. The table below shows a summary of General Fund expenditures, by function, for the years ended and 2010. 2011 2010 Increase % Amount Amount (Decrease) Change Instruction $ 37,120,736 $ 38,812,016 $ (1,691,280) 4.4 % Support services 17,378,664 16,818,568 560,096 3.3 % Non-instructional services 2,551,375 853,676 1,697,699 198.9 % Capital outlay 43,371 (43,371) 100.0 % Debt service/other financing uses 5,364,915 5,770,599 (405,684) 7.0 % Instruction Total $ 62,415,690 $ 62,298,230 $ 117,460 0.2 % Decreases of $1,691,280 in instructional expenses can be greatly attributed to a reduction in the number of unfilled professional teacher positions created through attrition. Support Services Increases in support services expenses of $560,096 were primarily due to an increase in contractual salaries, PSERS, and health insurance costs. Non-Instructional Services Increases in non-instructional expenditures of $1,697,699 were due to increased salaries, employer paid taxes, employee benefits, and supplies paid for by additional grants from 21 st Century. Other Financing Uses A net decrease in debt service and other financing uses of $405,684 was primarily due to the inclusion of the athletic operations within the General Fund this year, per GASB 54, versus the past practice of accounting for these funds separately and transferring funds from the General Fund to the Athletic Fund. 9

Management's Discussion and Analysis (Unaudited) Other Governmental Funds Capital Projects Fund The District's Capital Project Fund accounts for financial resources used to acquire or construct property and equipment. The Capital Projects Fund balance was $1,868,252 at, which consists of money to be used throughout the District for capital improvements and equipment and funds to complete the Central Mountain Stadium project. Debt Service Fund Tax Office The District's Debt Service Fund accounts for the proceeds of refunding bond issues and the proceeds from the sale of District land and buildings. The amount paid on existing debt (from the District's General Fund) included $3,639,613 of principal and $997,652 of interest. The District did not restructure any existing bonds or issue any new bonds in 2011. The Debt Service fund had no fund balance at. Keystone Central maintains a tax office for the purpose of collecting and distributing Earned Income and Business Privilege Taxes for the District as well as local municipalities. The cost of operating the office is prorated, based on taxes collected, to each governing body. Capital Assets The School District's investment in capital assets for its governmental and business-type activity as of is summarized below. Governmental Business-Type Activities Activity Totals Land $ 1,760,087 $ $ 1,760,087 Land improvements 5,544,808 5,544,808 Buildings and improvements 70,309,177 70,309,177 Furniture and equipment 12,442,236 112,190 12,554,426 Total 90,056,308 112,190 90,168,498 Less accumulated depreciation (41,325,040) (89,628) (41,414,668) Long Term Debt Net $ 48,731,268 $ 22,562 $ 48,753,830 At, the District's long-term debt of $34,494,613 (principal only) is below its legal limit of $ 142,255,639. $3,814,613 of this debt principal is scheduled for payment in 2011-2012. Additional information on the District's long-term debt can be found in Note 6 on pages 33-35. The District's bonds have a favorable "A+" rating from Standard and Poor's Rating Group. 10

Management's Discussion and Analysis (Unaudited) Economic Condition and Outlook Commonwealth of Pennsylvania (i.e., "State") funding continues to decrease and is predominantly due to a reduction of the Basic Education Subsidy. The State chose to use their Federal Stimulus funds to offset their contribution to our educational programs. The decrease in State funding is therefore seen as an increase in Federal funding for the year. Federal funding increased reflecting this change in funding as well as the Federal Stimulus funds the School. District received directly. Subsidy funding will continue to be an issue for all Pennsylvania school districts. Unfortunately, local school boards will be forced to make difficult decisions when trying to balance program offerings for students with local real estate tax increases in the community. The District's average daily membership decreased by 1.2% from 2010 to 2011. Local unemployment statistics are at 6.9% (September 2011/not seasonally adjusted) down from 7.8% a year ago. The Marcellus Shale natural gas industry has been a key factor in improving the areas job market. Other industries have also improved, and in most cases because of the Marcellus Shale industry, such as the manufacturing, trade, transportation, restaurant, and housing/hotel industry. The District's continuing proactive approach in utilizing energy conservation practices and shopping for natural gas and electricity needs has enabled us to significantly reduce expenditures for these major utilities. The District listed the McGhee Elementary School in Lock Haven for sale and will close on the property on November 14, 2011. The board is currently reviewing a plan to close an elementary school and relocate administrative departments to the Central Mountain High School as a means to reduce expenditures. The District continues to review alternatives that will enable the District to provide a quality education in a safe environment while being sensitive to community needs and limitations. Requests for Information Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Office of the Business Manager, Keystone Central School District, 110 East Bald Eagle Street, Lock Haven, Pennsylvania, 17745. 11

Statement of Net Assets c Governmental Business-Type Activities Activity Total Assets Current Assets Cash and cash equivalents $ 15,423,406 $ 610,313 $ 16,033,719 Internal balances 154,433 (154,433) Due from Agency Fund, net 6,881 6,881 Taxes receivable, net 1,760,503 1,760,503 Due from other governments 2,982,378 2,982,378 Other receivables 71,083 33,800 104,883 Inventories 84,772 81,226 165,998 Prepaid expenses 270,839 270,839 Total current assets 20,754,295 570,906 21,325,201 Capital Assets 48,731,268 22,562 48,753,830 Deferred Charges 847,688 847,688 Assets Held for Capital Projects 731,138 731,138 Total assets $ 71,064,389 $ 593,468 $ 71,657,857 Liabilities and Net Assets Liabilities Current liabilities: Current maturities of long-term debt $ 3,814,613 $ $ 3,814,613 Accounts payable 959,957 71 960,028 Accrued salaries and benefits 3,333,065 2,965 3,336,030 Payroll deductions and withholdings 806,761 806,761 Accrued interest payable 203,288 203,288 Deferred revenue 109,417 35,622 145,039 Other current liabilities 235,812 235,812 Total current liabilities 9,462,913 38,658 9,501,571 Noncurrent liabilities: Long-term debt 30,680,000 30,680,000 Compensated absences 787,238 75,675 862,913 Other postemployment benefits 1,793,461 1,793,461 Total noncurrent liabilities 33,260,699 75,675 33,336,374 Total liabilities 42,723,612 114,333 42,837,945 Net Assets Invested in capital assets, net of related debt 15,815,481 22,562 15,838,043 Unrestricted 12,525,296 456,573 12,981,869 Total net assets 28,340,777 479,135 28,819,912 Total liabilities and net assets $ 71,064,389 $ 593,468 $ 71,657,857 See notes to financial statements 12

Statement of Activities Year Ended June 3D, 2011 Governmental Activities Instruction Instructional student support Administrative and financial support services Operation and maintenance of plant services Pupil transportation Student activities Community services Interest on bonds payable Unallocated depreciation Business-Type Activity Food service Total governmental activities Total Program Revenues Charges Operating for Grants and _ Expenses Services Contributions $ (37,270,975) $ 131,194 $ 12,563,165 (4,275,755) 3,169,463 (5,408,898) 534,104 (4,731,395) 310,489 (3,399,284) 3,024,435 (1,188,249) 125,165 138,520 (1,366,126) 26,319 1,301,663 (978,852) 1,659,642 (2,798,511) (61,418,045) 282,678 22,701,481 (2,178,893) 996,890 1,239,946 $ (63,596,938) $ 1,279,568 $ 23,941,427 General Revenues Property taxes levied for general purposes, net Other taxes levied Grants, subsidies and contributions not restricted Investment earnings Miscellaneous income Net Assets, Beginning Net Assets, Ending Total general revenues Change in net assets Net (Expense) Revenues and Change in Net Assets Capital Grants and Governmental Business-Type Contributions Activities Activity Total $ $ (24,576,616) $ (24,576,616) (1,106,292) (1,106,292) (4,874,794) (4,874,794) 48,052 (4,372,854) (4,372,854) (374,849) (374,849) (924,564) (924,564) (38,144) (38,144) 680,790 680,790 (2,798,511) (2,798,511 ) 48,052 (38,385,834) (38,385,834) $ 57,943 57,943 $ 48,052 (38,385,834) 57,943 (38,327,891) 19,289,479 19,289,479 6,169,826 6,169,826 17,469,041 17,469,041 156,158 425 156,583 255,414 255,414 43,339,918 425 43,340,343 4,954,084 58,368 5,012,452 23,386,693 420,767 23,807,460 $ 28,340,777 $ 479,135 $ 28,819,912 See notes to financial statements 13

Balance Sheet - Governmental Funds Major Fund General Other Totals Assets Cash and cash equivalents Taxes receivable Due from other funds Due from other governments Other receivables Inventories Prepaid expenses Total assets $ 14,705,971 1,760,503 257,697 2,933,748 71,083 84,772 270,839 $ 20,084,613 $ 1,448,573 $ 16,154,544 0 1,760,503 736,372 994,069 3,747. 2,937,495 71,083 84,772 270,839 $ 2,188,692 $ 22,273,305 Liabilities and Fund Balances Liabilities Accounts payable Due to other funds Accrued salaries and benefits Payroll deductions and withholdings Deferred revenue Other current liabilities $ 787,935 729,300 3,320,340 806,761 1,249,399 203,574 $ 172,022 $ 959,957 103,455 832,755 12,725 3,333,065 806,761 1,249,399 32,238 235,812 Total liabilities 7,097,309 320,440 7,417,749 Fund Balances Nonspendable Committed Assigned Unassigned 355,611 7,088,988 5,542,705 355,611 7,088,988 1,868,252 1,868,252 5,542,705 Total fund balances Total liabilities and fund balances 12,987,304 $ 20,084,613 1,868,252 14,855,556 $ 2,188,692 $ 22,273,305 See notes to financial statements 14

Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Total Fund Balances - Governmental Funds $ 14,855,556 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not reported as assets in governmental funds. The cost of assets is $90,056,308 and the accumulated depreciation is $41,325,040. Property taxes receivable will be collected this year, but are not available soon enough to pay for the current period's expenditures, and therefore are deferred in the funds. Certain expenses incurred in connection with the issuance of long-term debt are expensed in the funds, but are deferred and amortized over the term of the bonds in the entity-wide statements. Long-term liabilities, including bonds payable, are not due and payable in the current period, and therefore are not reported as liabilities in the funds. Long-term liabilities at year end consist of: Bonds payable Accrued interest on bonds Compensated absences Other postemployment benefits Additional state rental subsidy receivable on accrued interest payable. Total Net Assets - Governmental Activities $ (34,494,613) (203,288) (787,238) (1,793,461) 48,731,268 1,139,982 847,688 (37,278,600) 44,883 $ 28,340,777 See notes to financial statements 15

Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds Year Ended Major Fund General Other Totals Revenues Local sources $ 26,797,519 State sources 31,515,950 Federal sources 7,571,281 Total revenues 65,884,750 Expenditures Instruction 37,120,736 Support services 17,378,664 Noninstructional services 2,554,375 Capital outlay Debt service 4,637,265 Total expenditures 61,691,040 Excess (Deficiency) of Revenues Over Expenditures Before Other Financing Sources (Uses) 4,193,710 Other Financing Sources (Uses) Refund of prior year receipts (644) Refund of prior year expenses 2,294 Transfers in Transfers out (729,300} Tqtal other financing sources (uses), net (727,650} Net changes in fund balances 3,466,060 Fund Balances, Beginning As previously reported 9,521,244 Effect of adoption of GASB No. 54 As restated 9,521,244 Fund Balances, Ending $ 12,987,304 $ 514,074 $ 27,311,593 2,052 31,518,002 7,571,281 516,126 66,400,876 37,120,736 335,416 17,714,080 2,554,375 997,354 997,354 4,637,265 1,332,770 63,023,810 (816,644) 3,377,066 (644) 2,294 729,300 729,300 (729,300} 729,300 1,650 (87, 344} 3,378,716. 998,541 10,519,785 957,055 957,055 1,955,596 11,476,840 $ 1,868,252 $ 14,855,556 See notes to financial statements 16

Reconciliation of the Statement of Revenues, Expenditures and Change In Fund Balances of Governmental Funds To the Statement of Activities Year Ended Total Net Change in Fund Balances - Governmental Funds $ 3,378,716 Amounts reported for governmental activities in the statement of activities are different because: Capital outlays are reported in governmental funds as expenditures. However, in the statements of activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which depreciation expense exceeded capital outlays in the period: Capital outlays Depreciation expense $ 955,229 (2,798,511) (1,843,282) Because some property taxes will not be collected for several months after the District's fiscal year ends, they are not considered available revenues in the governmental funds. Deferred tax revenues decreased by this amount this year. (30,396) The issuance of long-term debt (e.g. bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. During the fiscal year ended year ended, the following transactions factor into this reconciliation: Retirement of principal of long-term debt Amortization of issuance costs, premiums, and discounts, net Interest on long-term debt in the statement of activities differs from the amount reported in the governmental funds because interest is recognized as an expenditure in the funds when it is due, and thus requires the use of current financial resources. In the statement of activities, interest expense is recognized as the interest accrues, regardless of when it is due. The additional interest accrued in the statement of activities over the amount due is shown here, net of state subsidy. $ 3,639,613 (61,253) 3,578,360 19,510 Other postemployment benefits payable are considered long-term in nature, and are not reported as liabilities within the funds. Such liabilities are, howev.er, reported within the statement of net assets, and changes in these liabilities are reflected within the statement of activities. This amount represents the change in other postemployment benefits payable for the year ended. (158,249) In the statement of activities, certain operating expenses including compensated absences (vacations and sick days) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used. This amount represents the difference between the amount earned versus the amount used.. Change in Net Assets of Governmental Activities 9,425 $ 4,954,084 See notes to financial statements 17

Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund Year Ended Original Budget Revenues Local sources $ 26,690,473 $ State sources 32,661,879 Federal sources 6,520,229 Total revenues 65,872,581 Expenditures Regular programs 25,387,687 Special programs 11,163,447 Vocational programs 2,115,436 Other instructional programs 1,011,554 Nonpublic school programs 32,585 Adult education programs 19,704 Pupil personnel services 1,453,827 Instructional staff services 944,624 Administrative services 4,591,935 Pupil health 667,855 Business services 499,527 Operation and maintenance of plant services 4,833,916 Student transportation services Central & other support services Student activities Community services Debt service 3,693,326 1,475,149 1,239,750 1,571,063 4,637,975 Variance With Final Budget Final Positive Budget Actual {Negative} 26,690,473 $ 26,797,519 $ 107,046 32,661,879 31,515,950 (1,145,929) 6,520,229 7,571,281 1,051,052 65,872,581 65,884,750 12,169 24,921,602 24,364,113 557,489 11,163,447 9,936,482 1,226,965 2,115,436 2,055,075 60,361 1,011,554 710,860 300,694 32,585 29,265 3,320 24,944 24,941 3 1,625,157 1,625,051 106 1,183,804 1,183,801 3 4,591,935 3,888,692 703,243 713,065 713,060 5 499,527 411,455 88,072 4,833,916 4,689,980 143,936 3,693,326 3,399,284 294,042 1,480,274 1,467,341 12,933 1,239,750 1,188,248 51,502 1,571,063 1,366,127 204,936 4,637,975 4,637,265 710 Total expenditures Excess of Revenues Over Expenditures Before Other Financing Uses 65,339,360 533,221 65,339,360 61,691,040 3,648,320 533,221 4,193,710 3,660,489 Other Financing Sources (Uses) Refund of prior year receipts Refund of prior year expenses Transfers in Transfers out Budgetary reserve Total other financing uses, net Net change in fund balance Fund Balance, Beginning Fund Balance, Ending 978,288 (729,300) {809,529) (560,541) (27,320) 6,655,549 $ 6,628,229 $ (644) (644) 2,294 2,294 978,288 (978,288) (729,300) (729,300) (809,529} 809,529 {560,541) (727,650) (167,109) (27,320) 3,466,060 3,493,380 6,655,549 9,521,244 2,865,695 6,628,229 $ 12,987,304 $ 6,359,075 See notes to financial statements 18

Balance Sheet - Proprietary Fund Assets Current Assets Cash and cash equivalents Other receivables Inventories Total current assets Capital Assets Equipment Accumulated depreciation Capital assets, net Total assets $ 610,313 33,800 81,226 725,339 112,190 (89,628) 22,562 $ 747,901 Liabilities and Net Assets Liabilities Current liabilities: Accounts payable Due to other funds Accrued salaries and benefits Deferred revenue Total current liabilities $ 71 154,433 2,965 35,622 193,091 Noncurrent liabilities, Compensated absences Total liabilities Net Assets Invested in capital assets, net of related debt Unrestricted Total net assets Total liabilities and net assets 75,675 268,766 22,562 456,573 479,135 $ 747,901 See notes to financial statements 19

Statement of Revenues, Expenses and Change in Fund Net Assets - Proprietary Fund Year Ended June, 30, 2011 Operating Revenues Food service revenue Operating Expenses Salaries Employee benefits Purchased property services Other purchased services Supplies Depreciation Dues and fees Other operating expenses Total operating expenses Operating loss Nonoperating Revenues Earnings on investments State sources Federal sources Total nonoperating revenues Net Income Net Assets, Beginning Net Assets, Ending $ 996,890 709,991 327,540 27,115 4,632 1,091,745 9,136 4,941 3,793 2,178,893 (1,182,003) 425 131,115 1,108,831 1,240,371 58,368 420,767 $ 479,135 See notes to financial statements 20

Statement of Cash Flows - Proprietary Fund Year Ended June 30,2011 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers for goods and services Cash paid to employees for service Internal activity - receipts from other funds Net cash used in operating activities Cash Flows from Noncapital Financing Activities State sources Federal sources Net cash provided by noncapital financing activities Cash Flows Provided by Investing Activities Earnings on investments Decrease in cash and cash equivalents Cash and Cash Equivalents, Beginning Cash and Cash Equivalents, Ending Supplemental Disclosure of Noncash Transactions, USDA donated commodities Reconciliation of Operating Loss to Net Cash Used in Operating Activities Operating loss Adjustments to reconcile operating loss to net cash used in operating activities, Depreciation Change in assets and liabilities resulting in the provision (use) of cash: Other receivables Inventory Accounts payable Due to other funds Accrued salaries and benefits Deferred revenue Net cash used in operating activities $ 1,049,494 (1,170,412) (1,036,364) (159,7q9) (1,317,041) 131,115 1,120,186 1,251,301 425 (65,315) 675,628 $ 610,313 $ 79,931 $ (1,182,003) 9,136 53,289 (31,084) (7,102) (159,759) 1,167 (685) $ (1,317,041) See notes to financial statements 21

Statement of Fiduciary Net Assets - Fiduciary Funds Agency Assets Cash and cash equivalents Due from other funds Total assets $ 1,028,982 191 $1,029,173 Liabilities Due to other funds Other current liabilities Total liabilities and assets $ $ 7,072 1,022,101 1,029,173 See notes to financial statements 22

Notes to Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies The major accounting principles and practices followed by Keystone Central School District (the "District") are summarized below: Nature of Operations The District provides elementary and secondary education to the residents of the following municipalities: the City of Lock Haven, the Boroughs of Beech Creek, Flemington, Loganton, Mill Hall, Renovo, and South Renovo, and 22 townships within Clinton, Centre and Potter Counties of Pennsylvania. The District assesses the taxpayers of these municipalities based upon taxing powers at its disposal. The ability of the District's taxpayers to pay their assessments is dependent upon economic and other factors affecting the taxpayers. Reporting Entity The reporting entity has been defined in accordance with the criteria established in Statement Nos. 14 and 39, issued by the Governmental Accounting Standards Board ("GASB"). The specific criteria used in determining whether other organizations should be included in the District's financial reporting entity are financial accountability, fiscal dependency and legal separation. As defined above, there are no other related organizations that should not be included in the District's financial statements, nor is the District considered to be a component unit of any other government. Basis of Presentation - Government-Wide Financial Statements The government-wide financial statements include the statement of net assets and the statement of activities. These financial statements report financial information for the District as a whole, excluding fiduciary activities, on a full accrual, economic resource basis. Individual funds are not displayed but the statements distinguish governmental activities, generally supported by taxes and District general revenues, from business-type activities, generally financed in whole or in part with fees charged to customers. The District's General, Tax Office Special Revenue Fund, Capital Projects and Debt Service funds are classified as governmental activities. The District's Food Service Fund is classified as a business-type activity. The statement of activities reports the expenses of a given function or program offset by program revenues directly connected with that function or program. A function is an assembly of similar activities and may include portions of a fund or summarize more than one fund to capture the expenses and program revenues associated with a distinct functional activity. Program revenues include (1) charges for services to users of the District's services, (2) operating grants and contributions that finance annual operating activities and (3) capital grants and contributions that fund the acquisition, construction or rehabilitation of capital assets. These revenues are subject to externally imposed restrictions to these program uses. Taxes and other revenue sources not properly included with program revenues are reported as general revenues. 23

Notes to Financial Statements Basis of Presentation - Fund Financial Statements The accounts of the District are organized on the basis of funds, each of which constitutes a separate accounting entity. The operations of each fund are accounted for within a separate set of self-balancing accounts that comprises its assets, liabilities, fund balances, revenues and expenditures/expenses. Resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent. The District uses the following fund types(* - denotes a major fund): Governmental Fund Types Governmental funds are those through which most governmental functions of the District are financed. The acquisition, use and balances of the District's expendable financial resources and the related liabilities are accounted for through governmental funds. The following is a description of the governmental funds of the District: General Fund* The General Fund accounts for the general operations of the District and all financial transactions not accounted for in another fund. Special Revenue Fund The special revenue fund accounts for proceeds of specific revenue sources (other than special assessments and expendable trusts) that are legally restricted to expenditures for specific purposes. This fund includes. the activities of the Tax Office Special Revenue Fund. Capital Projects Fund The Capital Projects Fund accounts for receipt and disbursement of resources for the purpose of building or buying major capital assets. This fund includes the activities of Capital Projects Fund #30, Capital Projects Fund #32 (formerly Capital Reserve Fund), Capital Projects Fund #34, and Capital Projects Fund #35. Debt Service Fund The Debt Service Fund accounts for resources accumulated for the purpose of funding general long-term debt obligations. Proprietary Fund Type Proprietary funds account for the operations of the District that are financed and operated in a manner similar to those often found in the private sector. The fund included in this category is the Enterprise Fund, which accounts for the food service operations of the District. The Food Service Fund distinguishes between operating revenues and expenses and non-operating items. Operating revenues consist of charges for food served. Operating expenses consist mainly of food and food preparation costs, supplies and other direct costs. All other revenues and expenses are reported as non-operating. 24

Notes to Financial Statements Fiduciary Fund Type Fiduciary funds account for the assets held by the District as a trustee or agent for individuals, private organizations and/or other governmental units. The fund included in this category is the Agency Fund, which accounts for assets held by the District as an agent for others. This fund is accounted for in a manner similar to governmental funds and includes the Student Activities Fund and the Tax Office Agency Fund 17. Measurement Focus Government-Wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of the District are included on the statement of net assets. The statement of activities presents increases (i.e., revenues) and decreases (i.e., expenses) in the District's net total assets. Fund Financial Statements Governmental funds are accounted for using the current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Operating statements of these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets. Proprietary funds are also accounted for using the economic resources measurement focus. Basis of Accounting Basis of accounting refers to the point at which revenues or expenditures/expenses are recognized in the accounts and reported in the financial statements. It relates to the timing of the measurements made regardless of the measurement focus applied. Accrual Basis Government-wide financial statements and the proprietary and fiduciary fund type financial statements are prepared using the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred. Tax revenues are recognized in the year levied while grant revenue is recognized when grantor eligibility requirements are met. 25

Notes.to Financial Statements Modified Accrual Basis Governmental funds use the modified accrual basis of accounting. Under the modified accrual basis, revenues are recognized when susceptible to accrual (i.e., when they become both measurable and available). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay the liabilities of the current period. The District considers property and other taxes as available if they are collected within 60 days after year end. A one-year availability period is used for revenue recognition for all other governmental fund revenues (primarily inter-governmental in nature). Expenditures, other than principal and interest on bonds payable, compensated absences and.claims and judgments, are recorded when the related fund liability is incurred. Principal and interest on bonds payable, compensated absences and claims and judgments are recorded as fund liabilities when due and unpaid. The District reports deferred revenue on its fund financial statements. Deferred revenue arises when potential revenues do not meet both the "measurable" and "available" criteria for recognition in the current period. Deferred revenues may also arise when the District receives resources before it has a legal claim to them, as when grant monies are received prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed and revenue is recognized. The District applies all relevant GASB pronouncements and applicable Financial Accounting Standards Board ("FASB") pronouncements issued on or before November 30, 1989, unless they conflict with GASB pronouncements. The District does not apply FASB pronouncements issued after November 30, 1989. Allocation of Indirect Expenses The District allocates certain building-related costs to the proprietary fund. It does not allocate any other indirect costs including depreciation. Budgets and Budgetary Accounting An operating budget is adopted each year for the General Fund on a modified accrual basis of accounting. The Pennsylvania School Code dictates specific procedures relative to adoption of the District's budget and reporting of its financial statements, specifically: The District, before levying annual school taxes, is required to prepare an operating budget for the succeeding fiscal year. The District is required to have the budget printed, or otherwise made available for public inspection at least twenty (20) days prior to the date set for the adoption of the budget. Final action may not be taken on any proposed budget in which the estimated expenditures exceed two thousand dollars ($2,000), until after ten (10) days public notice. 26

Notes to Financial Statements The Board may make transfers of funds appropriated to any particular item of expenditure by legislative action during the last nine months of the fiscal year. An affirmative vote of a majority of all members of the Board is required. Fund balances in budgetary funds may be appropriated based on resolutions passed by the Board, which authorize the District to make expenditures. Appropriations lapse at the end of the fiscal period. In order to preserve a portion of an appropriation for which an expenditure has been committed by a purchase order, contract or other form of commitment, an encumbrance is recorded. Encumbrances outstanding at year's end are reported as reservations of fund balances. Included in the General Fund budget are program budgets as prescribed by the state and federal agencies funding these programs. These budgets are approved on a program-by-program basis by the state or federal funding agency. Capital budgets are implemented for capital improvements and capital projects in the Capital Projects Fund. All transactions of the Capital Projects Fund are approved by the Board prior to commitment thereby constructively achieving budgetary control. An Enterprise Fund budget is not adopted; however, a formal budget is prepared and approved by management and expenditures are controlled on the basis of this budget. New Accounting Principle The District adopted Governmental Accounting Standards Board ("GASB") Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, during the year ended. GASB No. 54 provides for more clearly defined fund balance categories and classifications to make the nature and the extent of constraints placed on a government's fund balance more.transparent. It also clarifies the existing government fund type definitions to improve the comparability and provide for a better understanding as to the purpose for which governments have chosen to use particular funds for financial reporting. Encumbrances Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation, is employed as an extension of formal budgetary integration in governmental funds. Encumbrances at year-end are reported as assignments of fund balance since they do not constitute expenditures or liabilities but serve as authorization for expenditures in the subsequent year. At, the District had no outstanding encumbrances. Cash and Cash Equivalents Cash and cash equivalents consist of cash and cash management liquid asset funds that are carried at cost. The District considers highly liquid short-term investments purchased with an original maturity of three months or less (excluding certain short-term instruments which are classified as investments) to be cash equivalents. 27

Notes to Financial Statements Inventories General Fund inventories of $84,772 are comprised of school opening, office and other supplies specifically acquired for use in the subsequent fiscal year. These supplies are delivered to schools and other locations prior to the end of the fiscal year but are recognized as expenditures in the following fiscal year. This has been a consistent policy followed each year by the District., Enterprise fund inventories consisting of food service inventories of $81,226 include $25,774 of food commodities donated by the federal government, which are valued at an estimated market value. All other food or supply inventories are valued at last unit cost in accordance with the recommendations of the Food and Nutrition Service of the Department of Agriculture and are expensed as used. Capital Assets General capital assets are those assets not specifically related to activities reported in the proprietary fund. These assets generally result from expenditures in the governmental funds. These assets are reported in the governmental activities column of the governmentwide statement of net assets but are not reported in the fund financial statements. Capital assets used by the proprietary fund are reported both in the business-type activities of the government-wide statement of net assets and in the fund financial statements. All capital assets are stated at cost or estimated cost, net of accumulated depreciation. Donated capital assets are reported at their fair value at date of receipt. The District maintains a capitalization threshold of $10,000. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are expensed in the current period. All capital assets, except land and construction in progress, are depreciated. Land is not depreciated. Construction in progress costs are accumulated until the project is complete and placed in service. At that time, the costs are transferred to the appropriate asset class and depreciation begins. Depreciation is computed using the straight-line method over the following estimated useful lives: Governmental Activities Business-Type Activities Land improvements Buildings and improvements Furniture and equipment 15-20 years N/A 20-40 years N/A 5-20 years 5-10 years The District does not have any infrastructure capital assets. Assets Held for Capital Projects Assets held for capital projects represent cash held by the District's Capital Projects Fund. 28

Notes to Financial Statements Compensated Absences The District's collective bargaining agreements with its professional and support employees specify the sick leave and vacation leave policies. Administrative personnel, while not party to these agreements, are provided similar benefits. The agreements generally provide for payment of accumulated sick leave, at retirement, based upon years of service and days accumulated. The rate paid varies by position. Vacation leave is available only to administrative and twelve month support employees. Support vacation pay is earned during the year in which service has been performed. Administrative vacation pay is earned at the beginning of the year in which the service will be performed. Employees are entitled to accrue an annual designated number of vacation days, which carryover from year to year. Governmental Fund Balance ClassificationslPolicies and Procedures In accordance with governmental Accounting Standards Board (GAS B) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, the District classifies its governmental fund balances as follows: Non-spendable - includes fund balance amounts that cannot be spent either because it is not in spendable form or because of legal or contractual constraints Restricted - includes fund balance amounts that are constrained for specific purposes which are externally imposed by providers, such as creditors or amounts constrained due to constitutional provisions or enabling legislation Committed - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the District's "highest level of decision making authority" which do not lapse at year-end o The School Board of the District is its highest level of decision-making authority and commits funds through a formal board motion Assigned - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the District o o The School Board of the District authorized the District Business Manager to assign funds to specific purposes The School Board passed a board motion authorizing assignments for activities as contemplated by the Board Unassigned - includes positive fund balance within the General Fund which has not been classified within the above mentioned categories and negative fund balances in other governmental funds In governmental funds when an expenditure is incurred that can be paid using either restricted or unrestricted resources, the District's policy is generally to first apply the expenditure toward restricted fund balance and then to unrestricted resources. When an expenditure is incurred that can be paid using either committed, assigned, or unassigned amounts, the District's policy is to use committed resources, then to assigned resources, then to unassigned resources. 29

Notes to Financial Statements Eliminations and Internal Balances Transactions and balances between governmental activities have been eliminated in the government-wide financial statements. Residual amounts due between governmental and business-type activities are labeled "internal balances" on the statement of net assets. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Cash and Cash Equivalents At, the District's cash and cash equivalents include deposits with local financial institutions and the Pennsylvania Local Government Investment Trust and various petty cash balances ($2,525) held throughout the School District. Pennsylvania statutes provide for the investment of governmental funds in certain authorized investment types, including U.S. Treasury bills, other short-term U.S. and Pennsylvania government obligations, and insured or collateralized time deposits and certificates of deposit. The statutes do not prescribe regulations related to demand deposits; however, they do allow the pooling of governmental funds for cash management and investment purposes. Act 72 requires all governmental (public funds) deposits not insured by the Federal Depository Insurance Corporation (FDIC) to be collateralized by the financial institution. The Pennsylvania Local Government Investment Trust ("PLGIT") is a common law trust organized to provide Pennsylvania local governments with a convenient method of pooling their cash for temporary investment. PLGIT functions similar to a money market fund, seeking to maintain a net asset value of $1 per share. Participants purchase "shares" in PLGIT, which invests the proceeds in: obligations of the United States Government, its agencies or instrumentalities; obligations of the Commonwealth of Pennsylvania, its agencies, instrumentalities or political subdivisions; and deposits in savings accounts, time deposits or share accounts of institutions insured by the Federal Deposit Insurance Corporation to the extent that such accounts are so insured, and for any amounts above the insured maximum, provided that approved collateral as provided by law is pledged by the depository. Shares may be withdrawn at any time. PLGIT/PLGIT PLUS have received an "AAAm" rating from Standard & Poor's, an independent credit rating agency. At, the carrying amount and bank balance of the District's deposits with PLiGIT was $35,117. Governmental Accounting Standards Board (GAS B) Statement No. 40, Deposit and Investment Risk Disclosures, requires disclosures related to the following deposit and investment risks; credit risk, custodial credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. The following is a description of the District's deposit and investment risks. 30

Notes to Financial Statements Deposits Custodial Credit Risk is the risk that in the event of a bank failure, the District will not recover its deposit or will not be able to recover collateral securities that are in the possession of an outside party. The District does not have a formal deposit policy for custodial credit risk. As of, the carrying amount of the District's deposits with local financial institutions was $17,756,197 and the bank balance was $18,203,701. Of this balance, $17,918,134 was exposed to custodial credit risk, as these deposits were not covered by depository insurance. Rather, these deposits were collateralized with securities held by the pledging financial institution, but not in the District's name.. 3. Property Taxes Real estate taxes for the District, which is comprised of a three county area, are collected from the City of Lock Haven, the Boroughs of Beech Creek, Flemington, Loganton, Mill Hall, Renovo, and South Renovo, and 22 townships within Clinton, Centre and Potter Counties of Pennsylvania. The tax on real estate for public school purposes for fiscal 2011 was 11.23 mills (per $1,000 of assessed valuation) in Clinton County, 40.32 mills in Centre County and 36.15 mills in Potter County as levied by the Board. Each County determines assessed valuations of property and the elected tax collectors are responsible for collection. The schedule for real estate taxes levied for each fiscal year is as follows: July 1 July 1 - August 31 September 1 - October 31 November 1 - June 30 June 30 Levy Date 2% Discount Period Face Payment Period 10% Penalty Period Lien Date Estimated collectible delinquent real estate taxes at, amounted to $175,610 as follows: Outstanding Balance $ 1,315,595 Estimated Uncollectible $ 175,610 Estimated Collectible $ 1,139,985 4. Due from Other Governments The amount reported in the General Fund at as due from other governments is summarized below: General Fund State source revenues Federal source revenues Total $ $ 912,377 2,021,371 2,933,748 31

Notes to Financial Statements Amounts due from the federal and state government are primarily federal grants and state subsidies receivable from the Commonwealth of Pennsylvania, Department of Education at. 5. Capital Assets The changes in the District's capital assets in 2011 are summarized as follows: Balance Balance July 1, 2010 Acquisitions Dispositions Governmental activities Capital assets: Land $ 1,760,087 $ $ $ 1,760,087 Land improvements 5,324,247 220,561 5,544,808 Buildings and improvements 69,643,354 665,823 70,309,177 Furniture and equipment 12,373,391 68,845 12,442,236 Total capital assets 89,101,079 955,229 90,056,308 Accumulated depreciation: Land improvements (2,322,172) (236,290) (2,558,462) Buildings and improvements (27,007,446) (1,884,041) (28,891,487) Furniture and equipment (9,196,911) (678,511) (9,875,091 ) Total accumulated depreciation (38,526,529) (2,798,511) (41,325,040) Governmental activities capital assets, net $ 50,574,550 $ (1,843,282) $ $ 48,731,268 Business-type activity Furniture and equipment $ 125,431 $ $ (13,241) $ 112,190 Accumulated depreciation (93,733) (9,136) 13,241 (89,628) Business-type activities capital assets, net $. 31,698 $ {9,136) $ $ 22,562 32

Notes to Financial Statements. 6. Long-Term Debt During its June 30,2002 fiscal year, the District issued $12,000,000 of Qualified Zone Academy Bonds to finance renovations of district elementary schools. The bonds are due in varying annual installments of principal only with interest paid directly by the federal government. Final maturity is scheduled for December 2015. The principal balance outstanding on this bond series at was $7,740,625, including $565,625 due during the fiscal year ending June 30, 2012. During its June 30, 2009 fiscal year, the District issued its General Obligation Note, Series A of 2008, in the face amount of $6,110,000, to refund the remainder of the Bond Issue of 2003. This note is due in varying installments plus interest at rates ranging from 3.0% to 4.35% with final maturity scheduled for March 2018. The principal balance outstanding on this note at June 30, 2011 was $4,200,000, including $910,000 due during the fiscal year ending June 30, 2012. During its June 30, 2009 fiscal year, the District issued its General Obligation Note, Series AA of 2008,in the face amount of $2,890,000, to finance renovations to the Renovo Elementary School. This note is due in varying installments plus interest at rates ranging from 4.0% to 4.5% with final maturity scheduled for March 2020. The principal balance outstanding on this note at was $2,880,000, including $5,000 due during the fiscal year ending June 30, 2012. During its June 30,2009 fiscal year, the District issued $6,495,000 of General Obligation Bonds, (Bond Issue of 2009), to refund the remainder of the Bond Issue of 2004A. These bonds are due in varying installments plus interest at rates ranging from 2.0% to 2.75% with final maturity scheduled for September 2013. The principal balance outstanding on this bond issue at was $4,025,000, including $1,310,000 due during the fiscal year ending June 30, 2012. During its June 30, 2009 fiscal year, the District issued its General Obligation Note, Series A of 2009, in the face amount of $4,775,000, to partially refund the Bond Issue of 2004. This note is due in varying installments plus interest at rates ranging from 3.0% to 4.4% with final maturity scheduled for February 2019. The principal balance outstanding on this note at was $4,720,000, including $40,000 due during the fiscal year ending June 30,2012. During its June 30, 2009 fiscal year, the District issued its General Obligation Note, Series AA of 2009, in the face amount of $2,655,000, to finance an energy conservation program. This note is due in varying installments plus interest at rates ranging from 3.0% to 4.5% with final maturity scheduled for February 2020. The principal balance outstanding on this note at was $2,590,000, including $45,000 due during the fiscal year ending June 30,2012. During its June 30, 2009 fiscal year, the District entered into a $597,976 note payable arrangement with Key Government Finance, Inc. to fund the purchase of a voice over internet protocol (VoIP) telephone system. This note is due in varying annual interest free installments through July 2011. The principal balance outstanding on this note at was $248,988, all of which is due during the fiscal year ending June 30, 2012. 33

Notes to Financial Statements During its June 30, 2010 fiscal year, the District issued its General Obligation Bonds, Series A of 2010, in the face amount of $1,000,000, for the purpose of funding the construction of the Central Mountain High School Stadium. These bonds due in varying installments plus interest at 3.65% with final maturity scheduled for May 2021. The principal balance outstanding on this bond series at was $995,000, including $10,000 due during the fiscal year ending June 30, 2012. During its June 30, 2010 fiscal year, the District issued its General Obligation Bonds, Series B of 2010, in the face amount of $6,545,000, to currently refund the outstanding balance of the Bond Issue of 2005. These bonds due in varying installments plus interest at rates ranging from 2.0% to 3.0% with final maturity scheduled for May 2018. The principal balance outstanding on this bond series at was $6,530,000, including $115,000 due during the fiscal year ending June 30, 2012. During its June 30, 2010 fiscal year, the District issued its General Obligation Bonds, Series C of 2010, in the face amount of $1,115,000, to currently refund the outstanding balance of the Bond Issue of 2004. These bonds due in varying installments plus interest at rates ranging from 2.0% to 3.0% with final maturity scheduled for May 2012. The principal balance outstanding on this bond series at was $565,000, all of which is due during the fiscal year ending June 30, 2012. The following summarizes the changes in long-term debt in 2011 : Balance, July 1, 2010 $ 38,134,226 Additions Retirements (3,639,613) Balance, 34,494,613 Less current maturities 3,814,613 Long-term debt $ 30,680,000 Total interest paid on long-term debt in 2011 was $997,652. No interest was capitalized in 2011. Defeased Bonds The District has defeased the Bond Issue of 2002 by placing the proceeds of the Bond Issue of 2005 in a sinking fund with earnings sufficient to call the remaining bonds on the redemption date. For financial reporting purposes, the bonds are considered defeased and the liability for those bonds has been removed from the District's statement of net assets. At June 30, 2010, the amount of defeased 2002 bonds outstanding but removed from the statement of net assets was $5,960,000. 34

Notes to Financial Statements Debt service to maturity on long-term debt at is summarized as follows: Year Ending June 30 Principal Interest Total 2012 $ 3,814,613 $ 919,209 $ 4,733,822 2013 3,615,000 833,717 4,448,717 2014 3,615,000 758,210 4,373,210 2015 3,545,000 722,140 4,267,140 2016 3,575,000 689,945 4,264,945 2017-2021 16,330,000 1,854,223 18,184,223 Total $ 34,494,613 $ 5,777,444 $ 40,272,057 7. Compensated Absences Vacation - District employees who are required to work on a twelve-month schedule are credited with vacation at rates that vary with length of service or job classification. Vacation (for most employee categories) may be taken or accumulated within certain limits and is paid prior to termination at the employee's current rate of pay. Sick Leave and Personal Leave - Most District employees are credited annually with twelve sick days, one personal day and three emergency days and may accumulate such days based on employee classifications. The liability to present employees is estimated and will change since unused leave will be paid at the rate of pay in effect at the time of separation. These compensated absences are recorded as expenditures as paid within the fund-perspective financial statements; the District normally pays its compensated absences from the General Fund. Within the government wide (full accrual) basis financial statements, compensated absences are recorded as expenditures as earned by District employees. The liability for compensated absences, including early retirement incentives, recorded in the governmental activities column on the statement of net assets, was $787,238 at. The liability for compensated absences for the business-type activity amounted to $75,675 at. The changes in the District's compensated absences in 2011 are summarized as follows: Governmental Activities Business-Type Activity Balance July 1, 2010 $ 796,663 71,645 Increase 164,104 14,377 Decrease (173,529) (10,347) Balance $ 787,238 $ 75,675 35

Notes to Financial Statements 8. Accrued Salaries and Benefits General Fund accrued salaries and benefits in the amount of $3,320,340 represent the following: accrued salaries of $2,933,981, the District's share of Social Security taxes of $221,410 and retirement plan expense of $164,949. These liabilities relate primarily to teachers' services rendered during the 2010-2011 school term, which are paid during July and August 2011. 9. Other Postemployment Benefits Plan Description The District provides full coverage in health care benefits for teachers for a period of 10 years, or until they become 65 years of age or Medicare eligible, retiring at age 50 or later and having 15 or more years credited service with the District. The District also provides full coverage in individual health care benefits for administrators who retire up to age 65, and who have at least 15 years of service with the District. The District only pays for single coverage and the employee has the option to pay for the spouse, family or dependents. The cost of such coverage for retirees is primarily funded through annual appropriations from the District's General Fund. The plan is unfunded and no financial report is prepared. These benefits are accounted for in accordance with GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Retired employees who are ineligible under the above requirements and choose to participate in the medical plan must pay 100% of the composite rate cost of such coverage. Funding Policy The contribution requirements of plan members and the District are established and may be amended by the School Board. The plan is funded on a pay-as-you-go basis, i.e., premiums are paid annually to fund the health care benefits provided to current retirees. Retiree contribution rates and amounts vary depending on classification and years of service with the District. The District made estimated contributions to the Plan of $968,393 for the year ended. Contributions are actuarially determined in accordance with GASB Statement 45. 36

Notes to Financial Statements Annual OPES Cost and Net OPES Obligation The District's annual other postemployment benefit (OPES) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASS Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. The following tables show the components of the District's annual OPES cost for the year, the amount actually contributed to the plan, and changes in the District's net OPES obligation: Annual required contribution Interest on net OPES obligation Adjustment to annual required contribution Annual OPES cost Contributions made Increase in net OPES obligation Net OPES obligation at July 1, 2010 Net OPES obligation at $ 1,153,445 73,585 (100,388) 1,126,642 (968,393) 158,249 1,635,212 $ 1,793,461 The District's annual OPES cost, the percentage of annual OPES cost contributed to the plan, and the net OPES obligation for the years ended, 2010 and 2009 were as follows:. Percentage Annual of Annual OPES OPES Cost Net OPES Year Ended Cost Contributed Obligation $ 1,126,642 86.0 % $ 1,793,461 June 30, 2010 1,203,759 33.6 % 1,635,212 June 30, 2009 1,218,673 31.4 % 836,452 37

Notes to Financial Statements Funded Status and Funding Progress The funded status of the plan as of July 1, 2010, the most recent actuarial valuation date, was as follows: Actuarial accrued liability $ 11,241,399 Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) $ 11,241,399 Funded ratio (actuarial value of plan assets/uaal) 0% Covered payroll $ 30,309,514 UAAL as a percentage of covered payroll 37.09% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the health care cost trend. Actuarial amounts determined regarding the funded status of the plan and the annual required contributions of the District are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Actuarial Methods and Assumptions The calculations are based on the types of benefits provided at the time of the valuation based upon the substantive plan (the plan as understood by the employer and the plan members). The projection of benefits for financial reporting purposes does not explicitly incorporate the potential effects of legal or contractual funding limitations in the future. The actuarial methods and assumptions used include techniques that are designed to reduce the efforts of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the July 1, 2010, actuarial valuation, the Entry Age Normal Cost Method was used. Under the Entry Age Normal Cost Method, the Normal Cost is the present value of benefits allocated to the year following the valuation date. Benefits are allocated on a level basis over the earnings of an individual between the date of hire and the assumed retirement age. The Accrued Liability as of the valuation date is the excess of the present value of future benefits over the present value of future Normal Cost. The Unfunded Accrued Liability is the excess of the Accrued Liability over the Actuarial Value of Assets. Actuarial gains and losses serve to reduce or increase the Unfunded Accrued Liability. The actuarial assumptions included a 4.5% investment rate of return, which is the expected rate to be earned on the District's deposits and investments, an annual healthcare cost trend rate of 7.5% for the first year, with the rate decreasing 0.5% per year to 5.5% in 2014. Rates gradually decrease from 5.3% in 2015 to 4.2% in 2099 and later. The UAAL is being amortized as a level dollar over a thirty year open period. 38

Notes to Financial Statements 10. Termination Benefits Under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), the District makes available health care benefits to eligible former employees and their dependents. Requirements are outlined by the federal government for this coverage. This program is offered up to a period of 18 months (36 months for an employee with dependents) after an employee's termination date. At, there were 6 participants covered under COBRA. The District provides a retirement stipend for teachers retiring with at least 15 years of service and having reached 50 years of age. The cost of this benefit is recognized on a "pay as you go" basis, and amounted to approximately $120,000 covering 11 participants for the year ended. The District also provides retirement stipends for support staff with at least 10 years of service and secretaries, who have no minimum service requirement. There is no age requirement for support staff or secretaries. The cost of this benefit is recognized on a "pay as you go" basis, and amounted to approximately $45,000 covering 12 participants for the year ended June 30, 2011. 11. Retirement Plan All full-time and certain part-time employees of the District participate in the Commonwealth of Pennsylvania Public School Employees' Retirement System ("PSERS"), a governmental costsharing multiple-employer defined benefit pension plan. The System was established as of July 18, 1917, under the provisions of Public Law 1043, No. 343. PSERS provides retirement and disability, legislatively mandated ad hoc cost-of-living adjustments and healthcare premium assistance benefits to qualifying annuitants. The District's and its employees' obligation to contribute to PSERS are established by authority of Act 96 of the Public School Employees' Retirement Code. Benefit provisions are established and amended by the PSERS board of trustees. PSERS issues a comprehensive annual financial report that includes stand-alone financial statements and required supplementary information for the plan. A copy may be obtained from Pennsylvania Public School Employees' Retirement System, P.O. Box 125, Harrisburg, Pennsylvania 17108-0125, Attention: Barbara D. Flurie, Office of Financial Management. The report is also available on the Internet, in the publication Section of the PSERS website, www.psers.state.pa. The District's contribution rate was 5.64% in 2011, 4.78% in 2010, and 4.76% in 2009 of covered payroll. The District's contributions were $1,623,195 in 2011, $1,540,868 in 2010, and $1,724,925 in 2009. The employees' contribution rates range from 5.25% to 7.50%, depending on date of hire and whether they elected to participate in the TO membership class. 39

Notes to Financial Statements 12. Internal Balancesllnterfund Balances and Transfers At, various operating funds owed amounts to and were due amounts from other funds. These amounts, which represent short-term borrowings that are expected to be repaid within the next fiscal year, consisted of the following: Interfund Receivable General Fund $ 257,697 Capital Projects Fund 729,300 Tax Office Special Revenue Fund 7,072 Food Service Fund Agency Fund 191 Total $ 994,260 Interfund Payable $ 729,300 103,455 154,433 7,072 $ 994,260 The following summarizes the interfund transfers in fiscal year 2011: Transfers In Transfers Out Capital Projects Fund General Fund $ 729,300 $ 729,300 Total $ 729,300 $ 729,300 The General Fund transferred $729,300 to the Capital Projects Fund to cover costs of certain capital projects. 13. Fund Balance Classifications The District presents its governmental fund balances by level of constraint in the aggregate on its balance sheet - governmental funds. The individual specific purposes of each constraint are presented below: Non-Major Governmental General Fund Funds Total Non-spendable for: Inventories $ 84,772 $ $ 84,772 Prepaid expenses 270,839 270,839 Total $ 355,611 $ $ 355,611 40

Notes to Financial Statements General Fund Non-Major Governmental Funds Total Committed for: Capital projects PSERS $ 4,048,988 3,040,000 $ $ 4,048,988 3,040,000 Total $ 7,088,988 $ $ 7,088,988 Assigned for: Capital Projects $ $ 1,868,252 $ 1,868,252 14. Significant Group Concentrations of Credit Risk The District's operations are located in the Counties of Clinton, Centre and Potter, Pennsylvania. Its service area is located within the geographic bounds of the District. The District assesses taxpayers, within its service area, based upon taxing powers at its disposal. The ability of each of the District's taxpayers to honor their assessed obligations to the District is dependent upon economic and other factors affecting the taxpayers. 15. Commitments Operating Leases The District leases office equipment under the terms of agreements that generally cover thirty-six (36) to sixty (60) months. The following tabulation represents future minimum rental payments required under such operating leases at : Year ending June 30: 2012 $ 118,489 2013 118,489 2014 118,489 2015 118,489 2016 118,489 $ 592,445 Total rent expense for all operating leases for the year ended amounted to $200,196. 41

Notes to Financial Statements 16. Contingencies The District participates in both state and federally assisted grant programs. These programs are subject to program compliance audits by the grantors or their representatives. The District is potentially liable for any expenditures which may be disallowed pursuant to the terms of these grant programs. Management is not aware of any material items of noncompliance that may result in the disallowance of program expenditures. 17. Non-Monetary Transactions The District receives USDA Donated Commodities in the Food Service Fund (Enterprise Fund), which is a proprietary fund type. These donated commodities are valued at an estimated market value and recognized as federal revenue with unused commodities recorded as inventory. The total food commodities donated by the federal government for fiscal year 2011 totaled $91,286; total food commodities used by the District during this same period was $79,931. 18. Transactions With Other Local Education Agencies The District is a member of Central Intermediate Unit 10. Through the membership, the District is able to secure various special services, including special education. 19. Adoption of New Accounting Principle The District adopted the provisions of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, during its year ended. The- Capital Reserve Fund does not meet the criteria to be reported as a special revenue fund under the new accounting principle. Therefore, the District reclassified the beginning fund balance to the Capital Projects Fund. The effect of this adoption increased the Capital Projects fund balance by $957,055 at July 1, 2010. In addition, the District's Athletic Fund, formerly reported as a special revenue fund, was reclassified into the General Fund, as it does not meet the criteria to be reported as a special revenue fund under the new accounting principle. The adoption did not have an effect on the General Fund since the Athletic Fund did not have a beginning fund balance. Following is a summary of the effect of the implementation of GASB No. 54 on the District's governmental funds' beginning fund balances: As Previously Effect of Reported Restatement As Restated Fund balance at July 1, 2010 Governmental balance sheet: Capital Projects Fund 998,541 957,055 1,955,596 Capital Reserve Fund 957,055 (957,055) Total $ 1,955,596 $ $ 1,955,596 42

Notes to Financial Statements 20. Pending Changes in Accounting Principles In February 2010, the GASB issued Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. This statement permits an agent employer that has an individual - employer OPEB plan with fewer than 100 total plan members to use the alternative measurement method regardless of the number of total plan members in the agent multiple - employer OPEB plan in which it participates. In addition, this statement clarifies that when actuarially determined OPEB members are reported by an agent multiple - employer plan and its participating employers, those measures should be determined as of a common date and at minimum frequency to satisfy the agent multiple - employer OPEB plan's financial reporting requirements. GASB 57 is effective for the District's fiscal year 2012 financial statements. In December 2010, the GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements ("SCA"). This statement addresses how to account for and report situations where a government engages another entity to operate a major capital asset on its behalf. This statement improves financial reporting by establishing recognition, measurement, and disclosure requirements for SCAs for both transferor's and governmental operators. To the extent applicable, the District is required to adopt Statement No. 60 for its fiscal year 2013 financial statements. In December 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus. This statement addresses certain issues with distinguishing a government's control over another government in the reporting of component units. The District is required to adopt Statement No. 61 for its fiscal year 2013 financial statements. In December 2010, the GASB issued Statement No. 62, Codification of Accounting and financial reporting Guidance Contained in Pre-November 3D, 1989 FASB and AICPA Pronouncements. This statement incorporates certain applicable accounting and financial reporting guidance of the FASB and AICPA in GASB literature to simplify the preparation of state and local government financial statements. The District is required to adopt Statement No. 62 for its fiscal year 2013 financial statements. In July 2011, GASB issued Statement No. 63, Financial Reporting of Deferred outflows of Resources, Deferred Inflows of Resources and net Position. This statement will improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government's net position. The District is required to adopt Statement No. 63 for its fiscal 2013 financial statements. In July 2011, the GASB issued Statement No. 64, Derivative Instruments; Application of hedge Accounting Termination Provisions - An Amendment of GASB Statement No. 53. This statement enhances comparability and improves financial reporting by clarifying the circumstances in which hedge accounting should continue when a swap counterparty, or a swap counterparty's credit support provider is replace. To the extent applicable, the District is required to adopt Statement no. 64 for its fiscal year 2012 financial statements. District management is in the process of analyzing these pending changes in accounting principles and the impact they will have on the financial reporting process. 43

Required Supplementary Information (Unaudited) Schedule Of Funding Progress - Other Postemployment Benefits Actuarial Actuarial Accrued Actuarial Value of Liability Unfunded Funded Covered Valuation Assets (AAL) AAL (UAAL) Ratio Payroll Date (a) (b) (b-a) (a/b) (c) July 1,2010 $0 $11,241,399 $11,241,399 0% $30,309,514 July 1,2007 0 19,817,090 19,817,090 0% 26,868,173 UAAL as a Percentage of Covered Payroll ([b-a]/c) 37.1% 73.8% Note: The July 1, 2010 actuarial valuation recognized the following significant assumption changes. (1) The interest rate assumption was changed from 5% per annum to 4.5% per annum. (2) The retirement assumption was changed from assuming all employees would retire immediately upon attainment of age 50 and 10 years of service to a floating scale based on PSERS plan experience, which varies by age, service, and gender. (3) The health care cost trend rate was changed from 9% for the first year, with the rate decreasing 1 % per year to an ultimate rate of 5% to 7.5% for the first year, with the rate decreasing 0.5% per year to 5.5% in 2014, then rates gradually decreasing from 5.3% in 2015 to 4.2% in 2099 and later. 44

Schedule of Expenditures of Federal Awards Year Ended Pass - Accrued Accrued Federal Through Grant Period Total (Deferred) (Deferred) Source CFDA Grant Beginningl Grant Received Revenue Revenue Revenue Grantor Program Tit! e Code Number Number Ending Date Amount For the Year Jul}' 1, 2010 Recog"ized Expenditures U.S. Department of Public Welfare ("DPW') Passed through Pennsylvania Department of Public Welfare: MA Reimbursement Title XIX Access 93.778 NIA 7/1110-6/30/11 NIA $ 20,234 $ 8,477 $ 18,358 $ 18,358 $ 6,601 U.S. Department of Agriculture ("USDA") Passed through Pennsylvania Department of Education: ARRA - FNS Equipment Grant 10.579 129-000142 6/8/09-9/30/10 14,101 14,101 14,101 ARRA - FNS Equipment Grant 10.579 129-000143 6/8/09-9/30/10 14,101 14,101 14,101 Child Nutrttion Cluster: Severe Need Breakfast Program 10.553 N/A 7/1/10-6130/11 N/A 240,290 11,865 236,653 236,653 8,228 National School Lunch Program 10.555 N/A 7/1/10-6/30111 N/A 804,831 35,554 792,248 792,248 22,971 Passed through Pennsylv'lnia Department of Agrtcullure: Child Nutrttion Cluster: Value of USDA Donated Commodities 10.555 N/A 7/1/10-6130/11 N/A 91,286 (14,420) a) 79,931 b) 79,931 b) (25,775) c) Total Child Nutrttion Cluster 1,136,407 32,999 1,108,832 1,108,832 5,424 Total, USDA 1,164,609 61,201 1,108,832 1,108,832 5,424 U.S. Department of Education ("ED") Passed Through Pennsylvania Department of Education: Tille I Cluster: ECIATitiel 84.010 13-100212 7/1/09-9/30/10 1,230,794 1,230,794 1,092,265 138,529 138,529 ECIATitiel 84.010 13-110212 7/1/10-9/30/11 1,287,800 321,950 1,082,421 1,082,421 760,471 ECIA Title I (Academic Achievement) 84.010 77-090212 7/1/08-9/30/10 5,000 (57) 57 57 ECIA Title I (Academic Achievement) 84.010 77-100212 7/1/09-9/30/11 9,000 6,827 1,656 4,980 4,980 (191) ARRA-Titiel 84.389 127-100212 5/26/09-9/30/10 641,538 333,442 114,761 229,100 229,100 10,419 Total Tille I Cluster 1,893,013 1,208,625 1,455,087 1,455,087 770,699 ARRA - State Fiscal Stabilization Fund 84.394 126-110212 7/1/10-6/30/11 2,322,752 2,322,752 2,322,752 2,322,752 ARRA - Education Jobs Fund 84.410 140-687978 711/10-6/30/11 1,375,844 1,375,844 1,375,844 1,375,844 Perkins Secondary Allocation 84.048 380-100010 7/1/09-6/30/10 78,844 (9,037) 9,037 9,037 Perkins Secondary Allocation 84.048 380-111006 711/10-6/30/11 84,467 84,467 78,501 78,501 (5,966) Drug-Free Schools 84.186 100-100212 7/1/09-9/30/10 18,862 10,479 10,479 Sub-total, ED 5,686,555 1,210,067 5,241,221 5,241,221 764,733 (Continued) See noles 10 financial slalemenls 45

Schedule of Expenditures of Federal Awards Year Ended Pass - Federal Through Grant period Source CFDA Grant Beginningl Grantor Program Title Code Number Number ElLdlng Date Grant Amount Total Received For the Year Accrued Accrued (Deferred) (Deferred) Revenue Revenue Revenue July 1, 2010 Recognized Expenditures U.S. Department of Ed (Continued) Twenty-First Century 84.287 41-00043704 7/1/09-6/30/10 Twenty-First Century 84.287 41-00052761 7/1/10-6/30/11 705,470 523,078 1,301,662 587,167 523,078 1,301,662 1,301,662 714,495 Reading First 84.357 23-090212 7/1/08-6/30/1 0 Title II Improving Teacher Quality 84.367 20-090212 7/1/08-9/30/1 0 Title II Improving Teacher Quality 84.367 20-100212 7/1/09-9/30/11 Title II Improving Teacher Quality 84.367 20-110212 7/1/10-9/30/11 ARRA - Title II, Part 0 Education Technology 84.386 135-100212 7/1/10-6/30/11 Total passed through PA Dept. of Ed. Passed Through Centrall.U. #10: Special Education Cluster (IDEA) IDEA Grant 84.027 N/A 7/1/09-6/30/10 IDEA Grant 84.027 N/A 7/1/10-6/30111 ARRA - IDEA Grant 84.391 NIA 2117/09-9/30111 Total Special Education Cluster Total passed through Centrall.U. # 10 Passed Through US Department of Ed., Federal Impact Aid 84.041 NIA 7/1/10-6/30/11 284,893 52,125 364,684 364,429 364,429 368,715 92,179 179,791 179,791.7,485,324 735,001 184,565 670,853 407,607 985,061 532,869 1,125,041 1,125,041 1,910 1,910 (24,135) 76,260 76,260 (9,977) 9,977 9,977 286,305 78,124 78,124 265,073 265,073 172,894 171,989 171,989 (7,802) 1,985,338. 7,144,306 7,144,306 1,644,320 184,565 670,853 670,853 263,246 320,785 305,329 305,329 93,245 505,350 976,182 976,182 356,491 505,35Q... 976,182 _ -..JlI J82 356,491 1,910 1,910 Total, ED 8,612,275 2,490,688 8,122,398 8,122,398 2,000,811 Total Federal Awards $ 9,797,118 $ 2,560,366 $ 9,249,588 $ 9,249,588 $ 2,012,836 Source Codes: I = Indirect Funding o = Direct Funding F = Federal Share S = State Share Footnotes: a) Beginning inventory @ 7/1/10 b) = Total amount of commodities used c) = Ending inventory @ 6/30/11 Z = Pass through entity was not able to provide CFDA number TEST OF 25% RULE: Total Federal expenditures $ 9,249,588 Tested as "major" programs: IDEA Cluster Title I Cluster State Fiscal Stabilization Fund Education Jobs Fund Title II Improving Teacher Quality ARRA - Title II, Education Technology 976,182 1,455,087 2,322,752 1,375,844 353,174 171,989 = Tested as a major program Total value of programs tested $ 6,655,028 I Federal expenditures $ 9,249,588 Notes: I Percentage tested as major programs 72% This schedule includes the federal award activity of Keystone Central School District and is presented on the accrual basis of accounting. The information on this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented iin this schedule may differ from the amounts presented in, or used in the preparation of, the basic financial statements. See notes to financial statements 46

Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Board of Directors Keystone Central School District We have audited the financial statements of the governmental activities, the business-type activity, each major fund, and the aggregate remaining fund information of Keystone Central School District (the "District") as of and for the year ended, which collectively comprise the District's basic financial statements and have issued our report thereon dated December 27, 2011. Our report indicated that the District adopted the provisions of GASB Statement No. 54 during 2011. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the District is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the District's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified a deficiency in internal control over financial reporting, described in the accompanying schedule of findings and questioned costs as item 2011-1, that we consider to be a significant deficiency in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 47

Compliance and Other Matters As part of obtaining reasonable assurance about whether the District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of the District in a separate letter dated December 27, 2011. The District's response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the Board of Directors, management, others within the District and federal award agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Williamsport, Pennsylvania December 27,2011 48

Independent Auditors' Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 Soard of Directors Keystone Central School District Compliance We have audited Keystone Central School District's (the "District") compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2011. The District's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the District's management. Our responsibility is to express an opinion on the District's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMS Circular A- 133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMS Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for. our opinion. Our audit does not provide a legal determination of the District's compliance with those requirements. In our opinion, the District complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended. Internal Control Over Compliance Management of the District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the District's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMS Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over compliance. 49

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, we identified a certain deficiency in internal control over compliance that we consider to be a significant deficiency as described in the accompanying schedule of findings and questioned costs as item 2011-2. A significant deficiency in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. The District's response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. We did not audit the District's response and, accordingly, we express no opinion on the response. This report is intended solely for the information and use of the Board of Directors, management, others within the District and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Williamsport, Pennsylvania December 27,2011 50

Schedule of Findings and Questioned Costs Year Ended June 30,2011 Section I - Summary of Auditors' Results Financial Statements Type of auditors' report issued: Internal control over financial reporting: Material weakness(es) identified? Unqualified yes x no ---- Significant deficiency(ies) identified? X yes ---- none reported Noncompliance material to financial statements noted? yes _--.-:.X-=--_ no Federal Awards Internal control over major programs: Material weakness(es) identified? yes x no ---- Significant deficiency(ies) identified? Type of auditors' report issued on compliance for major programs: X yes ---- Unqualified none reported Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMS Circular A-133? Identification of major program: yes X no CFDA Number 84.027,84.391 84.010, 84.389 84.394 84.410 84.367 84.386 Dollar threshold used to distinguish between Type A and Type S programs: Name of Federal Program or Cluster Special Education Cluster (IDEA) Title I, Part A Cluster State Fiscal Stabilization Fund Education Jobs Fund Title II Improving Teacher Quality Title II Part 0 Education Technology $300.000 Auditee qualified as low-risk auditee? X yes ---- no 51

Schedule of Findings and Questioned Costs Year Ended June 30,2011 Section II - Financial Statements FINDING NO. FINDING/NONCOMPLIANCE 2011-1 Internal Control over Financial Reporting - Budgetary Monitoring - Title II Program Criteria: Internal control is a process that captures and properly records transactions, safeguards assets, and assures compliance with laws and regulations. Budgetary monitoring is a key component to effective internal control over financial reporting. Condition: Cause: Effect: Recommendation: Management's Response: The District exceeded budget on its federally-funded Title II Program and funded the excess program expenditures through unrestricted General Fund sources. The overspending appears to have been attributable to a breakdown in the District's monitoring of related budgetary information at both the programmatic and Business Office levels. The fact that the District's internal control over financial reporting (Le., budgetary monitoring) did not prevent or detect this situation in a timely manner constitutes a significant deficiency in internal control over financial reporting. We recommend that management remain actively involved in the budget monitoring and financial reporting processes relative to intergovernmental grants to enable timely identification of any unanticipated budget variances affecting the District. See corrective action plan. 52

Schedule of Findings and Questioned Costs Year Ended Section III - Federal Award Findings and Questioned Costs FINDING NO. FI NDI NG/NONCOM PLiANCE QUESTIONED COSTS 2011-2 CFDA No. 84.010 - Title I; CFDA No. 84.367 - Title II Criteria: A system of effective internal controls includes the monitoring of cash flows and reporting requirements related to intergovernmental grants. Condition: In connection with our audit of the District's 2010-2011 Title I and Title II grants, we discovered that, although the District had expended a significant amount of these grant awards as of, very little cash was drawndown or received throughout the year. Furthermore, we discovered that not all required quarterly reports were filed for these grant awards during the year ended June 30, 2011. Cause: Oversight by program management. Effect: At the District had recorded a $760,471 N/A receivable related to their 2010-2011 Title I grant award and a $172,894 receivable related to their 2010-2011 Title II grant award. These amounts, or a portion thereof, could have been collected by the District during the year had more rigorous monitoring controls been in place. Additionally, the District did not file all of the required quarterly reports throughout the year. Recommendation: Management's Response: We recommend that an appropriate level of management review the District's cash flows and reporting responsibilities related to intergovernmental grants to ensure that cash draws are being managed appropriately and all reporting requirements are being met. See corrective action plan. 53

Summary of Schedule of Prior Audit Findings Year Ended FINDING NO.. FINDING/NONCOMPLIANCE QUESTIONED COSTS 2010-1 CFDA No. 84.010- Title I; CFDA No. 84.367 - Title II Condition: In connection with our audit of the District's 2009-2010 Title I and Title II grants, we discovered that, although the District had expended a significant amount of these grant awards as of June 30, 2010, no cash was received throughout the year. Furthermore, we discovered that no quarterly reports were filed for these grant awards during the year ended June 30, 2010.. Recommendation: We recommend that an appropriate level of management review the District's cash flows and reporting responsibilities related to intergovernmental grants to ensure that cash draws are being managed appropriately and all reporting requirements are being met. Resolution: See current year finding 2011-2. 54