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HomeMy WebLinkAboutOrd. 1321 2007-02-26 CITY OF PEARLAND, TEXAS $23,250,000 CERTIFICATES OF OBLIGATION SERIES 2007 TRANSCRIPT OF PROCEEDINGS Andrews Kurth LLP 600 Travis, Suite 4200 Houston,Texas 77002 (713)220-4200 � I HOU:2660188.1 • CITY OF PEARLAND, TEXAS (Brazoria and Harris Counties, nhes Texas) CERTIFICATES OF OBLIGATION SERIES 2007 I -- INDEX OF CONTENTS CERTIFICATE PROCEEDINGS AND DOCUMENTS Closing Memorandum 1 Resolution Authorizing Publication of Notice 2 of Intention to Issue Certificates Affidavits of Publication of Notice of Intent 3 Ordinance Authorizing Issuance of the Certificates 4 • Preliminary Official Statement and Official Notice of Sale 5 • . Official Statement 6 Paying Agent/Registrar Agreement 7 CERTIFICATES • • General Certificate 8 Signature Identification and No-Litigation Certificate 9 Federal Tax Certificate '-d Form 8038G 10 Official Statement Certificate 11 Certificate of the Bond Insurer 12 OPINIONS ( Approving Opinion of Bond Counsel 13 Opinion of Attorney General of Texas with Certificate of Comptroller of Public Accounts 14 Opinion of Counsel to the Bond Insurer 15 HOU:2665095.1 f I _ MISCELLANEOUS Receipt and Cross Receipt 16 Registrar's Receipt 17 Insurance Policy 18 Rating Agency Letters 19 Specimen Certificate 20 V' ' I Winning Bid 21 Bond Review Board Questionnaire 22 _ Reliance Letter to Bond Insurer • 23 • HOU:2665095.1 • R B C John H.Robuck Capital Associate Public Finance RBC Markets Phone(713)651-3340 Fax(713)651-3347 March 20,2007 ' Ms.Den Ward Wells Fargo Bank,N.A. Corporate Trust Services 1000 Louisiana Street, Suite 640 Houston,Texas 77002 Re: $23,250,000 City of Pearland,Texas Certificates of Obligation,Series 2007 Dear Deri: The delivery of the above captioned certificates(the"Certificates")is scheduled for Thursday,March 22,2007,at 10:00 A.M.at your bank. Mr.Marcus Deitz of Andrews Kurth LLP,Houston,Texas,Bond Counsel,will handle all legal matters relating to the closing. Andrews Kurth will provide the Good Faith Check at closing. The Good Faith Check is to be endorsed by the City and returned to UBS Securities LLC via overnight courier. Prior to closing, UBS Securities LLC("UBS")will make arrangements to pay the insurance premium of$79,000.00 I , to Ambac Assurance Corporation("AMBAC")as follows: • Citibank N.A. ABA Routing Number. 021000089 For: Ambac Assurance Corporation Account Number: 40609486 • Policy Number: 26306BE Attn.: Linda Crocitto(212)208-3241 ***Include Policy Number on Wire*** At or prior to closing,UBS will wire$23,311,674.38 in immediately available funds calculated as follows: Principal Amount of the Certificates $23,250,000.00 Plus: Accrued Interest 61,674.38 Total Amount to be Wired $23,311,674.38 i r-, Ms.Deri Ward March 20,2007 Page 2 UBS will wire the aforementioned sum of$23,311,674.38 to Wells Fargo Bank("WFB")as follows:., Wells Fargo Bank ABA Routing Number. 121000248 Account Number: 0001038377 For further credit to 99990909 Re: The City of Pearland Attn: Deri Ward(713)319-1658 WFB will disburse the total amount of$23,311,674.38 as follows: 1. $23,249,500.00 (representing$23,120,000.00 in project fund proceeds and$129,500.00 in issuance costs on the Certificates)shall be wired to the City's depository account as follows: • Wells Fargo Bank,N.A. ABA Routing Number: 121000248 Account Number: 2010419505' For further credit: City of Pearland Attn: Tim Kreitzer 2. $61,674.38 representing accrued interest shall be wired to the City's Debt Service Fund,as follows: Wells Fargo Bank,N.A. ABA Routing Number: 121000248 Account Number: 2010419505 For further credit: City of Pearland'' Attn: Tim Kreitzer 3. $500 shall be withdrawn by WFB from the proceeds of the Certificates and credit such sum to its account as the Paying Agent Annual Administration Fee for the Series 2007 Certificates. If I may be of further assistance,please do not hesitate to contact me at 713-651-3340. Sincerely, John H.Robuck Associate cc: Rick Witte,Andrews Kurth LLP - Marcus Deitz,Andrews Kurth LLP Bill Eisen,City of Pearland Claire Manthei,City of Pearland Michael Azzinaro,UBS Securities LLC Linda Crocitto,Ambac Assurance Corporation Frank Ildebrando,RBC Capital Markets Ryan O'Hara,RBC Capital Markets LL_ Karen Blogg,RBC Capital Markets • • • • CERTIFICATE FOR • RESOLUTION • THE STATE OF TEXAS . § - IA COUNTIES OF BRAZORAND HARRIS § • CITY OF PEARLAND § • We, the undersigned officers of the City of Pearland;Texas(the"City"),hereby certify as ' follows: . • • • 1. The City Council of the.Cityconvened in a regular meeting on January 8,2007, at the regular meeting place thereof, within the City, and the roll-was called of the duly constituted officers and members of the City Council, to wit: • . . Tom Reid • Mayor Richard F. Tetens Mayor Pro Tern Kevin Cole Council Member • Helen Beckman • Council Member • • Felicia Kyle . . Council Member • Steve Saboe • Council Member Young Lorfing . " • . City Secretary. . and all of such persons were present, thus constituting a,quorum.•Whereupon, among other. business, the following was transacted at said meeting: a written RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION - • TO ISSUE CERTIFICATES OF OBLIGATION IN A PRINCIPAL AMOUNT •• • NOT TO EXCEED $23,250,000 FOR THE ACQUISITION, CONSTRUCTION . - • AND IMPROVEMENT OF CERTAIN PUBLIC WORKS, AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH CERTIFICATES AND AUTHORIZING CERTAIN. OTHER MATTERS RELATING THERETO • • • (the"Resolution") was duly introduced for the consideration of the City Council and readin full. It was then duly moved and seconded that such Resolution be adopted; and, after due discussion, the motion, carrying with it the adoption of the Resolution, prevailed'and carried by the • following vote: . • {{ AYES: 5 NAYS: 0 •ABSTENTIONS: 0 • • 2. That.a true, full and correct copy of the Resolution adopted at the meeting described in the above and foregoing paragraph is attached to and follows this certificate;that the • Resolution has been duly recorded in the City Council's minutes of such meeting; that the above and foregoing paragraph is a true, full and correct excerpt from the City Council's minutes of such meeting pertaining to the adoption of the Resolution; that.the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of the , City Council as indicated therein; that each of the officers and members of the City Council was duly and sufficiently notified officially and personally, in advance, of the date, hour, place and 1 • HOU:2651776.1 • • subject of the aforesaid meeting, and that the Resolution would be introduced and considered for adoption at such meeting, and each of such officers and members consented, in advance, to the holding of such meeting for such purpose; that such meeting was open to the public as required by law; and that public notice of the date, hour, place and subject of such meeting was given as required by the Open Meetings Law, Chapter 551, Texas Government Code. SIGNED AND SEALED this January 8, 2007. • Ci ecret. Mayor C OF . 'ARL TEXAS CITY OF PEARLAND, TEXAS o®og®ap9limem40,B, oho 3 $ . of 43;a2.00Qa00) • L. 1 ' 1 , 2 HOU:2651776.1 • • • • RESOLUTION NO.R2007-7 • • RESOLUTION AUTHORIZING PUBLICATION NOTICE OF OF INTENTION • TO ISSUE CERTIFICATES OF OBLIGATION IN A PRINCIPAL AMOUNT( NOT TO EXCEED $23,250,000 FOR THE ACQUISITION, CONSTRUCTION AND IMPROVEMENT OF CERTAIN PUBLIC WORKS, AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH CERTIFICATES AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO • STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § • • WHEREAS, the City'Council (the "City Council") of the City of Pearland, Texas (the "City"), is authorized to issue certificates of obligation to pay contractual obligations to be incurred for the construction of public works, for the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes, and for the payment of contractual obligations for professional services pursuant to Subchapter C of Chapter • 271,Texas Local Government Code, as amended; • WHEREAS, the City Council has determined that it is in the best interests of the City and otherwise desirable to issue .certificates of obligation in a principal amount not to exceed • $23,250,000 styled "City of Pearland, Texas Certificates of Obligation, Series 2007" (the "Certificates") for the design, engineering, acquisition and construction of certain public works • and the purchase of certain equipment for authorized needs and purposes; WHEREAS, in.connection with the Certificates,'the City Council intends to publish notice of intent to issue the Certificates (the "Notice") in a newspaper of general circulation in the City, • WHEREAS, for purposes of providing for the sale of the Certificates, the City Council • intends to authorize the preparation of a Preliminary Official Statement (the "Preliminary Official Statement")to be used in the public offering of the Certificates; and • WHEREAS, the City Council has been presented with and has examined the proposed form of Notice and finds that the form and substance thereof are satisfactory, and that the recitals and findings contained therein are true, correct and complete.. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: • Section 1. • Preamble. The facts and recitations contained in the preamble of this : Resolution are hereby found and declared to be true and correct. • HOU:2648764.3 • • • • • • Section 2. Authorization of Notice. The City Secretary is hereby authorized and directed to execute and deliver the Notice set forth in Exhibit A hereto and to publish such Notice on behalf of the City once a week for two (2) consecutive weeks in a newspaper which is of general circulation in the City, the date of the first publication to be at least fifteen (15) days before the date tentatively set in the Notice for the passage of the ordinance authorizing-the issuance of the Certificates. S Section 3. Engagement of Professionals. This City Council hereby approves the engagement of Andrews Kurth LLP, as bond counsel ("Bond Counsel") in connection with the • issuance of the Certificates. Section 4. Authorization of a Preliminary Official Statement. This City Council hereby approves the preparation and distribution by the City's financial advisor to prospective purchasers of the Certificates of the Preliminary Official Statement, as the same may be completed, modified, or supplemented with the approval of the•Mayor or other authorized officers and agents of the City. . • Section 5. Authorization of Other Matters Relating Thereto. The Mayor, City • Secretary and other officers and agents of the City are hereby authorized and directed to do any and all things necessary or desirable to carry out the provisions of this Resolution. Section 6. Effective Date. This Resolution shall take effect•immediately upon passage. . Section 7. Public Meeting. It is officially found, determined and declared that the meeting at which this Resolution is adopted was open to the public and public notice of the time, place and subject matter of the public business to be considered at such meeting, including this Resolution, was given all as required by the Texas Government Code, Chapter 551, as amended. • 1. • • • 2 HOU:26487643 PASSED AND APPROVED this 8th day of January, 2007. Mayor City of Pearland, Texas ATTEST: C. Secre of P arland, Te as s r al�fflQry/�// l �a% 4 20446aooa , aP° • q'S , 11. a o rk SOS 00000°0 S� *pi //I/A f 010 i 9�©�o�.0 iy 1 . 3 HOU:2648764.3 • EXHIBIT A NOTICE OF INTENTION TO ISSUE CERTIFICATES NOTICE IS HEREBY GIVEN that the City Council of the City of Pearland, Texas (the "City") will meet at its regular meeting place at City Hall, Pearland, Texas at 7:30 p.m. on the t- 26th day of February, 2007, which is the time and place tentatively set for the passage of an ordinance and such other action as may be deemed necessary to authorize the issuance of the City's certificates of obligation, payable from ad valorem taxation and a limited (in an amount not to exceed $10,000) subordinate pledge of certain revenues of the water and sewer system of the City, in the maximum aggregate principal amount of$23,250,000,bearing interest at any rate or rates, not to exceed the maximum interest rate now or hereafter authorized by law, as shall be determined within the discretion of the City Council at the time of issuance and maturing over a period of years not to exceed forty(40) years from the date thereof, for the purpose of evidencing the indebtedness of the.City to pay all or any part of the contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit(i) the design and construction of a multi- purpose municipal facility located in the 2600 block of Cullen Parkway, (ii) renovations to the police facility located at 2703.Veterans Drive, (iii) renovations to the community center located at 3523 Liberty Drive, (iv) renovations to Fire Station #1 located at 2020 Old Alvin Road, (v) renovations to Fire Station #4 located at 8333 Freedom Drive and (vi) professional services rendered in connection with the above listed projects. WITNESS MY HAND AND THE OFFICIAL SEAL, OF THE CITY, this 8th day of January, 2007. . 461017 Seca y of r land, Tej as �. . AFFIDAVIT OF NEWSPAPER PUBLISHER • STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § Before me, the undersigned authority, on this day personally appeared Randy Emmons, who being by me duly sworn, deposes and says that he/she is the publisher of The Reporter News and that said newspaper(i) devotes not less than 25%of its total column lineage to general interest items, (ii) is published at least once each week, (iii) is entered as a second-class postal matter in the county in which it is published and is generally circulated within the territory of the City of Pearland, Texas (the "City"), and (iv) was published regularly and continuously for at least 12 months before January 17, 2007, the first date on which the City published the attached notice in said newspaper. The notice was also subsequently published on January 24, 2007. Publisher SUBSCRIBED AND SWORN TO before me this the (0 day of a , 2007. A ASA 41'/ .......•• : Notary 'ublic, State of Texas •••• aNS : ..: ••.'r••.._• r ion expires: 0 9 0.l0 • NS Q''►'niss on 0,ee 08,E 10 • • HOU:2657061.1 • • • .. • • • • • • -..,. , i•, -.. .-.-....4.:. 0 - .1..4i.•.',,:--,,.--!'i• I. • . . . . -rt.••••..Q..Q.".• " - r-, :•-.' ....... •-, ...:"c'''2 .; :. ',! .. : , . ' . ..•.a. -• - •.,.,.. ., •. i',... . .1 i .. • .. . Fr'P:.' ': ' •..,.n.. '.1-'''it,:•::::,, ,,..1:-..;...,3 .,,,,..:.f.:" :1 ,r,:t...-Iri..,;,,,g,-. : ...,d., t-,...,...;... . .. L,,.-. 7.. ';1. '... 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' . __. t • --- ( 1 , ,- 1 L ). 1 . . - •--- 1 • 1 t''' -, L _ ______ • J � _ti • ORDINANCE NO. 1321 AN ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007; PRESCRIBING THE TERMS AND a I; FORM THEREOF; PROVIDING FOR THE PAYMENT OF THE PRINCIPAL THEREOF AND INTEREST THEREON; AWARDING THE SALE THEREOF; AUTHORIZING THE PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE CERTIFICATES; AUTHORIZING THE _ PURCHASE OF BOND INSURANCE; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES, INCLUDING *USE OF THE PROCEEDS THEREOF, AND MATTERS INCIDENT THERETO;AND DECLARING AN EMERGENCY BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND: ARTICLE I • u~ FINDINGS AND DETERMINATIONS Section 1.1: Findings and Determinations. The City Council hereby officially finds and determines that: (a) The City of Pearland, Texas (the "City"), acting through its City Council, is it authorized pursuant to and in accordance with the provisions of Texas Local Government Code, Chapter 271, Subchapter C, as amended(the"Act"), to issue certificates of obligation to provide all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment,machinery,'buildings, land and rights • - h of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit(i)the design and construction of a•multi-purpose municipal facility located in the 2600 block of Cullen Parkway, (ii) renovations to the police facility located at 2703 Veterans Drive, (iii) renovations to the community center located at 3523 Liberty Drive, • (iv) renovations to Fire Station #1 located at 2020 Old Alvin Road, (v) renovations to Fire • Station #4 located at 8333 Freedom Drive and (vi) professional services rendered in connection with the above listed projects. (b) The City Council authorized the publication of a notice of intention to issue Certificates of Obligation, Series 2007 (the"Certificates")to the effect that the City Council was tentatively scheduled to meet at 7:30 p.m. on February 26, 2007 at its regular meeting place to adopt an ordinance authorizing the issuance of the Certificates to be payable from (i) an ad valorem tax levied, within the limits prescribed by law, on the taxable property located within the City, and (ii) the revenues.to be derived from the City's water and sewer system (the "System") after the payment of all operation and maintenance expenses thereof (the "Net Revenues") in an amount not to exceed $10,000, to the extent that ad valorem taxes are ever insufficient or unavailable for such purposes, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. • HOU26621472 . (c) Such notice was published at the times and in the manner required by the Act. (d) No petition signed by at least five percent(5%)of the qualified voters of the City has been filed with or presented to any official of the City protesting the issuance of such Certificates on or before February 26,2007,or the date of passage of this Ordinance. (e) The City has determined that it is in the best interests of the City and that it is otherwise desirable to issue the Certificates to provide all or part of the funds to pay contractual obligations to be incurred for the purposes authorized by the Act. ARTICLE II DEFINITIONS AND INTERPRETATIONS Section 2.1: Definitions. As used herein, the following terms shall have the meanings specified,unless the context clearly indicates otherwise: - "Act" shall mean Texas Local Government Code, Chapter 271, Subchapter C, as amended. _ "Attorney General"shall mean the Attorney General of the State of Texas. "Bond Insurance Policy" shall mean the financial guaranty insurance policy issued by the Bond Insurer insuring the payment when due of the principal and interest on the Certificates as provided therein. "Bond Insurer"shall mean Ambac Asset Assurance,Inc.. "Certificate" or "Certificates" shall mean any or all 'of the City of Pearland, Texas Certificates of Obligation, Series 2007,authorized by this Ordinance. —' "City"shall mean the City of Pearland,Texas and,where appropriate,its City Council. 1 ) "City Council"shall mean the governing body of the City. "Code"shall mean the Internal Revenue Code of 1986,as amended. "Comptroller"shall mean the Comptroller of Public Accounts of the State of Texas. "DTC" shall mean The Depository Trust Company, New York, New York, or any successor securities depository. "DTC Participant" shall mean brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC Participants. a "Fiscal Year" shall mean the City's then designated fiscal year, which currently is the twelve-month period beginning on the first day of October of a calendar year and ending on the 2 HOU:26621472 • —I i last day of September of the next succeeding calendar year and each such period may be designated with the number of the calendar year in-which such period ends. "Interest Payment Date," when used in connection with any•Certificate, shall mean ; September 1, 2007, and each March 1 and September 1 thereafter until maturity or earlier redemption of such Certificate. "Issuance Date" shall mean the date on which the Certificates are delivered to and paid for by the Purchaser. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements hereto. "Outstanding", when used with reference to the Certificates, shall mean, as of a particular date, all Certificates theretofore and thereupon delivered pursuant to this Ordinance except: (a) any Certificates canceled by or on behalf of the City at or before such date; (b) any Certificates defeased pursuant to the defeasance provisions of this Ordinance or otherwise defeased as permitted by applicable law; and (c) any Certificates in lieu of or in substitution for which a replacement Certificate shall have been delivered pursuant to this Ordinance. 1 "Paying Agent/Registrar" shall mean Wells Fargo Bank, N.A., Houston, Texas, and its • successors in that capacity. "Purchaser"shall mean the entity or entities specified in Section 7.1 hereof. "Record Date" shall mean the close of business on the fifteenth day of the calendar month immediately preceding the applicable Interest Payment Date. "Register" shall mean the registration books for the Certificates kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts t_4 registered to, each Registered Owner of Certificates. "Registered Owner" shall mean the person or entity in whose name any Certificate is registered in the Register. • Section 2.2: Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or c restrict any of the terms or provisions hereof. This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Certificates and the validity of the levy of ad valorem taxes to pay the principal of and interest on the Certificates. 3 HOU:2662147.2 { . ARTICLE III TERMS OF THE CERTIFICATES • a�14 Section 3.1: Amount, Purpose and Authorization. (a) The Certificates shall be issued in fully registered fonm, without coupons, under and pursuant to the authority of the Act in.the total authorized aggregate principal amount of TWENTY THREE MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($23,250,000) for the purpose of providing all. or part of the funds to pay contractual obligations to be incurred for the purposes described in paragraph 1.1(a)hereof. Section 3.2: Designation, Date and Interest Payment Dates. The Certificates shall be designated as the "City of Pearland, Texas Certificates of Obligation, Series 2007," and shall be dated March 1, 2007. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of March 1, 2007 or the most recent Interest Payment Date to which interest has been paid or duly provided for, calculated on the basis of a 360-day year of twelve 30-day months, payable on September 1, 2007, and each March 1 and September 1 thereafter until maturity or earlier redemption. • If interest on any Certificate is not paid on any Interest Payment Date and continues unpaid for thirty (30) days thereafter, the Paying Agent/Registrat shall establish a new record date for the payment of such interest, to be known as a Special Record Date. The Paying Agent/Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the City. Such Special Record Date shall be fifteen (15) days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first class, postage prepaid, not later than five(5) days prior to the Special Record Date,to each affected Registered Owner as of the close of business on the day prior to mailing of such notice.' Section 3.3: Numbers, Denomination. Interest Rates and Maturities. The Certificates t__' shall be initially issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in the following schedule, and may be transferred and exchanged as set out in this • Ordinance. The Certificates shall mature on March 1 in each of the years and in the amounts set • out in such schedule. certificates delivered in transfer of or in exchange for other Certii.c;ates shall be numbered in order of their authentication by the Paying Agent/Registrar, shall be in the denomination of$5,000 or integral multiples thereof and shall mature on the same date and bear interest at the same rate as the Certificate or Certificates in lieu of which they are delivered. Certificate Year of Principal Interest Number Maturity Amount Rate R-1 2008 $50,000 5.000% R-2 2009 • . 50,000 5.000 R-3 2010 100,000 5.250 R-4 2011 150,000 5.250 R-5 2012 200,000 5.250 R-6 2013 250,000 5.250 4 4, HOU:26621472 • r R-7 2014 300,000 5.250 R-8 2015 , 350,000 5.250 t R-9 2017 400,000 5.250 �, R-10 2018 450,000 5.250 R-11 2018 1,005,000 5.250 ,, R=12 2019 1,060,000 5.250 R-13 2020 1,115,000 5.250 '1 R-14 2021 1,170,000 5.250 R-15 2022 1,230,000 5.250 R-16 2023 1,295,000 5.250 R-17 2024 1,360,000 5.250 , * * * * * * * * * * * * R-18 2026 2,930,000 5.250 R-19 2030 6,525,000 3.250 * * * * * * * * * * * * R-20 2032 3,260,000 4.250 i Section 3.4: Redemption Prior to Maturity. (a) Optional Redemption. The Certificates maturing on and after March 1, 2018 are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 1, 2017,or any date thereafter, at par plus accrued interest to the date fixed for redemption. 1 (b) The Certificates maturing on March 1, 2026, 2030 and 2032 (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Principal ' Mandatory Redemption Dates Amounts Term Bonds Maturing March 1,2026 . March 1,2025 $ 1,430,000 - March 1,2026(maturity) 1,500,000 Term Bonds Maturing March 1,2030 March I,2027 $ 1,580,000 March 1,2028 1,660,000 , March 1,2029 1,745,000 March 1,2030(maturity) 1,540,000 Term Bonds Maturing March 1,2032 March 1,2031 $ 1,600,000 March 1,2032(maturity) 1,660,000 The particular Term Certificates to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 1 of each year in which Term Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term —, Certificates that have been optionally redeemed on or before January 1 of such year and which have not been made the basis for a previous reduction. _' 5 ,"'1 HOU:2662147/ ai • • (c) Certificates may be redeemed in part only in integral multiples of$5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of$5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of$5,000 denomination which is obtained by dividing the principal amount of such Certificate by$5,000. Upon presentation and surrender of any Certificate for redemption in part, „; • the Paying Agent/Registrar, in accordance with the provisions of this Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. • (d) Notice of any redemption, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the Register,not less than thirty(30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates d ; called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Certificates..which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being Outstanding except for the purpose of being paid with the funds so provided for such payment. Section 3.5: Manner of Payment, Characteristics. Execution and Authentication. The Paying Agent/Registrar is hereby appointed the paying agent for the Certificates. The Certificates shall be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the manner indicated in the FORM OF + CERTIFICATES set forth in Article IV of this Ordinance. If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of the Certificates or before the delivery of the Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. • The appr^-.gig legal opinion of Andrews Kurth LLP, Houston, TAxas, Bond Counsel, may be printed on the back of the Certificates over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Certificates,but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the validity of the Certificates. Section 3.6: Authentication. Except for the Certificates to be initially issued, which need not be authenticated by the Registrar, only such Certificates as shall bear thereon a certificate of authentication, substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be - entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. .Such duly executed certificate of authentication shall be conclusive evidence that the Certificate so authenticated was delivered by the Paying Agent/Registrar hereunder. • • r7 6 I HOU:2662147.2 i 1 Section 3.7: Ownership. The City, the Paying Agent/Registrar and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such -' Certificate for the purpose of making and receiving payment of the principal thereof and interest • thereon and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Certificate in accordance with this Section shall be valid and effective and shall discharge the liability of the 1- ; City and the Paying Agent/Registrar upon such Certificate to•the extent of the sums paid. Section 3.8: Registration, Transfer and Exchange. The Paying Agent/Registrar is hereby appointed the registrar for the Certificates. So long as any Certificate remains Outstanding, the Paying Agent/Registrar shall keep the Register at the City Administrator's office in which, subject to such reasonable regulations as it may prescribe, the Paying 1 Agent/Registrar shall provide for the registration and transfer of the Certificates in accordance with the terms of this Ordinance. rLL`, Each Certificate shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar,accompanied by an assignment duly executed-by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Certificate for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) • hours after such presentati on,n, a new Certificate or Certificates, registered in the name of the . transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate. as the Certificate or Certificates so presented and surrendered. . • All Certificates shall be exchangeable upon the presentation and surrender thereof at the • - principal corporate trust office of the Paying Agent/Registrar'for a Certificate of Certificates, maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Certificate or Certificates presented for exchange. The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver • exchange Certificates in accordance with the provisions of this Section. Each Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such Certificate is delivered. All Certificates issued in transfer or exchange shall be delivered to the Registered Owners thereof at the principal corporate trust office of the Paying Agent/Registrar or sent by United States mail, first class,postage prepaid. The City or the Paying Agent/Registrar may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Certificate. Any fee or charge of ? the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Certificate called for redemption in whole or in part during the forty-five(45)day period immediately prior 7 • • ,''1 HOU26621472 • _r • • to the date fixed for redemption; provided, however, that this restriction shall not apply to"the transfer or exchange by the Registered Owner of the unredeemed portion of a Certificate called for redemption in part. Section 3.9: Book-Entry Only System. The definitive Certificates shall be initially issued in the form of a separate single fully registered Certificate for each of the maturities thereof. Upon initial issuance, the ownership of each such Certificate shall be registered in the name of Cede & Co., as nominee of DTC, and except as provided in Section 3.11 hereof, all of the Outstanding Certificates shall be registered in the name of Cede& Co., as nominee of DTC. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede&Co., and subject to the provisions in this Ordinance with respect to interest checks being mailed to the Owner at the close of business on the Record Date, the word"Cede&Co."in this Ordinance shall refer to such new nominee of DTC. . With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, • the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Certificates. -Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (a) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (b) the delivery to any DTC Participant or any other person, other than a . Certificateholder, as shown on the Register, of any notice with respect to the Certificates, V ! including any notice of redemption or (c) the payment to any DTC Participant or any other person, other than a Certificateholder as shown in the Register, of any amount with respect to principal of Certificates,premium,if any,or interest on the Certificates. Except as provided in Section 3.10 of this Ordinance, the City and the. Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Certificate 7 ? is registered in the Register as the absolute owner of such Certificate for the'. se of pa yment p yment of principal of, premium, if any, and interest on Certificates, forthe purpose of giving notices of redemption and other matters with respect to such Certificate, for the purpose of registering transfer with respect to such Certificate, and for all other purposes whatsoever. The Paying ?r Agent/Registrar shall pay all principal of Certificates, premium, if any, and interest on the Certificates only to or upon the order of the respective owners, as shown in the Register as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with • respect to payment of principal of,premium, if any, and interest on the Certificates to the extent ' of the sum or sums so paid. No person other than an owner shall receive a Certificate evidencin • g , the obligation of the City to make payments of amounts due pursuant to this Ordinance. r Section 3.10: Payments and Notices to Cede & Co. Notwithstanding any other _ provision of this Ordinance to the contrary, as long as any Certificates are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal ofi premium, if any, and interest on the Certificates, and all notices with respect to such Certificates shall be made • i and given,respectively, in the manner provided in the representation letter of the City to DTC. . 8 . • HOU:2662147.2 L_: r- • Section 3.11: Successor Securities Depository: Transfer Outside Book-Entry Only • System. In the event that the City or the Paying Agent/Registrar determines that DTC is incapable of discharging its responsibilities described herein and in the representation letter of the City to DTC, and that it is in the best interest of the beneficial owners of the Certificates that they be able to obtain certificated Certificates, the City or the Paying Agent/Registrar shall (a) 1 ' appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC of the appointment of such • successor securities depository and transfer one or more separate Certificates to such successor securities depository or (b) notify DTC of the availability through DTC of Certificates and transfer one or more separate Certificates to DTC Participants having Certificates credited to their DTC accounts. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede&Co., as nominee of DTC,but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Certificateholders transferring or exchanging Certificates shall designate,in accordance with the i, provisions of this Ordinance. Section 3.12: Replacement Certificates. Upon the presentation and surrender to the Paying Agent/Registrar of a damaged or mutilated Certificate, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Certificate, of the same maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Registered Owner of such Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Paying Agent/Registrar and the City. If any Certificate is lost, apparently destroyed or wrongfully taken, the City, pursuant to the applicable laws of the State of Texas and ordinances of the City, and in the absence of notice or knowledge that such Certificate has been acquired by a bondfide purchaser,shall execute, and the Paying Agent/Registrar shall authenticate and deliver, a replacement Certificate of the same maturity, interest rate and principal amount, bearing a' number not contemporaneously outstanding,provided that the Registered Owner thereof shall have: (a) furnished,to the City and the Paying Agent/Registrar satisfactory evidence of the ownership of and the circumstances of the loss,destruction or theft of such Certificate; (b) furnished such security or indemnity as' may be required by the Paying • Agent/Registrar and the City to save and hold them harmless; (c) paid all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar and any tax or other governmental charge that may be imposed;and (d) met anyother reasonable requirements of the City eq ' and the Paying Agent/Registrar. • If, after the delivery of such replacement Certificate, a bona fide purchaser of the original • !M Certificate in lieu of which such replacement Certificate was issued presents for payment such • 9 HOU:26621471 F S ' original Certificate, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Certificate from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the City or the Paying Agent/Registrar in connection therewith. If any such mutilated, lost, apparently destroyed or wrongfully taken Certificate has become or is about to become due and payable, the City in its discretion may,instead of issuing a replacement Certificate, authorize the Paying Agent/Registrar to pay such Certificate. Each replacement Certificate delivered in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such replacement Certificate is delivered. Section 3.13: Cancellation. All Certificates paid or redeemed in accordance with this Ordinance, and all Certificates in lieu of which exchange Certificates or replacement Certificates are authenticated and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment or redemption. The Paying Agent/Registrar • - shall periodically furnish the City with certificates of destruction of such Certificates. ARTICLE IV FORM OF CERTIFICATES . The Certificates, including the Form of Comptroller's Registration Certificate, Form of . Paying Agent/Registrar Authentication Certificate, Statement of Insurance and Form of Assignment, shall be in substantially the following forms, with such omissions, insertions and variations as may be necessary or desirable,and not prohibited by this Ordinance: - • 10 i HOU2662I47.2 UNITED STATES OF AMERICA STATE OF TEXAS 1_ NUMBER DENOMINATION R- $ CITY OF PEARLAND, TEXAS REGISTERED CERTIFICATE OF OBLIGATION REGISTERED SERIES 2007 INTEREST RATE: DATED DATE: MATURITY DATE: CUSIP: March 1, 2007 March 1, REGISTERED OWNER: = PRINCIPAL AMOUNT: DOLLARS THE CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on the maturity date specified above (or on earlier redemption as herein provided), upon presentation and surrender of this Certificate at the principal corporate trust office of Wells Fargo Bank, N.A., Houston, Texas, or its successor (the "Paying Agent/Registrar"), the principal amount identified above (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America,.and to pay interest thereon at the rate shown above, calculated on a basis of a 360-day year composed of twelve 30-day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. Interest on this Certificate is payable on September 1, 2007, and each March 1 and September 1 thereafter until maturity or earlier redemption of this Certificate, by check sent by United States mail, first class, postage prepaid, i ` by the Paying Agent/Registrar to the Registered Owner of record as of Elie close of business on the fifteenth day of the calendar month immediately preceding the applicable interest payment date, as shown on the registration books kept by the Paying Agent/Registrar. Any accrued -- interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Certificate at the principal corporate trust office of the Paying Agent/Registrar. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the "Certificates") in the aggregate principal amount of $23,250,000 issued pursuant to an ordinance adopted by the City Council of the City on February 26, 2007 (the "Ordinance") for the purpose of providing all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit (i) the design and ±- construction of a multi-purpose municipal facility located in the 2600 block of Cullen Parkway, (ii) renovations to the police facility located at 2703 Veterans Drive, (iii) renovations to the 11 HOU:2662147.2 " community center located at 3523 Liberty Drive, (iv) renovations to Fire Station #1 located at 2020 Old Alvin Road, (v) renovations to Fire Station #4 located at 8333 Freedom Drive and (vi) professional services rendered in connection with the above listed projects. THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate either (i) is registered by the Comptroller - ' of Public Accounts of the State of Texas by due execution of the registration certificate endorsed hereon or (ii) is authenticated by the Paying Agent/Registrar by due execution of the r authentication certificate endorsed hereon. THE CITY RESERVES THE RIGHT, at its option, to redeem, prior to their maturity, Certificates maturing on and after March 1, 2018, in whole or in part, on March 1, 2017, or any date thereafter, at par plus accrued interest to the date fixed for redemption. 1r THE CERTIFICATES MATURING on March 1, 2026, 2030 and 2032 (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in•each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Principal Mandatory Redemption Dates Amounts Term Bonds Maturing March 1,2026 March 1,2025 $ 1,430,000 March 1,2026(maturity) 1,500,000 Term Bonds Maturing March 1,2030 March 1,2027 $ 1,580,000 March 1,2028 1,660,000 March 1,2029 1,745,000 March 1,2030(maturity) 1,540,000 Term Bonds Maturing March 1,2032 March 1,2031 $ 1,600,000 March 1,2032(maturity) 1,660,000 The particular Term Certificates to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 1 of each year in which Term . Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Certificates that have been optionally redeemed on or before January 1 of such year and which have not been made the basis for a previous reduction CERTIFICATES MAY BE REDEEMED IN PART only in integral multiples of$5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of$5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of$5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. 12 HOU:2662147.2 NOTICE OF ANY SUCH REDEMPTION, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class,,postage prepaid, to the Registered Owners thereof at their addresses as shown on the books of registration kept by the Paying Agent/Registrar, not less than thirty(30) days before the date fixed for such redemption. • By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above,the Certificates which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except far the purpose of being paid with the funds so provided for such payment. • THIS CERTIFICATE IS TRANSFERABLE only upon presentation and surrender at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of $5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. • } THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption;provided,however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTR.AR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. ( THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. • IT IS HEREBY DECLARED AND REPRESENTED that this Certificate has been duly and validly issued and delivered; that all acts, conditions and things required or proper to be r performed, exist and to be done precedent to or in the issuance and delivery of this Certificate have been performed, exist and have been done in accordance with law; that the Certificates do not exceed any constitutional or statutory limitation; and that annual ad valorem taxes sufficient r ' to provide for the payment of the interest on and principal of this Certificate, as such interest - comes due and such principal matures, have been levied and ordered to be levied, within the • limits prescribed by law, against all taxable property in the City and have been irrevocably • pledged for such payment. • 13 HOU:2662147.2 • IT IS FURTHER DECLARED AND REPRESENTED that the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof(the "Net Revenues"), in an amount not to exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues-is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of • the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of.obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is filed with the Paying Agent/Registrar, for the full provisions thereof, to all of which the Registered Owners of the Certificates assent by acceptance of the Certificates. - IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and this Certificate to be signed by the Mayor, countersigned by the City Secretary by their manual,lithographed or printed facsimile signatures. CITY OF PEARLAND,TEXAS a Mayor • (SEAL) • • COUNTERSIGNED: . • City Secretary * * * r • • • • 14 1 • HOU2662147.2 FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE The following form of Comptroller's Registration Certificate shall be attached or affixed • to each of the Certificates initially delivered: THE STATE OF TEXAS REGISTER NO. • OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this certificate has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this . Comptroller of Public Accounts of the State of Texas [SEAL] • * * * FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE The following form of authentication certificate shall be printed on the face of each of the Certificates other than those initially delivered: AUTHENTICATION CERTIFICATE • • WELLS FARGO BANK,N.A. By. Authorized Signature Date of Authentication: r * * • • • 15 . HOU:26621472 • • i STATEMENT OF INSURANCE Financial Guaranty Insurance Policy No.26306BE (the"Policy")with respect to payments due for principal of and interest on this Bond has been issued by Ambac Assurance Corporation("Ambac Assurance").The Policy has been delivered to The Bank of New York,New York,New York,as the Insurance Trustee under • said Policy and will be held by such Insurance Trustee or any successor insurance trustee.The Policy is on file and available for inspection at the principal office of the Insurance Trustee and a copy thereof may be secured from Ambac Assurance or the Insurance Trustee.All payments • required to be made under the Policy shall be made in accordance with the provisions thereo£The owner of this Bond acknowledges and consents to the subrogation rights of Ambac Assurance as more fully set forth in the Policy. * * * * FORM OF ASSIGNMENT The following form of assignment shall be printed on the back of each of the Certificates: ASSIGNMENT • For value received,the undersigned hereby sells, assigns and transfers unto (Please print or type name,address, and zip code of Transferee) • (Please insert Social Security or Taxpayer Identification Number of Transferee) the within bond and all rights thereunder,and hereby irrevocably constitutes and appoints attorney to transfer such bond on the books kept for registration thereof,with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE:The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in . NOTICE: Signature mustbe guaranteed by a every particular,without any alteration, member firm of the New York Stock Exchange enlargement or change whatsoever. or a commercial bank or trust company. * * * * r ARTICLE V • • SECURITY FOR THE CERTIFICATES • • Section 5.1: Pledge and Levy of Taxes and Revenues. (a) To provide for the payment of principal of and interest on the Certificates,there is hereby levied, within the limits prescribed by law, for the current year and each succeeding year thereafter, while the•Certificates or any part of the principal thereof and the interest thereon remain outstanding and unpaid, an ad . valorem tax upon all taxable property within the City sufficient to pay the interest on the 16 • HOU:26621472 • • • Certificates and to create and provide a sinking fund of not less than 2% of the principal amount of the Certificates or not less than the principal payable out of such tax, whichever is greater, with full allowance being made for tax delinquencies and the costs of tax collection, and such taxes, when collected, shall be applied to the payment of principal of and interest on the Certificates by deposit to the Certificates of Obligation, Series 2007 Debt Service Fund and to no other purpose. The Cityherebydeclares its (b) purpose and intent to provide and levy a tax legally sufficient to pay the principal of and interest on the Certificates, it having been determined that the existing and available taxing authority of the City for such purpose is adequate to permit a legally sufficient tax. As long as any Certificates remain outstanding, all moneys on deposit in, or credited to, the Certificates of Obligation, Series 2007 Debt Service Fund shall be secured by a pledge of security, as provided by law for cities in the State of Texas. j . (c) In addition, pursuant to the authority of Chapter. 1502, Texas Government Code, as amended, the City also hereby pledges the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof(the "Net Revenues"), in an amount not to exceed $10,000, to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and --' •subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2007 Debt Service Fund is hereby created as a special fund solely for the benefit of the Certificates. The City shall establish and maintain such fund at an official City depository and shall keep such fund separate and apart from all other funds and accounts of the City. Any amount on deposit in the Certificates of Obligation, Series 2007 Debt Service Fund shall be maintained by the City in trust for the Registered Owners of the Certificates. Such amount, plus any other amounts deposited by the City into such fund and any and all investment earnings on amounts on deposit in such fund, shall be used only to pay the principal of premium, if any, and interest on the '� 'Certificates. ' Section 5.3: Further Proceedings. After the Certificates to be initially issued have been executed, it shall be the duty of the Mayor to deliver the Certificates to be initially issued and all pertinent records and proceedings to the Attorney General for examination and approval. After the Certificates to be initially issued shall have been approved by the Attorney General, they shall be delivered to the Comptroller for registration. Upon registration of the Certificates to be -initially issued, the Comptroller (or a deputy lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's registration certificate prescribed herein to be affixed or attached to the Certificates to be initially issued, and the seal of said Comptroller shall be impressed,or placed in facsimile,thereon. 17 • HOU:26621472 • ARTICLE VI • i . CONCERNING THE PAYING AGENT/REGISTRAR Section 6.1: Acceptance. Wells Fargo Bank, N.A., Houston, Texas, is hereby appointed as the initial Paying Agent/Registrar for the Certificates pursuant to the terms and provisions of the Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar. The Paying Agent/Registrar Agreement shall be substantially in the form - attached hereto as Exhibit A, the terms and provisions of which are hereby approved, and the Mayor is hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest thereto and affix the City's seal. Such initial Paying Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of any fees pursuant to the terms of any contract between the Paying Agent/Registrar and the City and/or the deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. • Section 6.2: Trust Funds. All money transferred to the Paying Agent/Registrar in its • capacity as Paying Agent/Registrar for the Certificates under this Ordinance (except any sums representing Paying Agent/Registrar's fees) shall be held in trust for the benefit of the City, shall be the property of the City and shall be disbursed in accordance with this Ordinance. Section 6.3: Certificates Presented. Subject to.the provisions of Section 6.4, all . matured Certificates presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Certificates shall. be canceled as provided herein. . . Section 6.4: Unclaimed Funds Held by the Paying Agent/Registrar. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Certificates remaining unclaimed by the Registered Owner thereof after the expiration of three years froth the date such funds have become due and payable (a) shall be reported and disposed of by the Paying Agent/Registrar in accordance with the provisions of Title 6 of the Texas Property Code, as amended, to the extent such provisions are applicable to such funds, or (b) to the extent such provisions do not apply to the funds, such funds shall be paid by Paying Agent/Registrar to the City upon receipt by the Paying Agent/Registrar of a written request therefor from the City. The Paying Agent/Registrar shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with this Section. Section 6.5: Paying Agent/Registrar May Own Certificates. The Paying Agent/Registrar in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent/Registrar. • Section 6.6: Successor Paying Agents/Registrars. The City covenants that at all times while any Certificates are Outstanding it.will provide a legally qualified bank, trust company, financial institution or other agency to act as Paying Agent/Registrar for the Certificates. The City reserves the right to change the Paying Agent/Registrar for the Certificates on not less than 18 HOU:26621472 r sixty (60) days' written notice to the Paying Agent/Registrar, as long as any such notice is effective not less than 60 days prior to the next succeeding principal or interest payment date on the Certificates. Promptly upon the appointment of any successor Paying Agent/Registrar, the previous Paying Agent/Registrar shall deliver the Register or a copy thereof to the new Paying Agent/Registrar, and the new Paying Agent/Registrar shall notify each Registered Owner, by United States mail, first class, postage prepaid, of such change and of the address of the new Paying Agent/Registrar. Each Paying Agent/Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Ordinance. ARTICLE VII • PROVISIONS CONCERNING SALE AND APPLICATION OF.PROCEEDS OF CERTIFICATES Section 7.1: Sale of Certificates: Insurance. The sale of the Certificates to UBS Securities LLC (the "Purchaser") at a price of the par value thereof,plus accrued.interest on the it Certificates, is hereby approved, and delivery of the Certificates to the Purchaser shall be made upon payment therefor in accordance with the terms of sale and the terms and conditions of the Purchaser's bid. It is hereby officially found, determined and declared that the Purchaser is the highest bidder for the Certificates as a result of invitations for competitive bids. It is further officially found, determined and declared that the Certificates have been sold at public sale to the bidder offering the lowest interest cost, which is hereby determined to be a net effective interest rate of 4.366260%, after receiving sealed bids pursuant to an Official Notice of Sale and Preliminary Official Statement prepared and distributed in connection with the sale of the Certificates. The City hereby acknowledges that the Purchaser's bid is contingent upon the issuance of a policy of the Bond Insurance Policy from the'Bond Insuref'insuring the timely payment of principal of and interest on the Certificates. The terms and conditions of the Bond Insurance Policy, as set out in Exhibit E hereto, are incorporated herein.for all purposes for so long as such policy remains in effect. Such Bond Insurance Policy is to be obtained at the Purchaser's expense. The appropriate officials and representatives of the City are hereby authorized and directed to execute such '.ocuments and certificates and to do any and all things necessary or desirable to obtain such insurance, and the printing on the Certificates of an appropriate legend or statement regarding such insurance, as provided by the Bond Insurer,is hereby approved. Section 7.2: Approval, Registration and Delivery. The Mayor is hereby authorized to have control and custody of the Certificates and all necessary records and proceedings pertaining r thereto pending their delivery, and the Mayor and other officers and employees of the City are hereby authorized and directed to make such certifications and to execute such instruments as may be necessary to accomplish the delivery of the Certificates and to assure the investigation, • examination and approval thereof by the Attorney General and the registration of the initial - Certificates by the Comptroller. Upon registration of the Certificates, the Comptroller (or the Comptroller's certificates clerk or an assistant certificates clerk lawfully designated in writing to (__, act for the Comptroller)•shall manually sign the Comptroller's Registration Certificates prescribed herein to be attached or affixed to each Certificates initially delivered and the seal of the Comptroller shall be impressed or printed or lithographed thereon. • 19 HOU26621472 • • •• Section 7.3: Offering Documents; Ratings. The City hereby approves the form and contents of the Official Notice of Sale, Preliminary Official Statement and the final Official • Statement, dated as of the date hereof, relating to the Certificates, and any addenda, supplement or amendment thereto, and ratifies and approves the distribution of such Preliminary Official Statement-and Official Statement in the offer and sale of the Certificates and in the reoffering of the Certificates by the Purchaser, with such changes therein or additions thereto as the officials ' executing same may deem advisable, such determination to be conclusively evidenced by their L execution thereof. The Mayor is hereby authorized and directed to execute, and the City Secretary is hereby authorized and directed to attest, the final Official Statement. It is further hereby officially found, determined and declared that the statements and representations contained in the Official Notice of Sale, Preliminary Official Statement and final Official Statement are true and correct in all material respects, to the best knowledge and belief of the City Council, and that, as of the date thereof, the Preliminary Official Statement was an official statement of the City with respect to the-Certificates that was deemed "final" by an authorized official of the City except for the omission of no more than the information permitted by subsection (b)(1) of Rule 15c2-12 of the Securities and Exchange Commission. Copies of the Official Notice of Sale, the Preliminary Official Statement and the Official Statement are attached hereto as Exhibits B, C and D,respectively. • Further, the City Council hereby ratifies, authorizes and approves the actions of the Mayor, the City's financial advisor and other consultants in seeking a rating on the Certificates from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and such actions • are hereby ratified and confirmed. Section 7.4: Application of Proceeds of Certificates. Proceeds from the sale of the Certificates shall,promptly upon receipt by the City,be applied as follows: • • (1) Accrued interest shall be deposited into the Certificates of Obligation, Series 2007 • Debt Service Fund created in Section 5.2 of this Ordinance; (2) A portion of the proceeds shall be applied to pay expenses arising in connection with the issuance of the Certificates; • (3) The remaining proceeds shall be applied, together with other funds of the City, to provide funds to pay contractual obligations to be incurred for the purposes set forth in Section a, 3.1 of this Ordinance. Section 7.5: Tax Exemption. Tax Exemption. The City intends that the interest on the Certificates shall be excludable from gross income of the owners thereof for federal income tax purposes pursuant to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the "Code"), and all applicable temporary, proposed and final regulations (the "Regulations") and procedures promulgated thereunder and applicable to the Certificates. ' For this purpose, the City covenants that it will monitor and control the receipt, investment, expenditure and use of all gross proceeds of the Certificates (including all property the I— acquisition, construction or improvement.of which is to be financed directly or indirectly with ' . the.proceeds of the Certificates)and take or omit to take such other and.further actions as maybe required by Sections 103 and 141 through 150 of the Code and the Regulations to cause interest i 20 • HOU:26621472 i • on the Certificates to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Certificates for federal income tax purposes. Without limiting the generality of the foregoing,the City shall comply with each of the following covenants: (a) The City will use all of the proceeds of the Certificates to (i)provide funds to pay contractual obligations to be incurred for the purposes set forth in Section 3.1 hereof, which will be owned and operated by the City and(ii) to pay the costs of issuing the Certificates. The City • will not use any portion of the proceeds of the Certificates to pay the principal of or interest or L redemption premium on, any other obligation of the City or a related person. (b) The City will not directly or indirectly take any action, or omit to take any action, which action or omission would cause the Certificates to constitute "private activity bonds" within the meaning of Section 141(a)of the Code. • (c) Principal of and interest on the Certificates will be paid solely from both ad valorem taxes and pledged revenues collected by the City, investment earnings on such collections, and as available,proceeds of the Certificates. (d) - Based upon all facts and estimates now known•or reasonably expected to be in existence on the date the Certificates are delivered;the City reasonably expects that the proceeds of the Certificates will not be used in a manner that would cause the Certificates or any portion thereof to be an"arbitrage bond"within the meaning of Section 148 of the Code. (e) At all times while the Certificates are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Certificates in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Certificates and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Certificates. To the extent necessary to prevent the Certificates from constituting"arbitrage bonds,"the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose - investments allocable to the Certificates to be less than the yield that is materially higher than the yield on the Certificates. (f) 'i he City will not take any action or knowingly omit to take any action that, if taken or omitted, would cause the Certificates to be treated as"federally guaranteed"obligations for purposes of Section 149(b)of the Code. (g) The City represents that not more than fifty percent(50%) of the proceeds of the • Certificates will be invested in nonpurpose investments(as defined in Section 148(f)(6)(A)of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 149(g)(3)(A)(ii) of the Code, and the City reasonably expects that at least eighty-five percent (85%) of the spendable proceeds of the Certificates will be used to carry out the _ governmental purpose of the Certificates within the three-year period beginning on the date of issue of the Certificates. (h) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Certificates, if any,be rebated to the federal government. Specifically, the City will (i) maintain records regarding the 21 HOU:26621472 receipt, investment, and expenditure of the gross proceeds of the Certificates as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the • funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after.the day on which the last outstanding Certificate is discharged; (ii) account for all gross proceeds under a-reasonable, consistently.applied method of accounting, not employed as an artifice or device to avoid in whole or in part, the requirements of Section 148 of the Code,. including any specified method of accounting required by applicable Regulations to be used for all or a portion of any gross proceeds, (iii) calculate, at such times as are required by applicable Regulations, the amount of excess arbitrage profits, if any, earned from the investment of the gross proceeds of the Certificates and(iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such.error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it,interest thereon and any penalty. • (i) The City will not directly or indirectly pay any amount otherwise payable to the • federal government pursuant to the foregoing requirements to any person other than the federal •- government by entering into any investment arrangement•with respect to the gross proceeds of L the Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if such arrangement had been at arm's length and had the yield on the Certificates not been relevant to either party. (j) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of.the Code with.respect to the Certificates on such form and in such place as the Secretary may prescribe. • (k) The City will not issue or use the Certificates as part of an "abusive arbitrage device" (as defined in Section 1.148-10(a) of the Regulations). •Without limiting the foregoing, the Certificates are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations, by (i) • enabling the City to exploit the difference oetween tax-exempt and taxable interest rates to gain a material financial advantage, or (ii) increasing the burden on the market for tax-exempt obligations. • (1) Proper officers of the City charged with the responsibility for issuing the hereby are directed to make, execute and deliver certifications as to facts, estimates • or circumstances in existence as of the date of issuance of the Certificates and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the date of issuance of the Certificates, the City will take such actions as are • _necessary and appropriate to assure the continuous accuracy of the representations contained in • such certificates. • 22 HOU2662147.2 . • (m) The covenants and representations made or required by this Section are for the benefit of the Certificate holders and any subsequent Certificate holder, and may be relied upon by the Certificate holders and any subsequent Certificate holder and bond counsel to the City. In complying with b the_foregoing covenants, the City may rely upon an unqualified opinion issued to the City y nationally recognized bond counsel that any action by the City or reliance upon any interpretation of the Code or Regulations contained in such opinion will not cause interest on the Certificates to be includable in gross income for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance,the City's representations and obligations under the covenants and provisions of this Section 7.5 all survive the defeasance and discharge of the Certificates for as long as such matters are relevant to the exclusion of interest on the Certificates from the gross income of the owners for federal income tax purposes. Section 7.6: Related Matters. In order that the City shall satisfy in a timely manner all of its obligations under this Ordinance, the Mayor, the Mayor,. City Secretary and all other appropriate officers, agents,representatives and employees of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance and delivery of the Certificates, including, without limitation, executing and delivering on behalf of • the City all certificates, consents, receipts, requests, notices, and other documents as may be reasonably necessary to satisfy the City's.obligations under this Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of this Ordinance. ARTICLE VIII CONTINUING DISCLOSURE UNDERTAKING Section 8.1: Annual Reports. The City shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year ending in or after 2007, financial information and operating data with respect to the City of the general type included in the final Official Statement authorized by Section 7.3 of this Ordinance, being the financial information and operating data described in the Official Statement under the captions "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE DISTRICT — Current Investments," "CITY TAX DEBT," 'TAX DATA (except under the subheading "Estimated Overlapping Taxes")," "SELECTED FINANCIAL DATA" and in Appendix B to the Official Statement. Any financial statements so to be provided shall be(1) prepared in accordance with the accounting principles described in Appendix B to the Official Statement and (2) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If audited financial statements are not so provided,then the City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID,when and if audited financial statements become available. If the City changes its fiscal year,it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. 1 � _ 23 HOU:26621472 • The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB)that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. Section 8.2: Material Event Notices. .The City shall.notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: (a) Principal and interest payment delinquencies; (b) Non-payment related defaults;• (c) Unscheduled draws on debt service reserves reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers,or their failure to perform; • (f) -Adverse tax opinions or events affecting the tax-exempt status of the Certificates; (g) Modifications to rights of holders of the Certificates; • • (h) Certificate calls; (i) Defeasances; (j) Release, substitution, or sale of property securing repayment of the Certificates; and • (k) Rating changes. . The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 3.1 of this Ordinance by the time required by such Section. Section 8.3: Limitations, Disclaimers and Amendments. The City shall be obligated to observe and perform the covenants specified in this Article for so long as,but only for so long as; the City remains an`obligated person"with respect to the Certificates within the meaning of the Rule, except that the City in any event willgive the noticerequired bySection 8.2 of any Certificate calls and defeasance that cause the City to be no longer such an`obligated person." The provisions of this Article are for the sole benefit of the holders and beneficial owners of the Certificates, and nothing in this Article, express or implied, shall give any benefit or any -legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide. - any other information that may be relevant or material to a complete presentation of the City's • 24 • HOU2662147.2 • hl financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Article or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Certificates at any future date. • UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. • No default by the City in observing or performing its obligations under this Article shall constitute a breach of or default under the Ordinance for purposes of any other provision of this Ordinance. Nothing in this Article is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. • The provisions of this Article may be amended by the City from time to time to adapt the. changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, but only if (1) the provisions of this Article, as so amende d, would have permitted an underwriter to purchase or sell the Certificates in the primary offering of the Certificates in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances,and(2)either(a)the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (b) a person that is unaffiliated with the City(such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the holder and beneficial owners of the Certificates. If the City so amends the provisions of this Article, it shall include with any amended financial information or operating data next provided in accordance with Section 8.1 an explanation, in narrative form,of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided. The City may also amend or repeal the provisions of this Article if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City also may amend the provisions of this { Article in its discretion in any other manner or circumstance,but in either case only if and to the extent that the provisions of this sentence would not have prevented an underwriter from lawfully purchasing or selling Certificates in the primary offering of the Certificates, giving - effect to (a) such provisions as so amended and (b) any amendments or interpretations.of the Rule. Section 8.4: Definitions. As used in this Article, the following terms have the : meanings ascribed to such terms below: 25 • HOU:26621472 "MSRB"means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rule"means SEC Rule 15c2-12,as amended from time to time. • "SEC"means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. ARTICLE IX • MISCELLANEOUS Section 9.1: Defeasance. The City may defease the provisions of this Ordinance and discharge its obligations to the Registered Owners of any or all of the Certificates to pay the principal of and interest thereon in any manner permitted by law, including by depositing with the Paying Agent/Registrar or with the Comptroller of Public Accounts of the State of Texas either: (a) cash in an amount equal to the principal amount of such Certificates plus interest thereon to the date of maturityredemption; or em ption;or . (b) pursuant to an escrow or trust agreement, cash and/or. (i) direct noncallable • obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quay by a nationally recognized investment rating firm net'ess than AAA or its equivalent; or (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, which,in the case of(i), (ii)or(iii),may be in book-entry form, and the principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the . interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, shall be sufficient to -provide for the timely payment of the principal of and interest thereon to the date of maturity or • earlier redemption; . provided, however, that if any of the Certificates are to be redeemed prior to their respective • dates of maturity,provision shall have been made for giving notice of redemption as provided in 26 HOU26621472 1 ' this Ordinance. Upon such deposit, such Certificates shall no longer be regarded to be Outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the City. Section 9.2: Ordinance a Contract - Amendments. This Ordinance shall constitute a contract with the Registered Owners from time to time, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Registered Owners, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Registered Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the consent of Registered Owners who own in the aggregate 51% of the principal amount of the Certificates then Outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Registered Owners of Outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates,reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify'the terms of payment of the principal of or interest on the Certificates, (ii) give any preference to any Certificate over any other Certificate, • • or (iii) reduce"the aggregate principal amount of Certificates required to be held by Registered Owners for consent to any such amendment,addition,or rescission. Section 9.3: Legal Holidays. In any case where the date interest accrues and becomes • payable on the Certificates or principal of the Certificates matures or the date fixed for redemption of any Certificates or a Record Date shall be in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date shall not occur on such date,but payment may be made or the Record Date shall occur on the next succeeding day which is not in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to dose with the same force and effect as if(i)made on the date of maturity or the date fixed for redemption and no interest shall accrue for the period from the date of maturity or redemption to the date of actual payment or(ii)the Record Date had occurred on the fifteenth day of that calendar month. • Section 9.4: No Recourse Against City Officials. No recourse shall be had for the payment of principal of or interest on any Certificates or for any claim based thereon or on this Ordinance against any official of the City or any person executing any Certificates. Section 9.5: Further Proceedings. The Mayor, Mayor Pro-Tern, City Secretary and other appropriate officials of the City are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Ordinance. Section 9.6: Severability. If any Section, paragraph, clause or provision of this _Ordinance shall for any reason be held to be invalid or unenforceable, the invalidity or unenforceabilityof such Section, paragraph, p graph, clause or provision shall not affect any of the remaining provisions of this Ordinance. • 27 HOU:26621472 Section 9.7: Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date,hour,place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all . times to the general public at City Hall for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 9.8: Repealer. All orders, resolutions and ordinances, or parts thereof, inconsistent herewith are hereby repealed to the extent of such inconsistency. Section 9.9: Emergency. It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and the public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Certificates are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its • introduction.- Section 9.10: Effective Date. This Ordinance shall be in force and effect from and after • its passage on the date shown below. • • • L. 28 • HOU:26621472 . PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this February 26,2007. CITY OF PEARLAND,TEXAS /s/Tom Reid Mayor ATTEST /s/Young Lorfing • City Secretary • • (SEAL) • Exhibit A-Paying Agent/Registrar Agreement Exhibit B -Official Notice of Sale • Exhibit C-Preliminary Official Statement Exhibit D-Official Statement • Exhibit E-Insurance Provisions • • . • • • S-1 HOU2662147.2 EXHIBIT A PAYING AGENT/REGISTRAR AGREEMENT See Tab No. 7 1 - HOU:2662147.2 EXHIBIT B OFFICIAL NOTICE OF SALE See Tab No. 5 HOU:2662147.2 EXHIBIT C PRELIMINARY OFFICIAL STATEMENT See Tab No.5 i .. HOU:2662147.2 • EXHIBIT D OFFICIAL STATEMENT yam. See Tab No. 6 � f r • HOU:2662147.2 i • EDIT E INSURANCE PROVISIONS • , r 1 • HOU:26621472 • February 12,2007 AMBAC ASSURANCE STANDARD PACKAGE FOR LIMITED OR UNLIMITED TAX GENERAL OBLIGATION AMBAC-INSURED TRANSACTIONS TO: Obligor,Obligor's Counsel,Managing Underwriter,Obligation Counsel and Underwriter's Counsel RE: Preparation of Financing Documents for Ambac Assurance Insured Issues The attached materials have been prepared to assist you in the preparation of documents for your Ambac Assurance Corporation("Ambac Assurance")insured issue.Please modify the attached exhibits where appropriate and notify us as to any proposed modifications.If desired,these provisions can be incorporated into one section entitled"Financial Guaranty Insurance" within the applicable Resolution,Ordinance,Order or any other operative financing document(such applicable financing document will be referred to herein as the"Financing Document").Please be advised that the provisions contained in this package are in addition to the conditions listed in the Commitment for Financial Guaranty Insurance and any other comments or changes that may be required by the Ambac Assurance personnel working on this financing.If you have any questions,please call one of the following persons:Nicholas A.Concilio,Dwight Kwa,Stephen M.Ksenak or David N.Abramowitz. • Definitions(Exhibit A). • Ambac Assurance consent required for changes to underlying documentation and exercise of remedies upon default(Exhibit B). • • NOTICES/INFORMATION to be given to Ambac Assurance(Exhibit C). • Defeasance Language(Exhibit D). • Description of Ambac Assurance Payment Procedure(Exhibit E). • Ambac Assurance as a third-party beneficiary(Exhibit F). • Suggested language for(i)Ambac Assurance Official Statement Disclosure,(ii)Notice of Sale,(iii) Bond Legend,and(iv)Cover page of Official Statement(Exhibit G). • Form of Ambac Assurance Legal Opinion(Exhibit H). • Form of Ambac Assurance Certificate of Insurer (Exhibit I). • Ambac Assurance Wiring Instructions(Exhibit J). t- � • 4 . EXHIBIT A DEFINITIONS The following definitions are those which Ambac Assurance recommends for the Financing Document: "Ambac Assurance"shall mean Ambac Assurance Corporation,a Wisconsin-domiciled stock insurance company. { "Financial Guaranty Insurance Policy"shall mean the financial guaranty insurance policy issued by Ambac Assurance insuring the payment when due of the principal of and interest on the Obligations as provided therein. EXHIBIT B AMBAC ASSURANCE CONSENT LANGUAGE Ambac Assurance requires that the Financing Document include the following consent provisions: A. Consent of Ambac Assurance. Any provision of this[Financing Document]expressly recognizing or granting rights in or to Ambac Assurance may not be amended in any manner which affects the rights of Ambac Assurance hereunder without the prior written consent of Ambac Assurance.Ambac Assurance reserves the right to charge the Obligor*a fee for any consent or amendment to the Financing Document while the Financial Guaranty Insurance Policy is outstanding. B. Consent of Ambac Assurance in lieu of Holder Consent. {� Unless otherwise provided in this Section,Ambac Assurance's consent shall be required in lieu of Holder consent, when required,for the following purposes: (i)execution and delivery of any supplemental[Financing Document]or any amendment,supplement or change to or modification of the[Loan Agreement,Lease Agreement,etc.](ii) removal of the Trustee or Paying Agent and selection and appointment of any successor trustee or paying agent [required in those transactions in which the Financing Document provides for a trustee or paying agent];and(iii) initiation or approval of any action not described in(i)or(ii)above which requires Holder consent. C. Consent of Ambac Assurance in the Event of Insolvency • ju Any reorganization or liquidation plan with respect to the Obligor*must be acceptable to Ambac Assurance.In the event of any reorganization or liquidation,Ambac Assurance shall have the right to vote on behalf of all Holders who hold Ambac Assurance-insured Obligations absent a default by Ambac Assurance under the applicable Financial Guaranty Insurance Policy insuring such Obligations. D. Consent of Ambac Assurance Upon Default. Anything in this[Financing Document]to the contrary notwithstanding,upon the occurrence and continuance of an event of default as defined herein,Ambac Assurance shall be entitled to control and direct the enforcement of all rights and remedies granted to the Holders or the Trustee for the benefit of the Holders under this[Financing Document].[pursuant to state law] 2 a - [In transactions for which acceleration is a remedy for an event of default,the following two provisions must be included in the Financing Document in lieu of paragraph D above.] D. Consent of Ambac Assurance Upon Default. Anything in this[Financing Document]to the contrary notwithstanding,upon the occurrence and continuance of an event of default as defined herein,Ambac Assurance shall be entitled to control and direct the enforcement of all rights and remedies granted to the Holders or the Trustee for the benefit of the Holders under this[Financing Document], including,without limitation:(i)the light to accelerate the principal of the Obligations as described in this[Financing Document],and(ii)the right to annul any declaration of acceleration,and Ambac Assurance shall also be entitled to approve all waivers of events of default. E. Acceleration Rights Upon the occurrence of an event of default,the Trustee may,with the consent of Ambac Assurance,and shall,at the direction of Ambac Assurance or_%of the Holders with the consent of Ambac Assurance,by written notice to the Obligor and Ambac Assurance,declare the principal of the Obligations to be immediately due and payable,whereupon that portion of the principal of the Obligations thereby coming due and the interest thereon accrued to the date of payment shall,without further action,become and be immediately due and payable,anything in this [Financing Document]or in the Obligations to the contrary notwithstanding. [In the event that the maturity of the Obligations is accelerated,the Bond Insurer may elect,in,its sole discretion,to pay all or a portion of the accelerated principal and interest accrued on such principal to the date of acceleration(to the extent unpaid by the Obligor)with respect to the Bonds,and the Bond Trustee shall accept such amounts. Upon payment of all of such accelerated principal and interest accrued to the acceleration date as provided above,the Bond Insurer's obligations under the Bond Insurance Policy shall be fully discharged.]* Ali *applies only in transactions in which acceleration of the Obligations is a possible remedy • 3 ti ' EXHIBIT C NOTICES/INFORMATION TO BE GIVEN TO AMBAC ASSURANCE Ambac Assurance requires that the following notice provisions be incorporated in the Financing Document: Notices to be sent to the attention of the SURVEILLANCE DEPARTMENT: A. While the Financial Guaranty Insurance Policy is in effect,the Obligor*or the Trustee[as appropriate]shall furnish to Ambac Assurance,upon request,the following: (a) a copy of any financial statement,audit and/or annual report of the Obligor* (b) such additional information it may reasonably request. Upon request,such information shall be delivered at the Obligor's*expense to the attention of the Surveillance Department,unless otherwise indicated. B. A copy of any notice to be given to the registered owners of the Obligations,including,without limitation,notice of any redemption of or defeasance of Obligations,and any certificate rendered pursuani to this[Financing Document]relating to the security for the Obligations,at no cost to Ambac. C. To the extent that the Obligor has entered into a continuing disclosure agreement with respect to the Obligations, Ambac Assurance shall be included as party to be notified. Notices to be sent to the attention of the GENERAL COUNSEL OFFICE: A. The Trustee or Obligor* [as appropriate]shall notify Ambac Assurance of any,failure of the.Obligor*to provide relevant notices,certificates,etc. B. Notwithstanding any other provision of this[Financing Document],the Trustee or Obligor* [as appropriate]shall immediately notify Ambac Assurance if at any time there are insufficient moneys to make any payments of principal and/or interest as required and immediately upon the occurrence of any event of default hereunder. j-0 [For transactions on which Ambac Assurance is also providing a swap surety bond: Notices to be sent to the attention of TREASURY OPERATIONS: A. Notice of all interest rate determinations shall be promptly delivered to Ambac Assurance,attention:Treasury ( Operations,Policy# ] Other Information to be given to Ambac Assurance: The Obligor* will permit Ambac Assurance to discuss the affairs, finances and accounts of the Obligor* or any information Ambac Assurance may reasonably request regarding the security for the Obligations with appropriate officers. S r of the Obligor*.The Trustee or Obligor*[as appropriate]will permit Ambac Assurance to[have access to the Project and] -. { have access to and to make copies of all books and records relating to the Obligations at any reasonable time. *or appropriate obligor on the Obligations. y 4 • Ambac Assurance shall have the right to direct an accounting at the Obligor's expense,and the Obligor's failure to comply with such direction within thirty(30)days after receipt of written notice of the direction from Ambac Assurance shall be deemed a default hereunder;provided,however,that if compliance cannot occur within such period, then such period will be extended so long as compliance is begun within such period and diligently pursued,but only if such extension would not materially adversely affect the interests of any registered owner of the Obligations. [FOR CALIFORNIA AND INDIANA (ABATEMENT STYLE) LEASES] The Trustee or Obligor [as appropriate] shall annually certify to Ambac that the insurance policies required by Section_of the[Lease/Indenture] are in full force and effect,and will provide Ambac with copies of such policies upon request. Ii I , AI I � 5 EXHIBIT D DEFEASANCE LANGUAGE A. If applicable,the defeasance section of the Financing Document should include the following language: Notwithstanding anything herein to the contrary,in the event that the principal and/or interest due on the Obligations shall be paid by Ambac Assurance Corporation pursuant to the Financial Guaranty Insurance Policy,the Obligations shall remain Outstanding for all purposes,not be defeased or otherwise satisfied and not be considered paid by the Obligor,and the assignment and pledge of the Trust Estate and all covenants,agreements and other obligations of the Obligor to the registered owners shall continue to exist and shall run to the benefit of Ambac Assurance,and Ambac Assurance shall be subrogated to the rights of such registered owners. B. Ambac Assurance will allow the following obligations to be used as Permitted Investments for defeasance purposes in refunding escrow accounts: (Ambac Assurance does not give a premium credit for the investment of accrued and/or capitalized interest). (1) Cash(insured at all times by the Federal Deposit Insurance Corporation); (2) Direct obligations of the United States of America;or (3) Senior debt obligations of other Government Sponsored Agencies approved by Ambac. EXHIBIT E PAYMENT PROCEDURE PURSUANT TO THE FINANCIAL GUARANTY INSURANCE POLICY The following language sets out the applicable procedure for payments under the Financial Guaranty Insurance Policy and should be incorporated into the Financing Document: 1. As long as the Obligation insurance shall be in full force and effect,the Obligor,the Trustee and any Paying Agent agree to comply with the following provisions: (a) At least one 1 business dayprior to all Interest Payment( ) Dates the Trustee or Paying Agent,if any,will determine whether there will be sufficient funds in the Funds and Accounts to pay the principal of or interest on the Obligations on such Interest Payment Date.If the Trustee or Paying Agent,if any,determines that there will be insufficient funds in such Funds or Accounts,the Trustee or Paying Agent,if any,shall so notify Ambac Assurance. Such notice shall specify the amount of the anticipated deficiency,the Obligations to which such deficiency is applicable and whether such Obligations will be deficient as to principal or interest,or both.If the Trustee or Paying Agent,if any,has not so notified Ambac Assurance at least one(1)business day prior to an Interest Payment Date,Ambac Assurance will make payments of principal or interest due on the Obligations on or before the first(1st)business day next following the date on which Ambac Assurance shall have received notice of nonpayment from the Trustee or Paying Agent,if any. (b) the Trustee or Paying Agent,if any,shall,after giving notice to Ambac Assurance as provided in(a)above, make available to Ambac Assurance and,at Ambac Assurance's direction,to The Bank of New York,as insurance trustee for Ambac Assurance or any successor insurance trustee(the"Insurance Trustee"),the registration books of the Obligor maintained by the Trustee or Paying Agent,if any,and all records relating to the Funds and Accounts maintained under this[Financing Document]. 6 (c) the Trustee or Paying Agent,if any,shall provide Ambac Assurance and the Insurance Trustee with a list of registered owners of Obligations entitled to receive principal or interest payments from Ambac Assurance under the terms of the Financial Guaranty Insurance Policy,and shall make arrangements with the Insurance Trustee(i) to mail checks or drafts to the registered owners of Obligations entitled to receive full or partial interest payments from Ambac Assurance and(ii)to pay principal upon Obligations surrendered to the Insurance Trustee by the registered owners of Obligations entitled to receive full or partial principal payments from Ambac Assurance. (d) the Trustee or Paying Agent,if any,shall,at the time it provides notice to Ambac Assurance pursuant to(a) above,notify registered owners of Obligations entitled to receive the payment of principal or interest thereon from Ambac Assurance(i)as to the fact of such entitlement,(ii)that Ambac Assurance will remit to them all or a part of the interest payments next coming due upon proof of Holder entitlement to interest payments and delivery to the Insurance Trustee,in form satisfactory to the Insurance Trustee,of an appropriate assignment of the registered owner's right to payment,(iii)that should they be entitled to receive full payment of principal from Ambac Assurance,they must surrender their Obligations(along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee to permit ownership of such Obligations to be registered in the name of Ambac Assurance)for payment to the Insurance Trustee,and not the Trustee or Paying Agent,if any,and(iv)that should they be entitled to receive partial payment of principal.from Ambac Assurance,they must surrender their Obligations for payment thereon first to the Trustee or Paying Agent,if any,who shall note on such Obligations the portion of the principal paid by the Trustee or Paying Agent,if any,and then,along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee,to the Insurance Trustee,which will then pay the unpaid portion of principal. (e) in the event that the Trustee or Paying Agent,if any,has notice that any payment of principal of or interest on a Obligation which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has ti been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with the final,nonappealable order of a court having competent jurisdiction,the Trustee or Paying Agent,if any,shall,at the time Ambac Assurance is notified pursuant to(a)above,notify all registered owners that in the event that any registered owner's payment is so recovered,such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available,and the Trustee or Paying'Agent,if any,shall furnish to Ambac Assurance its records evidencing the payments of principal of and interest on the Obligations which have been made by the Trustee or Paying Agent,if any,and subsequently recovered from registered owners and the dates on which such payments were made. (f) in addition to those rights granted Ambac Assurance under this[Financing Document],Ambac Assurance shall,to the extent -:,akes payment of principal of or interest on Obligations,becorr,,: ;abrogated to the rights of the recipients of such payments in accordance with the terms of the Financial Guaranty Insurance Policy,and to evidence such subrogation(i)in the case of subrogation as to claims for past due interest,the Trustee or Paying Agent,if any,shall note Ambac Assurance's rights as subrogee on the registration books of the Obligor maintained by the Trustee or Paying Agent,if any,upon receipt from Ambac Assurance of proof of the payment of interest thereon to the registered owners of the Obligations,and(ii)in the case of subrogation as to claims for past due principal,the Trustee or Paying Agent,if any,shall note Ambac Assurance's rights as subrogee on the registration books of the Obligor maintained by the Trustee or Paying Agent,if any,upon surrender of the Obligations by the registered owners thereof together with proof of the payment of principal thereof. 2. The Obligor hereby covenants and agrees that it shall reimburse Ambac Assurance for any amounts paid under the Financial Guaranty Insurance Policy and all costs of collection thereof and enforcement of this [Financing Document] and any other documents executed in connection with this[Financing Document],together with interest thereon,from the date paid or incurred by Ambac Assurance until payment thereof in full by the Obligor,payable at the Insurer Payment Rate(as hereinafter defined),including without limitation(to the extent permitted by applicable law) interest on claims paid by Ambac Assurance in respect of interest on the Obligations. Such payment obligation shall 7 be payable on demand and on a parity with,and from the same sources and secured by the same security as,regularly scheduled principal and interest payments in respect of the[Obligations]. For purposes of the foregoing,"Insurer Payment Rate"shall mean the lesser of(a) the maximum rate permissible under applicable usury or similar laws limiting interest rates and(b)the greater of(i)the then applicable highest rate of interest on the [Obligations] and (ii)the per annum rate of interest,publicly announced from time to time by JPMorgan Chase Bank,N.A. ("Chase")at its principal office in the Cityof New York,as itsprime or base lendingrate("Prime Rate") P (any change in such Prime Rate to be effective on the date such change is announced by Chase)plus 3 percent. The Insurer Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event that Chase ceases to announce its Prime Rate publicly,Prime Rate shall be the publicly announced prime or base lending rate of such a } national bank as Ambac Assurance shall specify. Notwithstanding the foregoing,to the extent any payment obligation described in this paragraph would require the Obligor to make a Payment to Ambac Assurance other than a payment that the Obligor is otherwise required to make pursuant to the terms of the[Obligations],then such payment shall be subject to annual appropriation by the Obligor and shall be made only to the extent permitted by law. EXHIBIT F INTERESTED PARTIES In addition to theprovisions listed above,Ambac also requires the following q provision be incorporated into the Financing Document: A. Ambac as Third Party Beneficiary. To the extent that this [Financing Document]confers upon or gives or grants'to Ambac any right,remedy or claim under or by reason of this[Financing Document],Ambac is hereby explicitly recognized as being a third-party beneficiary hereunder and may enforce any such right,remedy or claim conferred,given or granted hereunder. EXHIBIT G AMBAC ASSURANCE CORPORATION DISCLOSURE LANGUAGE FOR OFFICIAL STATEMENTS, NOTICE OF SALE,AND BOND LEGEND Notes to Bond/Underwriter Counsel: 1. The term "[Obligations]" must be conformed to the defined term that is utilized in the Official Statement for the offered securities. = 2. The term "Obligor" should not be changed. This is the defined term utilized in the Financial Guaranty Insurance Policy. 3. "[Trustee/Paying Agent/Bond Registrar]" must be changed to reflect the proper parties participating in the transaction. Payment Pursuant to Financial Guaranty Insurance Policy Ambac Assurance Corporation ("Ambac Assurance") has made a commitment to issue a financial guaranty insurance policy(the"Financial Guaranty Insurance Policy")relating to the[Obligations],effective as of the date of issuance of the [Obligations]. Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New York,in New York,New York,or any successor thereto(the"Insurance Trustee"),that portion of the principal of and interest on the [Obligations] that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defined in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and/or interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the[Trustee/Paying Agent/Bond Registrar]. The insurance will extend for the term of the[Obligations] and,once issued,cannot be canceled by Ambac Assurance. 8 ti The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund installment dates, in the case of principal, and on stated dates for payment, in the case of interest. If the [Obligations] become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding [Obligations],Ambac Assurance will remain obligated to pay the principal of and interest on outstanding[Obligations]on the originally scheduled interest and principal payment dates,including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the[Obligations],the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration,except to the extent that Ambac Assurance elects,in its sole discretion,to pay all or a portion of the accelerated principal and interest accrued thereon to the date of acceleration (to the extent unpaid by the Obligor). Upon payment of all such accelerated principal and interest accrued to the acceleration date,Ambac Assurance's obligations under the Financial Guaranty Insurance Policy shall be fully discharged. s ' In the event the [Trustee/Paying Agent/Bond Registrar] has notice that any payment of principal of or interest on [a/an] i [Obligation]that has become Due for Payment and that is made to a holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final,non-appealable order of a court of competent jurisdiction,such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment(as set forth in the Financial Guaranty Insurance Policy). Specifically,the Financial Guaranty Insurance Policy does not cover: 1. payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption)or as a result of any other advancement of maturity; 2. payment of any redemption,prepayment or acceleration premiuii;and 3. nonpayment of principal or interest caused by the insolvency or negligence of the Trustee,Paying Agent or Bond Registrar,if any. 1— If it becomes necessary to call upon the Financial Guaranty Insurance Policy,payment of principal requires surrender of the[Obligations]to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such [Obligations] to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of holder entitlement to interest payments and an appropriate assignment of the •holder's right to•payment to Ambac Assurance. Upon payment of the insurance benefits, Ambac Assurance will become the owner of the [Obligation], appurtenant L coupon, if any,or right to payment of the principal of or interest on such[Obligation] and will be fully subrogated to the surrendering holder's rights to payment. FOR -ANSACTIONS INVOLVING AUCTION RATE SECURITIES: The Financial Guaranty Insurance Policy does not insure against loss relating to payments made in connection with the sale of the[Obligations]at auctions or losses suffered as a result of a holder's inability to sell the[Obligations]. 1-, FOR TRANSACTIONS INVOLVING VARIABLE RATE OBLIGATIONS: The Financial Guaranty Insurance Policy does not insure against loss relating to payments of the purchase price of the [Obligations] upon tender by a registered owner thereof or any preferential transfer relating to payments of the purchase price of the[Obligations]upon tender by a registered owner thereof. • ADDITIONAL PARAGRAPH FOR CALIFORNIA TRANSACTIONS: • In the event that Ambac Assurance were to become insolvent,any claims arising under the Financial Guaranty Insurance Policy would be excluded from coverage by the California Insurance Guaranty Association, established pursuant to the laws of the State of California. 9 ADDITIONAL PARAGRAPH FOR NEW YORK TRANSACTIONS: L- The insurance provided by the Financial Guaranty Insurance Policy is not covered by the property/casualty insurance security fund specified by the insurance laws of the State of New York. I -' ADDITIONAL PARAGRAPH FOR FLORIDA TRANSACTIONS: The insurance provided by the Financial Guaranty Insurance Policy is not covered by the Florida Insurance Guaranty Association. ADDITIONAL PARAGRAPH FOR CONNECTICUT TRANSACTIONS: In the event that Ambac Assurance were to become insolvent,any claims arising under the Financial Guaranty Insurance Policy would be excluded from coverage by the Connecticut Insurance Guaranty Association. ADDITIONAL PARAGRAPH FOR OKLAHOMA TRANSACTIONS: WARNING: Any person who knowingly,and with intent to injure,defrauds or deceives any insurer or makes any claim for the proceeds of an insurance policy containing any false,incomplete or misleading information is guilty of a felony. ADDITIONAL PARAGRAPH FOR VIRGINIA TRANSACTIONS: The Financial Guaranty Insurance Policy shall not be deemed invalid due to the absence of the required signature or countersignature. Ambac Assurance Corporation Ambac Assurance is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin,and is licensed to do business in 50 states,the.District of Columbia,the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands,•with admitted assets, of approximately $9,699,000,000(unaudited)and statutory capital of approximately$6,223,000,000(unaudited)as of September 30,2006. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve. Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's Investors Service,Inc. and Fitch Ratings have each assigned a triple-A financial strength rating to Ambac Assurance. Ambac Assurance has obtained a mid-g from the Internal Revenue Service to the effect that the insuring of an-'-::gation } by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially } identical to those contained in the Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor. [THE FOLLOWING MUST BE INCLUDED IN ANNUAL APPROPRIATION LEASE TRANSACTIONS: No representation is made by Ambac Assurance regarding the federal income tax treatment of payments that are made by Ambac Assurance under the terms of the Financial Guaranty Insurance Policy due to non-appropriation of funds by the Lessee.] Ambac Assurance makes no representation regarding the[Obligations]or the advisability of investing in the[Obligations] and makes no representation regarding,nor has it participated in the preparation of,this Official Statement other than the information supplied by Ambac Assurance and presented under the heading"[Insert Title of Bond Insurance Section]". Available Information The parent company of Ambac Assurance,Ambac Financial Group,Inc.(the"Company"),is subject to the informational requirements of the Securities Exchange Act of 1934,as amended(the"Exchange Act"),and in accordance therewith files 10 reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports,proxy statements and other information can be read and copied at the SEC's public reference room at 100 F Street, N.E.,Room 1580,Washington,D.C.20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an intereet site at http://www.sec.gov that contains reports,proxy and information statements and other information regarding companies that file electronically with the SEC, including the Company. These reports,proxy statements and other information can also be read at the offices of the New York Stock Exchange, Inc.,20 Broad Street,New York,New York 10005. Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance's administrative offices is One State Street Plaza,19th Floor,New York,New York 10004,and its telephone number is(212)668-0340. Incorporation of Certain Documents by Reference The following documents filed by the Company with the SEC (File No. 1-10777) are incorporated by reference in this Official Statement: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31,2005 and filed on March 13, 2006; 2. The Company's Current Report on Form 8-K dated and filed on April 26,2006; j - 3. The Company's Quarterly Report on Form 10-0 for the fiscal quarterly period ended March 31,2006 and filed on May 10,2006; _ 4. The Company's Current Report on Form 8-K dated July 25,2006 and filed on July 26,2006; • 5. The Company's Current Report on Form 8-K dated and filed on July 26,2006; 6. The Company's Quarterly Report on Form 10-0 for the fiscal quarterly period ended June 30,2006 and filed on August 9,2006; 7. The Company's Current Report on Form 8-K dated and filed on October 25,2006; 8. The Company's Quarterly Report on Form 10-0 for the fiscal quarterly period ended September 30, 2006 and filed on November 8,2006; 9. The Company's Current Report on Form 8-K dated and filed on January 31,2007;and 10. The Company's Current Report on Form 8-K dated and ..;i on February 12,2007. All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information". NOTICE OF SALE Ambac Assurance Corporation("Ambac Assurance")has issued a commitment for a fmancial guaranty insurance policy relating to the Obligations.All bids may be conditioned upon the issuance,effective as of the date on which the Obligations are issued,of a policy of insurance by Ambac Assurance,insuring the payment when due of principal of and interest on the Obligations.Each Obligation will bear a legend referring to the insurance.The purchaser,holder or owner is not authorized to make any statements concerning the insurance beyond those set out here and in the Bond Legend without the approval of Ambac Assurance. 11 4 • BOND LEGEND Financial Guaranty Insurance Policy No.> (the"Policy")with respect to payments due for principal of and interest on this Bond has been issued by Ambac Assurance Corporation("Ambac Assurance").The Policy has been delivered to The Bank of New York,New York,New York,as the Insurance Trustee under said Policy and will be held by such Insurance Trustee or any successor insurance trustee.The Policy is on file and available for inspection at the principal office of the Insurance Trustee and a copy thereof may be secured from Ambac Assurance or the Insurance Trustee.All payments required to be made under the Policy shall be made in accordance with the provisions thereof.The owner of this Bond acknowledges and consents to the subrogation rights of Ambac Assurance as more fully set forth in the Policy. r—. COVER PAGE OF OFFICIAL STATEMENT Payment of the principal of and interest on the[Obligations]when due will be insured by a fmancial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the Obligations. • • • • } f ' 12 t_> EXHIBIT H FORM OF THE AMBAC LEGAL OPINION DATE/ADDRESSES Ladies and Gentlemen: This opinion has been requested of the undersigned,a Vice President and an Assistant General Counsel of Ambac Assurance Corporation,a Wisconsin stock insurance company("Ambac Assurance"),in connection with the issuance by Ambac Assurance of a certain Financial Guaranty Insurance Policy and endorsement thereto,effective as of the date hereof (the"Policy"),insuring$>in aggregate principal amount of the>(the"Obligor"),>dated>(the"Obligations"). In connection with my opinion herein,I have examined the Policy,such statutes,documents and proceedings as I have considered necessary or appropriate under the circumstances to render the following opinion,including,without limiting the generality of the foregoing,certain statements contained in the Official Statement of the Obligor dated>,relating to the Obligations(the"Official Statement")under the headings">"and">". Based upon the foregoing and having regard to legal considerations I deem relevant,I am of the opinion that: 1. Ambac Assurance is a stock insurance company duly organized and validly existing under the laws of the State of } Wisconsin and duly qualified to conduct an insurance business in the State of>. 2. Ambac Assurance has full corporate power and authority to execute and deliver the Policy and the Policy has been duly authorized,executed and delivered by Ambac Assurance and constitutes a legal,valid and binding obligation of Ambac Assurance enforceable in accordance with its terms except to the extent that the enforceability(but not the validity)of such obligation may be limited by any applicable bankruptcy,insolvency,liquidation,rehabilitation or other similar law or enactment now or hereafter enacted affecting the enforcement of creditors'rights. l ' 3. The execution and delivery by Ambac Assurance of the Policy will not,and the consummation of the transactions contemplated thereby and the satisfaction of the terms thereof will not,conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Authority,Articles of Incorporation or By-Laws of Ambac Assurance,or any restriction contained in any contract,agreement or instrument to which Ambac Assurance is a party or by which it is bound or constitute a default under any of the foregoing. 1 1 4. Proceedings legally required for the issuance of the Policy have been taken by Ambac Assurance and licenses,orders, consents or other authorizations or approvals of any governmental boards or bodies legally required for the enforceability of the Policy have been obtained;any proceedings not taken and any licenses,authorizations or approvals not obtained are not material to the enfo--...ability of the Policy. 5. The statements contained in the Official Statement under the heading">,"insofar as such statements constitute summaries of the matters referred to therein,accurately reflect and fairly present the information purported to be L shown and, insofar as such statements describe Ambac Assurance,fairly and accurately describe Ambac Assurance. 6. The form of Policy contained in the Official Statement under the heading">"is a true and complete copy of the form of Policy. The opinions expressed herein are solely for your benefit,and may not be relied upon by any other person. Very truly yours, t- 1 Vice President and Assistant General Counsel 13 • EXHIBIT I CERTIFICATE OF BOND INSURER In connection with the issuance of> in aggregate principal amount of(the"Obligor")>(the "Obligations"),Ambac Assurance Corporation("Ambac")is issuinga Financial Guaran ty)� rP insurance policy(the "Insurance Policy")guaranteeing the payment of principal and interest when due on the Obligations,all as more fully set out in the Insurance Policy. On behalf of Ambac,the undersigned hereby certifies that:• (i) the Insurance Policy is an unconditional and recourse obligation of Ambac(enforceable by or on behalf of the holders of the Obligations)to pay the scheduled payments of interest and principal on the Obligations in the event of a Nonpayment as defined in the Insurance Policy; (ii) the insurance premium of$ was determined in arm's length negotiations in accordance with our standard procedures,is required to be paid as a condition to the issuance of the Insurance Policy and represents a reasonable charge for the transfer of credit risk; - (iii)no portion of such premium represents a payment for any direct or indirect services other than the transfer of credit risk,including costs of underwriting or remarketing the Obligations or the cost of insurance for casualty of Obligation financed property; (iv)we are not co-obligors on the Obligations and do not reasonably expect that we will be called upon to make any payment under the Insurance Policy;and (v) the Obligor is not entitled to a refund for the Insurance Policy in the event that the Obligations are retired prior to their stated maturity. IN WITNESS WHEREOF,Ambac Assurance Corporation has caused this certificate to be executed in its name on this day of ,200_ by one of its officers duly authorized as of such date. AMBAC ASSURANCE CORPORATION By: Vice President and Assistant General Counsel 14 EJIIHTT J AMBAC ASSURANCE CORPORATION WIRING INSTRUCTIONS Citibank N.A. 1 ABA NO.021000089 For:Ambac Assurance Corporation A/C No.40609486 Attention: [Closing Coordinator],212-208-3_ ***PLEASE INDICATE POLICY NUMBER ON WIRE AND CALL YOUR CLOSING COORDINATOR WITH YOUR WIRE REFERENCE NUMBER ON THE MORNING OF CLOSING*** • 15 CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS . § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § We, the undersigned officers of the City of Pearland, Texas (the "City"), hereby certify as follows: 1. The'City Council of the City convened in a regular meeting on February 26,2007, at the regular meeting place thereof, within the.City, and the roll was called of the duly constituted officers and members of the City Council,to wit: �- Tom Reid Mayor • Richard Tetens Councilmember • Helen Beckman Councilmember . Steve Saboe Councilmember Felicia Kyle Councilmember Kevin Cole Councilmember and all of such persons were present except Kevin Cole,thus constituting a quorum. Whereupon, among other business,the following was transacted at said.meeting: a written AN ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007; PRESCRIBING THE TERMS AND FORM THEREOF; PROVIDING FOR THE PAYMENT OF THE PRINCIPAL THEREOF AND INTEREST THEREON; .AWARDING THE SALE THEREOF; AUTHORIZING THE { PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE - CERTIFICATES; AUTHORIZING THE PURCHASE OF BOND INSURANCE:, MAKING OTHER PROVISIONS REGARDING SUCH • CERTIFICATES, INCLUDING USE OF THE PROCEEDS THEREOF, AND MATTERS INCIDENT THERETO; AND DECLARING AN EMERGENCY (the"Ordinance")was duly introduced for the consideration of the City Council and read in full. It was then duly moved and,seconded that the Ordinance be adopted on first reading; and, after due discussion, such motion, carrying with it the adoption of the Ordinance, prevailed and carried by the following vote: AYES: 4 . NAYS: 0, ABSTENTIONS: 0. 2. That a true, full and correct copy of the Ordinance adopted at the meeting described in the above and foregoing paragraph is attached to and follows this certificate;that the Ordinance has been duly recorded in the City Council's minutes of such meeting;that the above _I HOU:2667496.1 • 1 and foregoing paragraph is a true, full and correct excerpt from the City Council's minutes of such meeting pertaining to the adoption of the Ordinance; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of.the _! City Council as indicated therein; that each of the officers and members of the City Council was duly and sufficiently notified officially and personally, in advance, of the date, hour, place and , subject of the aforesaid meeting, and that the Ordinance would be introduced and considered for __ adoption at such meeting, and each of such officers and members consented, in advance, to the _ holding of such meeting for such purpose; that such meeting was open to the public as required by law; and that public notice of the date, hour, place and subject of such meeting was given as required by the Open Meetings Law, Chapter 551, Texas Government Code. , : SIGNED AND SEALED this Februarys , 2007. - -, cz=")0/11 ) a-44) . #172 Cit ecretari EXA Mayor C OF PA ' AND, S CITY OF PEARLAND, TEXAS (SEAL) a ao 4' \ E. • I P'‘,, 8 I� �3 000e ° ,mo00- o ����.ereoaooiseea0°e°��,� L S-1 HOU:2667496.1 This Official Notice of Sale does not alone constitute an offer to sell but is merely notice of sale of the Certificates described herein. The offer to sell such Certificates is being made by means of this Official Notice of Sale, the Official Bid Form and the Preliminary Official Statement. OFFICIAL NOTICE OF SALE CITY OF PEARLAND, TEXAS (Brazoria and Harris Counties,Texas) • .— $23,250,000 • CERTIFICATES OF OBLIGATION, SERIES 2007 Sealed Bids Will Be Received Monday,February 26,2007 at 1:00 P.M. Houston Time � E i This Official Notice of Sale does not alone constitute an invitation for bids but is merely notice of sale of the Certificates described herein. The invitation for bids on such Certificates is being made by means of this Official Notice of Sale, the Official Bid Form and the Official Statement. Prospective purchasers are urged to carefully _ examine all the documents to determine the investment quality of the Certificates. OFFICIAL NOTICE OF SALE $23,250,000 CITY OF PEARLAND,TEXAS (Brazoria and Harris Counties,Texas) CERTIFICATES OF OBLIGATION SERIES 2007 THE SALE CERTIFICATES OF OBLIGATION OFFERED FOR SALE AT COMPETITIVE BID: The City Council(the "Council") of The City of Pearland, Texas (the "City") is offering for sale at competitive bid its $23,250,000 Certificates of Obligation,Series 2007(the"Certificates). PLACE AND TIME OF SALE: The Council will receive sealed bids:at the City Hall, 3519 Liberty Drive, Pearland,Texas 77581 until 1:00 P.M.,Houston Time,Monday,February 26,2007,and the bids will be opened and publicly read at 7:00 P.M. Sealed bids, which must be submitted in duplicate on the Official Bid Form and plainly marked "Bid for Certificates," are to be addressed to"Mayor and City Council,City of Pearland,Texas." All bids • must be delivered at the above address prior to the above-scheduled time. Any bid received after such scheduled time for bid opening will not be accepted and will be returned unopened. ELECTRONIC BIDDING PROCEDURE: Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Bidders must submit,prior to Monday,February 26,2007, SIGNED Official Bid Forms,in duplicate,to RyanO'Hara,RBC Capital Markets, ts, 1001 Fannin,Suite 1200,Houston, Texas 77002. Subscription to the i-Deal's BIDCOMP Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor be responsible for the failure of any prospective bidder to subscribe. Electronic bids must be received via PARITY in the manner described below,no later than 1:00 P.M.,Houston Time,on Monday,February 26,2007. Electronic bids must be submitted via PARITY in accordance with this Official Notice of Sale,no later than 1:00 P.M., Houston Time, but no bid will be received after the time for receiving bids specified above. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Certificates on the terms provided in the Official Notice of Sale,and shall be binding upon the bidder as if made by a signed,sealed bid delivered to the City. The City shall not be responsible for any malfunction or mistake made by,or as a result of the use of the facilities of,PARITY,the use of such facilities being the sole risk of the prospective bidder. If any provisions of the Official Notice of Sale shall conflict with information provided by PARITY as the approved provider of electronic bidding services,this Official Notice of Sale shall control. Further information about PARITY, including any fee charged,may be obtained from i-Deal,395 Hudson Street,New York,New York 10014,(212)806- 8304. For purposes of both the written bid process and the electronic bidding process, the time as maintained by PARITY shall constitute the official time. For information purposes only, bidders are requested to state in their - electronic bids the true interest cost to the City,as described under"CONDITIONS OF THE SALE-Basis of Award" below. All electronic bids shall be deemed to incorporate the provisions of this Official Notice of Sale and the Official Bid Form. - r-, I _ BIDS BY TELEPHONE OR FACSIMILE: Bidders must submit,prior to Monday,February 26, 2007, SIGNED Official Bid Forms, in duplicate, to Ryan O'Hara, RBC Capital Markets, 1001 Fannin, Suite 1200, Houston, Texas 77002 and submit their bid by telephone or facsimile(fax)on the date of sale by 1:00 P.M.,Houston Time. Ryan O'Hara of RBC Capital Markets will call telephone bidders who have submitted SIGNED Official Bid Forms prior to the date of the sale. Fax bids must be received by 1:00 P.M.,Houston Time,on the date of the sale. Contact Ryan O'Hara of RBC Capital Markets at 713-853-0830 on the day of the sale to obtain the fax phone numbers. RBC Capital Markets will not be responsible for the submission of any,bids received after the above deadlines. RBC Capital Markets assumes no responsibility or liability with respect to any irregularities associated with the submission of any bids. AWARD OF THE BONDS: The Council will take action to award the Certificates(or reject all bids)at a regular meeting of the City Council on the date of the bid opening,and will adopt an ordinance authorizing the Certificates and approving the Official Statement(the "Ordinance"). The City reserves the right to reject any or all bids and to waive any irregularities,except time of filing. THE CERTIFICATES • DESCRIPTION: The Certificates will be dated March 1,2007 and interest will be calculated on the basis of a 360- day year of twelve 30-day months. Interest on the Certificates will be paid on'Se tember 1,2007,and semiannually P on March 1 and September 1 of each year thereafter until maturity or prior redemption. The Certificates maturing on or after March 1,2018 are subject to redemption prior to their scheduled maturities on March 1,2018,or any date thereafter, at the option of the City. Upon redemption the Certificates will be payable at a price equal to the principal amount thereof plus accrued interest to the date of redemption. The Certificates will be issued in fully registered form in principal amounts of$5,000 or any integral multiple thereof. Principal and semiannual interest will be paid by Wells Fargo Bank,N.A.,Houston,Texas,the Paying Agent/Registrar. Interest will be paid by check dated as of the interest payment date and mailed on or before each interest payment date by the Paying Agent/Registrar to the registered owner appearing.on'�the Paying Agent/Registrar's books on the Record Date (hereinafter defined). Principal will be paid to the registered owners at maturity upon presentation of the Certificates to the Paying Agent/Registrar. The Certificates will mature March 1 in each,year as follows: Maturity Principal Maturity Principal { Date Amount Date Amount 2008 $ 50,000 2021 $1,170,000 2009 50,000 2022 1,230,000 2010 100,000 2023 1,295,000 �.. 2011 150,000 2024 1,360,000 2012 200,000 2025 1,430,000 2013 250,000 2026 1,500,000 2014 300,000 2027 1,580,000 2015 350,000 2028 1,660,000 2016 400,000 2029 1,745,000 2017 450,000 2030 1,540,000 2018 1,005,000 2031 1,600,000 2019 1,060,000 2032 1,660,000 2020 1,115,000 REDEMPTION PROVISIONS: The Certificates maturing on and after.March 1,2018,are subject to redemption, 111 at the option of the City,at the par value thereof plus accrued interest on March 1,2017,or any date thereafter. I . ii 1_ SOURCE OF PAYMENT: The Certificates are direct obligations of the City,and the principal thereof and interest thereon are payable solely from the proceeds of an annual ad valorem tax levied upon all taxable property within the City,within the limits prescribed by law,and are further payable from a limited junior and subordinate pledge of the Net Revenues(as defined in the Ordinance)of the City's waterworks and sewer system(the"System"), but only to the extent of and in an amount not in excess of$10,000.00 of the Net Revenues of such System. BOOK-ENTRY-ONLY SYSTEM: The Cityintends to utilize the Book-Entry-OnlySystem Sys m of The Depository Trust Company("DTC"). CONDITIONS OF THE SALE TYPES OF BIDS AND INTEREST RATES: The Certificates will be sold in one block on an"All or None"basis, and at a price of par value plus accrued interest to the date of delivery of the Certificates. Bidders are invited to ti name the rate(s)of interest to be borne by the Certificates provided that each rate bid must be in a multiple of 1/8 of 1%or 1/20 of 1%and the net effective interest rate for the Certificates(calculated in the manner required by Chapter 1204,Texas Government Code,as amended)must not exceed 15%. The highest rate bid may not exceed the lowest rate bid by more than 2%in rate. No limitation is imposed upon bidders as to the number of rates or changes which may be used. All Certificates of one maturity must bear one and the same rate.. No bids involving supplemental interest rates will be considered. Each bidder shall state in his bid the total interest cost in dollars and the net effective interest rate determined hereby,which shall be considered informative only and not as a part of the bid. BASIS OF AWARD: For the purpose of awarding sale of the Certificates, the interest cost of each bid will be computed by determining at the rate(s)`specified therein,the total dollar cost of all interest on the Certificates from the date thereof to their respective maturities, using the table of Certificate Years located behind the Official Bid • Form herein,and deducting therefrom the premium bid,if any. Subject to the City's right to reject any or all bids and to waive any irregularities except time of filing, the Certificates will be awarded to the bidder (the "Purchaser") whose complying bid,based on the above computation,produces the lowest net interest cost to the City. GOOD FAITH DEPOSIT: A Good Faith Deposit,payable to the"City of Pearland"in the amount of$465,000 is required. Such Good Faith Deposit shall be in the form of a Cashier's Check,which is to be retained uncashed by the City pending the Purchaser's compliance with the terms of its bid and the Notice of Sale and Bidding Instructions. The Good Faith Deposit may accompany the Official Bid Form or it may be submitted separately.. If submitted separately, it shall be made available to the City prior to the opening of the bids, and shall be accompanied by instructions from the bank on which drawn which authorize its use as a Good Faith Deposit by the Purchaser who shall be named in such instructions. Unless otherwise agreed,the Good Faith Deposit will be returned to the purchaser of the Certificates on the date of delivery of the Certificates. No interest will be allowed on the Good Faith Deposit. In the event the Purchaser should fail or refuse to take up and pay for the Certificates in accordance with its bid,then said check shall be cashed and accepted by the City as full and complete liquidated damages. The ' checks accompanyil;g i.:ds ..tier than the winning bid will be returned immediately after the bids are opened;and an award of the Certificates has been made. INITIAL OFFERING PRICE CERTIFICATE: To provide the City with information to enable it to comply with certain conditions of the Internal Revenue Code of 1986 relating to the exclusion of interest on the Certificates from gross income for federal income tax purposes, the successful bidder will be required to complete, execute, and deliver to the City,at the time that the Certificates are awarded,a certification regarding"issue price"substantially in - the form attached hereto. If the successful bidder will not reoffer the Certificates for sale or has not sold a substantial amount of the Certificates of any maturity by the date of delivery,such certificate may be modified in a ---i manner approved by the City and the City's Bond Counsel(as hereinafter defined). In no event will the City fail to deliver the Certificates as a result of the successful bidder's inability to certify actual sales of Certificates at a - particular price prior to delivery. Each bidder,by submitting its bid,agrees to complete,execute,and deliver such a certificate by the date of the award of the Certificates,if its bid is accepted by the City. It will be the responsibility of the successful bidder to institute such syndicate reporting requirements,to make such investigation, or otherwise to ascertain the facts necessary to enable it to make such certifications with reasonable certainty. Any questions concerning such certification should be directed to Bond Counsel. iii DELIVERY OF THE CERTIFICATES AND ACCOMPANYING DOCUMENTS - The delivery of the Certificates is subject to receipt of the opinion of Andrews Kurth LLP, Houston,Texas, Bond Counsel for the City("Bond Counsel"),as hereinafter described. . CUSIP NUMBERS: It is anticipated that CUSIP identification numbers will appear on the Certificates,but neither the failure to print or type such number on any Certificates nor any error with respect thereto shall constitute cause for a failure or refusal by the Purchaser to accept delivery of and pay for the Certificates in accordance with the terms of this Notice of Sale and the terms of the Official Bid Form. All expenses in relation to the printing or typing of CUSIP numbers on the Certificates shall be paid by the City;provided,however,that the CUSIP Service Bureau fee for the assignment of the numbers shall be the responsibility of and shall be paid for by the Purchaser. INITIAL DELIVERY OF INITIAL BONDS: Initial delivery will be accomplished by the issuance of registered Certificates in the aggregate principal amount of$23,250,000, payable to the Purchaser, signed by the manual or facsimile signature of the Mayor and City Secretary of the City,approved by the Attorney General,and registered by the Comptroller of Public Accounts. Upon delivery of the Initial Certificates,they shall be immediately cancelled,and one definitive Certificate for each maturity will be registered and delivered only to Cede&Co.,and deposited with DTC in connection with DTC's Book-Entry-Only System. Initial delivery will be at the corporate trust office of the Paying Agent/Registrar. Payment for the Certificates must be made in immediately available funds for unconditional credit to the City, or as otherwise directed by the City. The Purchaser will be given five (5)business days'notice of the time fixed for delivery of the.Certificates. It is anticipated that initial delivery of the Initial Certificates can be made on or about March 22, 2007, and it is understood and agreed that the Purchaser will accept delivery and make payment for Initial Certificates by 10:00 A.M.,Houston,Texas Time on March 22,2007,or thereafter on the date the Certificates are tendered for delivery, up to and including April 19,2007. If for any reason the City is unable to make delivery on or before April 19,2007,then the City shall immediately contact the Purchaser and offer to allow the Purchaser to extend its offer for an additional fifteen (15) days. If the Purchaser does not elect to extend its offer within six (6) days thereafter, then its Good Faith Deposit will be returned, and both the City and the Purchaser shall be relieved of any further obligation. In no event shall the City be liable for any damages,whether direct,consequential or otherwise,by reason of its failure to deliver the Certificates. L CONDITIONS TO DELIVERY: The obligation of the Purchaser to take up'and pay for the Certificates is subject to the Purchaser's receipt of(a) the legal opinion of Andrews Kurth LLP,Houston,Texas, Bond Counsel for the City, (b) a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates,and(c)the certification as to the Official Statement,all as further described in the Official Statement. LEGAL OPINION: The City will furnish the Purchaser a transcript of certain certified proceedings held incident to . the authorization and issuance of the Certificates,including a certified copy of•the unqualified approving opinion of the Attorney General of Texas,as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding • obligations of the City under the Constitution and laws of the State of Texas.The City also will furnish the approving legal opinion of Andrews Kurth LLP,Houston,Texas,Bond Counsel,to the effect that,based upon an examination of such transcript,the Certificates are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The legal opinion of Bond Counsel will further state that(1)taxable property in the City is subject to the levy of a continuing,direct annual ad valorem tax,within the limits prescribed by law,to pay the Certificates and interest thereon, (2) the Certificates are further secured by a limited pledge of net revenues of the System and (3) subject to the matters discussed under the caption `TAX EXEMPTION" in the Official Statement, interest on the Certificates is excludable from gross income for federal income tax purposes. iv REGISTRATION: The Certificates are transferable only on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal office of the Paying Agent/Registrar. No service charge will be made for any transfer or exchange,but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. NO-LITIGATION BOND: The customary closing papers,including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates,or,which would affect the provisions made for their payment or security,or in any manner questioning the validity of said Certificates will also be furnished. NO MATERIAL ADVERSE CHANGE: The obligations of the Purchaser to take up and pay for the Certificates, and of the City to deliver the Certificates,are subject to the condition that,up to the time of delivery of and receipt of payment for the Certificates, there shall have been no material adverse change in the condition (financial or otherwise) of the City subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement,as it may have been supplemented or amended through the date of sale. CHANGE IN TAX EXEMPT STATUS: At any time before the Certificates are tendered for delivery, the Purchaser may withdraw its bid if the interest received by private owners of bonds of the same type and character as the Certificates shall be declared to be taxable income under present federal income tax laws,either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required to be taken into account in computing any federal income taxes, by the terms of any federal income tax law enacted subsequent to the date of this Official Notice of Sale. • CONTINUING DISCLOSURE AGREEMENT: The City will agree in the Ordinance authorizing the Certificates to provide certain periodic information and notices of material events in accordance with the Securities and Exchange Commission Rule 15c2-12, as described in the Preliminary Official Statement under "CONTINUING DISCLOSURE OF INFORMATION." The Purchaser's obligation to accept and pay for the Certificates is conditioned upon delivery to the Purchaser or its agent of a certified copy of the Ordinance containing the agreement described under such heading. GENERAL CONSIDERATIONS FINANCIAL ADVISOR: RBC Capital Markets is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. RBC Capital Markets,in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal doc•nr.entatron with respect to the federal income tax status of the Certificates. RBC Capital Markets is the trade name under which RBC Dain Rauscher Inc., a broker-dealer, conducts its investment banking business. SECURITIES REGISTRATION AND QUALIFICATION: No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities laws or regulations of any other jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws or regulations of any other jurisdiction in which the Certificates may be offered,sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification _ provisions in such other jurisdictions. v By submission of a bid, the Purchaser represents that the sale of the Certificates in states other than Texas will be made only pursuant to exemptions from registration or qualification or,where necessary,the Purchaser will register or qualify the Certificates in accordance with the securities laws or regulations of any jurisdiction which so requires. The City agrees to cooperate,at the Purchaser's written request and expense,in registering or qualifying Certificates, or in obtaining an exemption from registration or qualification, in any jurisdiction where such action is necessary, provided that the City shall not be required to file a consent to service of process in any jurisdiction. MUNICIPAL BOND INSURANCE: The City has submitted an application for municipal bond insurance under the bidder option program. The premium for such insurance,if any,will be paid by the Purchaser. OFFICIAL STATEMENT By accepting the winning bid,the City agrees to the following representations and covenants to assist the Purchaser in complying with Rule 15c2-12 of the Securities and Exchange Commission("SEC"). FINAL OFFICIAL STATEMENT: The City has prepared the accompanying Official Statement for dissemination to potential purchasers of the Certificates, but will not prepare any other document or version for such purpose except as described below. The Purchaser will be responsible for informing the City of the initial offering yields. The City will prepare a final Official Statement describing these offering yields,the interest rates on the Certificates, the selling compensation, the final debt service schedule, the ratings assigned to the Certificates (if not currently included), and the terms of and obligor on any policy of municipal bond insurance. Accordingly,the City deems the accompanying Official Statement to be final as of its date,within the meaning pf SEC Rule 15c2-12(b)(1),except for the omission of the foregoing items. By delivering the final Official Statement or any amendment or supplement thereto to the Purchaser on or after the sale date,the City represents the same to be complete as of its date,within the meaning of SEC Rule 15c2-12(e)(3). Notwithstanding the foregoing, the only representations concerning the absence of material misstatements or omissions from the Official Statement which are or will be made by the City are those described in the Official Statement under "GENERAL CONSIDERATIONS - Certification as to Official Statement." CHANGES TO OFFICIAL STATEMENT: If, subsequent to the date of the Official Statement,the City learns, through the ordinary course of business and without undertaking any investigation or examination for such purposes, or is notified by the Purchaser of any adverse event which causes the Official Statement to be materially misleading, and unless the Purchaser elects to terminate its obligation to purchase the.Certificates, as described above under "DELIVERY OF THE CERTIFICATES AND ACCOMPANYING DOCUMENTS -Conditions to Delivery," the City will promptly prepare and supply to the Purchaser an appropriate amendment or supplement to the Official Statement satisfactory to the Purchaser, provided, however, that the obligation of the City to do so will terminate when the City delivers the Certificates to the Purchaser,unless the Purchaser notifies the City oh or before such date that less than all of the Certificates have been sold to ultimate customers, in which case the City's obligations hereunder will extend for an additional period of time(but not more than 90 days after the date the City delivers the Certificates)until all of the Certificates have been sold to ultimate.customers. DELIVERY OF OFFICIAL STATEMENTS: The City will furnish to the Purchaser (and to each other participating purchaser of the Certificates, within the meaning of SEC Rule 15c2-12(a), designated by the Purchaser), within seven days after the sale date, up to 200 copies of the Official Statement. The City will also furnish to the Purchaser a like number of any supplement or amendment prepared by the City for dissemination to potential purchasers of the Certificates as described above as well as such additional copies of the Official Statement or any supplement or amendment as the Purchaser may request prior to the 90th day after the end of the underwriting period referred to in SEC Rule 15c2-12(e)(2). The City will pay the expense of preparing up to 200 copies of the Official Statement and up to 200 copies of any supplement or amendment issued on or before the delivery date,but the Purchaser must pay for all other copies of the Official Statement or any supplement or amendment thereto. vi • OFFICIAL STATEMENT: Upon the award of the sale of the Certificates,the Preliminary Official Statement will be amended to conform to the terms of the Purchaser's bid and, if necessary, to make certain other changes. In connection therewith, the Purchaser will be required to furnish information concerning the initial resale offering prices and yields of the Certificates as well as the names of the members of the underwriting syndicate. ndi tcate. ADDITIONAL COPIES OF NOTICE,BID FORM AND STATEMENT: A limited number of additional copies of this Official Notice of Sale, the Official Bid Form and the Official Statement, as available over and above the normal mailing, may be obtained at the offices of RBC Capital Markets, 1001 Fannin,Suite 1200,Houston,Texas, 77002,Financial Advisor to the City. On the date of the sale, the City Council will,in the Ordinance authorizing the issuance of the Certificates,confirm its approval of the form and content of the Official Statement,and any addenda,supplement or amendment thereto, and authorize its use in the reoffering of the Certificates by the Purchaser. /s/ Tom Reid Mayor City of Pearland,Texas February 15,2007 • • • vii OFFICIAL BID FORM February 26,2007 Mayor and City Council City of Pearland _ 3519 Liberty Drive - Pearland,Texas 77581 Gentlemen: Subject to the terms of your Official Notice of Sale and Official Statement,dated February 5, 2007, which are incorporated herein by reference, we hereby submit the following bid for the$23,250,000 CITY OF PEARLAND, TEXAS,CERTIFICATES OF OBLIGATION,SERIES 2007,dated March 1,2007. This offer is being made for,all said Certificates and for not less than all. For said legally issued Certificates of Obligation, we will pay you the par value thereof,plus accrued interest from their date to the date of delivery to us for the Certificates maturing and bearing interest per annum as follows: L_.' Maturity Principal Interest Maturity , Principal Interest Date - Amount Rate Date Amount Rate March 1,2008(a) $ 50,000 % March 1,2021(a)(b) $1,170,000 % L March 1,2009(a) 50,000 March 1,2022(a)(b) 1,230,000 March 1,2010(a) 100,000 March 1,2023(a)(b) 1,295,000 March 1,2011(a) 150,000 March 1,2024(a)(b) 1,360,000 1 March 1,2012(a) 200,000 March 1,2025(a)(b) 1,430,000 March 1,2013(a) 250,000 March 1,2026(a)(b) 1,500,000 March 1,2014(a) 300,000 March 1,2027(a)(b) 1,580,000 March 1,2015(a) 350,000 March 1,2028(a)(b) 1,660,000 March 1,2016(a) 400,000 March 1,2029(a)(b) 1,745,000 March 1,2017(a) 450,000 March 1,2030(a)(b) 1,540,000 March 1,2018(a)(b) 1,005,000 March 1,2031(a)(b) 1,600,000 March 1,2019(a)(b) 1,060,000 March 1,2032(a)(b) 1,660,000 March 1,2020(a)(b) 1,115,000 (1) At the option of the Purchaser, any or all of such serial maturities may be designated as term certificates subject to mandatory sinking fund redemption as follows;provided that the mandatory sinking fund amount in each year shall equal the amounts shown above as maturing in such year. Term Bonds Years of First Maturity Date Mandatory Principal Amount Interest (March 1) Redemption of Term Bonds Rate { $ % (b) Subject to optional redemption and payment, at the option of the City, in whole or, from time to time, in part, on March 1, 2017, or on any date thereafter at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption. jl Interest cost,in accordance with the above bid,is: - Total Interest Cost from March 1,2007 $ NET INTEREST COST $ NET EFFECTIVE INTEREST RATE The Initial Certificates shall be registered in the name of , which will, upon payment for the Certificates,be cancelled by the Paying Agent/Registrar.The Certificates will then be registered in the name of Cede&Co.(DTC's partnership nominee),under the Book-Entry-Only System. Cashier's Check of the Bank, ,Texas,in the amount of$465,000 which represents our Good Faith Deposit(is attached hereto)or(has been made available to you prior to the opening of this Bid), and is submitted in accordance with the terms as set forth in the "Official Notice of Sale" and "Official Statement." We agree to accept delivery of the Certificates utilizing the Book-Entry-Only System through DTC and make payment for the Initial Certificates in immediately available funds in the Corporate Trust Office,Wells Fargo Bank, N.A., Houston,Texas, not later than 10:00 AM, CST,on March 22,2007,or thereafter on the date the Certificates are tendered for delivery,pursuant to the terms set forth in the Notice of Sale and Bidding Instructions.It will be the obligation of the purchaser of the Certificates to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute and deliver to the City, by the date of delivery of the Certificates, a certificate relating to the "issue price" of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale,with such changes thereto as may be acceptable to the City and its Bond Counsel. Respectfully submitted, By Authorized Representative • ACCEPTED this 26th day of February,2007,the City Council,City of Pearland,Texas. , Mayor % �. ATTEST: City Clerk (For your information you will find attached a list of the group of purchasers associated with us in this proposal) r�. OFFICIAL BID FORM February 26,2007 - Mayor and City Council • City of Pearland 3519 Liberty Drive Pearland,Texas 77581 Gentlemen: Subject to the terms of your Official Notice of Sale and Official Statement, dated February 5, 2007, which are incorporated herein by reference, we hereby submit the following bid for the$23,250,000 CITY OF PEARLAND, TEXAS,CERTIFICATES OF OBLIGATION,SERIES 2007,dated March 1,2007. This offer is being made for all said Certificates and for not less than all. For said legally issued Certificates of Obligation,we will pay you the par value thereof,plus accrued interest from their date to the date of delivery to us for the Certificates maturing and bearing interest per annum as follows: Maturity Principal Interest Maturity. Principal Interest Date - Amount Rate Date • Amount Rate March 1,2008(a) $ 50,000 % March 1,2021(a)(b) $1,170,000 % March 1,2009(a) 50,000 March 1,2022(a)(b) 1,230,000 March 1,2010(a) 100,000 March 1,2023(a)(b) 1,295,000 March 1,2011(a) 150,000 March 1,2024(a)(b) 1,360,000 March.1,2012(a) 200,000 March 1,2025(a)(b) 1,430,000 March 1,,2013(a) 250,000 March 1,2026(a)(b) 1,500,000 March 1,2014(a) 300,000 March 1,2027(a)(b) 1,580,000 March 1,2015(a) 350,000 March 1,2028(a)(b) 1,660,000 March 1,2016(a) 400,000 March 1,2029(a)(b) 1,745,000 March 1,2017(a) 450,000 March 1,2030(a)(b) 1,540,000 March 1,2018(a)(b) 1,005,000 March 1,2031(a)(b) 1,600,000 March 1,2019(a)(b) 1,060,000 March 1,2032(a)(b) 1,660,000 March 1,2020(a)(b) ' 1,115,000 (a) At the option of the P'!rrhaser, any or all of such serial maturities may be designated as term certificates subject to n,.uidatory sinking fund redemption as follows;provided that the mandatory'sinking fund amount in each year shall equal the amounts shown above as maturing in such year. Term Bonds Years of First Maturity Date Mandatory Principal Amount Interest (March 1) Redemption of Term Bonds Rate $ % (b) Subject to optional redemption and payment, at the option of the City, in whole or, from time to time, in part, on March 1, 2017, or on any date thereafter at a price equal to the principal amount thereof, plus - accrued interest to the date fixed for redemption. Interest cost,in accordance with the above bid,is: • Total Interest Cost from March 1,2007 $ NET INTEREST COST $ NET EFFECTIVE INTEREST RATE % The Initial Certificates shall be registered in the name of , which will, upon payment for the Certificates, be cancelled by the Paying Agent/Registrar.The Certificates will then be registered in the name of Cede&Co.(DTC's partnership nominee),under the Book-Entry-Only System. Cashier's Check of the Bank, ,Texas,in the amount of$465,000 which represents our Good Faith Deposit(is attached hereto)or(has been made available to you prior to the opening of this - Bid), and is submitted in accordance with the terms as set forth in the "Official Notice of Sale" and "Official Statement." We agree to accept delivery of the Certificates utilizing the Book-Entry-Only System through DTC and make - payment for the Initial Certificates in immediately available funds in the Corporate Trust Office,Wells Fargo Bank, N.A., Houston,Texas, not later than 10:00 AM,CST,on March 22,2007,or thereafter on the date the Certificates are tendered for delivery,pursuant to the terms set forth in the Notice of Sale and Bidding Instructions.It will be the obligation of the purchaser of the Certificates to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute and deliver to the City, by the date of delivery of the Certificates, a certificate relating to the "issue price" of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale,with such changes thereto as may be acceptable to the City and its Bond Counsel. Respectfully submitted, By Authorized Representative ACCEPTED this 26th day of February,2007,the City Council,City of Pearland,Texas. Mayor ATTEST: City Clerk (For your information you will find attached a list of the group of purchasers associated with us in this proposal) L_. CERTIFICATE REGARDING ISSUE PRICE The undersigned hereby certifies with respect to the sale of$23,250,000 City of Pearland, Texas (the "Issuer"), Certificates of Obligation,Series 2007(the"Certificates"): 1. The undersigned is a duly authorized representative of the underwriter or of the manager of the syndicate of underwriters (the "Underwriters") which has purchased the Certificates at competitive sale. In this capacity,the undersigned is familiar with the facts stated herein. • 2. The term"Initial Offering Prices"means the respective initial offering prices for the Certificates of each maturity(expressed as a dollar amount or percentage of principal amount and exclusive of accrued interest)as set forth in the following table: Principal Initial Principal Initial _ Amount Year of Offering Amount Year of Offering Maturing Maturity Price Maturing Maturity Price $ 50,000 March 1,2008 % $1,170,000 March 1,2021 % 50,000 March 1,2009 % 1,230,000 March 1,2022 % 100,000 March 1,2010 % 1,295,000 March 1,2023 % 150,000 - March 1,2011 % 1,360,000 March 1,2024 % 200,000 March 1,2012 % 1,430,000 March 1,2025 % j 250,000 March 1,2013 % 1,500,000 March 1,2026 % 300,000 March 1,2014 % 1,580,000 March 1,2027 % 350,000 March 1,2015 % 1,660,000 March 1,2028 % 400,000 March 1,2016 % 1,745,000 March 1,2029 % 450,000 March 1,2017 % 1,540,000 March 1,2030 % 1,005,000 March 1,2018 % 1,600,000 March 1,2031 % 1,060,000 March 1,2019 % 1,660,000 March 1,2032 % 1,115,000 March 1,2020 % 3. The Underwriters purchased the Certificates for contemporaneous sale to the Public and not for 1 investment for their own account. Each of the Certificates has actually been offered to the Public at its respective initial offering price set forth above in a bona fide public offering of all the Bonds and, as of the Issue Date, a substantial amount of the Certificates (at least ten percent) of each maturity has been sold to the Public in arm's length transactions for cash prices (with no other consideration being included). The initial offering prices do not I exceed the respective fair market value of each such maturity of*tie Certificates as of the Sale Date and are based on actual facts and reasonable expectations in existence an the Sale Date. 4. The term "Sale Date" means the first day on which there was a binding contract in writing for the sale of the Certificates by the Issuer to the Underwriters on specific terms that were not later modified or adjusted in any material respect. In the case of the Certificates,the Sale Date is February 26,2007. 5. The term "Issue Date" means the first day on which there is physical delivery of the written evidence of the Certificates in exchange for the purchase price (but not earlier than the day interest on the Certificates begins to accrue for federal income tax purposes). In the case of the Certificates, the Issue Date is r March 22,2007. 6. The term "Public",shall not include bond houses, brokers, and similar persons or organizations r , acting in the capacity of wholesalers or underwriters. 1 7. The accrued interest on the Certificates as of the Issue Date is$ . The aggregate of the respective Initial Offering Prices of all of the Certificates,exclusive of accrued interest and without adjustment for any costs of issuance,is$ 8. .. The Underwriter[has] [has not]purchased bond insurance or another form of credit enhancement ("Guarantee") from securing the payment of the principal of,or interest on,any of the Certificates. With respect to the Guarantee, a. The provider of the Guarantee is (the"Guarantor"). b. The fee or premium paid to the Guarantor for the Guarantee is $ (the "Premium"). The Premium is set forth in the Guarantor's commitment,does not exceed a reasonable charge for the transfer of the credit risk provided by the Guarantee, and does not include any direct or indirect payment or compensation(such as rating agency fees)for any service other than the transfer of such credit risk. The Guarantor has not provided any service other than the Guarantee,except for any such service for - which the Guarantor has charged a reasonable arm's length price which will be in addition to, and stated separately from,the Premium. No portion of the Premium is refundable upon the redemption or defeasance of any of the Certificates. c. As a result of the Guarantee, the interest rates on the Certificates, are less than those which-would have been necessary in order to sell the Certificates at the respective Initial Offering Prices without the Guarantee. As of the Issue Date, the present value of such interest savings expected to result from the Guarantee is greater than the present value of the Premium, using the yield on the Certificates (computed for this purpose by treating the Premium as additional interest on the Certificates)as the discount rate. We understand that the Issuer will rely on the above in making certain representations to Andrews Kurth LLP, Houston, Texas, Bond Counsel, and in complying with the conditions of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations in effect thereunder, necessary for interest on the Certificates to be and remain excludable from gross income for federal income tax purposes. • EXECUTED and DELIVERED this ,2007. (Name of Underwriter or Manager) By: Title: i t1 CERTIFICATE YEARS Dated: March 1,2007 Due: As shown below Years Maturity Bond Cumulative Date Amount Years Bond Years • March 1,2008 $ 50,000 50.0000 50.0000 March 1,2009 50,000 100.0000 150.0000 March 1,2010 100,000 300.0000 450.0000 March 1,2011 150,000 600.0000 1,050.0000 March 1,2012 200,000 1,000.0000 2,050.0000 March 1,2013 250,000 1,500.0000 3,550.0000 - March 1,2014 300,000 2,100.0000 5,650.0000 March 1,2015 350,000 2,800.0000 8,450.0000 March 1,2016 400,000 3,600.0000 12,050.0000" 'March 1,2017 450,000 4,500.0000 16,550.0000 March 1,2018 1,005,000 11,055.0000 27,605.0000 March 1,2019 1,060,000 12,720.0000 ; 40,325.0000 March 1,2020 1,115,000 14,495.0000 54,820.0000 { March 1,2021 1,170,000 16,380.0000 71,200.0000 .. _ March 1,2022 1,230,000 - 18,450.0000 89,650.0000 March 1,2023 1,295,000 20,720.0000 110,370.0000 March 1,2024 1,360,000 23,120.0000 133,490.0000 March 1,2025 1,430,000 25,740.0000 159,230.0000 March 1,2026 1,500,000 28,500.0000 187,730.0000 March 1,2027 1,580,000 31,600.0000 219,330.0000. March.1,2028 1,660,000 ,34,860.0000 254,190.0000 March 1,2029 1,745,000 38,390.0000 . . . ' 292,580.0000 March 1,2030 1,540,000 35,420.0000 328,000.0000 March 1,2031 1,600,000 38,400.0000. 366,400.0000 March 1,2032 1,660,000 41,500.0000 407,900.0000 - AVERAGE MATURITY—17.486 YEARS 1 PRELIMINARY OFFICIAL STATEMENT DATED FEBRUARY 15,2007 .c 5 This Preliminary Official Statement is subject to completion and amendment. Upon sale of the Certificates, the Official Statement will be i 5— completed and delivered to the Underwriters. Prospective purchasers must read the entire Official Statement to make an informed investment =e decision. In the opinion of Bond Counsel,interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, . subject to the matters described under"Tax Exemption"herein,and is not includable in the alternative minimum taxable income of individuals. See"TAX EXEMPTION"for a discussion of the opinion of BondCounsel,including the alternative minimum tax on corporations. NEW ISSUE: BOOK-ENTRY-ONLY = " RATINGS: Moody's Investors Service,Inc..--.......... . " " " Standard&Poor's Ratings Services “ " Ez c $23,250,000 5= CITY OF PEARLAND, TEXAS L L v (A political subdivision of the State of Texas located within Brazoria and Harris Counties) CERTIFICATES OF OBLIGATION, SERIES 2007 Dated: March 1,2007 Due: March 1,as shown below Principal of and interest on the$23,250,000 City of Pearland,Texas,Certificates of Obligation,Series 2007(the"Certificates")are payable by Wells Fargo Bank,N.A., Houston,Texas,the paying agent/registrar(the"Paying Agent/Registrar"). The Certificates are initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery — of the Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying • F. Agent/Registrar to Cede& Co.,which will make distribution of the amounts so paid to the beneficial owners of the Certificates. See"THE v CERTIFICATES-Book-Entry-Only System"herein. Interest on the Certificates will accrue from March 1,2007 and is payable on March 1 and September 1 of each year,commencing September 1,2007,to the registered owners(initially Cede&Co.)appearing on the registration books of the Paying Agent/Registrar on the 15th day of the month preceding each interest payment date(the"Record Date"). See"THE CERTIFICATES -Description." The Certificates will be authorized by an ordinance(the"Ordinance")to be approved by City Council on February 26,2007. The Certificates, • when issued,will constitute valid and binding obligations of the City of Pearland,Texas(the"City")and will be payable from the proceeds of an annual ad valorem tax,levied within the limits prescribed by law,against all taxable property within the City and will be further payable from a g limited junior and subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the Et.= "System")in an amount not to exceed$10,000. See'THE CERTIFICATES-Source of Payment." 2 r Proceeds of the sale of the Certificates will be used for(i)the design and construction of a multi-purpose municipal facility,(ii)renovations to an existing police facility, (iii) renovations to and existing community center, (iv) renovations to two existing fire stations and (v) payment for v professional services rendered in connection with these projects. Proceeds from the sale of the Certificates will also be used to pay the costs of t' 2 issuance of the Certificates. See"THE CERTIFICATES-Use of Proceeds." r= The City has applied for a municipal bond insurance policy to guarantee the scheduled payment of principal of and interest on the Certificates. - 5 The premium for such insurance,if purchased will be paid by the Underwriters(hereafter defined). 1 PRINCIPAL AMOUNTS,MATURITIES,INTEREST RATES AND PRICES (Due March 1) Initial CUSIP Initial CUSIP i Principal Interest Reoffering Nos. Principal Interest Reoffering Nos. - Maturity Amount Rate Yield(a) (b) Maturity Amount Rate Yield(a) (b) b v 2008 $ 50,000 % % 2021(c) $1,170,000 % % ova __ 2009 50,000 2022(c) 1,230,000 •=z' 2010 100,000 2023(c) 1,295,000 aL. = 2011 150,000 2024(c) 1,360,000 • •= 2012 200,000 2025(c) 1,430,000 v= 2013 250,000 2026(c) 1,500,000 4 2014 300,000 2027(c) 1,580,000 2015 350,000 2028(c) 1,660,000 • 2016 400,000 2029(c) 1,745,000 v 2017 450,000 2030(c) 1,540,000 2018(c) 1,005,000 2031(c) 1,600,000 5 2019(c) 1,060,000 2032(c) 1,660,000 .v R 2020(c) 1,115,000 (a)_The initial yields will be established by and are the sole responsibility of the Underwriters,and may subsequently be changed. ✓v (b) CUSIP numbers have been assigned to the Certificates by Standard and Poor's CUSIP Service Bureau, A Division of the McGraw-Hill Companies, Inc.,and are included solely for the convenience of the registered owners of the Certificates. Neither the City,the Financial ''• ,..5Advisor,nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. — v (c) The Certificates maturing on March 1, 2018 and thereafter, are subject to redemption,at the option of the City, at par value thereof plus accrued interest on March 1,2018,or any date thereafter. See"THE CERTIFICATES-Redemption Provisions." The Certificates are offered when,as and if issued,subject to the approving opinion of the Attorney General of the State of Texas and the opinion -- s = of Andrews Kurth LLP,Houston,Texas,Bond Counsel for the City,as to the validity of the issuance of the Certificates under the Constitution -y ^ 2 and laws of the State ofTexas. See"LEGAL MATTERS." Delivery of the Certificates is expected to be on or about March 22,2007. .' Fs SELLING: MONDAY,FEBRUARY 26,2007 r^ ` UNTIL 1:00 P.M.,HOUSTON TIME i.- .- c 1 _ No dealer,broker,salesman or other person has been authorized by the City to give any information or to make any — representation other than those contained in this Official Statement,and,if given or made,such other information or representations must not be relied upon as having been authorized by the City. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice,and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances,create any implication that there has been no change in the condition of the City or other matters described herein since the date hereof. TABLE OF CONTENTS INTRODUCTORY STATEMENT 3 Property Subject to Taxation by the City 16 - _ SALE AND DISTRIBUTION OF THE Tax Increment Reinvestment Zone 17 CERTIFICATES 3 Notice and Hearing Procedures 18 Sale of the Certificates 3 Levy and Collection of Taxes 18 Prices and Marketability 3 Collection of Delinquent Taxes 18 Securities Laws 3 Historical Analysis of Tax Collection 19 i I Municipal Bond Insurance 4 Analysis of Tax Base 20 Municipal Bond Ratings 4 Estimated.Overlapping Taxes 21 OFFICIAL STATEMENT SUMMARY 5 Sales Tax 21 INTRODUCTION 7 SELECTED FINANCIAL DATA 22 - THE CERTIFICATES 7 Historical Operations of the City's Description 7 General Fund 22 Redemption Provisions 7 General Fund and Debt Service Fund Notice of Redemption 7 Balance for the Past Five Fiscal Book-Entry-Only System 8 Years 23 Successor Paying Agent/Registrar 9 Pension Fund 23 Source of Payment 10 Financial Statements 23 Authorization of the Certificates 10 ADMINISTRATION OF THE CITY 23 Use of Proceeds 10 Mayor and City Council 23 Future Debt 10 Administration 24 Legal Investments in Texas 10 Consultants 24 Remedies in the Event of Default 10 LEGAL MATTERS 24 INVESTMENT AUTHORITY AND Legal Opinions 24 r INVESTMENT OBJECTIVES OF THE No-Litigation Certificate 25 • ' CITY 13:;.11 No Material Adverse Change 25 Legal Investments 11 TAX EXEMPTION 25 Investment Policies 12 TAX TREATMENT OF ORIGINAL ISSUE Current Investments 12 DISCOUNT AND PREMIUM Additional Provisions 12 CERTIFICATES 26 CITY TAX DEBT 13 Discount Certificates 26 Tax Supported Debt Statement 13 Premium Certificates 27 Bonded Indebtedness Payable from Ad CONTINUING DISCLOSURE OF Valorem Taxes 13 INFORMATION 28 Pro-Forma Tax Supported Debt Service Annual Reports 28 r Schedule 14 Material Event Notices 28 i Estimated Overlapping Debt 15 Availability of Information From Debt Ratios 15 NRMSIRs and SID 28 TAX DATA 15 Limitations and Amendments 29 General 15 Audited Financial Report of the City 29 1 Property Tax Code and County-Wide Compliance With Prior Undertakings 29 Appraisal District 15 GENERAL CONSIDERATIONS 30 Tax Rate Limitations 16 Sources and Compilation of Information 30 i I Certification as to Official Statement 30 APPENDIX A— Economic and Demographic Characteristics Updating of Official Statement 30 APPENDIX B— Audited Financial Statements of the City APPENDIX C— Form of Legal Opinion • ii i $23,250,000 CITY OF PEARLAND,TEXAS CERTIFICATES OF OBLIGATION,SERIES 2007 INTRODUCTORY STATEMENT Information contained in this Official Statement,including Appendices A and B,has been obtained from the City of Pearland, Texas (the "City") in connection with the offering by the City of its $23,250,000 Certificates of Obligation,Series 2007(the"Certificates")identified on the cover page hereof. All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources,is intended to show recent historic information,and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience,as is shown by that financial and other information,will necessarily continue or be repeated in the future. SALE AND DISTRIBUTION OF THE CERTIFICATES Sale of the Certificates After requesting competitive bids for the Certificates, the City accepted the lowest bid, which was tendered by a syndicate managed by (collectively, referred to herein as the "Underwriters") to purchase the Certificates, bearing the interest rates on the inside cover page of this Official Statement, at a cash price of par,plus accrued interest to the date of delivery. The net effective interest rate on the certificates is _ %. Prices and Marketability The delivery of the Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Underwriters on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is bondhouse,broker or similar person acting in the capacity of underwriter or wholesaler. The City has no control over trading of the Certificates after a bona fide offering of the Certificates is made by the Underwriters at the yields specified on the cover page. Information concerning reoffering yields or prices is the responsibility of the Underwriters. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Underwriters after the Certificates are released for sale, and the Certificates may be offered and sold at prices other than the initial offering price,including sales to dealers who may sell the Certificates into investment accounts. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITERS MAY OVER- ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES, AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,IF COMMENCED,MAY BE DISCONTINUED AT ANY TIME. Securities Laws No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein;nor have the Certificates been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such jurisdictions. - For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission("Rule 15c2-12"),this document, as may be supplemented or corrected by the City from time to time, may be treated as an Official Statement with respect to the Certificates described herein"deemed final"by the City as of the date hereof(or of any such supplement or correction) except for the omission of certain information referred to in the succeeding sentence. This document,when further supplemented by adding information specifying the interest rates and certain other information relating to the Certificates,shall constitute a"Final Official Statement"of the City with respect to the Certificates,as such term is defined in Rule 15c2-12. 3. Municipal Bond Insurance The City has made application for municipal bond insurance under the bidder option program. The premium for such insurance,if purchased,will be paid for by the Underwriter. • Municipal Bond Ratings In connection with the sale of the Certificates, the City has made application to Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") for ratings and the ratings of" " and " ", • respectively, have been assigned to the Certificates with the understanding that upon delivery of the Certificates,a municipal bond insurance policy insuring the timely payment of the principal of and interest on the Certificates will be issued by . In addition, Moody's and S&P have assigned underlying ratings of"_"and" "respectively on the Certificates. An explanation of the significance of such ratings may be obtained from Moody's and S&P. The ratings reflect only the views of Moody's and S&P,and the City makes no representation as to the appropriateness of such ratings. There is no assurance that such ratings will continue for any period of time or that they will not be revised downward or withdrawn entirely by Moody's and/or S&P,if, in the judgment of Moody's and S&P,circumstances so warrant. Any such downward revision or withdrawal of either or both of the ratings may have an adverse effect on the market price of the Certificates. • • • 4 OFFICIAL STATEMENT SUMMARY The following material is a summary of certain information contained herein and is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement. The reader should refer particularly to sections that are indicated for more complete information. The Issuer The City of Pearland,Texas(the"City")is a political subdivision and home rule city of the State of Texas located within Brazoria and Harris Counties, Texas. For additional information regarding the City, see "Appendix A—Economic and Demographic Characteristics." The Certificates $23,250,000 Certificates of Obligation, Series 2007 (the "Certificates"), are dated March 1, 2007 and mature March 1, 2008 through March 1, 2032. Interest on the Certificates accrues from March 1, 2007, and is payable initially on September 1, 2007, and on each March 1 and September 1 thereafter until the earlier of maturity or prior redemption. See"THE CERTIFICATES-Description." Other Characteristics The Certificates are issued in fully registered form in integral multiples of$5,000. The Certificates maturing on and after March 1, 2018 are subject to redemption,'at the option of the City, at a price of the par value thereof plus accrued interest, on March 1, 2017 or any date thereafter. See"THE CERTIFICATES-Redemption Provisions." Paying Agent/Registrar The initial paying agent/registrar is Wells Fargo Bank,N.A.,Houston, Texas. The City intends to use the book-entry-only system of The Depository Trust Company ("DTC"), but reserves the right on its behalf or on behalf of the DTC to discontinue such system. (See"THE BONDS-Book-Entry-Only System.") Source of Payment Principal and interest on the Certificates are payable from the proceeds of an annual ad valorem tax levied upon all taxable property within the City,within the limits prescribed by law,and are further payable from a limited junior and subordinate pledge of the Net Revenues(as defined in the Ordinance) of the City's waterworks and sewer system (the "System"),but only to the extent of and in an amount.not in excess of $10,000 of the Net Revenues of such System. See "THE CERTIFICATES-Source of Payment." Use of Proceeds Proceeds from the sale of the Certificates will be used for(i)the design and construction of a multi-purpose municipal facility, (ii)renovations to an existing police facility, (iii) renovations to and existing community center,(iv)renovations to two existing fire stations and(v) payment for professional services rendered in connection with these projects. Proceeds from the sale of the Certificates will also be used to pay the costs of issuance of the Certificates. See "THE CERTIFICATES-Use of Proceeds." Bond Insurance The City has applied for a municipal bond insurance policy on the Certificates under the bidder program.option The Premium for such P P insurance,if purchased,will be paid for by the Underwriter. Ratings Moody's Investors Service,Inc.(Insured) Standard&Poor's Ratings Group(Insured) "" Moody's Investors Service,Inc.(Underlying) " If Standard&Poor's Ratin g Group(Underlying)s `�VI �__: 5 -Selected Financial Information- (Unaudited) The Certificates 2006 Certified Net Assessed Valuation(100%of estimated market value) $ 4,654,672,740(a)(b) Direct Debt: Outstanding Tax Supported Debt(as of January 1,2007) $ 196,115,000(c) Plus: The Certificates 23,250,000 Total Tax Supported Debt $ 219,365,000 Estimated Overlapping Debt $ 394,269.068 Direct and Estimated Overlapping Debt $ 613,634,068 Debt Service Fund Balance(as of January 12,2007) $ 10,622,956 1- %of 2006 Per Assessed Capita Valuation (81,408) Debt Ratios: Direct Tax Supported Debt 4.71% $ 2,695 Direct Tax Supported and Estimated Overlapping Debt 13.18% $ 7,538 2006 Tax Rate(per$100 of Assessed Valuation) Maintenance and Operation $ 0.298974 Debt Service 0.353685 Total $ 0.652659 Estimated Annual Debt Service Requirements: Average(Fiscal Years 2007-2032) $ .13,812,736 I Maximum(2018) • $ 16,691,471 Tax Collections: Arithmetic Average,Tax Years(2001-2005)-Current Years 97.74% -Current and Prior Years 99.61% (a) Provided by the Brazoria Central Appraisal District(the"Appraisal District")and net of exemptions. Includes $724,365,960 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas(the "TIRZ"). Pursuant to an agreement between the City and the TIRZ,tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. - (b) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was annexed by the City on December 31,2006. (c) Includes all outstanding debt of Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 31, 2006. Also includes $1,940,000 Brazoria County Municipal Utility District No. 1 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds, Series 2007, which is expected to be delivered on March 22,2007. This debt will be assumed by the City. — 6 INTRODUCTION This Official Statement and the Appendices hereto provide certain information with respect to the issuance by the City of Pearland, Texas(the"City") in connection with the offering by the City of its $23,250,000 Certificates of Obligation,Series 2007(the"Certificates"). The Certificates are issued pursuant to the Texas Constitution,the general laws of the State of Texas, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance 1__ authorizing issuance of the Certificates(the"Ordinance')adopted by the City Council of the City(the"Council"). There follows in this Official Statement descriptions of the Certificates, the plan of financing, and certain information about the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City upon request. Certain capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance,except as otherwise indicated herein. THE CERTIFICATES Description The Certificates are dated March 1,2007 and bear interest from such date at the stated interest rates indicated under "PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES"on the cover page hereof, which interest is payable initially on September 1,2007,and each March 1 and September 1 thereafter until the earlier of maturity or prior redemption. The Certificates are issued in fully registered form in denominations of$5,000 each or any multiple thereof. Principal of the Certificates is payable at the principal payment office of Wells Fargo Bank, N.A.(the"Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date,and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede & Co.,the nominee of The Depository Trust Company pursuant to the Book-Entry-Only System described below. In the event the Book-Entry-Only-System is discontinued,the Certificates may.be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer,but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date(the"Record Date")for the interest payable on any interest payment date means the 15th day of the month next preceding such interest payment date. It will be required that all transfers be made within three business days after request and presentation. 1 The City has agreed to replace mutilated, destroyed, lost or stolen Certificates upon surrender of the mutilated Certificates, or receipt of satisfactory evidence of such destruction, loss or theft, and receipt by the City and the Paying Agent/Registrar of security or indemnity to keep them harmless. The City may require payment of taxes, governmental charges and other expenses in connection with any such replacement. Redemption Provisions The Certificates maturing on March 1, 2018 and thereafter are to optional redemption subjectp p prior to maturity, in whole or in part,on March 1, 2017,or any date thereafter,at the option of the City at a price equal to the principal amount thereof plus accrued interest to the date of redemption. If less than all of the Certificates are redeemed at any time,the maturities of the Certificates to be redeemed shall be selected by the City. Notice of Redemption Not less than 30 days prior to a redemption date for the Certificates,the City shall cause a notice of redemption to be sent by United States mail,first class,postage prepaid,to the registered owners of the Certificates to be redeemed,in whole or in part at the address of the registered owner appearing on the registration books of the Paying _Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY • CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT,INTEREST ON SUCH CERTIFCATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. 7 Book-Entry-Only System This section describes how ownership of the Certificates is to be transferred and how the principal of premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company("DTC"), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof The City cannot and does not give any assurance that (I) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee(as the registered owner of the Certificates), or redemption or other notices, to the Beneficial Owners,or that they will do so on a timely basis, or(3)DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates.The Certificates will be issued as fully-registered securities registered in the name of Cede& Co.(DTC's partnership nominee)or such other name as may be requested by an authorized representative of DTC.One fully-registered security will be issued for each maturity of CIBs and CABs, as set forth on the inside cover hereof,each in the aggregate principal amount of such maturity and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law,a"banking organization"within the meaning of the New York Banking,Law,a member of the Federal Reserve System, a"clearing corporation"within the meaning of the New York Uniform Commercial Code, and a"clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S.equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation("DTCC").DTCC,in turn,is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange.Inc.,the American Stock Exchange LLC,and the National Association of Securities Dealers,Inc.Access to the DTC system is also available to others such as both U.S. and non-U.S.securities brokers and dealers,banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant,either directly or indirectly("Indirect Participants").DTC has Standard&Poor's highest rating:"AAA." The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. • Purchases of Certificates under the DTC system must be made by or through Direct Participants,which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the hooks of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates,except in the event that use of the book-entry system for the Certificates is - discontinued. - To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede& Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 8 2 • , • Conveyance of notices and other communications by DTC to Direct Participants,by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them,subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates,such as redemptions,tenders,defaults,and proposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners.In _ the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within a maturity are being redeemed, DTC's practice is to determine by lot'the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede& Co.(nor any other DTC nominee)will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures,DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest a p yments on the Certificates will be made to Cede& Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or Agent,on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices,as is the case with Certificates held for the accounts of customers in bearer form or registered in "street name,"and will be the responsibility of • such Participant and not of DTC, Paying Agent, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest payments to Cede& Co.(or such other nominee as may be requested by an authorized representative of DTC)is the responsibility of the City or Paying Agent. Disbursement of such payments to Direct Participants will be the responsibility of DTC,and reimbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or Paying Agent. Under such circumstances,in the event that a successor depository is not obtained,certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC(or a successor securities depository). Discontinuance of the use of the system of book-entry transfers through DTC may require the approval of DTC Participants under DTC's operational arrangements. In that event,certificates will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable,but the City and the Underwriters take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book-Entry-Only \j System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System,and,(ii)except as described above,notices that are to be given to registered owners under the Ordinance will be given only to DTC. Successor Paying Agent/Registrar Provision is made in the Ordinance for replacing the Paying Agent/Registrar. If the City replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the _Paying Agent/Registrar's records to the successor paying agent/registrar(the"Successor Paying Agent/Registrar"), and the Successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any Successor Paying Agent/Registrar selected by the City shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Certificates. 9 Source of Payment The Certificates are payable as to principal and interest from, and secured by,the proceeds of a continuing, direct annual ad valorem tax,levied within the limits prescribed by law,against all taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding,it will levy,assess and undertake to collect such tax. The Certificates will be further payable from a limited junior,and subordinate pledge of Net Revenues(as defined in the Ordinance) of the City's waterworks and sewer system(the "System") in an amount not to exceed $10,000. See "TAX DATA - Tax Rate Limitations" and "THE CERTIFICATES - Remedies in the Event of Default." Authorization of the Certificates The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas,particularly Subchapter C of Chapter 271,Texas Local Government Code,as amended,and the provisions of the Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates,as _ a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. Use of Proceeds Proceeds of the Certificates are being used for(i)the design and construction of a multi-purpose municipal facility, (ii)renovations to an existing police facility,(iii)renovations to and existing communitycenter,(iv)renovations ons to two existing fire stations and (v) payment for professional services rendered in connection with these projects. Proceeds from the Certificates will also be used to pay the costs of issuance on the Certificates. Future Debt The City has$29,711,530 unissued bonds authorized by City voters. The City plans to issue such authorized bonds in late 2007 or 2008. The City may also issue additional certificates of obligation for City projects. Depending on the rate of development within the City, changes in assessed valuation, and the amounts, interest rates, maturities — and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds,the Certificates, and such future certificates of obligation or bonds. In addition, Brazoria County Municipal Utility District No. 1 anticipates delivering its $1,940,000 Waterworks and Sewer System Combined Unlimited Tax and Revenue Bonds,Series 2007 on March_,2007. This debt will be assumed by the City. Legal Investments in Texas . Pursuant to the Texas Public Securities Procedures Act, Chapter 1201,Texas Government Code, as amended, the Certificates,whether rated or unrated,are(a)legal investments for insurance companies,fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment • Act,Chapter 2256,Texas Government Code,as amended,and such political subdivisions may impose a requirement consistent with such act that the Certificates have a ratinr o f.not less than "A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than"A"or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws,rules,regulations or investment criteria that might affect the suitability of the Certificates for any of the above purposes or limit the authority of any of the above entities or persons to purchase or invest in the Certificates. Remedies in the Event of Default -i - The Ordinance does not provide for the appointment of a trustee to represent the interests of the Certificate holders upon any failure of the City to perform in accordance with the terms of the Ordinance or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinance does not establish specific events of default with respect to the Certificates and,under State law,there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could seek a judgment against the City if a default occurred in the payment of principal of or 10 i • interest on any such Certificates; however,such judgment could not be satisfied by execution against any property of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy,if a default occurs,is a mandamus or mandatory injunction proceeding to compel the City to levy,assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as it becomes due or perform other material terms and covenants contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to,perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Certificates are valid and binding obligations for all purposes according to their terms. However,the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a•periodic basis. The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S.Bankruptcy Code("Chapter 9').Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues,the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval,the prosecution of any other legal action by creditors.or Certificate holders of an entity which has sought protection under Chapter 9.Therefore,should the City avail itself of Chapter 9 protection from creditors,the ability to enforce would be subject to the approval of the Bankruptcy Court(which could require that the action be heard in Bankruptcy Court instead of other federal or state court);and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it.The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors,including rights afforded to creditors under the Bankruptcy Code. INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY The City invests its in,estable funds in investments authorized by Texas law in accordance with investment policies 1 approved by the Mayor and Council of the City. Both state law and the City's investment policies are subject to change. • Legal Investments Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities,(2)direct obligations of the State;of Texas or its agencies and instrumentalities,(3)collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by,or backed by the full faith and credit of,the State of Texas or the United States or their respective agencies and instrumentalities,(5)obligations of states, agencies, counties, cities,and other political subdivisions of any state rates as to investment quality by a nationally iF recognized investment rating firm not less than A or its equivalent,(6)certificates of deposit that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits, (7)certificates of deposit �\• and share certificates issued by a state or federal credit union domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, o-ai-- secured as to principal by obligations described in the clauses(1)through (5) or in any other manner and amount provided by law for City deposits, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) bankers' acceptances with the remaining term of 270 days or less,if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency,(10)commercial paper that is rated at least A-1 or P-1 or the equivalent by either(a)two nationally recognized credit rating agencies or(b)one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S.or state bank),(11)no-load money market mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that: have an average weighted maturity of less than two years; invests exclusively in obligations described in the preceding clauses;and are continuously rated as to investment quality by ' at least one nationally recognized investment rating firm of no less than AAA or its equivalent, and (13) bonds issued, assumed, or guaranteed by the State of Israel; and may invest bond proceeds in guaranteed investment contracts that have a defined termination date and are secured by obligations described in clause (i) above in an amount at least equal to the amount of bond proceeds invested under such a contract. 11 The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than Aaa or AAA or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal;(2)obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest;(3)collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that-adjusts opposite to the changes in the market index. Investment Policies Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted"Investment Strategy Statement"that specifically addresses each funds'investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2)preservation and safety of principal,(3) liquidity, (4) marketability of each investment,(5)diversification of the portfolio,and(6)yield. Under Texas law, City investments must be made"with judgment and care, under prevailing circumstances, that person or prudence, discretion, and intelligence would exercise in the management of the person's own affairs,not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly,the investment officers of the City shall submit an investment report detailing:(1)the investment position of the City; (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value for each pooled fund group,(4)the book value and market value of each separately listed asset at the beginning and end of the reporting • period,`(5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and(7)the compliance of the investment portfolio as it related to: ,11 (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the Mayor and Council of the City. The City's policies requires investments in accordance with applicable state law. The City'Statement of Investment does not exclude any investments allowable under State law described above under"Legal Investments." The City generally invests in obligations of the United States or its Agencies and instrumentalities. Current Investments • State law and City ordinances authorize the City to invest in direct obligations of the U.S.Treasury with maturity dates of three years or less,obligations of agencies of the U.S.Government with maturity dates of two years or less, and certain investment pools. The City's investment balances on December 31,2006 were as follows: Face Principal Market Book Amount Invested Value Value Money Market Funds $77,124,571 $77,124,571 $77,124,571 $77,124,571 Government Securities 18,710,000 18,266,900. 18,521,442 18,512,473 Certificates of Deposit 3,612,702 3,612,702 3,612,702 3,612,702 Total Portfolio $99,447,273 $99,004,173 $99,258,715 $99,249,746 Additional Provisions Under Texas law, the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers with person business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Mayor and Council; (3)require the registered principal of firms seeking to sell securities to the City to: (a)receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform and annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase 12 agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict the investment in mutual funds in the aggregate to no more than 80% of the City's monthly average fund balance, excluding bpnd proceeds and reserves and other funds held for debt service and further restrict the investment in non-money market mutual funds of any portion of bond proceeds,reserves and funds held for debt service and to not more than 15%of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and(8)require local government investment pools to confirm to the new disclosure,rating,net asset value, yield calculation,and advisory board requirements. CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. Bonded Indebtedness Payable from Ad Valorem Taxes • 2006 Net Assessed Valuation(100%of estimated market value) $ 4,654,672,740(a)(b) Direct Debt: Outstanding Tax Supported Debt(as of January 1,2007) $ 196,115,000(c) Plus: The Certificates 23,250.000 • Total Direct Debt $ 219,365,000 Debt Service Fund Balance(as of January 12,2007) $ 10,622,956 a 4 (a) Provided by the Brazoria Central Appraisal District(the"Appraisal District")and net of exemptions. Includes $724,365,960 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas(the i _i "TIRZ"). Pursuant to an agreement between the City and the TIRZ,tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for • administrative services related to the TIRZ. See "TAX DATA— Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. •. (b) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was annexed by the City on December 31,2006. • (c) Includes all outstanding debt of Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 1, 2006. Also includes $1,940,000 Brazoria County Municipal Utility District No. 1 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds, Series 2007, which is expected to be delivered on March 22,2007. This debt will be assumed by the City. 13 1 I. Pro-Forma Tax Supported Debt Service Schedule The following sets forth the principal and interest on the City's Outstanding Tax Supported Debt,phis the principal and estimated interest on the Certificates and Brazoria County Municipal Utility District No.1$1,940,000 Waterworks and Sewer System y m Combination Unlimited Tax and Revenue Bonds,Series 2007(the"Bonds"). - Fiscal Year Current Total •- Ending Debt Service Plus: The Certificates(b) Plus: The Bonds(c) Debt Service 9-30 Requirements(a) Principal Interest Principal _ Interest Requirements 2007 S 13,395,299 S 581,250 S 46,075 • S14,022,624 2008 12,970,204 S 50.000 1,161,250 92.150 14,273,604 } 2009 14,502,498 50,000 1,158,750 92,150 15,803,398 r 2010 14,627,363 100,000 1,155,000 92,150 15,974,513 2011 14,790,504 150,000 1,148,750 S 15,000 92,150 16,196,404 2012 15,033,287 200,000 1,140,000 55,000 91,438 16,519,725 2013 15,024,058 250.000 1,128,750 60,000 88,825 16,551,633 L 2014 15,026,154 300,000 1,115,000 65,000 85,975 16,592,129 • 2015 15,022,821 350,000 1,098,750 70,000 82,888 16,624,459 2016 15,020,138 400,000 1,080,000 75,000 79,563 16,654,701 2017 15,027,493 450,000 1,058,750 75,000 76,000 16,687,243 2018 15,043,033 460,000 1,036,000 80,000 72,438 16,691,471 2019 12.362,173 1.095,000 997,125 85,000 68,638 14,607,936 1 2020 12,367,339 1,155,000 940,875 90,000 64,600 14,617,814 2021 12,372,811 1,215,000 881,625 95,000 60,325 14,624,761 2022 12,372,296 1,275,000 819,375 100,000 55,813 14,622,484 2023 12,377,686 1,340,000 754,000 110,000 51,063 14,632,749 2024 12,378,035 1,410,000 685,250 115,000 45,838 14,634,123 2025 12,357,406 1,480,000 613,000 120,000 40,375 14,610,781 2026 12.446.384 1,555,000 537,125 130,000 34,675 14,703,184 • 2027 12,448,500 1,635,000 457,375 135,000 . 28,500 .14,704,375 2028 12.458,363 1,720,000 373,500 145,000 22,088 14,718,951 2029 12,457,775 I,810,000 285,250 155,000 15,200 14,723,225 2030 1,540.000 201,500 165,000 7,838 1,914,338 2031 1,600,000 123,000 1,723,000 l 1 2032 1.660.000 41.500 1.701.500 111 R81,621 S21250000 t7(l572,75Q 11-4R 755 t15.111,17h =a (a) Includes all Outstanding Debt Service of the City and Brazoria County Municipal Utility District No.1. (b) Interest estimated at 4.75%for illustration purposes only. (c) The Brazoria County Municipal Utility District No. 1 anticipates delivering its$1,940,000 Waterworks and Sewer System Combination Unlimited Tz •tr:_Revenue Bonds on March 22,2007. This debt will be assumed by the City. Estimated Average Annual Requirements(2007-2032) S13,812,736 , Estimated Maximum Annual Requirement(2018) $16,691,471 14 • Estimated Overlapping Debt = The following table indicates the indebtedness,defined as outstanding obligations payable from ad valorem taxes,of governmental entities overlapping the City and the estimated percentages and amounts of such indebtedness attributable to property' within the City. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports. Such figures do not indicate the tax burden levied by the 4tR applicable taxing jurisdictions for operation and maintenance or for other purposes. The City has not independently verified the accuracy or completeness of the information shown below except for amounts related to the City. Debt as of Overlapping Taxing Jurisdiction January 1,2007 Percent Amount , Alvin Community College District $ 19,375,000 5.22% $ 1,011,375 Brazoria County 54,630,000 6.97 3,807,711 Brazoria County MUD No. 17 23,295,000 10000 23,295,000 Brazoria County MUD No. 18 30,465,000 99.86 30,422,349 Brazoria County MUD No. 19 35,930,000 100.00 35,930,000 Brazoria County MUD No.26 56,265,000 100.00 56,265,000 Pearland ISD 269,647,591 90.16 243,114,268 Harris County(a) 1,735,195,971 0.02 347,039 Harris County Flood Control District 24,524,985 -0.02 4,905 Port of Houston Authority 357,105,000 0.02 71.421 TOTAL ESTIMATED OVERLAPPING $394,269,068 The City(b) 219,365,000(b) Total Direct-and Estimated Overlapping Debt $613,634,068 4 ` (a) Harris County Toll Road Certificates are considered self-supporting and are not included in the amount shown for Harris County. (b) Includes the Certificates and all outstanding debt of Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 31,2006. Also includes the$1,940,000 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds, Series 2007,which is expected to be delivered on March 22, 2007. This debt will be assumed by the City. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2006 Certified Net Assessed Valuation($4,654,672,740) 4.71% 13.18% Per Capita(81,408) $2,695 $7,538 TAX DATA General • �', One of the City's principal sources of operational revenue and its principal source of funds for debt service payments is the receipts from ad valorem taxation. See"SELECTED FINANCIAL DATA". The following is a recapitulation of(a) the Texas Property Tax Code, including methodology, limitations, remedies and procedures; (b) historical analysis of collection and trends of tax receipts and provisions for delinquencies; (c) an analysis of the tax base, including relative property composition, principal taxpayers and adequacy of the tax base to service debt h' requirements;and(d)taxation that may add to the City's taxpayers'tax costs. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") establishes for each county in Texas a single appraisal _ district with responsibility for recording and appraising property for all taxing units within the county,and a single appraisal review board, with responsibility for reviewing and equalizing the values established by the appraisal district. The Property Tax Code requires the appraisal district, by May 15 of each year, or as soon thereafter as practicable,to prepare appraisal records of property as of January 1 of each year based upon market value.The chief appraiser must give written notice before May 15,or as soon thereafter as practicable,to each property owner whose property value is appraised higher than the prior tax year or the value rendered by the property owner or whose —f property was not on the appraisal roll the preceding year or whose property was reappraised in the current tax year. 15 fi Notice must also be given if ownership of the property changed during the preceding year. The appraisal review board has the ultimate responsibility for determining the value of all taxable property within the City;however,any property owner who has timely filed notice with the appraisal review board may appeal a final determination by the • appraisal review board by filing suit in a Texas district court. Prior to such appeal or any tax delinquency date, however,the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event,the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units such as the City are entitled to challenge certain matters before the appraisal review board,including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption.A taxing unit may not,however,challenge the valuation of individual properties. • • Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies • of the county and all cities,towns,school districts and,if entitled to vote,the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years.It is not known what frequency of reappraisals will be utilized by the Brazoria County Appraisal District or whether reappraisals will be conducted on a zone or county-wide basis. Tax Rate Limitations Article XI,Section 5 of the Texas Constitution,provides for an overall limitation for Home Rule Cities of$2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy,with respect to Home Rule Cities which have such a$2.50 limitation,of approving ad valorem tax bonds only to the extent that all of such city's ad valorem tax debt can be serviced by a debt service tax rate of$1.50 at 90%collection. Property Subject to Taxation by the City Except for certain exemptions provided by Texas law,all real and tangible personal property and certain categories of intangible personal property with a tax situs in the City are subject to taxation by the City;however,no effort is expected to be made by the Brazoria County Appraisal District to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions; property,used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind-powered energy devices; most individually-owned automobiles; and property of disabled veterans, only to the extent.of $3,000 of taxable property. In addition, taxpayers who are over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of$25,000. These over 65 exemptions and {- disabled veterans exemptions amounted to$93,081,976 from the 2006 tax roll. • The state constitution permits local governments the option of granting homestead exemptions of up to 20% of market value. The City has not granted such additional homestead exemption for the 2006 tax year. An eligible owner of agricultural and timberland may apply to have such properties which meet certain requirements appraised on the basis of productivity value or market value,whichever is less. The loss of value due to property values based on productivity value on the 2006 tax roll was approximately$53,070,290. The City has authority to enter into tax abatement agreements to encourage economic development. Under such agreements,a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. Such abatement agreement may last for a period of up to 10 years. The City has$7,396,340 of such property that was subject to abatement January 1,2006. - The constitution of the State of Texas authorizes a property tax exemption for certain business personal property. The City Council had the option to take official action to override the exemption and to continue taxing the property • exempted by the amendment. On December 18, 1989,the City's City Council took such official action not to tax the property in 1990 and to allow the exemption for 1991 and all future years. This Freeport Goods exemption amounted to$31,851,230 on the 2006 tax roll. 16 `" Tax Increment Reinvestment Zone Article VIII, Section 1-g of the Texas Constitution and the Tax Increment Financing Act, Chapter 311, V.T.C.A. Tax Code (the "TIF Act") authorize municipalities in the State to establish one or more tax increment financing reinvestment zones for development or redevelopment of the territory within the zones. The TIF Act provides that the municipality may appoint a board of directors for a reinvestment zone.to develop a project plan and financing plan for the zone and may delegate to the board certain management duties relating to the zone.Project costs,including financing costs,within the zone may be paid from tax increments collected by each of the taxing units in the zone.The amount of a taxing unit's tax increment for a year is the amount of property taxes levied by the unit for that year on the captured appraised value of real property taxable by the unit(the"Captured Appraised Value") and located in the zone. The Captured Appraised Value is the total appraised value of the property for a year, less the tax increment base of the unit. The tax increment base of a taxing unit is the total appraised value of all real property taxable by the unit and located in the zone in the year in which the City created the zone.Participation by a taxing unit in a reinvestment is discretionary with such taxing unit,and it may decide to a_ deposit all or none,or a portion,of its tax increments into the fund and retain for its own purposes the remainder.A taxing unit cannot reduce the amount of its participation once the financing plan has been implemented. The City designated a reinvestment zone and created the Reinvestment Zone Number Two,City of Pearland,Texas (the"TIRZ") in 1998. The TIRZ initially encompassed approximately 3,467 acres of land(the"Original Area"). The City approved the annexation of an additional 457 acres of land(the"Annexation Area")into the boundaries of the TIRZ on June 26,2006. The TIRZ encompasses all of the master planned community of Shadow Creek Ranch, which includes approximately 3,300 acres of land. The purpose of the TIRZ is to design, construct and finance or cause to be designed, constructed and financed • certain public works and improvements to promote and facilitate the development of the vacant, undeveloped property in the TIRZ. Specifically,the TIRZ is constructing public works and infrastructure improvements to assist in the development of the master planned community, Shadow Creek Ranch("Shadow Creek Ranch"). The City, Alvin Independent School District ("AISD"), Brazoria County,Texas("Brazoria County")and Fort Bend County, Texas ("Fort Bend County") have agreed to deposit to a tax increment fund established for the TIRZ (the "Tax • Increment Fund")annually a certain percentage of tax collections arising from their taxation of the increase,if any, since January 1, 1998,in the total appraised value of all real property located in the Original Area of the TIRZ and taxable by the City, AISD, Brazoria County and Fort Bend County. The City has further agreed to deposit to the Tax Increment Fund tax collections arising from its taxation of the increase, if any, since January 1, 2006, in the total appraised value of real property located in the Annexation Area of the TIRZ•and taxable by the City. The TIRZ Board has nine members, four of whom are appointed by the City. One of the City's appointees is nominated by AISD and Brazoria County and Fort Bend County each appoint one member of the TIRZ Board. Finally, the Texas State Senator and Texas State Representative, or their designees, in whose district the TIRZ is located serve as the final two members of the TIRZ Board. The City has agreed to pay 100% of its collected Tax Increments(the"City Tax Increment")to the Tax Increment j Fund. However,pursuant to a development plan and a development agreement (the"Development Agreement")by j and between the City and Shadow Creek Ranch Fuvtiopmc,ii Company, L.P., the master developer of property' within the TIRZ(the"Developer"),the City,the Developer and the TIRZ have agreed that a certain portion of the .•. City Tax Increment shall be paid by the TIRZ to the City as an"Administrative Fee"(the"Administrative Fee")to 1 compensate the City for some of its cost of providing City services to the developed property within the TIRZ. Pursuant to the Development Agreement,the Administrative Fee is as follows: Years 1 through 3(1999-2001) No Administrative Fee Years 4 through 8(2002-2006) 36 percent of the City Increment Years 9 through 30(2007-2028) 64 percent of the City Increment Provided that,the amount of City Tax Increment deposited and retained annually in the Tax Increment Fund for the applicable year shall in no event be less than: (i)$0.44 per$100.00 of valuation in years four through eight,and(ii) _ $0.255 per$100.00 of valuation in years nine through thirty. For tax year 2006, the assessed value attributable to the TIRZ is$724,365,960. As described above,tax revenues generated from assessed value attributable to the TIRZ are deposited into the Tax Increment Fund and are not I ! available to make debt service payments on the Certificates. While a portion such revenues are to be retained by the City as Administrative Fees, such Administrative Fees may not be available to make debt service payments on the Certificates. 17 4 Notice and Hearing Procedures The Property Tax Code establishes procedures for providing notice and the opportunity for a hearing for taxpayers in the event of certain proposed tax increases and provides for taxpayer referenda which could result in the repeal of certain tax increases. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values over $1,000, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. Levy and Collection of Taxes The City is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. The City has elected to have Brazoria County bill and collect taxes on behalf of the City. Before the later of September 30 or the 60th day after the date the certified appraisal roll is.received by the City,the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations(the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations,be repealed at an election within the City held upon petition of 10%of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the"effective tax rate" until it has held a public hearing on the proposed tax rate and has otherwise complied with the Property Tax Sr ; Code. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. Taxes are due on receipt of the tax bill,and become delinquent after January 31 of the following year,or on the first day of the calendar month next following the expiration of twenty-one (21) days after mailing of the tax bills, whichever occurs later. A delinquent tax account incurs an initial penalty of six percent(6%)of the amount of the tax and accrues an additional penalty of one percent(1%)per month up to July 1, at which time-the total penalty becomes twelve percent(12%). In addition, delinquent taxes accrue interest at one percent(1%).per month. If the tax is not paid by July 1, an additional penalty of up to twenty percent(20%)may under certain circumstances be imposed by the City.The Property Tax Code also makes provision for the split payment of taxes,discounts for early payments, partial payments of taxes and the postponement of the delinquency date of taxes under certain circumstances. • Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property owner on January 1 of the year for which the tax is imposed.On January I Jf eac:1 year,a tax lien attaches to property to secure the payment of all taxes,penalties and interest ultimately imposed for the year on the property.The lien exists in favor of the State and each taxing unit, including the City,having the power to tax the property.The City's tax lien is on a parity with tax liens of all other ;- such taxing units.A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien,whether or not the debt or lien existed before the attachment of the tax lien.In the event a taxpayer fails to make timely payment of taxes due the City,the City may file suit to foreclose its lien securing payment of the tax, to enforce personal liability for the tax, or both. Whether a lien of the United States is on a parity with or takes priority over a tax lien of the City is determined by applicable federal law. In the absence of such federal law,the City's tax lien takes priority over a tax lien of the United States.The ability of the City to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units,the foreclosure sale price attributable to market conditions,the taxpayer's right to redeem the property within two years of foreclosure,or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. 18 I - Historical Analysis of Tax Collection -Collection Ratios- _' Tax Rate Fiscal Net Per$100 of %of Collections Year Tax . Assessed Assessed Adjusted Current Current and Ending Year Valuation(a) Valuation Tax Levy(a) Year Prior Years 9-30 1995 $ 844,357,847 - $0.695000 $ 5,869,525 98.65% 99.72% 1996 1996 875,483,990 0.695000 6,343,113 98.31 99.43 1997 1997 1,012,049,410 0.695000 7,062,826 98.50 99.57 1998 _, 1998 1,172,298,277 0.695000 8,147,473 98.10 99.27 1999 1999 1,322,581,461 0.695000 9,174,224 98.35 99.65 2000 2000 1,563,565,809 0.695000 10,864,049 97.66 99.31 2001 2001 1,760,551,863 0.686000 12,890,902 96.79 98.34 2002 2002 2,171,317,975 0.686000 14,869,170 98.02 100.33 2003 2003 2,355,280,316 0.696000 17,987,752 98.03 100.02 2004 2004 3,019,449,422 0.694800 22,145,299 98.08 99.68 2005 2005 3,816,235,030 0.674400 26,773,438 97.08 99.70 2006 2006 4,654,672,740(b) 0.652659 28,804,610 (In Process of Collection) 2007 (a) Includes assessed value attributable to the TIRZ. (b) Includes assessed value attributable to Brazoria County Municipal Utility District No. 1,annexed by the City on December 31,2006. -Tax Rate Distribution- • 2006 2005 2004 2003 2002 , Maintenance $0.298974 $0.345480 $0.338900 $0.345700 $0.406000 _ Debt Service 0.353685 0.328920 0.355900 0.350300 0.280000 Total $0.652659 $0.674400 $0.694800 $0.696000 $0.686000 1 -Analysis of Delinquent Taxes- ' The following is an analysis,by tax year,of taxes delinquent as of September 30,2006. Uncollected Adjusted Percentage Tax Year As of September 30,2006 Tax Levy(a) of Tax Levy _ 2005 $563,291 $26,773,438 2.1% , 2004 146,608 22,145,299+ 0.7 , 2003 96,388 17,987,752 '0.5 2002 66,031 14,869,170 0.4 2001 59,188 12,890,902 0.5 2000 30,021 10,864,049 0.3 1999 33,913 9,174,224 0.4 1998 16,169 8,147,473 0.2 1997 12,990 7,062,826 0.2 1996 8,788 6,343,113 0.1 (a) The total tax levy has been adjusted to reflect additions and deletions from the tax roll for prior years. , --b - -Delinquent Tax Collection Procedures- In addition to the legal procedures and penalties described under "Levy and Collection of Taxes", the City has -I retained a delinquent tax attorney on a contract basis to file suit to collect delinquent taxes due the City. The fees - due such attorney for acting as delinquent tax attorney are payable from an additional penalty imposed upon the delinquent taxpayer,not to exceed 20%of the tax due. 19 i ,' Analysis of Tax Base _' -Tax Base Distribution- 2006 Tax Roll 2005 Tax Roll 2004 Tax Roll Type of Property Amount % Amount % Amount % Residential $3,717,506,240 74.6% $2,892,460,301 71.6% $2,306,313,150 70.6% Acreage - 181,164,630 3.6 171,917,714 4.3 171,709,500 5.3 +1 Vacant Lots/Tracts 226,948,950 4.6 238,624,160 5.9 158,938,710 4.9 __ Farm&Ranch 8,373,960 0.2 7,986,224 0.2 5,528,720 0.2 1 , Commercial/Industrial 760,826,290 15.3 655,848,240 16.2 545,849,480 16.7 u Utilities 51,234,300 1.0 48,658,247 1.2 45,034,700 1.4 Real Inventory 22.885,800 0.5 12,121,454 0.3 14,500,240 0.4 Other 17.583,110 0.4 13,241,531 0.3 18,183,090 0.6 Gross Assessed • Value $4,986,523,280 $4,040,857,870 $3,266,057,590 Less: Exemption (331,850,540) (224,622,840) (245,607,617) Net Assessed Value $4,654.672,740(a)(bxc) $3,816,235,030(aXd) $3,020,449,973(a)(e) (a) Value may differ from those shown elsewhere in this Official Statement due to'subsequent adjustments to the tax roll. .` (b) Includes $724,365,960 in assessed value attributable to the TIRZ. Pursuant to an agreement between the City ' and the TIRZ,tax revenues generated from assessed value attributable to:the TIRZ are deposited in a fund to be • used for TIRZ projects and are not available to make debt service payments on the Bonds;however,a portion of such revenues are retained by the City for administrative services related to the TIRZ. See"TAX DATA—Tax Increment Reinvestment Zone"for a description of the agreement between the City and the TIRZ. (c) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was annexed by the City on December 31,2006. (d) Includes$472,467,612 in assessed value attributed to the TIRZ. (e) Includes$219,785,523 in assessed value attributed to the TIRZ. -Principal Taxpayers- • 2006 • . 2005• 2004 1 Taxable Taxable Taxable Assessed Assessed Assessed Principal Taxpayer Type of Property Valuation Valuation Valuation r' Weatherford U.S.Inc. Oil Field Equipment $ 33,607,360 $ 33,721,540 $ 34,027,450 Wal-Mart Real Estate Shopping Center 25,434,850 18,652,320 12,428,460 Centerpoint Energy,Inc. Utility 22,914,100 21,856,040 19,416,250 ' Shadow Creek Ranch Development Land Development 22,305,440 27,498,170 24,982,840 Pearland Investments Ltd.Prt. Land Development 21,244,650 18,529,300 17,119,940 Waterford SCR,LP Land Development 19,088,150 (a) (a) HD Development Properties LP Land Development 13,485,360 11,466,010 (a) Lowe's Home Centers Retail Store 13,454,040 12,683,070 13,731,580 MHI Partnership Ltd. Land Development 13,206,850 12,094,900 (a) Perry Homes Home Construction 11,016,650 17,768,220 (a) Home Depot USA Inc. Retail Store (a) 9,069,980 9,756,700 Landar Mary's Creek Apartments Apartments (a) (a) 10,309,630 HCA Healthcare ealth Care Corp.�' (a) (a) 10,454,400 D R Horton-Emerald Ltd. Home Construction (a) (a) 9,371,630 Total Ten Principal Taxpayers i $195,756,450 $183,339,550 $161,598,880 Percentage Ten Principal Taxpayers Comprise of Tax Roll 4.21% _0% % (a) Not a principal taxpayer in such tax year. 20 -Tax Adequacy- Estimated Average Annual Debt Service Requirements based on Total New Debt Service(2007-2032) $13,812,736 Tax Rate of$0.32 per$100 assessed valuation against the 2006 Certified Assessed Valuation,at 95%collection,produces $14,150,205 Estimated Maximum Annual Debt Service Requirements based on Total New Debt Service(in the year 2018) $16,691,471 Tax Rate of$0.38 per$100 assessed valuation against the 2006 Certified Assessed Valuation,at 95%collection,produces $16,803,369 Estimated Overlapping Taxes Under Texas law, if ad valorem taxes levied by a taxing authority become delinquent, a lien is created upon the property which has been taxed,which lien is on a parity with any tax lien on such property in favor of the City. In addition to ad valorem taxes required to retire the aforementioned direct and estimated overlapping debt, certain taxing jurisdictions including those mentioned in Estimated Overlapping Debt are also authorized by Texas law to assess, levy,, and collect ad valorem taxes for operation, maintenance, administrative and/or general revenue purposes. Set forth below is an estimation of ad valorem taxes levied on a $100,000 single-family residence by such jurisdictions, assuming the assessments are made at their claimed basis of assessment (100%). Such residence is further assumed to be located within Brazoria County wherein substantially all of the residential property within the City is located. No recognition is given to local assessments for civic association dues, fire department . contributions,or other charges made by other than political subdivisions. 2006 Tax Estimated Taxing Jurisdiction Rate/$100 2006 Tax Bill The City $0.652659 $ 652.66 Brazoria County 0.321701 321.70 Brazoria Drainage District No.4 0.143845 143.85 Pearland ISD 1.662200 1.662.20 sl Estimated Total 2006 Tax Bill: $2.780405 '• $2,780.41(a) (a) Ad valorem taxes are levied by separate municipal utilitydistricts ("MUD") on property located within the specific MUD. These taxes are paid in addition to the above noted City taxes. Sales Tax -Authority The City has adopted the provisions of Article 1066c,Vernon's Texas Civil Statutes, as amended,which grants the City the power to impose and levy a 1%sales tax. The City has also voted an additional 1/2%sales and use tax for economic development under Article 5190.6, Vernon's Texas Civil Statutes, as amended. The City may not and has not pledged the proceeds from the sales and use tax as security for the Certificates. - 21 -Collection History- The State Comptroller,after deduction of a 2%service fee,currently remits the City's portion of sales tax collections monthly. By statute the Comptroller is required to remit at least twice annually. The following is an analysis of the collection history of the City's sales and use tax: Ad Valorem Tax Comparisons Fiscal Year _ Sales and Use Equivalent Tax Rate %of Actual Ended 9-30 Tax Receipts Tax Year Equivalent Tax Levy 1994 $1,905,741 (1993) $0.261 36.48 1995 2,166,219 (1994) 0.284 40.74 1996 2,298,546 (1995) 0.272 39.16 1997 2,589,918 (1996) 0.298 40.83 1998 2,962,481 (1997) 0.297 41.94 1999 3,415,183 (1998) 0.291 41.92. 2000 3,684,676 (1999) 0.279 40.16 2001 4,795,355 (2000) 0.307 44.14 - 2002 5,025,749 (2001) 0.285 38.99 ' 2003 5,859,053 (2002) 0.270. 39.40 2004 6,739,484 (2003) 0.260 37.47 ,=r 2005 7,785,161 (2004) 0.258 37.09 2006 9,712,118 (2005) 0.253(a) 37.49(a) ^v (a) Includes values for Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 31,2006. SELECTED FINANCIAL DATA Historical Operations of the City's General Fund , The following is a condensed statement of revenues and expenses of the City's General Fund for the past five fiscal years. The inclusion of the following table is not intended to imply that any revenues of the City,other than receipts from ad valorem taxes as provided in the Ordinance and the limited, subordinate pledge of Net Revenues of the System,are pledged to pay principal and interest on the Certificates. . Fiscal Year Ended September 30 r 2006 2005 _ 2004 2003 2002 REVENUES General Property Taxes(a) $11,413,806 $ 9,649,452 $ 8,752,162 $ 8,970,369 $ 8,054,173 Sales Taxes 9,712,118 , 7,785,161 6,739,484 5,859,053 5,025,749 Franchises 3,426,352 3,097,163 2,883,188 2,5111,475 2,453,829 \' Licenses&Permits 4,066,914 3,863,592 3,427,957 2,682,456 2,256,638 Charges for Services 8,734,090 6,138,610 5,259,748 3,982,070 3,651,825 Fines&Forfeitures 1,934,882 1,883,381 1,561,850 ' 1,377,552 845,322 1`' Intergovernmental 448,502 871,196 716,136 615,436 -0- Other Revenues 769,479 1,066,315 855,628 324,501 908,154 Total Revenues $40,506,143 $34,354,870 $30,196,153 $26,344,912 $23,195,690 EXPENDITURES i General Government $ 6,284,996 $ 6,664,735 $ 6,059,595 $ 5,678,275 $ 5,052,056 - Public Safety 12,685,081 10,816,906 10,142,115 9,637,676 7,411,992 Public Works 9,727,972 10,449,814 8,709,151 8,769,722 7,603,804 Community Services 2,739,532 2,692,450 2,792,376 2,729,859 2,271,052 _ Capital Outlay 4.308,250 1,019,976 -0- -0- -0- Total $35,745,831 $31,643,881 $27,703,237 $26,815,532 $22,338,904 (a) Includes penalties and interest. Source: City's audited financial statements. , 22 i 1 General Fund and Debt Service Fund Balance for the Past Five Fiscal Years Fiscal Year Ended September 30 5 + 2006 2005 2004 2003 2002 General Fund $10,597,369 $8,20 771 2, $8,285,590 $5,361,732 $5,024,946 Debt Service Fund $ 4,658,301 $3,855,129 $3,007,752 $2,130,321 $2,229,529 Source: City's audited financial statements. Pension Fund 7 The City participates in the Texas Municipal Retirement System(TMRS),an agency operated by the State of Texas. Employees of the City who participate in TMRS contribute a fixed percentage,currently 7%,of their gross pay and the City matching percent is currently 2 to 1. As employees leave municipal employment other than through retirement,they may withdraw from TMRS those funds they contributed,but forfeit their employer's contributions. Each municipal employer's requirements for current contributions are offset by the amounts of such forfeitures. As of January 5, 2007, the City employed 401 full-time employees and 51 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's contribution for fiscal year 2006, amounted to y approximately $1.7 million which includes amortization of prior service cost over 25 years. The City had no q unfunded pension benefit obligation as of September 30, 2006. The liability for prior service benefits will be amortized over a period of twenty-five years or less by contributions from the City which are a level percentage of payroll. 1 , Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2006, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available,for a fee,upon request. ' ADMINISTRATION OF THE CITY Mayor and City Council • Policy-making and supervisory functions are the responsibility of and are vested in the Mayor and City Council for �• the City, under provisions of the "Charter of the City. of Pearland" (the "Charter") approved by the electorate February 6, 1971. The Council is elected at large on the first Saturday in May. The Mayor and five Council members serve three-year staggered terms. The Mayor is entitled to vote only in the event of a tie and has no power to veto Council action. Members of the Council are described below: Tom. . Council Members Period Served Expires May Occupation Y Tom 16 Years 2008 Retired Mayor Kevin Cole 3 Years(a) 2007 Insurance Broker Council Member IS_ Mayor P o-Tern Helen Beckman 1 Year 2009 Retired Council Member Felicia Kyle 1 Year 2009 Attorney Council Member Richard Tetens 6 Years(b) 2007 Retired Council Member Steve Saboe 2 Years 2008 Management - Council Member i�, (a) Elected May 2004,however Councilman Cole has served a previous term(3 years)on the City Council. (b) Elected May 2001,however Councilman Tetens has served two previous terms(6 years)on the City Council. u 23 Administration Under provisions of the Charter, the City Council enacts local legislation, adopts budgets, determines policies and appoints the City Manager,who is charged with the duties of executing the laws and administering the government of the City. As the chief executive officer and head of the administrative branch of the City government,the City Manager is given the power and duties to: (1) Appoint and remove all department heads and all other employees in the administrative service of the City and may authorize the head of a department to appoint and remove subordinates in his respective department; (2) Prepare the budget annually,submit it to City Council,and be responsible for its administration; (3) Prepare and submit to City Council a complete report on the finances and administrative activities of the City; (4) Keep City Council advised of the financial condition and future needs of the City and make appropriate recommendations;and (5) Perform such other necessary duties as prescribed by the Charter or required by City Council. Members of the administrative staff are described below: • Name Position Period Served Bill Eisen City Manager 6 Years Nick Finn Assistant City Manager 2 Years Mike Hodge Assistant City Manager 2 Years Claire Manthei Director of Finance 2 Years Daniel Cameron Director of Public Works 14 Years Young Lorfing City Secretary 10 Years Doug Kneupper City Engineer 4 Years Darrin Coker City Attorney 10 Years Joseph Wertz Director of Projects 5 Years Christopher Doyle Police Chief 28 Years Consultants •49 The City has retained several consultants to perform professional services in connection with the independent auditing of its books and records and other City activities. Several of these consultants are identified below: Bond Counsel Andrews Kurth LLP Houston,Texas Certified Public Accountants Null-Lairson,r.C. Pearland,Texas Financial Advisor RBC Capital Markets Houston,Texas LEGAL MATTERS Legal Opinions The City will furnish the Underwriter a transcript of certain certified proceedings prepared incident to the authorization and issuance of the Certificates,including a certified copy of the unqualified approving opinion of the Attorney General of Texas,as recorded in the Bond Register of the Comptroller of Public Accounts of the State of - Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The City also will furnish the approving legal opinion of Andrews Kurth LLP, Houston,Texas, Bond Counsel, to the effect that, based upon an examination of such transcript,the Certificates are valid and binding obligations of the City under the Constitution - and laws of the State of Texas. The legal opinion of Bond Counsel will further state that (1) the Certificates are payable, both as to principal and interest, from the levy of ad valorem taxes, within the limits prescribed by law, 24 1 7 I against taxable property within the City and (2) subject to the matters discussed under the caption "TAX EXEMPTION,"interest on the Certificates is excludable from gross income for federal income tax purposes. The 1 opinion of Bond Counsel is expected to be reproduced on the back panel of the Certificates over a certification by the City Secretary attesting that such legal opinion is dated as of the date of delivery of and payment for the Certificates and is a true and correct copy of the original opinion. Errors or omissions in the printing of such legal opinion on the Certificates shall not affect the validity of the Certificates nor constitute cause for the failure or refusal by the Underwriter to accept delivery of and pay for the Certificates. � 4 Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such,firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of ` the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information describing the Certificates in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent upon the sale and delivery of the Certificates. The legal opinion will be i printed on the Certificates. No-Litigation Certificate — The City will furnish to the Underwriter a certificate,dated as of the date of delivery of the Certificates,executed by appropriate City officials,to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Certificates; restraining or enjoining the issuance, execution or delivery of the Certificates; affecting the provisions made for the payment of or security for the Certificates; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the I Certificates;or affecting the validity of the Certificates. No Material Adverse Change The obligations of the Underwriter to take and pay for the Certificates,and of the City to deliver the Certificates,are subject to the condition that,up to the time of delivery of and receipt of payment for the Certificates,there shall have been no material adverse change in the condition(financial or otherwise)of the City subsequent to the date of sale > from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. TAX EXEMPTION In the opinion of Andrews Kurth LLP,Houston,Texas,Bond Counsel,interest on the Certificates is(1)excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), from gross income of the -'' owners thereof for federal income tax purposes and(2)is not includable in'the alternative minimum taxable income of individuals or corporations,except as described below. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the ordinance authorizing the issuance of the Certificates and has relied on representations by the City with respect to matters solely within the knowledge of the City, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Certificate proceeds and any facilities financed therewith, the source of repayment of the Certificates,the investment of Certificate proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Certificate proceeds and certain other amounts be paid periodically to the United States and that the City file an information report with the Internal Revenue Service(the"Service"). If the City should fail to comply with the covenants in the Ordinance, or if its representations relating to the Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates,regardless of the date on which the event causing such taxability occurs. Interest on all tax-exempt obligations,such as the Certificates,owned by a corporation(other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit • (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. 25 Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of,receipt or accrual of interest on or acquisition or disposition of the Certificates. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes,regulations,published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Service with respect to the matters addressed in the opinion of Bond Counsel,and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the City as the"taxpayer,"and the owners of the Certificates may have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Certificates, the City may have different or conflicting interests from the owners of the Certificates. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit,regardless of its ultimate outcome. Under the Code,taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest,such as interest on the Certificates,received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations,such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies,property and casualty insurance companies,certain foreign corporations doing business in the United States,certain S corporations with Subchapter C earnings and profits,individual recipients,of Social Security or Railroad Retirement benefits,taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. If a tax-exempt obligation,such as the Certificates,was acquired at a"market discount"and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue, the Code provides ordinary income tax treatment of gain recognized upon the disposition of such"market discount bond." A"market discount bond"is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or,in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., a market discount). Such treatment applies to"market discount bonds"to the extent the gain from the disposition thereof exceeds the accrued market discount of such bonds unless a statutory de minimis rule applies. The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of the Certificates. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates may be offered at initial offering prices which are less than the stated redemption prices at maturity of such Certificates. If the initial offering prices of the Certificates are lower than the stated redemption price payable at maturity, the Certificates of that maturity(the"Discount Certificates")will be considered to have "original issue discount"for federal income tax purposes. An initial owner who purchases a Discount Certificate in the initial public offering of the Certificates at such an initial offering price will acquire such Discount Certificate with original issue discount equal to the difference between(a)the stated redemption price payable at the maturity of such Discount Certificaie and (b) the initial offering price to the public of such Discount Certificate. Under I- existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Certificate and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Certificate continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Certificates under the caption "TAX EXEMPTION" generally applies to - original issue discount deemed to be earned on a Discount Certificate while held by an owner who has purchased such Certificate at the initial offering price in the initial public offering of the Certificates and that discussion should be considered in connection with this portion of the Official Statement. n 26 1- Y In the event of a redemption,sale;or other taxable disposition of a Discount Certificate prior to its stated maturity, however,any amount realized by such initial owner in excess of the basis of such Discount Certificate in the hands of such owner(increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Certificate continues to be held by such initial owner) will be includable in gross income for federal income tax purposes. Because original issue discount on a Discount Certificate will be treated for federal income tax purposes as interest on a Certificate,such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Corporations that purchase Discount Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Certificate may be required to take into account i such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a Certificate. See "TAX EXEMPTION" for a discussion regarding the alternative minimum taxable income consequences for corporations and for a reference to collateral federal tax consequences for certain other owners. The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Certificate or of the City. The portion of the principal of a Discount Certificate representing original issue discount is payable upon the maturity or earlier redemption of such Certificate to the registered owner of the Discount Certificate at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Certificate is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determined under an actuarial method of accrual, using the yield to maturity as the constant interest rate and semi-annual compounding. The federal income tax consequences of the purchase,ownership,redemption,sale or other disposition of Discount Certificates by an owner that did not purchase such Certificates in the initial public offering and at the initial • offering price may be determined according to rules which differ from those,described above. All prospective purchasers of Discount Certificates should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Certificates and with respect to the federal,state,local and foreign tax consequences of the purchase,ownership,redemption,sale or other disposition of such Discount Certificates. Premium Certificates d _ Some of the Certificates may be offered at initial offering prices which exceed the stated redemption prices payable at the maturity of such Certificates. If any of the Certificates of such maturities are sold to members of the public (which for this purpose excludes bond houses,brokers and similar persons or organizations acting in the capacity of wholesalers or underwriters) at such initial offering prices, each of the Certificates of such maturities ("Premium Certificates") will be considered for federal income tax purposes to have"bond premium"equal to the amount of such excess. The basis for federal income tax purposes of a Premium Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxapole disposition of the Certificate by the amount of amo'tiz.ble 1iremium. This reduction in basis will increase the amount of any gain(or decrease the amount of any loss)recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Certificate by the initial purchaser. Generally,no corresponding deduction is 1 allowed for federal income tax purposes, for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Certificate which is amortizable each year(or shorter period in the event of a sale or disposition of a Premium Certificate)is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. The federal income tax consequences of the purchase,ownership,redemption,sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Certificates of the same maturity may be determined,according to rules _which differ from those described above. Moreover, all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption,sale or other disposition of Premium Certificates. 27 CONTINUING DISCLOSURE OF INFORMATION In order to provide certain continuing disclosure with respect to the Bonds in accordance with Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934,as the same may be amended from time to time ("Rule 15c2-12"), the City has entered into a Disclosure Dissemination Agent Agreement ("Disclosure Dissemination Agreement") for the benefit of the Holders of the Bonds with Digital Assurance Corporation, L.L.C. ("DAC"), under which the City has designated DAC as Disclosure Dissemination Agent. The form of Disclosure Dissemination Agreement can be obtained on www.dacbond.com. In the Ordinance,the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY—Current Investments," "CITY TAX DEBT," "TAX DATA"(except under the subheading"Estimated Overlapping Taxes"), "SELECTED FINANCIAL DATA," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year ending in or after 2006. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to the Texas Municipal Advisory Council, the state information depository ("SID") designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission(the"SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12,as amended and in effect from time to time(the"Rule"). The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not commissioned or are not available by the required time,the City will provide unaudited financial statements and audited financial statements when and if they become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix "B"or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly,it must provide updated information by March 31 in each year,beginning March 31,2008,unless the City changes its fiscal year. If the City changes its fiscal year,it will notify each NRMSIR and the SID of the change. Material Event Notices The City will also pro's,:-le t'nely notices of certain events to certain information vendors. The,City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates:(1)principal and interest payment delinquencies;(2)non-payment related defaults;(3) -' unscheduled draws on debt service reserves reflecting financial difficulties;14) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6)adverse tax opinions or events affecting the tax-exempt status of the Certificates;(7)modifications to rights of holders of the Certificates;(8)calls;(9)defeasances;(10)release,substitution,or sale of property securing repayment of the Certificates; and (11) rating changes. Neither the Certificates nor the Ordinance makes any provision for debt service reserves or liquidity enhancement. In addition,the City will provide timely notice of any failure by the City to provide information,data, or financial statements in accordance with its agreement described above under"Annual Reports." The City will provide each notice described in this paragraph to the SID and to _ either each NRMSIR or the Municipal Securities Rulemaking Board. Availability of Information From NRMSIRs and SID • The City has agreed to provide the foregoing information only to NRMSIRs and the SID..The information will be available to holders of and beneficial owners of the Certificates only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. 28 The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council of Texas is 600 West 86 '4 Street,P.O.Box 2177,Austin,Texas 78768-2177,and its telephone number is(512)476-6947. The MAC has also received SEC approval to operate and has begun to operate,a`central post office"for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post office,which then transmits such information to the NRMSIRs and the appropriate SID for filing.This central post •• office can be accessed and utilized at www.disclosureUSA.org ("DisclosureUSA"). The City may utilize • DisclosureUSA for the filing of information relating to the Certificates. Limitations and Amendments The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations,condition,or prospects or agreed to update any information that is provided,except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Certificates at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, of its continuing disclosure agreement or from any statement made pursuant to its agreement. Holders or beneficial owners of Certificates may seek as their sole remedy a writ of mandamus to compel the City to comply with its agreement. No default by the City with respect to its continuing disclosure agreement shall constitute a breach of or default under the Ordinance for purposes of any other provision of the • Ordinance. Nothing in this paragraph is intended or shall act to disclaim,waive,or otherwise limit the duties of the City under federal and state securities laws. The City's undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions. • The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements,a change in law,or a change in the identity;nature,status or type of operations of the City if, i '4 but only if(i)the agreement,as so amended,would have permitted a purchaser to purchase or sell the Certificates in the offering made hereby in compliance with the Rule,taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate amount of the outstanding Certificates consent to such amendment or(b)a person unaffiliated with the City(such as nationally recognized bond counsel)determines that the amendment will not materially impair the interests'of the holders and beneficial owners of the Certificates. The City may also amend or repeal the agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid, and the City may amend the agreement in its discretion in any other circumstance or manner, but in either case only to the extent that its'tight to do so would not prevent the Underwriters from purchasing the Certificates in the offering described herein in compliance with the Rule. If the City amends the agreement, it has agreed to include with any fmancial information or operating data next provided • in accordance with its agreement described above under"Annual Reports"an explanation,in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Audited Financial Report of the City ERn . The City presently requires that an annual audit be performed by an independent public accounting firm in accordance with generally accepted auditing standards for governmental units. The most recent audit,and additional financial information are available for public inspection,or copies may be obtained by written request,to the extent permitted by law,addressed to the City,with such fee,if any,for copies as may from time to time be authorized by the City. Compliance With Prior Undertakings The City'has complied in all material respects with its prior continuing disclosure agreements made in accordance with the Rule. r - F 29 • I r GENERAL CONSIDERATIONS Sources and Compilation of Information • The information contained in this Official Statement has been obtained primarily from the City and from other sources believed to be reliable. Nor representation is made as to the accu racy or completeness p eteness of the information derived from sources other than the City. The summaries of the statutes, orders, ordinances and other related documents are included herein subject to all of the provisions of such documents.These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. The information contained in this Official Statement in the section entitled "APPENDIX B - Audited Financial Statements of the City" has been provided by Patillo, Brown & Hill, P.C., Waco, Texas and has been included herein in reliance upon their authority as an expert in the fields of auditing and accounting. Bond Counsel has reviewed the information herein contained under the captions "THE CERTIFICATES" (except for sections captioned "Book-Entry-Only System," "Future Debt" and "Use of Proceeds"), '"LEGAL MATTERS - Legal Opinions," "TAX EXEMPTION," "TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES," and "CONTINUING DISCLOSURE OF INFORMATION (except for the section captioned "Compliance With Prior Undertakings")," solely to determine whether such information fairly and accurately describes the Certificates, the Ordinance, and the law set out therein. Bond Counsel has neither independently verified other factual information contained in this Official Statement nor conducted an investigation of the affairs of the City for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon the limited participation of such firms as an assumption of responsibility for,or an expression of opinion of any kind with regard to,the accuracy or completeness of any of the other information contained herein. Neither this Official statement nor any statement that may have been made orally or in writing is to be constructed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. Certification as to Official Statement At the time of payment for and delivery of the Certificates, the City will furnish the Underwriter a certificate, executed by the City Secretary and Mayor, acting in their official capacities,to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in this Official Statement, on the date thereof and on the date of delivery were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, this Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary to make the statements herein, in the light of the circumstances,under which they.were made, not misleading; and (c) insofar as the descriptions and statements, including•financial data contained in this Official Statement,of or pertaining to entities other than the City and their activities are concerned,such statements and data have been obtained from sources which the City believes to be reliable and that the City has no reason to believe that they are untrue in any material respect. Updating of Official Statement The City will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the City and, to the extent that information comes `o it.:r..tention, in the other matters described in the Official Statement,until the delivery of the Certificates to the Underwriter. This Official Statement was duly authorized and approved by,the City Council of the City of Pearland,Texas as of the date specified on the first page hereof. /s/ Tom Reid ky Mayor City of Pearland _ ATTEST: /s/ Young Lolling • City Secretary City of Pearland 30 I - APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF PEARLAND The following information has been derived from various sources,including the U.S.Census data,Texas Workforce Commission, "Sales Management Survey of Buying Power",Claritas,and City of Pearland,Texas officials. While j such sources are believed to be reliable,no representation is made as to the accuracy thereof. Residential and.Commercial Development Because of the City's proximity to downtown Houston, it has become an area of continuing growth in residential, • ^- commercial and some light industrial development. As of January 2007,there are numerous residential subdivisions either developed or under construction within the City with homes ranging in value from$75,000 to$400,000,the average being approximately$185,400. -Building Permits- Residential Commercial Other(a) Total Year - L 12-31 No. Value No. Value No. Value Ng Value 1995 340 34,734,829 13 3,762,900 528 7,799,090 881 46,296,819 1 1996 478 38,301,224 19 5,189,850 392 85,320,262 889 128,811,066 ,, 1997 415 43,712,441 30 10,785,050 402 50,038,171 847 104,535,662 1998 506 - 60,691,036 23 12,696,415 422 40,739,351 951 114,126,808 • 1999 536 64,525,679 22 .13,847,245 532 48,265,402 1,090 126,638,386 2000 818 202,795,755 17 43,414,385 604 59,823,285 1,439 306,033,425 • 2001 1,245 212,152,849 20 10,868,583 705 21,129,833 1,970 244,151,265 2002 1,424 257,282,301 20 29,585,122 719 15,782,222 2,163 302,649,645 2003 1,684 312,354,189 49 41,504,192 •742 17,717,326 2,475 371,575,707 • ( 2004 2,102 384,666,248 43 39,220,592 645 21,702,813 2,790 445,589,653 2005 2,610 479,228,095 51 40,675,200 664 30,299,897 3,325 550,203,192 2006 2,072 393,252,216 66 173,299,982 446 38,301,234 2,584 . 604,853,432 (a) Includes Apartments and public facilities. Source: City of Pearland ' • i - 1 � 7 • Major Employers The City has a well-rounded workforce with a significant percentage of workers employed in professional or executive positions or as administrative support for professionals. The industries employing the greatest number of Pearland's residents are manufacturing of durable goods,retail trade and education. Industrial activities within the City include the manufacturing of pipe, concrete building materials, mining equipment, lighting fixtures, large storage tanks and the fabrication and forging of steel. According to the Pearland Chamber of Commerce, the following is a list of the industrial employers located within the City with employment above 100. 100—999 Employees Davis Lynch Randall's Home Depot Shaw Cor Pipe Protection Kemlon Strickland Chevrolet Kroger Super Target Lowe's Tele-Flow,Inc. Pauluhn Electric Manufacturing TurboCare Pearland,City of Weatherford Manufacturing Pro Fax 1000+Employees Pearland ISD Wal-Mart ECONOMIC AND GROWTH INDICATORS U.S.Census of Population City of Pearland Brazoria County - Number %Change Number %Change 1930 -- — 23,054 +11.84 1940 -- — 27,069 +17.42 1950 -- — 46,549 +71.96 1960 1,497 — 76,204 +63.71 1970 6,444 +330. 6 108,312 +42.13 1980 13,248 +105.59 169,587 . +56.57 1990 18,927 +42.87 191,707 +13.04 2000 37,640 +98.87 241,767 +26.11 2005 69,808 +85.46 2006* 78,528 +9.63 * As of December 2006. Employment Statistics Source: Texas Workforce Commission . I 1 i f '' City of Pearland k_ 2006(a) 2005 2004 2003 2002 2001 2000 1999 1998 Labor Force 31,055 27,906 20,398 13,035 12,555 12,074 12,010 11,773 11,905 Employed 30,024 26,809 19,403 12,323 12,004 11,640 11,556 11,290 11,466 Unemployed 1,031 1,097 994 • 712 551 434 454 483 439 Rate 3.3 3.9 4.9 5.5 4.4 3.6 3.8 4.1 3.7 Brazoria County 2006(a) 2005 2004 2003 2002 2001 2000 1999 1998 Labor Force 139,841 132,814 125,175 116,777 110,179 106,660 106,312 104,330 105,383 Employed 133,577 126,536 115,693 106,393 102,593 100,336 99,685 97,274 98,970 Unemployed 6,264 6,278 9,480 10,384 7,586 6,324 6,627 7,056 6,413 -- Rate 4.5 4.7 7.7 8.9 6.9 5.9 6.2 6.8 6.1 (a) As of November 2006. Marketing Survey of Buying Power* Houston CMSA Brazoria County Population(000s) Total Population 5,341.3 271.9 18-24 10.0 9.9 _' 25-34 14.8• - 13.7 35-49 23.1 23.9 50+ 23.6 24.5 �` Households 1,865.4 93.0 I Retail By Store Group Sales(000's) - Total Retail Sales $ 81,154,286 $3,203,521 • Food&Beverage Stores 9,044,420 369,610 Food&Beverage Stores Estab. 8,160,895 231,535 General Merchandise 11,987,182 641,421 Furnit.&Home Furnish.and Electron.&Appin. 5,176,520 73,145 f Motor Vehicle&Parts Dealers $ 22,198,875 $ 927,372 Total EBI($000) $107,301,634 $5,067,825 Median Household EBI 42,818 45,928 _, $20,000-$34,999 20.8 19.1 $35,000-$49,999 18.1 18.6 $50,000 and Over 41.6 45.0 Buying Power Index 1.8831 0.858 * Statistical data from "Sales &Marketing Management-2005 Survey of Buying Power",copyright in 2005 • -- Sales Management Survey of Buying Power. Further reproduction is forbidden. APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY CITY OF PEART'AND, TEXAS '9y ..-..1- 4--Pii.1— ..,,,,,_,. .,.. .., v ,.., , ,......--, . ,,,,- --,-_- F. X A S .---,- ANNUAL FINANCIAL REPORT Fiscal Year Ended • September 30, 2006 Officials Issuing Report Bill Eisen Nick Finan and Claire Manthei Rick Overgaard City Manager Mickiel Hodge Director of Finance Assistant Director of Assistant City Finance Managers 1� IlL 11 Greenway Plaza,Suite 1515 Nulllairson One Sugar Creek Ctr.Blvd., Suite 920 Houston,TX 77046 Pearland,TX 77478 (713)621-1515 CFRBFTIDPU131]CPLCOUNT/VNTS 281.242.8600 Fax:(713)621-1570 PROFESSIONAL CORPORATION Fax:281.242.7333 • To the Honorable Mayor and Members of the City Council City of Pearland,Texas We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of City of Pearland, Texas, (the "City") as of and for the year ended September 30, 2006, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of City's management. Our responsibility is to express opinions on these financial statements based on our audit. • We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government • Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Pearland, Texas, as of September 30, 2006, and the respective .;;ranges in financial position and cash flows,where applicable,thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated December 29, 2006 on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions or laws, regulations, contracts, and grants.That report,which has been issued separately from this document, is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. 1 r; The Management's Discussion and Analysis on pages 3 through 13, budgetary comparison information and Required Pension System Supplementary Information on pages 59 through 61 are not required parts 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 supplementary pp tary information. However,we did not audit the 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 City of Pearland, Texas' basic financial statements. Combining and individual nonmajor fund financial statements and schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. • ./..)714" 7444:51111 Houston, Texas December 29,2006 2 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS As management of the City of Pearland, we offer readers of the City's financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30,2006. FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2006, by $105.5 million (net assets). Of this amount, $9.6 million (unrestricted net assets) may be used to meet the City's ongoing obligations to citizens and creditors in accordance with the City's fund designation and fiscal policies. • The City's total net assets increased by$36.6 million. • At the close of the current fiscal year,the City of Pearland's governmental funds reported combined ending fund balances of $72.2 million, an increase of $13.4 million in comparison with the prior year. Approximately $53.8 million of this ending balance can be attributed to work in progress for capital projects. • As of September 30, 2006, the unreserved, undesignated fund balance for the General Fund was$10.0 million or 28%of total General Fund expenditures. • The City of Pearland's General Obligation and Certificates of Obligation debt increased to $186.6 million, a net increase of$38.1 million over the previous year. The key factor was the sale of$32.2 million in Permanent Improvement and Refunding Bonds. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City'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. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements — The government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private-sector business. The Statement of Net Assets presents information on all of the City'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 City is improving of deteriorating. The Statement of Activities presents information showing how the City's net assets changed during the fiscal year. All changes in net assets are reported when 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 the future fiscal periods(e.g.,uncollected taxes and earned but unused compensated absences). 3 r_. CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City of Pearland include general government, public safety, public works, community services'and parks and recreation. The business-type activities of the City include water and sewer. The government-wide financial statements can be found on pages 17 through 19 of this report. The government-wide financial statements include not only the City of Pearland,itself(known as the primary government), but also a legally separate Economic Development Corporation, Tax Increment Reinvestment Zone(TIRZ) and the Development Authority of Pearland for which the City of Pearland is financially accountable. Financial information for these component units is reported separately from the fmancial information presented for the primary government,itself. 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 City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All funds of the City can be divided into • two categories-governmental funds and proprietary funds. 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 statement focus on current sources and uses of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information maybe useful in evaluating a government's near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial Istatements, it is useful to compare the information presented for governmental funds with similar ,_ information presented for governmental activities in the goverment-wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term - financing decisions. Both the governmental funds balance sheet and the governmental fund statements of revenues, expenditures, and changes in fund balance== a ide a reconciliation to facilitate this comparison between governmental funds and governmental activities. Beginning on page 20 of this report, information is presented separately in the Governmental -- Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances for the General,Debt Service,Capital Projects and other funds,which are considered to be major funds. Data from the other governmental funds are combined into a - single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. - - The City of Pearland adopts an annual appropriated budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with the budget. 4 �. A CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Proprietary Funds—The City maintains one type of proprietary fund. Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses an Enterprise Fund to account for its Water and Sewer Fund. Proprietary. funds provide the same type of information as the government-wide financial statements, only in more detail. The basic proprietary fund financial statements, which begin on page 34 of this report, provide separate information for the Water and Sewer Enterprise Fund since it is considered to be a major fund of the City. The basic proprietary fund financial statements can be found on pages 24 through 26 of this report. Combining Component Unit Financial Statements - The City's three discretely presented component units shown in aggregate on the face of the government-wide financial statements have individual information for each of the major discretely presented component units presented in the form of combining statements immediately following the fund financial statements of the primary government. 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 beginning on page 30 of this report. Other Information —In addition to the basic financial statements and accompanying notes, this report also presents other required supplementary information as well as combining and individual fund statements and schedules that further support the information in the financial statements. This information is presented immediately following the notes to the financial statements beginning on page 59 of this report. • Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the City, assets exceeded liabilities by $105.5 million at the close of the most recent fiscal year. • By far the largest portion of the City's net assets (74 percent) reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment); less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt,it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. 5 • CITY OF PEARLAND,TEXAS ( MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF NET ASSETS September 30,2006 and 2005 Amounts in(000's) Governmental Activities Business-type Activities Totals - 2006 2005 2006 2005 2006 2005 Current and other assets $ 79,129 $ 65,343 $ 21,256 $ 17,835 $ 100,385 $ 83,178 Capital assets 143,139 92,505 100,944 88,846 244,083 181,351 ,.- Total Assets 222,268 157,848 122,200 106,681 344,468 264,529 Other liabilities 6,072 8,854 3,166 6,662 9,238 15,516 Long-term liabilities outstanding 174,625 133,263 55,061 46,798 229,686 180,061 Total Liabilities 180,697 142,117 58,227 53,460 238,924 195,577 t Net assets: r Invested in capital assets, nets of related debt 24,569 3,084 53,144 45,642 77,713 48,726 _ Restricted 8,085 6,862 10,129 . 7,027 18,214 13,889 Unrestricted 8,917 5,785 700 552 9,617 6,337 . Total Net Assets $ 41,571 $ 15,731 $ 63,973 $ 53,221 $ 105,544 S 68,952 An additional portion of the City's net assets (17 percent) represent resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets (9 percent)may be used to meet the government's ongoing obligations to..citizens and creditors. 6 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF CHANGES IN NET ASSETS For the Years Ended September 30,2006 and 2005 Amounts in(000's) Governmental Activities Business-type Activities Totals 2006 2005 2006 2005 2006 2005 Revenues Program revenues: Charges for services S 14,094 $ 12,309 $ 13,849 S 11,220 $ 27,943 $ 23,529 Operating grants and contributions 1,426 1,155 474 1,900 1155 Capital grants and ' contributions 15,749 1,118 13,434 8,365 29,183 9,483 Property taxes 21,845 19,805 21,845 19,805 '" Sales and use taxes 9,980 8,026 9,980 8,026 Franchise taxes 3,426 3,097 3,426 3,097 • Unrestricted investment earnin; 2,991 1,863 682 399 3,673 2,262 Other 526 828 526 828 Total Revenues 70,038 - 48,201 28,439 . 19,984 98,478 68,185 Expenses - General government $ 13,914 8,714 13,914 8,714 Public safety 12,471 11,857 12,471 11,857 a Public works 6,562 12,858 6,562 12,858 Community services 2,895 2,939 2,895 2,939 Parks and recreation 2,952 2,952 Interest on long-term debt 6,559 5,115 6,559 5,115 Business-type activities: Water and sewer 16,533 13,624 16,533 13,624 Total Expenses 45,352 41,483 16,533 13,624 61,886 55,107 - Increase(decrease)in net assets before transfers 24,686 6,718 11,906 6,360 36,592 13,078. Transfers 1,154 359 (1,154) (359) Increase in net assets 25,840 7,077 10,752 6,001 36,592 13,078 Net assets-beginning 15,731 8,654 53,221 47,221 68,952 55,875 Net assets-ending $ 41,571 $ 15,731 -$ 63,973 S 53?", 105,544 $ 68,952 At the end of the current fiscal year, the City is able to report positive balances in all three -- categories of net assets, both for the government as a whole, as well as for its separate governmental and business-type activities. 7 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS ' The most significant changes in net assets occurred with a net increase in net assets invested in capital assets net of related debt of $29.0 million as a result of assets received due to the annexation of a municipal utility district and the contribution of capital assets from the City's discretely presented component units. The remaining increase in the government's net assets of approximately $7.6 million from the occurred in both restricted and unrestricted net assets primarily in governmental activities as ,- discussed below. Governmental activities - Governmental activities increased the City's net assets by $25.8 million,thereby accounting for 71 percent of the total growth in the net assets of the City. Key elements of this increase are as follows: ?_ • Program revenues from operating and capital grants increased by $20.0 million from the prior year. This category of revenues reflects contributions from component units of infrastructure and funds for infrastructure and other projects. • Other significant changes in revenues can be seen in sales and use taxes. This category (primarily sales and hotel occupancy taxes) increased due to the strengthening of the local economy and continued increase in retail establishments within the City. • Transfer in from business-type activities of$1.2 million for discretionary contributions to the governmental debt service and contraction activities accounted another portion of j, this increase. Expenses and Program Revenues-Governmental Activities `_. $25,000 $20,000 ■Expenses •Program Revenues I. $15,000 0 0 $10,000 -- c $5,000' , sir Erni. - im. „,,,_.., . , . i e& ke'C* ,zo it.bC eclfr cc' co CP CP Q2' N.cmy H - p 8 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Governmental Activities Charges for services 16% Grants and Other contributions 4% 19% Property taxes 25% Sales and use taxes 25% • • Franchise taxes • 11% • Business-type activities -Business-type activities increased the City's net assets by$10.8 million, accounting for 29 percent of the total growth in the government's net assets. Key elements of this increase are as follows. • Charges for services increased approximately $2.6 million over the prior year primarily due to an increase in water usage due to lower than average rainfall levels. • • Capital grants for infrastructure relating to water and sewer facilities (from impact fees and annexed municipal utility district assets) amounted tp$13.4 million for the year. Expenses and Program Revenues-Business-type Activities $30,000 ■Expenses S25,000 •Program Revenues S20,000 ro o S 15,000 S10,000 $I 55,000 I S- Water and sewer • CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Business-type Activities Charges for services 49% Other 2% v..; _ • Grants and contributions 49% Increases in business activity expense for the year of approximately$2.9 million due to major repairs and renovations being completed in the current fiscal year also contributed to the increase. Transfers out to the governmental activities of$1.2 million off set the increase of net assets before transfers of$11.9 million. FINANCIAL ANALYSIS OF THE CITY'S FUNDS As noted earlier,fund accounting is used to demonstrate and ensure compliance with finance-related legal requirements. Governmental Funds-The focus of the City's governmental funds is to provide information of near- term inflows, outflows, and balances of spendable resources: Such information is useful in assessing the City's financing requirements, in particular,unreserved fund balance may serve as a useful measure of the CirvA net resources available for spending at the end of the fiscal year. The City's governmental funds reflect a combined fund balance of$72.2 million. Of this, $10.0 million is unreserved and available for day-to-day operations of the City; $4.7 million is reserved for debt service and the balance is reserved or designated for capital projects and other projects. There was an increase in the combined fund balance of$13.4 million from the prior year. The increase in fund balance includes a$2.4 million increase in fund balance of the general fund as well as an increase in the capital projects fund of approximately $9.4 million due to the proceeds of recent bond issues. With a current year increase of$2.4 million,the General Fund's fund balance totaled$10.6 million at year end. 10 ii CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS _ I In the Capital Projects Fund, the City spent $36.9 million on various improvement projects. Additionally, the City issued $32.2 million in Permanent Improvement bonds and received contributions from the General Fund and component units totaling$2.6 million leaving an ending fund balance of$53.0 million. Proprietary Funds - As the City's business-type activities contain only one activity (water and sewer services) the City's proprietary funds provide the same type of information found in the government-wide financial statements. GENERAL FUND BUDGETARY HIGHLIGHTS During the year there was a $1.3 million increase in appropriations between the original and final amended budget. The increase in appropriations is attributable to carryover funding from prior year encumbrances and projects budgeted in the previous year but still in progress. Budget estimates for revenues and other sources increased by approximately $3.2 million for the year as well to reflect the increases in revenues (primarily sales tax) to reflect the actual revenues recognized during the year. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of fiscal year 2006, the City's governmental activities and business- type activities had invested $143.1 million and$100.9 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net decrease of $7.0 million, or seven percent over the end of last fiscal year for the business-type activities capital assets and a change of$50.6 million or 55%for the governmental'activities capital assets, Governmental Activities Business-Type Activities . Totals 2006 2005 2006 2005 2006 2005 Land S 3,715 S 2,717 $ 414 S 368 $ 4,128 $ 3,085 Construction in progress 74,022 45,327 21,083 19,425 95,106 64,752 Infrastructure 44,160 34,583 47,781 57,229 91,941 91,812 Buildings and improvements 17,836 6.418 23,133 22,610 40,969 29,028 - Machinery and equipment 3,406 3,460 8,532 8,348 11,938 11,808 Total Captial Assets S 143,139 S 92,505 S 100,943 S 107,979 S 244,082 S 200,484 Construction in progress at year-end represents numerous ongoing projects, the largest of which relate to street and water and Sewer improvement projects. _ 11 - 1 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Long-Term Debt-At the end of the current fiscal year,the City had total bonds, certificates of obligation, notes, and capital leases outstanding of$227.5 million. Of this amount, $90.3 million is composed of general obligation bonds,96.3 million is composed of certificates of obligation and $40.2 million represents revenue bonds secured solely by specified revenue sources. Governmental Activities Business-Type Activities Totals 2006 2005 2006 2005 2006 2005 General obligation bonds S 90,305 $ 60,175 S S S 90,305 S 60,175 Revenue bonds - 40,170 32,480 40,170 32,480 Certificates of obligation 81,275 72,390 15,000 15,880 96,275 88,270 Capital leases payable 309 396 309 396 Compenated absences 3,099 3,315 418 415 3,517 3,730 $ 171,889 $ 136,276 S 55,588 S 48,775 S 227,477 $ 185,051 , The City had multiple debt issuances during the year involving general obligation refunding bonds, and certificates of obligation. The net effect of these issuances and the debt retired during the year _ was an increase in total debt of$42.4 million or 22.9 percent. , Current ratings on debt issues are as follows: Mnruly' Investors Standard and Service Poors General obligation bonds A l A+ Revenue bonds A2 A r ; 1 In fiscal year 2006,the City received a ratings upgrade from Moody's Investor Service for its water and sewer revenue bonds,from an A3 to an A2. L. All of the City's bond issues have been successful in qualifying for bond insurance resulting in ratings of "Aaa", "AAA" and "AAA" ratings from Moody's, Standard & Poors and Fitch, respectively. o: Both the Pearland Economic Development Corporation(PEDC) and the Development Authority of Pearland (DAP), component units of the City, have issued debt. The PEDC bonds are rated "A2" and "A" from Moody's and Standard&Poors,respectively. The DAP bonds are rated BBB by Standard and Poors. Their bonds have also qualified for bond insurance. Therefore, the PEDC and DAP bonds are rated"Aaa"and"AAA"by Moody's and Standard&Poors,respectively. 12 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES A primary factor in the 2007 budget is how the overall economy affects the City of Pearland's growth. Pearland continues to be one of the fastest growing cities in the Houston area. Developments, such as, Shadow Creek Ranch, the Lakes at Highland Glen and Southern Trials have all contributed to this growth. New single family housing starts totaled 2,312 for 2006 and • construction value was $438 million. This continued growth creates the need to expand services and provide infrastructure. The Pearland City Council approved a$39.7 million General Fund budget for fiscal year 2006— 2007. This is a 4.5% increase over the 2005 — 2006 adopted budget. This increase includes 23 full-time employees to provide for base services, keep up with:growth, and to serve the anticipated annexation of Brazoria County MUD#1.The budget incorporates a tax rate reduction of 3.22%to$0.6527 per$100 of valuation. In the budgetary process, water and sewer revenues were anticipated to increase 25% through rate and volume increases. REQUESTS FOR INFORMATION The financial report is designed to provide our citizens, customers, investors and creditors with a general overview of City's finances. If you have questions about this report or need any additional financial information, contact Claire Manthei, Director of Finance, at 3519 Liberty Drive, Pearland, Texas 77581, or call (281) 652-1600. For general information, visit the City's website at www.citvofpearland.com. • 13 ' r i l • BASIC FINANCIAL STATEMENTS 15 { I t . (This page intentionally left blank) • a 1—� r 16 CITY OF PEARLAND,TEXAS STATEMENT OF NET ASSETS September 30,2006 Primary Government Discretely Presented Governmental Business-type Component Activities Activities Total Units ASSETS Cash and Equivalents $ 49,182,583 $ 43,622 $ 49,226,205 $ 6,389,549 ' Investments 24,024,670 24,024,670 3,448,107 Receivables,net of allowance for uncollectibles 5,837,850 1,808,617 7,646,467 864,825 Inventories 54,908 54,908 Prepaid items 28,925 28,925 Restricted cash and investments 19,403,861 19,403,861 13,014,729 Capital Assets Capital assets not subject to depreciation 77,737,014 . 21,497,128 99,234,142 Capital assets,net of accumulated - _ depreciation 65,402,066 79,446,744 144,848,810 Total Capital Assets 143,139,080 100,943,872. 244,082 952 Total Assets - 222,268,016 122,199,972. 344,467,988 23,717,210 LIABILITIES Accounts payable and accrued liabilities 4,563,958 1,446,352 6,010,310 98,167 Accrued interest 625,110 187,814 812,924 89,265 Unearned revenues 650,530 20,802 671,332 Customer deposits 232,450 1,511,380 1,743,830 Long-term liabilities Due within one year 3,157,943 2,100,030 5,257,973 1,960,000 Due in more than one year 171,467,499 52,961,000 224,428,499•. 38,749,728 Total liabilities 180,697,490 58,227,378 238,924,868 40,897,160 NET ASSETS Invested in capital assets,net of related debt 24,569,259 53,143,735 77,712,994 Restricted for. Debt Service 4,063,041 352,738 4,4'5,779 2,174,602 Other projects 4,021,258 9,776,345 13,797,603 Unrestricted 8,916,968 699,776 9,616,744 (19,354,552) - , Total net assets $ 41,570,526 $ 63,972,594 $ 105,543,120 $ (17,179,950) See Notes to Financial Statements. a - y 17 CITY OF PEARLAND,TEXAS Statement of Activities For the Year Ended September 30,2006 Program Revenue Operating Capital Grants tk - _ Charges for Grants and and Functions/Programs Expenses Services Contributions Contributions Primary government Governmental Activities General government $ 13,913,528 $ $ 1,239,521 $ Public safety 12,471,207 2,627,073 111,239 Public works 6,561,555 4,331,168 15,742,684 Community services 2,894,851 6,311,659 55,002 Parks and recreation 2,952,329 824,518 20,674 6,000 Interest on long-term debt 6,558,908 Total governmental activities 45,352,378 14,094,418 1,426,436 15,748,684 Business-type activities: Water and sewer 16,532,722 13,849,201 473,947 13,433,840 Total business-type activities 16,532,722 13,849,201 473,947 13,433,840 Total primary government $ 61,885,100 $ 27,943,619 $ 1,900,383 $ 29,182,524 . Component Units Pearland Economic Development Corporation $ 8,910,132 $ $ $ TIRZ Developments 1,421,796 Development Authority of Pearland 9,250,386 Total component units $ 19,582,314 $ • $ $ General revenues: Taxes: Property taxes Sales and use taxes Franchise taxes Unrestricted investment earnings Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets-beginning Net assets-ending See Notes to Financial Statements. 18 • • Net(Expense)Revenue and Changes in Net Assets Primary Government Governmental Business-type Component Activities Activities Total Units $ (12,674,007) $ $ (12,674;007) (9,732,895) (9,732,895) 13,512,297 13,512,297 3,471,810 3,471,810 (2,101,137) (2,101,137) (6,558,908) (6,558,908) (14,082,840) (14,082,840) 11,224,266 11,224,266 • 11,224,266 11,224,266 (14,082,840) 11,224,266 (2,858,574) • $ (8,910,132) (1,421,796) (9,250,386) .. (19,582,314) 21,845,231 21,845,231 5,354,319 9,979,706 9,979,706 4,821,342 3,426,352 3,426,352 2,991,139 681,249 3,672,388 739,368 526,111 526,111 1,153,720 (1,153,720) 39,922,259 (472,471) 39,449,788 10,915,029 25,839,419 10,751,795 36,591,214 (8,667,285) 15,731,107 53,220,799 68,951,906 (8,512,665) $ 41,570,526 $ 63,972,594 = $ 105,543,120 $ (17,179,950) • • 19 CITY OF PEARLAND,TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30,2006 Other Total Capital Governmental Governmental • General Fund Debt Service Projects Fund Funds Funds ASSETS Cash and cash equivalents $ 2,269,889 $ 2,640,419 $ 40,528,127 $ 3,744,148 $ 49,182,583 Investments 6,502,990 2,007,852 15,364,939 148,889 24,024,670 Receivables,net of allowance for uncollectibles 4,541,115 467,851 659,841 169,043 5,837,850 Inventories 54,908 54,908 _- Prepaid expenses 28,925 28,925 Total assets $ 13,397,827 $ 5,116,122 $ 56,552,907 $ 4,062,080 $ 79,128,936 LIABILITIES AND FUND BALANCES - Liabilities: Accounts payable $ 759,615 $ $ 3,051,161 $ 11,617 $ 3,822,393 Accrued expenditures 726,297 29,851 15,267 771,415 Deposits 232,450 232,450 Deferred revenue 1,082,096 427,970 530,000 29,205 2,069,271 . Total liabilities 2,800,458 457,821 3,596,428 40,822 6,895,529 , Fund balances: Reserved for: Inventories 54,908 54,908 Encumbrances 552,256 552,256 Prepaid expenses 28,925 28,925 Debt service 4,658,301 4,658,301 Unreserved,reported in General fund 9,961,280 9,961,280 Special revenue funds 3,215,232 3,215,232 Capital projects funds 52,956,479 806,026 53,762,505 Total fund balances 10,597,369 4,658,301 52,956,479 4,021,258 72,233,407 Total Iiabilities and fund balances 5 13,397,827 $ 5,116,122 $ 56,552,907 $ 4,062,080 $ 79,128,936 See Notes to Financial Statements. 20 CITY OF PEARLAND,TEXAS RECONCILL4TION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS September 30,2006 Total fund balance,governmental funds $ 72,233,407 Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets used in governmental activities are not current financial resources and therefore are not reported in this fund financial statement,but are reported in the governmental activities of the Statement of Net Assets. 143,139,080 Certain other long-term assets are not available to pay current period expenditures and therefore are not reported in this fund financial statement,but are reported in the governmental activities of the Statement of Net Assets. 1,418,741 Some liabilities,(such as Capital Lease Contract Payable,Long-term Compensated Absences, and Bonds Payable),are not due and payable in the current period and are not included in the fund financial statement,but are included in the governmental activities of the Statement of Net Assets. Bonds and capital leases payable (171,526,300) Compensated absences (3,099,142) Accrued interest not reflected in Governmental funds (595,260) Net Assets of Governmental Activities in the Statement of Net Assets 41,570,526 - See Now to Financial Statements. 21 I CITY OF PEARLAND,TEXAS STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30,2006 Other Total Capital Governmental Governmental - General Fund Debt Service Projects Fund Funds Funds REVENUES Property taxes $ 11,413,806 $ 10,736,081 $ $ $ 22,149,887 Sales and use taxes 9,712,118 267,588 9,979,706 Franchise fees 3,426,352 3,426,352 Licenses and permits 4,066,914 4,066,914 Fines and forfeitures 1,934,882 102,708 2,037,590 Charges for services 8,734 090 8,734,090 Investment earnings 516,775 142,407 2,235,649 96,308 2,991,139 Intergovernmental 448,502 291,786 6,994,659 117,239 7,852,186 Other 252,704 1,157,710 333,596 1,744,010 Total revenues 40,506,143 11,170,274 10,388,018 917,439. 62,981,874 EXPENDITURES Current: General government- 6,284,996 96,248 6,381,244 Public safety 12,685,081 184,516 12,869,597 Public works 9,727,972 9,727,972 • Community services 2,739,532 31,256 2,770,788 Parks and recreation 4,308,250 66,548 4,374,798 Debt Service: Principal 3,429,108 3,429,108 Interest and other charges 6,546,227 6,546,227 • Bond issuance costs 224,849 224,849 Capital outlay 36,706,096. 36,706,096 L. Intergovernmental 1,683,678 1,683,678 Total Expenditures 35,745,831 11,659,013 36,930,945 378,568 84,714,357 Excess(deficiency)of revenues over expenditures 4,760,312 (488,739) (26,542,927) 538,871 (21,732,483) OTHER FINANCING SOURCES (USES) General obligation debt issued 13,000,000 33,865,000 41,865,000 Premium on general obligation debt 4,141 89,403 93,544 Payments to refunded bond escrow agent (8,004,139) (8,004,139) Transfers in 1,655,653 1,291,909 2,589,500 314,519 5,851,581 Transfers out (4,021,367) (589,828) (86,666) (4,697,861) Total other financing sources and uses (2,365,714) 1,291,911 35,954,075 227,853 35,108,125 Net change in fund balances 2,394,598 803,172 9,411,148 766,724 13,375,642 Fund balances-beginning 8,202,771 3,855,129 43,545,331 3,254,534 58,857,765 Fund balances-ending $ 10,597,369 $ 4,658,301 S 52,956,479 $ 4,021,258 $ 72,233,407 ► .e ► s - -e . - __. a See Notes to Financial Statements. 22 CITY OF PEARLAND,TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES,EXPENDITURES',AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OFACTIVITIET For the Year Ended September 30,2006 Net change in fund balances-total governmental funds: $ 13,375,642 Amounts reported for Governmental Activities in the Statement of Activities are different because: Governmental funds report outlays for capital assets as expenditures because such outlays use current financial resources. In contrast, the Statement of Activities reports only a portion of the outlay as expense. The outlay is allocated over the assets'estimated useful lives as depreciation expense for the period. This is the amount by which capital outlays S45,438,872 exceeded depreciation$2,904,946 in the current period. 42,533,926 Capital Assets contributed by discretely presented component units that do not represent current assets and are not reflected in the governmental fund financial statements. .8,100,000 Governmental funds do not present revenues that are not available to pay current obligations. In contrast,such revenues are reported in the Statement of Activities when earned. 246,261 Governmental funds report bond proceeds as current financial resources.In contrast,the Statement of Activities treats such issuance of debt as a liability. Governmental funds report repayment of bond principal as an expenditure,In contrast,the Statement of Activities treats such repayments as a reduction in long-term liabilities.This is the amount by which proceeds exceeded repayments. (38,344,382) Some expenses reported in the statement of activities do not require the use of current financial resources and these are not reported as expenditures in governmental funds: Accrued interest not reflected in Governmental funds (72,028) Change in net assets of governmental activities S 25,839,419 See Notes to Financial Statements. 23 CITY OF PEARLAND,TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS September 30,2006 Business-type Activities- Enterprise Fund Water and Sewer Fund ASSETS Current assets: Cash and cash equivalents $ 43,622 Accounts Receivable,net of allowance for doubtful accounts 1,808,617 Restricted cash and cash equivalents 17,783,400 Restricted investments 1,620,461 Total current assets 21,256,100 Non-current assets: Capital Assets: Land and improvements 413,699 Construction in progress 21,083,429 Infrastructure_ 72,594,008 Buildings 23,132,786 Machinery and equipment 8,532,461 • • Less Accumulated depreciation (24,812,511) Total non-current assets 100,943,872 Total assets 122,199,972 LIABILITIES Current Liabilities: Accounts payable and accrued expenses . . 1,446,352 Accrued interest payable 187,814 Customer deposits 1,511,380 Deferred revenue 20,802 Compensated absences-current portion 60,030 Bonds and certificates of obligation payable-current portion 2,040,000 Total current liabilities e Non-current liabilities:Compensated absences 358,613 Bonds and certificates of obligation payable 52,602,387 Total non-current liabilities 52,961,000 Total liabilities 58,227,378 NET ASSETS Invested in capital assets,net of related debt 53,143,735 Restricted for debt service 352,738 - Restricted for capital projects 9,776,345 Unrestricted 699,776 Total net assets $ 63,972,594 See Notes to Financial Statements. 24 CITY OF PEARLAND,TEXAS STATEMENT OF REVENUES,EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS For the Year Ended September 30,2006 Business-type Activities- Enterprise Fund Water and Sewer Fund REVENUES Charges for services $ 13,849,201 OPERATING EXPENSES Personal services 3,216,442 Supplies and materials 3,479,851 Contractual services 3,008,513 - Repairs and maintenance 1,455,889 Other expenses 67,096 Depreciation 3,064,550 Total Operating Expenses 14,292,341 Operating income(loss) • (443,140) NON-OPERATING REVENUES(EXPENSES) Earnings on investments 681,249 Operating grants and contributions 473,947 Interest expense (2,240,380) Total non-operating revenue(expenses) (1,085,185) Income(loss)before contributions and transfers (1,528,325) Capital contributions 13,433,840 • Transfers in 159,001 Transfers out (1,312,721) Change in net assets 10,751,795 Total net assets-beginning as restated 53,220,799 Total net assets-ending $ 63 972,594 See Notes to Financial Statements. 25 CITY OF PEARLAND,TEXAS • STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30,2006 Business-type 'Activities- Enterprise Funds Water and Sewer Fund CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers and users $ 14,584,942 Disbursed for personnel services (3,273,604) Disbursed for goods and services (8,072,531) Net cash provided(used)by operating activities 3,238,807 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from other funds 159,001 Transfers to other funds (1,312,721) Operating grants and contributions 473,947 Net cash provided by(used by)noncapital financing activities (679,773) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from the sale of equipment Capital grants and contributions 8,731,013 Proceeds from the sale of bonds 14,166,547 Principal payments on debt (7,035,000) Issuance costs (596,956) Acquisition and construction of capital assets (11,669,778) Net cash used by capital and related financing activities 3,595,826 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (1,620,461) Interest received 681 249 Interest paid (2,330,024) Net cash provided by(used by)investing activities (3,269,236) Net decrease in cash and equivalents 2,885,624 Cash and equivalents,beginning of year 14,941,398 Cash and equivalents,at end of year $ 17,827,022 Unrestricted cash and equivalents 43,622 Restricted cash and equivalents 17,783,400 $ 17,827,022 See Notes to Financial Statements. - 26 1� I I i Business-type Activities- Enterprise Funds Water and Sewer Fund Reconciliation of operating income to net cash provided by operating activities Operating income(loss) $ (443,140) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation - 3,064,550 (Increase)decrease in accounts receivable 463,692 Increase(decrease)in accounts payable (61,182) Increase(decrease)in salaries payable (57,162) Increase(decrease)in customer deposits 257,610 Increase(decrease)in deferred revenue 14,439 Net cash provided by operating activities $ 3,238,807 27 CITY OF PEARLAND,TEXAS DISCRETELY PRESENTED COMPONENT UNITS-GOVERNMENTAL ACTIVITIES COMBINING STATEMENT OF NET ASSETS September 30,2006 Pearland Economic Development Development TIRZ Authority of Total Component Corporation Developments Pearland Units ASSETS Cash and equivalents $ 3,239,475 $ 3,129,862 $ 20,212 $ 6,389,549 Investments 3,448,107 3,448,107 Receivables-less allowance for uncollectibles 864,825 864,825 Restricted cash 10,840,127 2,174,602 13,014,729 Total assets 18,392,534 3,129,862 2,194,814 23,717,210 LIABILITIES Accounts payable and accrued expenses 26,768 54,573• 16,826 98,167 Accrued interest 89,265 89,265 Non-current liabilities: Due within one year 405,000 1,555,000 1,960,000 Due in more than one year 19,742,117 19,007,611 38,749,728 Total liabilities 20,263,150 54,573 20,579,437 40,897,160 NET ASSETS Restricted-debt service 2,174,602 . 2,174,602 Unrestricted (1,870,616) 3,075,289 (20,559,225) (19,354,552) Total net assets $ (1,870,616) $ 3,075,289 $ (18,384,623) $ (17,179,950) See Note to Financial Statements. • i 28 • CITY OF PEARLAND,TEXAS DISCRETELY PRESENTED COMPONENT UNITS-GOVERNMENTAL ACTIVITIES COMBINING STATEMENT OF ACTIVITIES For the year ended September 30,2006 Net(Expense)and Changes in Net Assets Pearland Economic Development Development TIRZ Authority of Functions/Programs Expenses Corporation Developments Pearland Totals Component Unit Pearland Economic Development Corporation $ 8,910,132 $ (8,910,132) $ $ $ (8,910,132) TIRZ Developments 1 421 796 p � (1,421,796) (1,421,796) Development Authority of Pearland 9,250,386 (9,250,386) (9,250,386) $ 19,582,314 (8,910,132) (1,421,796) (9,250,386) (19,582,314) General revenues: Taxes: Property taxes 5,354,319 5,354,319 Sales and use tax • 4,821,342 4,821,342 Unrestricted investment earnings 582,217 71,559 85,592 739,368 Transfers (2,151,892) 2,151,892 Total general revenues 5,403,559 3,273,986 2,237,484 10,915,029 Change in net assets (3,506,573) 1,852,190 (7,012,902) (8,667,285) Net assets,beginning 1,635,957 1,223,099 (11,371,721) _ (8,512,665) Net assets,ending $ (1,870,616) $ 3,075,289 $ (18,384,623) $ (17,179,950) See Note to Financial Statements. 29 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS , NOTE I -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Pearland, Texas, (the "City") was incorporated in December 1959, and adopted a "Home Rule Charter"February 6, 1971.The Charter,as amended,provides fora Council-Manager form of government and provides services authorized by its charter. Presently, these services include police and emergency medical, water and sewer services, drainage, sanitation, building and code inspection,planning, zoning, engineering, street repair and maintenance,park maintenance,recreational activities for citizens,and general administrative services.Fire protection is provided through a volunteer department.The City is governed by an elected mayor and five-member Council. _ The Mayor and all members are elected at large.The Mayor is allowed to vote only in case of a tie vote.The Mayor and each Council member hold office for a period of three years and until his/her successor is elected and qualified. Council members shall be limited to two full consecutive terms of office and there is no limitation on the office of the Mayor. The City Manager is appointed by Council and is responsible for implementation of Council policy,execution of the laws,and all day-to-day y y operations of the City. A. Financial Reporting Entity The City is an independent political subdivision of the State Of Texas governed by an elected council and a mayor and is considered a primary government.As required by accounting principles generally accepted in the United States of America,these financial statements have been prepared based on considerations regarding the potential for inclusion of component units, which are other entities or organizations that are financially accountable to the City.Discretely presented component units, are reported in a separate column in the government-wide statements to emphasize that they are legally separate from the primary government.Based on these considerations,the City's financial statements include the following discretely presented component units: the Pearland Economic Development Corporation (PEDC); the Tax Increment Reinvestment Zone (TIRZ #2); and the Development Authority of Pearland.No other entities have been included in the City's reporting entity. Additionally, as the City is considered a primary government for financial reporting purposes,its activities are not considered a part of any other governmental or other type of reporting entity. Considerations regarding the potential for inclusion of other entities, organizations, or functions in the City's financial reporting entity are based on criteria prescribed by generally accepted accounting F-;wiples..": ,,;se same criteria are evaluated in considering whether the City is a part of any other governmental or other type of reporting entity. The,overriding elements associated with prescribed criteria considered in determining that the City's financial reporting entity status is that of a primary government are:that it has a separately elected Governing body;it is legally separate;and it is fiscally independent of other state and local governments.Additionally prescribed criteria under. generally accepted accounting principles include: considerations pertaining to organizations for which the primary government is financially accountable; and considerations pertaining to other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's fmancial statements to be misleading or incomplete. The component units discussed below are included in the City's reporting entity because of the significance of their operational or financial relationships with the City. 30 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) A. Financial Reporting Entity(continued) Discretely Presented Component Units: Pearland Economic Development Corporation(PEDC) In 1995, the citizens of Pearland established the Pearland Economic Development Corporation (PEDC)to help the citizens and public officials of Pearland attract new businesses and existing businesses to expand. The mechanism to fund the operations of the corporations is through a sale tax levy at a rate of one-half of one percent(1/2%). The PEDC is fiscally dependent upon the primary government because, besides appointing the Board, the City Council also must approve the PEDC's budget and any debt issuances. Tax Increment Reinvestment Zone(TIRZ#2) In 1998, the Tax Increment Reinvestment Zone (TIRZ#2) was established for a period of 30 years or until dissolved by the City. The TIRZ#2 provides tax assisted property development and/or redevelopment in specific geographic areas in accordance with applicable state laws. Besides appointing Board members, the City Council mist also approve any debt issuances done;,n behalf of the TIRZ. Development Authority of Pearland In 2004, the City created the Development Authority of Pearland to provide financing for the development of the TIRZ#2. Proceeds from bond sales are to be used to reimburse developers and fund a debt service reserve.Besides appointing Board members,the City Council must also approve any debt issuances done on behalf of the TIRZ. B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the Statement of Net Assets and the Statement of Changes in Net Assets)report information about the City as a whole. These statements include all activities of the primary government and its component units. For the most part, the effect of interfund activity has been eliminated from the government-wide statements. Exceptions to this general rule are charges between the City's business-type and governmental funds. Elimination of these charges would distort the direct costs and program revenues reported for the various -functions concerned. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment.Program revenues include 1)charges to customers or applicants who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and 2)grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly • _ included among program revenues are reported instead as general revenues. 31 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) C.Measurement Focus,Basis of Accounting and Financial Statement Presentation The government-wide financial statements and all proprietary funds are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recognized when earned and expenses are recorded when a liability is incurred,regardless of the timing of the related cash flows.With this measurement focus,all assets and all liabilities associated with the operations of these activities are included on the statements of net assets.Proprietary fund equity consists of retained earnings. Proprietary fund-type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net total assets. Furniture and equipment capitalized in the Proprietary Fund Types are valued at cost. The governmental fund financial statements are presented on a .current financial resources measurement focus and modified accrual basis of accounting. This is the manner in which these funds are normally budgeted. Revenues are recognized as soon as they are both measurable and available. Measurable means that the amount of the transaction can be determined and available means collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period.Revenues susceptible to accrual include property taxes, sales and use taxes, franchise fees, charges for services and interest on temporary investments. Other receipts become measurable and available when cash is received by the government and are recognized as revenue at that time. Under modified accrual accounting, expenditures are recognized in the accounting period in which the liability is incurred, if measurable, except for interest on general long-term debt, which is recognized when due. Since the governmental fund statements are presented on a different measurement focus and basis of accounting than the government-wide statements' governmental column,a reconciliation is presented which briefly explains the adjustments necessary to reconcile fund-based financial statements with the governmental column of the government-wide presentation. In the fund financial statements,the accounts of the Cit y are organized on the basis of funds,each of which is considered a separate accounting Pntity.Tice operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses,as appropriate.Following is a description of the various funds: Governmental funds are those funds through which most governmental functions are typically financed.The City reports the following major governmental funds: i The General Fund is used to account for all financial transactions not properly includable in other funds. The principal sources of revenues include local property taxes, sales and franchise taxes, licenses and permits, fines and forfeitures, and charges for services. Expenditures include general government, administrative services, public works, parks and recreation,community development,and public safety. 32 t _� CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) - C.Measurement-Focus,Basis of Accounting and Financial Statement Presentation(continued) The Debt Service Fund is used to account for the payment of interest and principal on all ', r general obligation bonds and other governmental long-term debt of the City.The primary source of revenue for debt service is local property taxes. The Debt Service Fund is considered a major fund for reporting purposes. The Capital Projects Fund is used to account for the expenditures of resources accumulated from sales tax revenues and the sale of bonds and related interest earnings for capital improvement projects. The Capital Projects Fund is considered a major fund for reporting purposes. The City's Business type activities consist of the following funds: The Enterprise Funds are used to account for the operations that provide water and sewer • - utility services to the public. The services are financed and operated in a manner similar to private business enterprises where the.intent of the governing body is that the costs (expenses including depreciation)of providing goods or services to the general public on a continuing basis will be financed or recovered primarily through user charges. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. All assets, liabilities, equities, revenues, expenses and transfers relating to the government's business activities are accounted for through proprietary funds. The measurement focus is on determination of net income, financial position and cash flows. Operating revenues include charges for services. Operating expenses include costs of materials, contracts, personnel and depreciation. In accordance with GASB Statement No. 20, the City has elected to follow GASB statements issued after November 30, 1989, rather than the Financial — Accounting Standards Board,in accounting for enterprise funds. • As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges between the City's water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include: 1) charges to customers or applicants for goods, services, or privileges provided 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenue.Likewise,general revenue includes all taxes. 33 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS • NOTE 1-SUMMARY OF SIGN IFICANT ACCOUNTING POLICIES(continued) C.Measurement Focus,Basis of Accounting and Financial Statement Presentation(continued) Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fimd's principal ongoing operations. The principal operating revenues of the City's Enterprise Fund are charges to customers for sales and services. Operating expenses for Enterprise Funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenue and expenses not meeting this definition are reported as nonoperating revenue and expense. i D. 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 in the governmental funds. Open encumbrances are reported as reservations of fund balances since they do not constitute expenditures or liabilities.Encumbrances outstanding at year- end are appropriately provided for in the subsequent year's budget. E. Cash and Cash Equivalents The City's cash and cash equivalents are considered to be cash on hand,demand deposits,and short- term investments with original maturities of three months or less from the date of acquisition. For the purpose of the statement of cash flows, the Proprietary Fund Types consider temporary investments with maturity of three months or less when purchased to be cash equivalents. The City pools cash resources of its various funds to facilitate the management of cash. Cash applicable to a particular fund is readily identifiable. The balance in the pooled cash accounts is available to meet current operating requirements. Cash in excess of current requirements is invested in various interest-bearing accounts and securities and disclosed as part of the City's investments. The City pools excess cash of the various individual funds to purchase these investments. These pooled investments are reported in the combined balance sheet as Investments in each fund based on each fimd's share of the pooled investments.Interest income is allocate:.o eacn respective individual fund,monthly,based on their respective share of investments in the pooled investments. F. Investments Investments consist of United States(US) Government Agency securities..The City reports all investments at fair value based on quoted market prices at year-end date. G. Receivables All receivables are reported at their gross value and, where appropriate, are reduced by the estimated portion that is expected to be uncollectible. Trade accounts receivable in excess of 180 days comprise the trade accounts receivable allowance for uncollectibles. 34 t CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) H. Due to and Due from Other Funds J Interfund receivables and payables arise from interfund transactions and are recorded by all funds affected in the period in which the transactions are executed. These receivables and payables are classified as "due from other funds" or "due to other funds" or"due from component unit/primary government" or "due to component unit/primary government" if the transactions are between the primary government and its component unit. Interfund receivables and payables which are not expected to be paid within 12 months are classified as loans from/loans to other funds, component units,or primary government. I. Inventories ones and Prepaid Items Inventory,which consists of fuel and auto parts for use in the City's vehicles,is stated at cost(first- in, first-out method). Expenditures are recognized as the fuel and auto parts are consumed rather when purchased. J. Restricted Assets Certain proceeds of the Enterprise Fund and Economic Development Corporation revenue bonds and —I certain resources set aside for their repayment are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Certain resources are also set aside for repayment of Development Authority bonds and are reported as restricted assets. K.Capital Assets Capital assets which include property, plant, equipment and infrastructure, are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of one year.Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not ad to the value of the asset or materially extend assets'lives are not capitalized. The City has elected to delay implementation of the requirements of GASB Statement No. 34 related to infrastructure (roads, sidewalks, etc.) assets acquired prior to October 1, 2002. The City has implemented the general provisions of GASB Statement No.34 and will complete the implementation of the retroactive provisions for infrastructure no later than September 30,2007. 35 • CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) K.Capital Assets(continued) Property, plant, and equipment are depreciated using the straight-line method over the following useful lives: • Estimated Asset Description Useful Life Buildings and improvements 20-45 Machinery and equipment 5-15 Infrastructure 40-50 • L. Compensated Absences It is the City's policy to permit employees to accumulate earned but unused vacation, sick and holiday pay benefits. Employees hired prior to October 1,2005 earn vacation leave at the rate of 15 days per year from 1 to 15 years of service,20 days per year for service of 16 to 19 years,and 25 days per year for service of 20 years or more. Employees, who are not classified and are hired after October 1, 2005, earn vacation at a rate of 10 days per year from 1-6 years of service, 15 days per year for 7-15 years of service and 20 days for over 16 years of service.Effective October 1,2005,employees are no longer able to carry over unused vacation from one year to the next with the exception of police department personnel in classified positions Employees are required to use their vacation in the year it is earned. Employees who are unable to use their vacation due to departmental scheduling or staffing problems, may,with the City Manager's approval,receive compensation for half of the remaining balance up to a maximum of forty(40)hours. City employees receive 11 paid holidays per year. Employees may be paid or may elect to receive compensatory time off for the holiday.Overtime is earned at one and one-half timesthe�Y y regular rate of pay.Employees may be paid or receive compensatory time.The maximum accrual for overtime is 160 hours,except for employees involved in public safety,who can accrue up to 320 hours. All sick leave benefits are accumulated and paid to employees upon separation from the City. Vacation, sick and holiday pay benefits are accrued when incurred in the government-wide and proprietary fund financial statements.A liability for these amounts is reported in governmental funds only if they have matured,for example,as a result of employee resignations and retirements. M. Estimates The preparation of financial statements,in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and thereported amounts of revenues and expenditures duringthere reporting period. Actual results Pan Po g could differ from those estimates. 36 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2—DEPOSITS(CASH)AND INVESTMENTS Authorization for Deposits and Investments The Texas Public Funds Investment Act (PFIA), as prescribed in Chapter 2256 of the Texas Government Code,regulates deposits and investment transactions of the City. In accordance with applicable statutes, the City has a depository contract with an area bank (depository)providing for interest rates to be earned on deposited funds and for banking charges the City incurs for banking services received. The City may place funds with the depository in interest and non-interest bearing accounts. State law provides that collateral pledged as security for bank deposits must have a market value of not less than the amount of the deposits and must consist of: (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal and interest on which are unconditionally guaranteed or insured by the State of Texas;and/or(4)obligations of states, agencies,counties,cities,and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a ratingof not less than A or its equivalent. City policy requires the collateralization level to be at least 102%of market value of principal and accrued interest. ' The Council has adopted a written investment policy regarding the investment of City funds as required by the Public Funds Investment Act (Chapter 2256, Texas Government Code). The investments of the City are in compliance with the City's investment policy. The City's investment policy is more restrictive than the PFIA requires. It is the City's policy to restrict its direct investments to obligations of the U.S. Government or U.S. Government Agencies, fully collateralized certificates of deposit, banker's acceptances,mutual funds, repurchase agreements and local government investment pools. The maximum maturity allowed is three years from date of purchase. The City's investment policy does not allow investments in collateralized mortgage obligations. . Deposit and Investment Amounts The City's cash and investments are classified as: cash and cash equivalents, investments, and restricted cash and investments. The cash and cash equivalents inrks'l cas.; on hand, deposits with financial institutions, and short-term investments,which have maturities at purchase of less than three months, consist mainly of certificates of deposit. The restricted cash and investments are assets restricted for specific use. The restricted cash and investments include cash on deposit with financial institutions. For better management of cash,the City pools the cash, based on the City's needs, into either bank/sweep accounts, or in longer-term investments in U.S.Government Securities. However, each fund's balance of cash and investments is maintained in the books of the City. The deposit and investment policies for the Pearland Economic Development Corporation, TIRZ Developments,and Development Authority of Pearland are substantially the same as the City. 37 Yt . CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2—DEPOSITS(CASH)AND INVESTMENTS(continued) The.following schedule shows the City's recorded cash and investments at year-end: Total Fair Value Primary Government Component Units Cash deposits $ 68,630,066 $ 19,404,278 FHLMC discount note 11,141,243 FNMA discount note 12,883,427 3,448,107 $ 92,654,736 $ 22,852,385 Quoted market prices are the basis of the fair value for US Treasury and Agency securities.The amount of increase or decrease in the fair value of investments during the current year is included in the City's investment income as follows: Interest income $ • 4,218,159 unrealized gain(loss)on temporary investments 193,596 Investment earnings $ 4,411,755 Investment Risks . Interest Rate Risk , ' At year-end,the City had the following investments subject to interest rate risk disclosure,under U.S.generally accepted accounting principles: Weighted Total Fair Average Maturity • Value (days) Temporary Investments FHLMC discount note $ 11,141,243 108 FNMA discount note 16,331,534 105 $ 27,472,777 Portfolio weighted average maturity 106 The City measures interest rate risk using the weighted average maturity method for the portfolio. The City's investment policy specifies a maximum weighted average maturity of 365 days or 12 months based on the stated maturity date for each investment in the portfolio. To the extent possible, the City attempts to match investments with anticipated cash flow requirements. The City does not directly invest in securities with a stated maturity date more than three years or 1,095 days from date of purchase. The settlement date is considered the date of purchase. 38 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2—DEPOSITS(CASH)AND INVESTMENTS(continued) Concentration of Credit Risk The City's investment policy does not address diversification requirements. However, as of September 30, 2006, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Total Fair Percentage of Investment Type Value Total Portfolio FHLMC discount note $ 11,141,243 41% FNMA discount note 16,331,534 59% Total $27,472,777 100% Credit Risk Federal-Home Loan Mortgage Corporation Discount Notes "and Federal National Mortgage Association Discount Notes(FNDN)agency notes were rated AAA by Standard&Poor's, AAA by Fitch Ratings,and Aaa by Moody's Investors Service. All credit ratings meet acceptable levels required by guidelines prescribed by both the PFIA and the City's investment policy. A public fund investment pool must be continuously rated no lower than AAA or AAAm or no lower than investment grade by at least one nationally recognized rating service and have a weighted average maturity no greater than 90 days. Investments with minimum required ratings do not qualify as authorized investments during the period the investment does not have the minimum rating. Restricted Assets The Enterprise Funds have restricted certain cash and investments for customer deposits,reserve and emergency expenditures, capital improvements, cash restricted for others, and revenue bond debt service. Because of certain bond covenants,the Enterprise Fund is required to maintain prescribed amounts of resources that can be used only to service outstanding debt. Some of the proceeds fror* debt or from funds received from acquisition of Municipal Utility Districts are restricted for use on capital projects. Primary Government Component Units Revenue bond debt service 540,552 $ 2,174,602 Customer deposits 1,511,380 Capital improvements 17,351,929 10,840,127 Total $ 19,403,861 $ 13,014,729 39 • CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3-RECEIVABLES Receivables at September 30,2006 consist of the following: Primary Government: Governmental Funds: Other Non Major Capital Projects Governmental General Fund Debt Service Fund Fund Funds Total Receivables Property taxes,including penalties and interest $ 1,224,251 $ 476,586 $ $ $ 1,700,837 Sales and other taxes 1,727,831 1,727 831 Fines and forfeitures 605,116 80,256 685,372 Interest 38,927 38,927 Other 453,211 659,841 88,787 1,701,839 Allowance for uncollectibles (8,221) (8,735) (16,956) $ 4,541,115 $ 467,851 $ 659,841 $ 169,043 $ 5,837,850 — Proprietary Funds: Water and Sewer • Fund Receivables Customer accounts $ 2,232,550 • Interest 834 Allowance for uncollectibles (448,711) $ 1,808,617 Component Units: Pearhnd Economic Development Corporation f Y' Receivables Sales and other taxes $ 857,173 Interest 7,652 Total $ 864,825 1- • ` 40 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3—RECEIVABLES(continued) Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. At the end of the current fiscal year,the various components of deferred revenue reported in the governmental funds were as follows: • Unavailable Unearned Delinquent property taxes receivable-general fund $ 402,829 $ Delinquent property taxes receivable-debt service fund 427,970 Municipal fines and forfeitures 587,943 Surety-public improvements-capital projects fund 530,000 Grants and revenues prior to meeting all eligibility requirements 120,528 Total Deferred Revenue for Governmental Funds $ 1,418,742 $ 650,528 Property Taxes • Property taxes are levied by October 1 in conformity with Subtitle E, Texas Property Tax Code. Taxes are due on receipt of the tax bill and are delinquent if not paid before February 1 of the year following the year in which imposed. On January 1 of each year,a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. The Central Appraisal District("CAD")of Brazoria County, Texas, establishes appraised values. Taxes are levied by the City Council based on the appraised values and operating needs of the City. The City contracts IY billing and collection of tax levies with the Brazoria County Tax Assessor-Collector. • • 41 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 4-CAPITAL ASSETS A summary of changes in the primary government's capital assets for the year ended September 30,2006, , follows: - Primary Government Balance Balance September 30, Reclassification/ September 30, 2005 Increases (Decreases) 2006 Governmental Activities: Capital assets not being depreciated: Land $ 2,717,453 S 997,321 $ S 3,714,774 Construction in progress 45,326,958 28,695,282 74,022,240 Total capital assets not being depreciated 48,044,411 29,692,603 77,737,014 Other capital assets: Infrastructure 38,596,399 10,803,793 • 49,400,192 Buildings and improvements 12,901,650 11,774,745 • 24,676,395 `3 Machinery and equipment 9,282,167 1,267,729 (758,198) 9,791,698 Furniture and fixtures Total other capital assets 60,780,216 23,846,267• (758,198) 83,868,285 • Less accumulated depreciation for: Infrastructure ' (4,014,681) (1,225,349) (5,240,030) Buildings and improvements (6,483,279) (356,966) . (6,840,245) Machinery and equipment (5,821,517) (1,322,625) 758,198 (6,385,944) Total accumulated depreciation (16,319,477) (2,904,940) 758,198 (18,466,219) Other capital assets,net 44,460,739 20,941,327 65,402,066 Totals $ 92,505,150 $ 50,633,930 $ $ 143,139,080 R Balance . • Balance September 30, • • Reclassification/ September 30, 2005 Increases (Decreases) 2006 Business-type Activities: Capital assets not being depreciated: Land and intangibles $ 367,962 S 45,738 $ 413,699 Construction in progress 19,424,558 2,445,527 (786,656) 21,083,429 Total capital assets not being depreciated 19,792,520 _ 2,491,265 (786,656) 21,497,128 Other capital assets: Water and sewer system 59,855,918 11,951,434 786,656 72,594,008 Buildings and improvements 22,610,028 522,758 23,132,786 Machinery and equipment 8,347,893 196,716 (12,148) 8,532,461 Total other capital assets 90,813,839 12,670,908 774,508 104,259,255 Less accumulated depreciation (21,760,109) (3,064,550) 12,148 (24,812,511) y Other capital assets,net 69,053,730 9,606,358 786,656 79,446,744 Totals $ 88,846,250 $ 12,097,623 $ $ 100,943,872 I 42 E, . CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS ' 9 NOTE 4-CAPITAL ASSETS(continued) Depreciation was charged to programs as follows: General government $ 713,830 Public safety 541,950 Public works 1,504,390 Community services 144,770 Total Governmental Activity $ 2,904,940 Water and sewer $ 3,064,550 Total Business-Type Activity $ 3,064,550 The City has active construction projects as of September'30, 2006. The projects include various improvements to streets, drainage and facilities as well as and water and sewer improvements.At year-end,the City's contractual commitments on projects were as follows: • ri Total In Remaining Project Description Progress Commitment l '' Drainage Improvement 22,866,245 2,699,679 Building Improvements 98,610 16,307,390 . Street Improvement 51,057,385 102,241,857 Water and sewer Improvements 21,083,429 64,029,657 Totals $ 95,105,669 $ 185,278,583 43 F _ CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT A. General Obligation Bonds and Certificates of Obligation The City issues general obligation bonds and certificates of obligation and, upon annexation and dissolution of Municipal Utility Districts, assumes unlimited tax and revenue obligations. The assumed obligations were used to acquire and construct major capital facilities. General obligation bonds,certificates of obligation,and assumed obligations from dissolved and annexed areas are for both governmental and business-type activities.The bonds are reported in the Proprietary Funds only if they are expected to be repaid from proprietary revenues. The general long-term bonds, certificates of obligation and assumed obligations are paid through the Debt Service Fund from tax revenues. The following is a summary of changes in the City's total governmental long-term liabilities for the year ended September 30, 2006. In general, the City uses the General and Debt Service funds to liquidate governmental long-term liabilities. • Amounts Due Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Governmental Activities: Bonds payable: General obligation bonds $ 60,175,000 $ 32,165,000 $ (2,035,000) $ 90,305,000 $ 2,085,000 Certificates of obligation 72,390,000 9,700,000• (815,000) 81,275,000 490,000 Annexed utility district bonds 8,320,000 (8,320,000) Deferred amount for issuance premium 1,458,694 93,631 (63,361) 1,488,964 Less:deferred amounts on refunding (789,621) (111,623) 46,686 (854,558) Less:bond issuance costs (663,459) (371,840) • 38,251 (997,048) Total bonds payable 132,570,614 49,795,168 (11,148,424) 171,217,358 2,575,000 • Obligations under capital leases 395,659 92,043 (178,760) 308,942 184,880 Compensated absences 3,314,699 (215,557) 3;099,142. 398,063 Total Governmental Activities $ 136,280,972 $ 49,887,211 $ (11,542,741) $ 174,625,442 $ 3,157,943 I � 1 ` Long-term liabilities applicable to the City's governmental activities are not due and payable in the current period, and accordingly, are not reported as fund liabilities in the governmental funds. Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. The full amount estimated to be required for debt service on general obligation debt is provided by(1) the debt service portion of the tax levy; (2) interest earned in the Debt Service Fund; and (3) operating transfers from both the General Fund and the Water and Sewer Enterprise Fund.Transfers from the Enterprise Funds are approved at the discretion of City Council and are not intended to service a specific bond series. 44 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS h NOTE 5-LONG-TERM DEBT(continued) A summary of the terms of general obligation bonds and certificates of obligation,as of September 30,2006, follows: - Interest Debt Series Original Issue Matures Rate(%) • Outstanding General Obligation Bonds General Obligation Bonds,Series 2001 1,900,000 $ 920,000 Permanent Improvement and Refunding Bonds,Series 2000 10,830,000 2009 4.80-4.90 5,665,000 Permanent Improvement and Refunding Bonds,Series 2003 15,000,000 2028 4.00-6.00 14,540,000 Permanent Improvement and Refunding Bonds,Series 2005 37,015,000 2029 3.25-5.00 37,015,000 Permanent Improvement and Refunding Bonds,Series 2006 32,165,000 2029 4.00-5.00 32,165,000 Total General Obligation Bonds $ 90,305,000 Certificates of Obligation Certificates of Obligation,Series 2001 11,650,000 2022 5.00-6.00 $ 10,020,000 Certificates of Obligation,Series 2002 25,000,000 2027 5.10-5.08 22,025,000 • Certificates of Obligation,Series 2003 25,000,000 2023 3.00-4.50 18,630,000 Certificates of Obligation,Series 2004 21,000,000 2028 4.00-5.25 20,900,000 Certificates of Obligation,Series 2006 9,700,000 2029 3.65-4.68 9,700,000 Total Certificates of Obligation $ 81,275,000 Prior Year Refunding In prior years, the City defeased certain general obligation and other bonds by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payments on the refunded bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the City's financial statements. At September 30, 2006, $17.2 million of previously refunded bonds outstanding were considered defeased. Current Year Refunding of Long-Term Debt The City issued $8,165,000 of genera/obligation refunding bonds to provide resources to purchase U.S. Government State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of$8,001,623 of general obligation bonds. As a result, the refunded bonds of$7,890,000 are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net assets. The reacquisition price exceeded the net carrying amount of the old debt by$111,623. This amount is being netted against the new debt and amortized over the remaining life of the refunded debt,which is shorter than the life of the new debt issued. This advance refunding was undertaken to increase total debt service payments over the next 14 years by$3,960,438 and resulted in an economic gain of$9,121. 45 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) Capital Lease Obligations The City has entered into certain capital lease agreements in order to purchase public safety and management information systems equipment and other construction related equipment. The capital lease obligations are paid out of the General and Debt Service Funds. Following is a summary of future lease payments due on this equipment Lease Fiscal Year Obligations 2007 $ 184,880 2008 118,775 2009 15,993 Total 319,648 Less interest portion (10,706) Obligations under Capital Leases $ 308,942 • • .l . 46 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30,2006 are as follows: Governmental Activities Fiscal Year General Obligation Certificates of Obligation Ending Principal Interest Principal Interest 2007 $ 2,085,000 $ 4,524,657 $ 490,000 $ 3,864,361 2008 2,185,000 4,040,961 540,000 3,771,183 2009 2,855,000 3,924,160 1,560,000 3,724,802 • 2010 2,195,000 3,815,399 2,790,000 3,611,780 2011 2,375,000 3,724,521 3,010,000 3,463,983 2012 2,530,000 3,624,636 3,340,000 3,308,771 . 2013 2,635,000 3,517,108 3,500,000 3,148,327 2014 .2,750,000 3,402,561 3,655,000 2,989,991 2015 2,875,000 3,274,824 3,820,000 2,823,418 2016 3,015,000 3,135,033 4,000,000 2,648,723 2017 2,050,000 3,022,305 4,490,000 2,461,173 2018 2,240,000 2,935,330 4,605,000 2,260,313 2019 2,520,000 2,835,499 4,960,000 2,046,674 2020 2,715,000 2,718,046 5,120,000 1,814,293 2021 2,860,000 2,588,202 5,360,000 1,564,609 2022 3,015,000 2,450,797 5,605,000 . 1,301,499 2023 4,005,000 2,286,212 5,040,000 1,046,474. 2024 5,805,000 2,049,662 3,690,000 833,373 2025 6,115,000 1,756,950 3,835,000 650,456 2026 6,435,000 1,448,762 4,100,000 462,622 2027 6,770,000 1,135,256 4,280,000 263,244 _ 2028 8,960,000 763,538 2,635,000 99,825 2029 11,315,000 273,650 850,r':,0 19,125 r $ 90,305,000 $ 63,248,069 $ 81,275,000 $ 48,179,019 47 , ' CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS • NOTE 5-LONG-TERM DEBT(continued) B. Enterprise Fund Debt The following is a summary of changes in the City's total business-type long-term liabilities for the year } ended September 30,2006. • Amounts Due c Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Business-type Activities: Bonds payable: Certificates of obligation $ 15,880,000 $ $ (880,000) S 15,000,000 S 915,000 Water and sewer revenue bonds 32,480,000 13,845,000 (6,155,000) 40,170,000 1,125,000 Premium on bond issuance 321,547 321,547 Deferred issuance costs (252,204) (596,956) (849,160) 48,107,7% 13,569,591 (7,035,000) 54,642,387 2,040,000 a_ Other liabilities: Compensated absences 415,316 52,623 (49,296) 418,643 60,030 Total Business-type Activities $ 48,523,112 $ 13,622,214 $ (7,084,296) $ 55,061,030 $ 2,100,030 • A summary of the terms of certificates of obligation and revenue bonds recorded in the Enterprise Funds as of September 30,2006,is as follows: Interest Debt • Series Original Issue Matures Rate(%) Outstanding Water and Wastewater Fund Water and Sewer System Revenue Bonds,Series 1996 B 8,870,000 2008 4.20-4.40 $ 1,010,000 Water and Sewer System Adjustable Rate Revenue Bonds,Series 1999(1) 8,000,000 2020 3.75 6,980,000 Water and Sewer System Revenue Bonds,Series 2001 10,000,000 2023 4.37-6.25 9,500,000 Water and Sewer System Revenue Bonds,Series 2003 9,500,000 2025 4.00-6.00 8,835,000 Certificates of Obligation,Series 1998 17,100,000 2018 3.10-3.80 15,000,000 j L V.aker and Sewer System Revenue and Refunding Bonds,Series 2006 13,845,000 2031 3.74-4.82 13,845,000 Total Utility System Fund $ 55,170,000 • 48 f'� CITY PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) The annual requirements to amortize governmental activity revenue bonds and certificates of obligation outstanding at September 30,2006 are as follows: Fiscal Year Revenue Bonds Certificates of Obligation Ending Principal Interest Principal Interest 2007 $ 1,125,000 S 1,828,614 $ 915,000 $ 521,073 2008 1,180,000 1,783,380 945,000 492,006 , , 2009 1,245,000 1,729,919 980,000 461,198 2010 1,305,000 1,669,361 1,015,000 428,271 " ,, 2011 1,370,000 1,611,111 1,050,000 393,158 2012 1,435,000 1,543,986 1,090,000. 355,698 2013 1,500,000 1,474,224 1,125,000 316,100 2014 1,570,000 1,404,811 1,170,000 274,498 2015 1,640,000 1,337,811 1,210,000 230,760 2016 1,715,000 . 1,267,474 1,250,000 184,938 2017 1,895,000 1,193,461 2,090,000 121,790 2018 1,975,000 1,117,341 2,160,000 41,040 2019 2,055,000 1,037,494 • 2020 2,140,000 953,344 i• 2021 2,225,000 864;994 2022 2,335,000 757,081 2023 2,445,000 643,781 2024 1,600,000 529,869 2025 1,600,000 461,494 ;-, 2026 1,150,000 393,119 2027 1,205,000 338,494 2028 1,265,000 278,244 2029 1,330,000 214,994 , 2030 1,395,000 146,831 2031 1,470,000 75,338 $ 40,170,000 $ 24,656,569 $ 15,000,000 $ 3,820,528 49• � f CITY PEARLAND,TEXAS 1 ' NOTES TO FINANCIAL STATEMENTS L. NOTE 5-LONG-TERM DEBT(continued) C. Component Unit Long-Term Debt The following is a summary of the long-term debt transactions of the Pearland Economic Development Corporation and the Development Authority of Pearland for the year ended September 30,2006: Amounts Due Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Pearland Economic Development q -.„ Corporation Sales tax revenue bonds S 10,590,000 $ 10,235,000 $ (345,000) $ 20,480,000 $ 400,000 Deferred amount for issuance premium 155,448 - (7,212) 148,236 Deferred loss on refunding (189,626) - 16,418 (173,208) Deferred issuance costs (256,439) (102,808) 13,138 (346,109) _" Compensated absences 14,540 44,500 (20,842) 38,198 5,000 Development Authority of Pearland +— Tax Increment Revenue Bonds 13,995,000 9,775,000 (1,535,000) 22,235,000 1,555,000 Deferred issuance costs (927,778) (695,027) 32,702 (1,590,103) . Deferred amount for issuance discount (86,013) 3,727 . (82,286) $ 23,381,145 $ 19,170,652. $ (1,842,069) $ 40,709,728 $ 1,960,000 b A summary of the terms of the revenue bonds recorded as long-term liabilities in the Pearland Economic Development Corporation and Development AuthorAty of Pearland as of September 30, 2006 are as follows: Interest Debt Series Original Issue Matures Rate(%) Outstanding Pearland Economic Development Corporation Sales Tax Revenue Bonds,Series 2005 10,590,000 2026 2.30-4.42 $ 10,245,000 i ' Sales Tax Revenue ioLds,Seri..,,.u06 10,235,000 2030 3.66-4.75 10,235,000 1 Development Authority of Pearland Tax Increment Revenue Bonds,Series 2005 13,995,000 2028 2.50-5.00 13,180,000 Tax Increment Revenue Bonds,Series 2006 9,775,000 2028 3.50-4.75 9,055,000 Total Component Unit Long-Term Debt $ 42,715,000 s 50 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) The annual requirements to amortize component unit revenue bonds outstanding at September 30, 2006 are as follows: Revenue Bonds Pearland Economic Fiscal Year Development Corporation Development Authority of Pearland Ending Principal Interest Principal Interest 2007 $ 400,000 $ 1,003,562 $ 1,555,000 $ 1,038,268 2008 525,000 888,369 635,000 984,893 _ 2009 545,000 870,144 645,000 961,964 2010 565,000 851,669 670,000 937,214 2011 585,000 831,506 695,000 ' 910,277 2012 610,000 809,256 725,000 881,262 2013 635,000 784,906 755,000 849,974 2014 660,000 757,406 790,000 816,346 2015 690,000 728,856 825,000 780,289 2016 720,000 698,956 865,000 742,194 2017 " 760,000 664,756 905,000 702,654 2018 795,000 628,669 945,000 659,841 2019 835,000 590,575 975,000 614,541 2020 875,000 556,125 1,025,000 567,741 2021 910,000 519,625 1,070,000 518,131 2022 950,000 481,075 1,125,000 466,756 2023 995,000 439,200 1,180,000 411,350 2024 1,040,000 395,138 1,235,000 353,225 - 2025 1,090,000 348,538 1,300,000 289,956 2026 1,140,000 299,325 1,365,000 223,351 ,,` 2027 1,190,000 247,838 1,440,000 152,701 2028 1,255,000 188,338 1,510,000 78,176 2029 1,320,000 128,725 2030 1,390,000 66,025 $ 20,480,000 $ 13,778,581 $ 22,235,000 $ 13,941,104 F. Legal Compliance Long-term debt assumed by the City upon dissolution of annexed municipal utility district in fiscal -- year 2006 has been recorded as part of the City's long-term debt.A portion of the assumed debt is related to assets recorded in the Water and Sewer Fund. Even though the debt is related to assets recorded in the Water and Sewer Fund, the debt is considered general obligation debt based on _-_ Texas law.The annexed debt was defeased during fiscal year 2006. _ 51 CITY PEARLAND,TEXAS 11 NOTES TO FINANCIAL STATEMENTS NOTE 6—FUND EQUITY/NET ASSETS The City records fund balance reserves on the fund level to indicate that a portion of the fund balance is legally restricted for a specific future use or to indicate that a portion of the fund balance is not available for expenditures NOTE 7-INTERFUND TRANSACTIONS a w; A summary of interfund transfers,the purpose of which is to cover operational expenses/expenditures,for the year ended September 30,2006,is as follows: Transfers Out Transfers In Amounts Purpose Transfer for engineering costs and other Capital Projects Fund General Fund S 589,828 capital project costs General Fund Capital Projects Fund 2,589,500 Transfer funds for capital projects costs • General Fund Debt Service Fund 958,347 'Debt service payments Transfer of funds to park and recreation General Fund Non Major Governmental Funds 314,520 activities Annual scheduled transfer of funds for water General Fund Water and Sewer Fund 159,000 and sewer services Water and Sewer Fund General Fund 979,161 Transfer funds for administrative costs Water and Sewer Fund Debt Service Fund 333,562 Debt service payments Non Major Governmental Fund General Fund 86,666 Transfer funds for administrative costs S 6,010,584 • NOTE 8-DEFERRED COMPENSATION PLAN The City maintains, for its employees, a tax-deferred compensation plan meeting the requirements of Internal Revenue Code Section 457.The pia was estaL.:sned in the 1995 fiscal year by City Ordinance, and Nationwide Retirement Solutions and SRC Retirement Corporation were appointed as plan administrators. The deferred compensation is not available to employees until termination, retirement, death, or unforeseen emergency. The plan's trust arrangements are established to protect deferred compensation amounts of employees under the plan from any other use other than intended under the plan (eventual payment to employees deferring the compensation) in accordance with federal tax laws. a y Amounts of compensation deferred by employees under plan provisions are disbursed bi-weekly by the City to a third party administrator.The third party administrator handles all funds in the plan and makes investment decisions and disburses funds to employees in accordance with plan provisions. 52 CITY PEARLAND,TEXAS NOTES TO FINANCL4L STATEMENTS • NOTE 9-EMPLOYEE RETIREMENT SYSTEM Plan Description and Provisions The City provides pension benefits for all of its full-time employees through a nontraditional, joint contributory, defined benefit plan in the state-wide Texas Municipal Retirement System ("TMRS"), one of 801 currently administered by TMRS,an agent multiple-employer public employee retirement system. Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City- financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee,with interest,prior to establishment of the plan.Monetary credits for service since the plan began are a percent (100%, 150%, or 200%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began,would be • the total monetary credits and employee contributions accumulated, with interest, if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of his Mary in the last three years that are one year before the effective date.At retirement,the benefit is calculated as if the sum of the employee's accumulated contributions, with interest, and the employer-financed monetary credits, with interest, were used to purchase an annuity. The plan provisions are adopted by the City Council of the City,within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes.Plan provisions for the City were as follows: Deposit Rate: 7% •. Matching Ratio(City to Employee): 2 to 1 A member is vested after 5 years Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. Contributia.as Under the state law governing TMRS,the Actuary annually determines the City's contribution rate.This rate consists of the normal cost contribution rate and the prior service contribution rate,both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to City matching percent,which are the obligation of the City as of an employee's retirement date,not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time his retirement becomes effective.The prior service contribution rate amortizes the unfunded (over funded) actuarial liability(asset) over the remainder of the plan's 25-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate.Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance to budget for it, there is a one-year delay between the actuarial valuation that is the basis for the rate and the calendar year when the rate goes into effect 53 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 9-EMPLOYEE RETIREMENT SYSTEM(continued) The City's total payroll in fiscal year 2006 was $17.1 million and the City's contributions were based on a payroll of$17.0 million. Contributions made by employees totaled $1.2 million, and the City made contributions of$1.7 million during the fiscal year ended September 30,2006. Three year trend information is presented below: 2006 2005 2004 Annual Pension Cost(APC) $ 1,730,700 $ 1,480,301 $ 1,371,452 Percentage of APC Contributed 100% 100% 100% NPO at the End of Period $ - $ $ • Because the actuary determines contribution rates on an annual basis and the City pays the calculated rate each month,the City will always have a net pension obligation(NPO)of zero at the beginning and end of the period,and the annually required contributions(ARC)will always:equal contributions made. • A schedule of funding progress for TMRS for the three most recent actuarial valuations may be found s in the required supplementary information section of the City's Annual Financial Report. All assumptions for the December 31, 2005 valuations are contained in the 2005 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153,Austin,Texas 78714-9153.The following is a summary of the actuarial assumptions: Actuarial Cost Method Unit Credit • Amortization Method Level Percent of Payroll Remaining Amortization Period 25 Years-Open Period Asset Valuation Method Amortized Cost Actuarial Assumptions: Investment Rate of Return 7% Projected Salary Increases None Includes Inflation At 3.5% • Cost-of-Living Adjustments None - — • NOTE 10-COMMITMENTS AND CONTINGENCIES Litigation and Other Contingencies The City was involved in various lawsuits and arbitration proceedings at September 30,2006.The City and its legal counsel believe that any amounts,which the City might ultimately be required to pay,will - not exceed underlying insurance coverage. , i 54 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 10-COMMITMENTS AND CONTINGENCIES(continued) Arbitrage Rebate In accordance with the provisions of the Internal Revenue Code, sections 103, 103A, and 148, as ;- amended,a governmental debt issuance must qualify and maintain tax-exempt status by satisfying certain arbitrage requirements contained in these provisions.As part of the requirements,certain amounts earned on the non-purpose investment of debt issuance proceeds, in excess of the yield on an issue, earned as arbitrage, will be required to be paid to the U.S. Treasury.As part of this process,the City annually determines potential arbitrage liabilities on its debt issues, on component unit debt issues and on debt issues assumed by the City from various Municipal Utility Districts.As of September 30,2006,the City does not have any arbitrage liabilities. Reimbursement due to Developers • In 2004, the City, along with the Reinvestment Zone Number Two (the Zone), and the Development Authority of Pearland (the Authority), component units of the City, entered into an agreement with a developer to reimburse the developer all or a portion of the project;costs to implement the Shadow Creek Ranch Development TIRZ (TIRZ Plan). As projects implementing the TIRZ Plan are completed, the Zone Board may recommend to the City that the Authority reimburse developers on behalf of the Zone and the City.The Zone Board will forward to the City and the Authority all of the • necessary and required documentation supporting the requested reimbursement and a determination of the exact amount requested for reimbursement,including a calculation of the amount of interest to be reimbursed on funds advanced for the projects. In addition all monies available in the Tax Increment Fund shall be transferred to the escrow agent no less than once per year and no later than the fifteenth day of each August, subject to the retention by the City of: (1) an amount equal to the City's administrative costs connected with the Zone and the TIRZ Plan,as provided in the TIRZ plan (36%of the City's Tax Increment,but not more than$0.255,in years four through eight,and 64%of the City's Tax Increment,but not more than$0.44,in years nine through 30)shall be retained by the City; (2) amounts required to be maintained in the Alvin ISD Suspense Account; (3) an amount sufficient to pay reasonable current and anticipated administrative and operating costs of the Zone, as • determine by the Zone Board. NOTE 11-RISK MANAGEMENT I The City is exposed to various risks of loss related to torts:theft of,damage to,and destruction of assets; errors and omissions;injuries to employees;and natural disasters.The City's risk management program mainly encompasses obtaining property and liability insurance through Texas Municipal League's Intergovernmental Risk-Pool(TML-1RP),and through commercial insurance carriers.The participation of the City in TML-IRP is limited to payment of premiums. The City has not had any significant reduction in insurance coverage, and the amounts of insurance settlements have not exceeded insurance coverage for any of the last three years. The City also provides Workers' Compensation insurance on its employees through TML-Workers' - Compensation Fund. Workers' Compensation premiums are subject to change when audited by TML- Workers'Compensation Fund.At year-end September 30,2006,the City believed the amounts paid on Workers'Compensation would not change significantly from the amounts recorded. . 55 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 12-SUBSEQUENT EVENTS Surface Water—Interim Water Supply Agreement with Gulf Coast Water Authority On November 6,2006, the City of Pearland entered into an interim water supply agreement with the Gulf Coast Water Authority. The contract reserves the right for the City of Pearland to purchase up to 14.3 million GPD of the Brazos River surface water at a mutually agreed upon delivery point. The Authority has entered into a contract with the Chocolate Bayou Water Company to purchase all of the real and personal property, including water rights. The City of Pearland agrees to pay the Authority its pro-rate share(40.19%)of the debt($27,805,000 principal amount)that the Authority will issue to purchase these assets. In two years, the City of Pearland can either prepay it's obligation with respect to the outstanding principal amount of the bonds,through the issuance of City debt or the City can continue to pay the Authority it's pro-rata share of the annual debt service. Development Authority of Pearland Issuance Debt L ; On October 2, 2006,the Development Authority of Pearland approved the issuance of$9,970,000 in Tax Increment Contract Revenue Bonds,Series 2006. The proceeds of the bonds will be used to pay eligible project costs pursuant to the Plan. The City and the TIRZ #2 Board have approved total reimbursements to the Developer of approximately $64.9 million. Pursuant to such reimbursement approval, the Developer has been reimbursed $31.4 million, which includes $9,104,000 from this issuance and $2.2 million in a cash contribution in November of 2006. The Plan, as amended, f estimates that throughout the life of the TIRZ, the Authority will fmance total infrastructure project costs of approximately$160,750,000 Water/Sewer Rate Increase • The City of Pearland increased water/sewer revenues 25% through a rate increase effective with October 1,2006 consumption. The rate increase will generate an additional$3.0 million in revenues. ' The increase is necessary to fund needed capital improvement projects, mainly the purchase of 10 MGD capacity in the expansion of the City of Houston Southeast Water Purification Plant and to meet bond coverage requirements. This is the first change in water and sewer rates for at least six years. Monthly Rates are as follows: • Previous Current Water—Residential/Commereial Single Unit Base—2000 gallons $10.89 $11.98 Volume per 1000—over 2,000 gallons $2.02 $2.73 Water—Residential/Commercial Multi-Unit Base—2000 gallons $9.90 $10.89 Volume per 1000—over 2,000 gallons $1.82 $2.71 Sewer Base—2000 gallons $11.39 $12.53 Volume per 1000—over 2,000 gallons $1.46 $2.06 • • 56 APPENDIX C - FORM OF BOND COUNSEL OPINION A N D R E W S 600 Travis.Suite 4200 ATTORNEYS Houston.Texas 77002 K U RT H LLP 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com ,2007 WE HAVE ACTED as Bond Counsel for the "City"), Cityof Pearland, Texas (the C>t in tY'), connection with an issue of certificates of obligation(the"Certificates")described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, dated March 1, 2007, in the aggregate principal amount of$23,250,000, maturing on March 1 in each year from 2008 through 2032, inclusive. The Certificates are issuable in fully registered form only, in denominations of$5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and.control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1 of this issue. WE HAVE NOT BEEN REQUESTED to examine,and have not investigated or verified, -- any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any. responsibility •r`h rest to the fmancial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION,it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the. Certificates constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, HOU:2664499.1 Austin Beijing Dallas Houston London Los Angeles New York The Woodlands Washington, DC • ,2007 Page 2 moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law;and • (2) The Certificates are payable, both as to principal and interest, from, and secured by,the proceeds of a continuing,direct annual ad valorem tax,levied within the limits prescribed by law, against taxable property within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates;and (3) The Certificates are further secured by a limited and subordinate pledge of the net revenues of the waterworks and sanitary sewer system of the City. The revenues to be derived from the operation of the City's water and sewer•system after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed$10,000, are pledged to the payment of the principal of and interest on the Certificates, to the extent that ad valorem taxes may ever be insufficient or unavailable for said purpose; provided, however, that such pledge is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net 4 Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the.Certificates. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under i existing law and is not subject to the alternative minimum tax on individuals or, except as t _h_P' ?after described, corporations. The opinion set forth_inthe-first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the"Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Certificates in gross income for federal income tax purposes to be retroactive to the date'of issuance of the Certificates. The Code and the existing regulations,rulings and court decisions thereunder,upon which the foregoing opinions of Bond.Counsel are based, are subject to change,which could prospectively or retroactively result in the inclusion of the interest on the IS -Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate HOU2664499.1 ,2007 Page 3 investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT))will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposedthe by Code i s computed. Purch asers p of Certificates are directed to the discussion entitled"TAX EXEMPTION set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on,or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations,such as the Certificates, may result in collateral federal income tax consequences to, among others, • financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. 7867/7866 • • • P HOU:2664499.1 r OFFICIAL STATEMENT DATED FEBRUARY 15,2007 i , In the opinion of Bond Counsel,interest on the Certificates is excludable from gross income for federal income tax purposes under existing law,subject to the matters described under 'Tax Exemption" herein, and is not includable in the alternative minimum taxable income of individuals. See 'TAX EXEMPTION"for a discussion of the opinion of Bond Counsel,including the alternative minimum tax on corporations. NEW ISSUE: BOOK-ENTRY-ONLY RATINGS: Moody's Investors Service,Inc.. ."Aaa„ Standard&Poor's Ratings Services "AAA" $23,250,000 CITY OF PEARLAND, TEXAS • (A political subdivision of the State of Texas located within Brazoria and Harris Counties) CERTIFICATES OF OBLIGATION,SERIES 2007 1 Dated: March 1,2007 Due: March 1,as shown below Principal of and interest on the$23,250,000 City of Pearland,Texas, Certificates of Obligation,Series 2007(the"Certificates")are payable by Wells Fargo Bank,N.A.,Houston,Texas,the paying agent/registrar(the'Paying Agent/Registrar"). The Certificates are initially registered and delivered only to Cede&Co.,the nominee of The Depository Trust Company("DTC")pursuant to the Book-Entry-Only System described herein. Beneficial ownership j of the Certificates may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede&Co.,which will make distribution of the amounts so paid to the beneficial owners of the Certificates. See'THE CERTIFICATES-Book-Entry-Only System"herein. Interest on the Certificates will accrue from March 1,2007 and is payable on March 1 and September 1 of each year,commencing September 1,2007,to the ' registered owners(initially Cede&Co.)appearing i interest payment date(the"Record Date"). See'TE CERTIFICATESon the h ks rif rheo Paying Agent/Registrar on the 15th day of the month preceding each -- Description." The Certificates will be authorized by an ordinance(the "Ordinance")to be approved by City Council on February 26,2007. The Certificates, when issued, will constitute valid and binding obligations of the City of Pearland,Texas(the"City")and will be payable from the proceeds of an annual ad valorem tax,levied within the limits prescribed by law,against all taxable property within the City and will be further payable from a limited junior and 1 ! subordinate pledge of the Net Revenues (as defined in the Ordinance)of the City's waterworks and sewer system(the "System") in an amount not to exceed$10,000. See"THE CERTIFICATES-Source of Payment." Proceeds of the sale of the Certificates will be used for(i)the design and construction of a multi-purpose municipal facility, ir police facility,(iii)renovations to and existing community center,(iv)renovations to two existingfire stations and(v) amen)t r professional services renovations to an existing rendered in connection with these projects. Proceeds from the sale of the Certificates will also be used to pay the costs of issuance of the Certificates. See 'THE CERTIFICATES-Use of Proceeds." Payment of the principal of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the Obligations. s PRINCIPAL AMOUNTS,MATURITIES,INTEREST RATES AND PRICES tl r»baC . $10,535,000 Serial Bands .. Initial CUSIP Initial CUSIP Maturity Principal Interest Reoffering Nos. Maturity Principal Interest Reoffering Nos. (March 1) Amount Rate Yield(a) 704862(b) (March 1) Amount Rate Yield(a) 704862(b) 2008 $ 50,000 5.00% 3.60% YBI 2017 $ 450,000 5.25% 3.87% YL9 2009 50,000 5.00 3.62 YC9 2018(c) 1,005,000 5.25 3.90 YM7 2010 100,000 5.25 3.65 YD7 2019(c) 1,060,000 5.25 3.92 YN5 2011 150,000 5.25 3.68 YE5 2020(c) 1,115,000 5.25 3.94 YPO 2012 200,000 5.25 3.70 YF2 2021(c) 1,170,000 5.25 3.96 YQ8 [ 2013 250,000 5.25 3.73 YGO 2022(c) 1,230,000 5.25 3.97 YR6 2014 300,000 5.25 3.75 YH8 2023(c) 1,295,000 5.25 4.00 2015 350,000 5.25 3.79 YJ4 2024(c) 1,360,000 5.25 4.01 YT2 2016 400,000 5.25 3.83 YKI S12,715,000 Term Bonds $2,930,000 Term Bond Due March I,2026(aXb)(c)(d)Interest Rate 5.25%(Price$109,995)CUSIP No.704883YU9 $6,525,000 Term Bond Due March 1,2030(a)(b)(c)(d)Interest Rate 3.25%(Price$83.109)CUSIP No.704883YV7 - $3,260,000 Term Bond Due March 1,2032(a)(b)(cXd)Interest Rate 4.25%(Price$97.002)CUSIP No.704883YW5 (a) The initial yields will be established by and are the sole responsibility of the Underwriters,and may subsequently be changed. (b) CUSIP numbers have been assigned to the Certificates by Standard and Poor's CUSIP Service Bureau,A Division of the McGraw-Hill Companies, Inc., and are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor, nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Certificates maturing on March 1,2018 and thereafter,are subject to redemption,at the option of the City,at par value thereof plus accrued interest on March 1,2018,or any date thereafter. See'THE CERTIFICATES •Redemption Provisions." _ (d) Subject to mandatory redemption by lot or other customary random selection on March 1 in the years and in the amounts set forth herein under the caption'THE CERTIFICATES-Redemption Provisions." The Certificates are offered when,as and if issued, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Andrews Kurth LLP,Houston,Texas,Bond Counsel for the City,as to the validity of the issuance of the Certificates under the Constitution and laws of the State of Texas. See"LEGAL MATTERS." Delivery of the Certificates is expected to be on or about March 22,2007. No dealer,broker, salesman or other person has been authorized by the City to give any information or to make any representation other than those contained in this Official Statement,and,if given or made,such other information or representations must not be relied upon as having been authorized by the City. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. This Official Statement contains,in part,estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice,and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances,create any implication that there has been no change in the condition of the City or other matters described herein since the date hereof. - TABLE OF CONTENTS INTRODUCTORY STATEMENT»... ..3 TAX DATA . ».» 17 , SALE AND DISTRIBUTION OF THE General 17 CERTIFICATES..»..-.».....-.-.....-..» --....-...3 Property Tax Code and County-Wide Sale of the Certificates 3 Appraisal District 17 Prices and Marketability 3 Tax Rate Limitations 18 . Securities Laws 3 Property Subject to Taxation by the City 18 FINANCIAL GUARANTY INSURANCE._... 3 Tax Increment Reinvestment Zone 19 Payment Pursuant to Financial Guaranty Notice and Hearing Procedures 20 Insurance Policy 3 Levy and Collection of Taxes 20 Ambac Assurance Corporation 4 Collection of Delinquent Taxes 20 • Available Information 5 Historical Analysis of Tax Collection 21 Incorporation of Certain Documents by Analysis of Tax Base 22 Reference 5 Estimated Overlapping Taxes 23 MUNICIPAL BOND RATINGS»»......................»_ 5 Sales Tax 23 OFFICIAL STATEMENT SUMMARY 6 SELECTED FINANCIAL DATA ..»»».......24 INTRODUCTION -»»--.. 8 Historical Operations of the City's THE CERTIFICATES...........».»....... ...»»_8 General Fund 24 Description 8 General Fund and Debt Service Fund Redemption Provisions 8 Balance for the Past Five Fiscal Notice of Redemption 9 Years 25 Book-Entry-Only System 9 Pension Fund 25 Successor Paying Agent/Registrar 11 Financial Statements 25 Source of Payment 11 ADMINISTRATION OF THE CITY--.— Authorization of the Certificates 12 Mayor and City Council 25 '.'se of Proceeds 12 Administration 26 Future Debt 12 Consultants 26 Legal Investments in Texas 12 LEGAL MATTERS- .».»».».»»26 Remedies in the Event of Default 12 Legal Opinions 26 INVESTMENT AUTHORITY AND No-Litigation Certificate 27 INVESTMENT OBJECTIVES OF THE No Material Adverse Change 27 CITY»»....».»»..»..._......»..........»...........»....»..».13 TAX EXEMPTION.....»............_............_.....».......»27 Legal Investments 13 TAX TREATMENT OF ORIGINAL ISSUE a Investment Policies 14 DISCOUNT AND PREMIUM Current Investments 14 CERTIFICATES..».....................»».».».28 Additional Provisions 14 Discount Certificates 28 CITY TAX DEBT—.------15 Premium Certificates 29 Tax Supported Debt Statement 15 CONTINUING DISCLOSURE OF Bonded Indebtedness Payable from Ad INFORMATION .......»...» ..»».»30 • Valorem Taxes 15 Annual Reports 30 Tax Supported Debt Service Schedule 16 Material Event Notices 30 Estimated Overlapping Debt 17 Availability of Information From Debt Ratios 17 NRMSIRs and SID 30 i Limitations and Amendments 31 Audited Financial Report of the City 31 APPENDIX A— Economic and Demographic Characteristics Compliance With Prior Undertakings 31 APPENDIX B— Audited Financial Statements of the City GENERAL CONSIDERATIONS......„.._.,..„,,,,, 32 APPENDIX C— Form of Legal Opinion Sources and Compilation of Information 32 APPENDIX D— Specimen of Financial Guaranty Certification as to Official Statement 32 Insurance Policy Updating of Official Statement 32 • • • • • • • • • • • • i1 ii $23,250,000 CITY OF PEARLAND,TEXAS CERTIFICATES OF OBLIGATION,SERIES 2007 INTRODUCTORY STATEMENT Information contained in this Official Statement,including Appendices A and B,has been obtained from the City of Pearland, Texas (the "City") in connection with the offering by the City of its $23,250,000 Certificates of Obligation,Series 2007(the"Certificates")identified on the cover page hereof. All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources,is intended to show recent historic information,and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience,as is shown by that financial and other information,will necessarily continue or be repeated in the future. SALE AND DISTRIBUTION OF THE CERTIFICATES Sale of the Certificates After requesting competitive bids for the Certificates, the City accepted the lowest bid, which was tendered by a syndicate managed by UBS Securities LLC (collectively,referred to herein as the "Underwriters")to purchase the Certificates,bearing the interest rates on the inside cover page of this Official Statement,at a cash price of par,plus accrued interest to the date of delivery. The net effective interest rate on the certificates is 4.366260%. Prices and Marketability The delivery of die Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Underwriters on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. The City has no control over trading of the Certificates after a bona fide offering of the Certificates is made by the Underwriters at the yields specified on the cover page. Information concerning reoffering yields or prices is the responsibility of the Underwriters. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Underwriters after the Certificates are released for sale, and the Certificates may be offered and sold at prices -- other than the initial offering price,including sales to dealers who may sell the Certificates into investment accounts. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITERS MAY OVER- ALLOT OR EFFECT TRANSACTIONS WHICH STABIIJ7F OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES, AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,IF COMMENCED,MAY BE DISCONTINUED AT ANY TIME. Securities Laws No registration sta.vn nt relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such jurisdictions. FINANCIAL GUARANTY INSURANCE - Payment Pursuant to Financial Guaranty Insurance Policy Ambac Assurance Corporation ("Ambac Assurance") has made a commitment to issue a financial guaranty insurance policy(the "Financial Guaranty Insurance Policy")relating to the Certificates,effective as of the date of issuance of the Certificates. Under the terms of the Financial Guaranty Insurance Policy,Ambac Assurance will pay to The Bank of New York,in New York,New York,or any successor thereto(the"Insurance Trustee"),that portion of the principal of and interest on the Certificates that shall become Due for Payment but shall be unpaid by reason 3 of Nonpayment by the Obligor (as such terms are defined in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and/or interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Paying Agent/Bond Registrar. The insurance will extend for the term of the Certificates and,once issued,cannot be canceled by Ambac Assurance. The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund-installment dates,in the case of principal,and on stated dates for payment,in the case of interest. If the Certificates become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Certificates,Ambac Assurance will remain obligated to pay the principal of and interest on outstanding Certificates on the originally scheduled interest and principal payment dates, including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Certificates,the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration,except to the extent that Ambac Assurance elects, in its sole discretion, to pay all or a portion of the accelerated principal and interest accrued thereon to the date of acceleration(to the extent unpaid by the Obligor). Upon payment of all such accelerated principal and interest accrued to the acceleration date, Ambac Assurance's obligations under the Financial Guaranty Insurance Policy shall be fully discharged. In the event the Paying Agent/Bond Registrar has notice that any payment of principal of or interest on an Certificate that has become Due for Payment and that is made to a holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to.the United States Bankruptcy Code in accordance with a final, non-appealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. • The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment (as set forth in the Financial Guaranty Insurance Policy). Specifically,the Financial Guaranty Insurance Policy does not cover: 1. payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption)or as a result of any other advancement of maturity; 2. payment of any redemption,prepayment or acceleration premium;and 3. nonpayment of principal or interest caused by the insolvency or negligence of the Trustee,Paying Agent or Bond Registrar,if any. If it becomes necessary to call upon the Financial Guaranty Insurance Policy, payment of.principal requires surrender of the Certificates to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Certificates to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of holder entitlement to interest payments and an appropriate assignment of the holder's right to payment to Ambac Assurance. Upon payment of the insurance benefits, Ambac Assurance will become the owner of the Certificate, appurtenant coupon, if any,or right to payment of the principal of or interest on such Certificate and will be fully subrogated to the surrendering hold. `:.sights to payment. Ambac Assurance Corporation Ambac Assurance is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin, and is licensed to do business in 50 states, the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, with admitted assets of approximately $9,699,000,000 (unaudited) and statutory capital of approximately $6,223,000,000 (unaudited)as of September 30,2006. Statutory capital consists of Ambac Assurance's policyholders'surplus and statutory contingency reserve. Standard&Poor's Ratings Services,a division of The McGraw-Hill Companies,Inc., Moody's Investors Service,Inc.and Fitch Ratings have each assigned a triple-A financial strength rating to Ambac Assurance. - Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in the Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor. 4 Ambac Assurance makes no representation regarding the Certificates or the advisability of investing in the Certificates and makes no representation regarding, nor has it participated in the preparation of, this Official Statement other than the information supplied by Ambac Assurance and presented under the heading"FINANCIAL GUARANTY INSURANCE"and"APPENDIX D." Available Information The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the "Company"), is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports, proxy statements and other information can be read and copied at the SEC's public reference room at 100 F Street,N.E.,Room 1580,Washington,D.C.20549. Please call the SEC at 1- 800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC,including.the Company. These reports,proxy statements and other information can also be read at the offices of the New York Stock Exchange,Inc.,20 Broad Street,New York,New York 10005. Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance's administrative offices is One State Street Plaza, 19th Floor,New York,New York 10004,and its telephone number is(212)668-0340. Incorporation of Certain Documents by Reference The following documents filed by the Company with the SEC(File No. I-10777)are incorporated by reference in this Official Statement: • 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31,2005 and filed on March 13,2006; 2. The Company's Current Report on Form 8-K dated and filed on April 26,2006; 3. The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 2006 and filed on May 10,2006; 4. The Company's Current Report on Form 8-K dated July 25,2006 and filed on July 26,2006; 5. The Company's Current Report on Form 8-K dated and filed on July 26,2006; ' 6. The Company's Quarterly Report on Form 10-Q for the fiscal,quarterly period ended June 30,2006 and filed on August 9,2006; • , 7. The Company's Current Report on Form 8-K dated and filed on October 25,2006; 8. The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 30, 2006 and filed on November 8,2006; 9. The Company's Current Report on Form 8-K dated and filed on January 31,2007;and 10. The Company's Current Report on Form 8-K dated and filed on February 12,2007. All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information". MUNICIPAL BOND RATINGS In connection with the sale of the Certificates, the City has made application to Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") for ratings and the ratings of "Aaa" and "AAA", respectively, have been assigned to the Certificates with the understanding that upon delivery of the Certificates, a municipal bond insurance policy insuring the timely payment of the principal of and interest on the Certificates will be issued by Ambac Assurance Corporation. In addition, Moody's and S&P have assigned underlying ratings of "Al"and"A+"respectively on the Certificates. An explanation of the significance of such ratings may be obtained - from Moody's and S&P. The ratings reflect only the views of Moody's and S&P, and the City makes no representation as to the appropriateness of such ratings. There is no assurance that such ratings will continue for any period of time or that they will not be revised • downward or withdrawn entirely by Moody's and/or S&P,if, in the judgment of Moody's and S&P,circumstances so warrant. Any such downward revision or withdrawal of either or both of the ratings may have an adverse effect on the market price of the Certificates. 5 • ..+y„ (BurA[tapupJ dnol0 S UT2 [s,1oOd PmmPumS ..Ili„ (Su[Apapun)•ouq'ao[A1aS s1o2S2AUI S,Apoow • ..yyy„ (pamsuI)dno1O sSurEg s,xood p p s "Egli„ (painsul)•0uI'aoIAtwS s.o2SanuI S,ApooN sSupuu {.'Q XIQN3ddy,.Pue{{37NVRIIISNI v 10 '1yIONVNId„ aaS •uouEaodro, aouemssy augury a3UEtnsul AfuelenO EupuEu13 ,{•SOO1d.Io SII-Sd.LVDL4LL 1 D f, 3}LL„ aaS •sa3Eagplap aqi ;o aouunss[ ;o moo alp AEd of pasn aq os[g!gm saleogrua,alp Jo ales atn wolf spaa0old •s3oafold asagl qum uonaauuoa ut patapuat sa0ruas [Euo[ssa;oid xo; luawAed (A)pue suopms a1g Sunsnca Omf of sUopenouar(A!)'laivao A2[unwwoa 8upsnca pug of saonenonal (tIr) 'Au[Ioe; aOrlod Sullsnca Ire of • suonenouai (n) 'Aigron; [Edro[unw asodmd-q[nw E;o u093111 uoo pue usrsap aqi(I)1o;pasn aq I[rm saleaggra3 agfJo_am^rig)wo s : :aapotd Sp20001d;O aS fI „1U011.14(ed JO EaMOS-S3.LypidinI D - 3H,L, aaS •wa1sAS tons ;O sanuanag faR ail ;o 000'OI$ ;o ssamca ur iou lunowe us ut pue;o 1Uaix2 aqi of Attu)inq '(„warsAS„ agi) walsAs 1 MES pug sltomlaiem s,Air3 agi jo (aouuu[pio atp u[ paugap se) sanuanag 1aN at[i;o aSpa[d afewplogns pue 1orunf palnur e wo.g aiquAEd laturg ate pue'me[Aq paquosatd smug my Urgum'A2I3 alp wglrm Auadotd a[gExet pE uodn.pa[nb[xel walo[EA pe Ienuue ue;o spaaootd ati wog a[geAed are sa1Eoggxa3 aqi uo warm!pue[edioupd IUaurAed Jo aomoS ({{'wafsAS A[UO-Atiu3-xoog=SQNOg gII „,aaS) •walsAs Bans anuquoos[p of 3yj alp Jo JINN uo so;[Egaq su no ig2[1 aqf SOMESEt inq '( O,I,Q„) Auedwo3 isnly Atoitsoda j au, Jo walsAs A[uo4tiva-poq agi asn Oi spualut A1[O ag,I, •sexaj 'uoisnogy" N`1[Usg oSte3 SI[%M sI 1etisr2atpu9Se SUrAEd[BMWagy -••1e11sfSa2i/1Ua3y 8u[Aed • ,,suo[sIAO.rd uondwapag — S3.LVOI-TIT.1IH3 Hill, Su[peaq alp lapun paquosap se uogdwapat punj Suppgs Ato1EpUEw of foafgns os[e are spuog W1a,I, „SUo[Srnold uondwapag - SaLVJL-TT.L 1H3 3I.I,Ief aaS •taiJearagf amp Aue xo LIOZ '[ gam uo 'Ai[O agi;o uondo aqi ie 'uopdwapat o1 laafgns • am '8IOZ 'I yorew 121j pue uo Supnfew saie3gg1a3 ag•L •000'S$3o sa[dn[nw[EdBaful'u[ULIo;parals1Sar Sun;n[puss!are sa3E0ggla-3 agy sonsual0etet,tail) {{ uondp0sa Q-swim/dump I au„, DoS. „•saie0grua3„ agi Se u[ataq of palls;al A[aAUOa[[oa axe spuog uua,I,mg pus spuog [spas aql, •(„spuog ttuay„ aql)Z£OZ Pur OEOZ `9ZOZ S1EaA ail uI I garew Supniew spuoq Uua);o immure [ed[ouud 000'6IL`tIS PIM(..spuog IeuaS„asp)aA[snpul'tZOZ 42non11 800Z S1e34 ati;o g3Ea u[ [ g01EN SUunfew spuoq [epas Jo iunotue pdt3uud 000`S£S`0[$ apnpu[ spuog atu. •LOOZ 61 4O'W Pafep a1E (,.sale3911130„aql)L00Z sauaS'Uop12IIg0;o sa2Eoggla3 000'0SZ'£Z$ Samognla3 agy .,•sonsymouret3 o1gdel2owa f pug otwouo03—v x[pnaddy„ aas 'Auk aqi Sugam2a1 UOUEUuo;U! [euorppe 1Od •sexa,I, 'saquno3 spiel;pue Euozetg UILj11M pa1E001 sexay;o arms agi;o Alto alai awog pue uots[Atpgns [e3ngod a sr(„Au,„ aq1)SExay'puE[1ead Jo 40 sty puss!agy •UOAettuo;ut ata[dwoo aiow 10;pa1E0lpur ate ley1 suop3as of Ape[n3n.led ta;21 p[nots tapear sty •lUawal1is [erog;O s[tI1 u[ alagmasla Sutteadde sivawa1Eis lepueug pue uonetuloJui pa[Ielap agi Aq Afatqua slI ut pagr[enb si pun (gang pautwluoz uogntulo;ur Uieuao Jo Aletuwns E sr jepaletu Surmogo; at , AHV1cWfiS,LNaW3,Ld.LS'IhIDI,43O -St.h.ctt d LA,,..ciuu- (Unaudited) The Certificates 2006 Certified Net Assessed Valuation(100%of estimated market value) $ 4,654,672,740(aXb) Direct Debt: Outstanding Tax Supported Debt(as of January I,2007) $ 196,115,000(c) Plus: The Certificates Total Tax Supported Debt 23,250,000 $ 219,365,000 Estimated Overlapping Debt $ 394,269,068 Direct and Estimated Overlapping Debt ,$_ 613,634,06g Debt Service Fund Balance(as of January 12,2007) $ 10.622..95E s °%of 2006 Per Assessed Capita Valuation (81,408) Debt Ratios: Direct Tax Supported Debt 4.71% $ 2,695 Direct Tax Supported and Estimated • Overlapping Debt 13.18% $ 7,538 2006 Tax Rate(per$100 of Assessed Valuation) Maintenance and Operation $ 0.298974 Debt Service 0.353685 Total $ 0.652659 Annual Debt Service Requirements: Average(Fiscal Years 2007-2032) $ 13,699,995 Maximum(2018) $ 17,102,854 Tax Collections: Arithmetic Average,Tax Years(2001-2005)-Current Years 97.74% -Current and Prior Years 99.61% (a) Provided by the Brazoria Central Appraisal District(the "Appraisal District"end net c ,.temptions. Includes $724,365,960 in assessed value attributable to Reinvestment Zone Number 1 wo, City of Pearland,Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ,tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA —Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. (b) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was annexed by the City on December 31,2006. (c) Includes all outstanding debt of Brazoria.CountyMunicipal Utility p District No. 1, which was annexed by the City on December 31, 2006. Also includes $1,940,000 Brazoria County Municipal Utility District No. 1 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds, Series 2007, which is - expected to be delivered on March 22,2007. This debt will be assumed by the City. 7 r l_: _ INTRODUCTION This Official Statement and the Appendices hereto provide certain information with respect to the issuance by the City of Pearland, Texas (the "City") in connection with the offering by the City of its$23,250,000 Certificates of Obligation,Series 2007(the"Certificates"). The Certificates are issued pursuant to the Texas Constitution, the general laws of the State of Texas, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance authorizing issuance of the Certificates(the"Ordinance")adopted by the City Council of the City(the"Council"). There follows in this Official Statement descriptions of the Certificates, the plan of financing, and certain information about the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City upon request. Certain capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance,except as otherwise indicated herein. THE CERTIFICATES Description The Certificates are dated March 1,2007 and bear interest from such date at the stated interest rates indicated under "PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES" on the cover page hereof, which interest is payable initially on September 1,2007,and each March 1 and September 1 thereafter until the earlier of maturity or prior redemption. The Certificates are issued in fully registered form in denominations of$5,000 each or any multiple thereof. Principal of the Certificates is payable at the principal payment office of Wells Fargo Bank, N.A. (the "Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date,and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede &Co., the nominee of The Depository Trust Company pursuant to the Book-Entry-Only System described below. In the event the Book-Entry-Only-System is discontinued,the Certificates may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge • will be made for any transfer,but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date(the"Record Date")for the interest payable on any interest payment date means the 15th day of the month next preceding such interest payment date. It will be required that all transfers be made within three business days after request and presentation. The City has agreed to replace mutilated, destroyed, lost or stolen Certificates upon surrender of the mutilated Certificates, or receipt of satisfactory evidence of such destruction, loss or theft, and receipt by the City and the Paying Agent/Registrar of security or indemnity to keep them harmless. The City may require payment of taxes, governmental charges and other expenses in connection with any such replacement. Redemption Provisions 1 'r -Optional Redemption- The Certificates maturing on March 1, 2018 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on March 1,2017,or any date thereafter,at the option of the City at a price equal to the principal amount thereof plus accrued interest to the date of redemption. If less than all of the Certificates are redeemed at any time,the maturities of the Certificates to be redeemed shall be selected by the City. • 8 -Mandatory Redemption- The Term Bonds are subject to mandatory sinking fund redemption and shall be redeemed by the City prior to their scheduled maturities on March 1 in the years and in the amounts set forth below at a redemption price equal to the principal amount redeemed plus accrued interest to the mandatory redemption date (the "Mandatory Redemption Dates"): . $2,930,000 Term Bonds Mataringon March 1,2026 Mandatory Redemption Date Principal Amount March 1,2025 $1,430,000 March 1,2026(Final Maturity) 1,500,000 $6,525,000 Term Bonds Maturing on March 1,2030 Mandatory Redemption Date Principal Amount March 1,2027 $1,580,000 - March 1,2028 1,660,000 March 1,2029 1,745,000 March 1,2030(Final Maturity) 1,540,000 ' $3,260,000 Term Bonds Maturing on March 1,2032 Mandatory Redemption Date Principal Amount March 1,2031 $1,600,000 March 1,2032(Final Maturity) 1,660,000 The particular Term Bonds to be mandatorily redeemed shall be selected by lot or other customary random selection method. The principal amount of any Term Bond to be mandatorily redeemed on such Mandatory Redemption Date shall be reduced by the principal amount of such Term Bond which, by the 45th day prior to such Mandatory Redemption Date,either has been purchased in the open market and delivered or tendered for cancellation by or on behalf of the City to the Registrar or optionally redeemed and which,in either case, has not previously been made the basis for a reduction under this sentence. Notice of Redemption Not less than 30 days prior to a redemption date for the Certificates,the City shall cause a notice of redemption to be sent by United States mail,first class,postage prepaid,to the registered owners of the Certificates to be redeemed,in whole or in part at the address of the registered owner appearing on the registration books of the Paying -- Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN V DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTIrT HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT,INTEREST ON SUCH CERTIFCATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. Book-Entry-Only System This section describes how ownership of the Certificates is to be transferred and how the principal of premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC"), New York, New York, while the Certificates are registered in its nominee name. The information in this section --- concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable,but takes no responsibility for the accuracy or completeness thereof The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee(as the registered owner of the Certificates), or redemption or 9 other notices, to the Beneficial Owners,or that they will ll do so on a timely basis,or(3)DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates.The Certificates will be issued as fully-registered securities registered in the name of Cede&Co. (DTC's partnership nominee)or such other name as may be requested by an authorized representative of DTC. One fully-registered security will be issued for each maturity of Certificates, as set forth on the inside cover hereof,each in the aggregate principal amount of such maturity and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company, organized under the New York Banking Law,a"banking organization"within the meaning of the New York Banking Law,a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code,and a"clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds _ and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. ui eq ty,corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ("Direct.Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges _ between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers,-banks, trust companies,clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation("DTCC").DTCC,in turn,is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income.Clearing:Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange.Inc.,the American Stock Exchange LLC,and the National Association of Securities Dealers,Inc.Access to the DTC system is also available to others such as both U.S.and non-U.S.securities brokers and dealers,banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant,either directly or indirectly("Indirect Participants").DTC has Standard&Poor's highest rating:"AAA." The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Certificates under the DTC system must be made by or through Direct Participants,which will receive • a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the hooks of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates,except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede &Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants,by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them,subject to any statutory or regulatory requirements as may be in effect from time to time. _ Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates,such as redemptions,tenders,defaults,and proposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners.In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. 10 Redemption notices shall be sent to DTC. If less than all of the Certificates within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede&Co. (nor any other DTC nominee)will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures,DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede &Co.'s consenting or-voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants'accounts upon DTC's receipt of funds and corresponding detail information from the City or Agent,on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices,as is the case with Certificates held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC,Paying Agent, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest payments to Cede& Co.(or such other nominee as may be requested by an authorized representative of DTC)is the responsibility of the City or Paying Agent. Disbursement of such payments to Direct Participants will be the responsibility of DTC,and reimbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or Paying Agent. Under such circumstances,in the event that a successor depository is not obtained,certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC(or a successor securities depository). Discontinuance of the use of the system of book-entry transfers through DTC may require the approval of DTC Participants under DTC's operational arrangements. In that event,certificates will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable,but the City and the Underwriters take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System,and, (ii)except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Successor Paying Agent/Registrar Provision is made in the Ordinance for replacing the Paying Agent/Registrar. If the City replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar's records to the successor paying agent/registrar(the"Successor Paying Agent/Registrar"), and the Successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any Successor Paying Agent/Registrar selected by the City shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Certificates. Source of Payment The Certificates are payable as to principal and interest from, and secured by, the proceeds of a continuing, direct annual ad valorem tax,levied within the limits prescribed by law,against all taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding,it will levy,assess and undertake to collect -such tax. The Certificates will be further payable from a limited junior and subordinate pledge of Net Revenues(as defined in the Ordinance) of the City's waterworks and sewer system (the "System") in an amount not to exceed $10,000. See "TAX DATA Tax Rate Limitations" and "THE CERTIFICATES - Remedies in the Event of Default." 11 Authorization of the Certificates - The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas,particularly Subchapter C of Chapter 271,Texas Local Government Code,as amended,and the provisions of the Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates,as a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. Use of Proceeds Proceeds of the Certificates are being used for(i)the design and construction of a multi-purpose municipal facility, (ii)renovations to an existing police facility,(iii)renovations to and existing community center, (iv)renovations to two existing fire stations and (v) payment for professional services rendered in connection with these projects. Proceeds from the Certificates will also be used to pay the costs of issuance on the Certificates. Future Debt The City has$29,711,530 unissued bonds authorized by City voters. The City plans to issue such authorized bonds in late 2007 or 2008. The City also intends to ask for voter approval of approximately $162 million of general obligation bonds at an election to be held on May 12, 2007. The City may also issue additional certificates of obligation for City projects. Depending on the rate of development within the City,changes in assessed valuation, and the amounts, interest rates, maturities and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds, the Certificates, and such future certificates of obligation or bonds. In addition, Brazoria County Municipal Utility District No. 1 anticipates delivering its $1,940,000.Waterworks and Sewer System Combined Unlimited Tax and Revenue Bonds, Series 2007 on March 22, 2007. This debt will be assumed by the City. Legal Investments in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201,Texas Government Code, as amended, the Certificates, whether rated or unrated,are(a)legal investments for insurance companies,fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act,Chapter 2256,Texas Government Code,as amended,and such political subdivisions may impose a requirement consistent with such act that the Certificates have a rating of not less than•"A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the.Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than"A"or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws,rules,regulations or investment criteria that might affect the sui!al?ility of the Certificates for any of the above purposes or limit the authority of any of the above entities or • persons to purchase or invest in the Certificates. Remedies in the Event of Default The Ordinance does not provide for the appointment of a trustee to represent the interests of the Certificate holders upon any failure of the City to perform in accordance with the terms of the Ordinance or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinance does not establish specific events of default with respect to the Certificates and,under State law,there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates; however,such judgment could not be satisfied by execution against any property -of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy,if a default occurs,is a mandamus or mandatory injunction proceeding to compel the City to levy,assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates • as it becomes due or perform other material terms and covenants contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance,the Certificates are valid and binding obligations for all purposes 12 r `> according to their terms. However,the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The City is also eligible to'seek relief from its creditors under Chapter 9 of the U.S.Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues,the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Certificate holders of an entity which has sought protection under Chapter 9.Therefore,should the City avail itself of Chapter 9 protection from creditors,the ability to enforce would be subject to the approval of the Bankruptcy Court(which could require that the action be heard in Bankruptcy Court instead of other federal or state court);and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it.The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customaryrights of debtors relative to their creditors, g editors,including rights afforded to creditors under the Bankruptcy Code. INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Mayor and Council of the City. Both state law and the City's investment policies are subject to change. Legal Investments • Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, (2)direct obligations of the State of Texas or its agencies and instrumentalities,(3)collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by,or backed by the full faith and credit • of,the State of Texas or the United States or their respective agencies and instrumentalities,(5)obligations of states, agencies,counties, cities,and other political subdivisions of any state rates as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent,(6)certificates of deposit that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits, (7)certificates of deposit and share certificates issued by a state or federal credit union domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in the clauses (1) through(5)or in any other manner and amount provided by law for City deposits, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) bankers' acceptances with the remaining term of 270 days or less,if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency,(10)commercial paper that is rated at least A-1 or P-1 or the equivalent by either(a)two nationally recognized credit rating agencies or(b) one nationally recognized credit ratin"-.ency if the paper is fully secured by an irrevocable letter of credit issued by a U.S.or state bank),(1 )no-load money market mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years; invests exclusively in obligations described in the preceding clauses;and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of no less than AAA or its equivalent, and (13) bonds - issued, assumed, or guaranteed by the State of Israel; and may invest bond proceeds in guaranteed investment contracts that have a defined termination date and are secured by obligations described in clause (i) above in an amount at least equal to the amount of bond proceeds invested under such a contract. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than Aaa or AAA or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal;(2)obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest;(3)collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in the market index. 13 • i ' Investment Policies Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted"Investment Strategy Statement"that specifically addresses each funds'investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2)preservation and safety of principal, (3)liquidity, (4) marketability of each investment,(5)diversification of the portfolio,and(6)yield. Under Texas law, City investments must be made "with judgment and care, under prevailing circumstances, that person or prudence, discretion,and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly, the investment officers of the City shall submit an investment report detailing: (1)the • _ investment position of the City; (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value for each pooled fund group,(4)the book value and market value of each separately listed asset at the beginning and end of the reporting j period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for t2 which each individual investment was acquired, and(7)the compliance of the investment portfolio as it related to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds•without express r written authority from the Mayor and Council of the City. The City's policies requires investments in accordance with applicable state law. The City'Statement of Investment does not exclude any investments allowable under State law described above under"Legal Investments." The City generally invests in obligations of the United States or its Agencies and instrumentalities. Current Investments State law and City ordinances authorize the City to invest in direct obligations of the U.S. Treasury with maturity dates of three years or less,obligations of agencies of the U.S.Government with maturity dates of two years or less, and certain investment pools. The City's investment balances on December 31,2006 were as follows: Face Principal Market Book Amount Invested Value Value i t Money Market Funds $77,124,571 $77,124,571 •• $77,124,571 $77,124,571 Government Securities 18,710,000 18,266,900 18,521,442 18,512,473 Certificates of Deposit 3,612,702 3,612,702 3,612,702 3,612,702 Total Portfolio $99,447,273 $99,004,173 $99,258,715 • $99,249,746 Additional Provisions t _. Under Texas law, the ''..;.is ac;uiuonally required to: (1) annually review iti adopted policies and strategies; (2) require any investment officers with person business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Mayor and J Council; (3)require the registered principal of firms seeking to sell securities to the City to: (a)receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform and annual audit of the management controls on investments and adherence to the City's investment policy; J (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict the investment in mutual funds in the aggregate to no more than 80% of the City's monthly average fund balance, excluding bond ! _proceeds and reserves and other funds held for debt service and further restrict the investment in non-money market mutual funds of any portion of bond proceeds,reserves and funds held for debt service and to not more than 15%of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt 1 service;and(8)require local government investment pools to confirm to the new disclosure,rating,net asset value, . -- yield calculation,and advisory board requirements. 14 CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other.political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. _ Bonded Indebtedness Payable from Ad Valorem Taxes 2006 Net Assessed Valuation(100%of estimated market value) $ 4,654,672,740(a)(b) Direct Debt: Outstanding Tax Supported Debt(as of January 1,2007) $ 196,115,000(c) Plus: The Certificates 23,250,000 Total Direct Debt $ _219,365,000 Debt Service Fund Balance(as of January 12,2007) $ 10.622.956 (a) Provided by the Brazoria Central Appraisal District(the"Appraisal District")and net of exemptions. Includes $724,365,960 in assessed value attributable to Reinvestment Zone Number Two,City of Pearland,Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ,tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt -- service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA—Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. (b) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was annexed by the City on December 31,2006. (c) Includes all outstanding debt of Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 1, 2006. Also includes $1,940,000 Brazoria County Municipal Utility District No. 1 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds, Series 2007, which is expected to be delivered on March 22,2007. This debt will be assumed by the City. 15 • Tax Supported Debt Service Schedule The following sets forth the principal and interest on the City's Outstanding Tax Supported Debt, plus the principal and interest on the Certificates and Brazoria County Municipal Utility District No. 1 $1,940,000 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds,Series 2007(the"Bonds"). Fiscal Year Current Total Ending Debt Service Plus: The Certificates , Plus: The Bonds(b) Debt Service 9-30 Requirements(a) Principal Interest Principal Interest Requirements 2007 $ 13,395,299 $ 528,638 $ 40,264 $13,964,201 2008 12,970,204 $ 50,000 1,056,025 80,528 14,156,757 2009 14,502,498 50,000 1,053,525 80,528 15,686,551 2010 14,627,363 100,000 1,049,650 80,528 15,857,541 2011 14,790,504 150,000 1,043,088 $ 15,000 80,528 16,079,119 2012 15,033,287 200,000 1.033,900 55,000 79,928 16,402,115 2013 15,024,058 250,000 1,022,088 60,000 77,865 16,434,010 2014 15,026,154 300,000 1,007,650 65,000 75,585 16,474,389 - 2015 15,022,821 350,000 990,588 70,000 73,083 16,506,492 2016 15,020,138 400,000 970,900 75,000 70,353 16,536,391 2017 15,027,493 450,000 948,588 75,000 67,428 16,568,509 2018 15,043,033 1,005,000 910,394 80,000 64,428 17.102,854 _ 2019 12,362,173 1,060,000 856,188 85,000 61,228 14,424,589 2020 12,367,339 1,115,000 799,094 90,000 57,828 14,429,261 2021 12,372,811 1,170,000 739,113 95,000 54,228 14.431.152 2022 12,372,296 1,230,000 676,113 100,000 50,333 14,428,741 2023 12,377,686 1,295,000 609.831 110,000 46,233 14,438,751 2024 12,378,035 ',360,000 540,138 115,000 41,613 14,434,786 2025 12,357,406 i,430,000 466,900 120,000 36,783 14,411,089 2026 12,446,384 1,500,000 389,988 130,000 31,623 14,497,995 2027 12,448,500 1,580,000 324,938 135,000 26,033 14,514,471 2028 12,458,363 1,660,000 272,288 145,000 20,228 14,555,878 2029 12,457,775 1,745,000 216,956 155;000 13,920 14,588,651 2030 1,540,000 163,575 165,000 7,178 1,875.753 2031 1,600,000 104,550 1,704,550 2032 1,660,000 35.275 1.695.275 $311,881,621 $23.2512.00Q ,$17.809.975 gaan ;1.318.274 $356.199.87Q (a) Includes all Outstanding Debt Service of the City and Brazoria County Municipal Utility District No. 1. (b) The Brazoria County Municipal Utility District No. I anticipates delivering its $1,940,000 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds on March 22,2007. This debt will be assumed by the City. Average Annual Requirements(2007-2032) $13,699,995 ' Maximum Annual Requirement(2018) $17,102,854 16 Estimated Overlapping Debt The following table indicates the indebtedness,defined as outstanding obligations payable from ad valorem taxes,of governmental entities overlapping the City and the estimated percentages and amounts of such indebtedness attributable to property within the City. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports. Such figures do not indicate the tax burden levied by the applicable taxing jurisdictions for operation and maintenance or for other purposes. The City has not independently verified the accuracy or completeness of the information shown below except for amounts related to the City. Debt as of Overlapping _ Taxing Jurisdiction January 1,2007 Percent Amount Alvin Community College District $ 19,375,000 5.22% $ 1,011,375 Brazoria County 54,630,000 6.97 3,807,711 — Brazoria County MUD No. 17 23,295,000 100.00 23,295,000 Brazoria County MUD No. 18 30,465,000 99.86 30,422,349 Brazoria County MUD No. 19 35,930,000 100.00 35,930,000 Brazoria County MUD No.26 56,265,000 100.00 56,265,000 Pearland ISD 269,647,591 90.16 243,114,268 Harris County(a) 1,735,195,971 0.02 347,039 Harris County Flood Control District 24,524,985 0.02 4,905 Port of Houston Authority 357,105,000 0.02 71.421 TOTAL ESTIMATED OVERLAPPING $394,269,068 The City(b) 219.365,000(b) Total Direct and Estimated Overlapping Debt $�1,3,634.068 (a) Harris County Toll Road Certificates are considered self-supporting and are not included in the amount shown for Harris County. (b) Includes the Certificates and all outstanding debt of Brazoria County Municipal Utility District No. 1, which ; was annexed by the City on December 31,2006. Also includes the$1,940,000 Waterworks and Sewer System Combination Unlimited Tax and Revenue Bonds,Series 2007,which is expected to be delivered on March 22, 2007. This debt will be assumed by the City. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2006 Certified Net Assessed Valuation($4,654,672,740) 4.71% 13.18% Per Capita(81,408) $2,695 $7,538 TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments is the receipts from ad valorem taxation. See"SELECTED FINANCIAL DATA". The following is a recapitulation of(a) the Texas Property Tax Code, including methodology, limitations, remedies and procedures; (b) historical analysis of collection and trends of tax receipts and provisions for delinquencies; (c) an analysis of the tax base, including relative property composition, principal taxpayers and adequacy of the tax base to service debt requirements;and(d)taxation that may add to the City's taxpayers'tax costs. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") establishes for each county in Texas a single appraisal _ district with responsibility for recording and appraising property for all taxing units within the county,and a single appraisal review board, with responsibility for reviewing and equalizing the values established by the appraisal district. The Property Tax Code requires the appraisal district, by May 15 of each year, or as soon thereafter as practicable,to prepare appraisal records of property as of January 1 of each year based upon market value.The chief appraiser must give written notice before May 15,or as soon thereafter as practicable,to each property owner whose property value is appraised higher than the prior tax year or the value rendered by the property owner or whose property was not on the appraisal roll the preceding year or whose property was reappraised in the current tax year. 17 � I Notice must also be given if ownership of the property changed during the preceding year. The appraisal review board has the ultimate responsibility for determining the value of all taxable property within the City;however,any 1 property owner who has timely filed notice with the appraisal review board may appeal a final determination by the appraisal review board by filing suit in a Texas district court. Prior to such appeal or any tax delinquency date, however,the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event,the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units such as the City are entitled to challenge certain matters before the appraisal review board,including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption. A taxing unit may not,however,challenge the valuation of individual properties. Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies of the county and all cities, towns,school districts and,if entitled to vote,the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years.It is not known what frequency of reappraisals will be utilized by the Brazoria County Appraisal District or whether reappraisals will be conducted on a zone or county-wide basis. Tax Rate Limitations Article XI,Section 5 of the Texas Constitution,provides for an overall limitation for Home Rule Cities of$2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy,with respect to Home Rule Cities which have such a$2.50 limitation,of approving ad valorem tax bonds only to the extent that all of such city's ad valorem tax debt can be serviced by a debt service tax rate of$1.50 at 90%collection. Property Subject to Taxation by the City Except for certain exemptions provided by Texas law,all real and tangible personal property and certain categories of intangible personal property with a tax situs in the City are subject to taxation by the City;however,no effort is expected to be made by the Brazoria County Appraisal District to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions; property used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods,.family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind-powered energy devices; most individually-owned automobiles; and property of disabled veterans, only to the extent of $3,000 of taxable property. In addition, taxpayers who are over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of$25,000. These over 65 exemptions and• disabled veterans exemptions amounted to$93,081,976 from the 2006 tax roll. The state constitution permits local governments the option of granting homestee' _:.emptiuns of up to 20% of market value. The City has not granted such additional homestead exemption for the 2006 tax year. An eligible owner of agricultural and timberland may apply to have such properties which meet certain requirements appraised on the basis of productivity value or market value, whichever is less. The loss of value due to property values based on productivity value on the 2006 tax roll was approximately$53,070,290. The City has authority to enter into tax abatement agreements to encourage economic development. Under such agreements,a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. Such abatement agreement may last for a period of up to 10 years. The City has $7,396,340 of such property that was subject to abatement January 1,2006. -The constitution of the State of Texas authorizes a property tax exemption for certain business personal property. The City Council had the option to take official action to override the exemption and to continue taxing the property exempted by the amendment. On December 18, 1989,the City's City Council took such official action not to tax the property in 1990 and to allow the exemption for 1991 and all future years. This Freeport Goods exemption amounted to$31,851,230 on the 2006 tax roll. 18 Tax Increment Reinvestment Zone Article VIII, Section 1-g of the Texas Constitution and the Tax Increment Financing Act, Chapter 311, V.T.CA. Tax Code (the "TIF Act") authorize municipalities in the State to establish one or more tax increment financing reinvestment zones for development or redevelopment of P p the territory within the zones. The TIF Act provides that the municipality may appoint a board of directors for a reinvestment zone to develop a project plan and financing plan for the zone and may delegate to the board certain management duties relating to the zone.Project costs,including financing costs,within the zone may be paid from tax increments collected by each of the taxing units in the zone. The amount of a taxing unit's tax increment for a year is the amount of property taxes levied by the unit for that year on the captured appraised value of real property taxable by the unit(the "Captured Appraised Value") and located in the zone. The Captured Appraised Value is the total appraised value of the property for a year, less the tax increment base of the unit. The tax increment base of a taxing unit is the total appraised value of all real property taxable by the unit and located in the zone in the year in which the City created the zone.Participation by a taxing unit in a reinvestment is discretionary with such taxing unit,and it may decide to deposit all or none,or a portion,of its tax increments into the fund and retain for its own purposes the remainder.A taxing unit cannot reduce the amount of its participation once the financing plan has been implemented. The City designated a reinvestment zone and created the Reinvestment Zone Number Two,City of Pearland,Texas (the "TIRZ") in 1998. The TIRZ initially encompassed approximately 3,467 acres of land (the "Original Area"). The City approved the annexation of an additional 457 acres of land(the"Annexation Area")into.the boundaries of the TIRZ on June 26,2006. The TIRZ encompasses all of the master planned community of Shadow Creek Ranch, which includes approximately 3,300 acres of land. The purpose of the TIRZ is to design, construct and finance or cause to be designed, constructed and financed • certain public works and improvements to promote and facilitate the development of the vacant, undeveloped property in the TIRZ. Specifically,the TIRZ is constructing public works and infrastructure improvements to assist in the development of the master planned community, Shadow Creek Ranch("Shadow Creek Ranch"). The City, Alvin Independent School District("AISD"), Brazoria County,Texas("Brazoria County")and Fort Bend County, Texas ("Fort Bend County") have agreed to deposit to a tax increment fund established for the TIRZ (the "Tax Increment Fund")annually a certain percentage of tax collections arising from their taxation of the increase,if any, since January 1, 1998, in the total appraised value of all real property located in the Original Area of the TIRZ and taxable by the City, AISD, Brazoria County and Fort Bend County. The City has further agreed to deposit to the Tax Increment Fund tax collections arising from its taxation of the increase, if any, since January 1, 2006, in the total appraised value of real property located in the Annexation Area of the TIRZ and taxable by the City. The TIRZ Board has nine members, four of whom are appointed by the City. One of the City's appointees is nominated by AISD and Brazoria County and Fort Bend County each appoint one member of the TIRZ Board. Finally, the Texas State Senator and Texas State Representative, or their designees, in whose district the TIRZ is located serve as the final two members of the TIRZ Board. The City has agreed to pay 100%of its collected Tax Increments(the "City Tax Increment") to the Tax Increment • Fund.. However,pursuant to a development plan and a development agreement (the"Development Agreement")by and between the City and Shadow Creek Ranch Development Company, L.P., the master developer of pro, within the TIRZ(the "Developer"), the City,the Developer and the TIRZ have agreed that a certain portion of the City Tax Increment shall be paid by the TIRZ to the City as an"Administrative Fee"(the"Administrative Fee") to compensate the City for some of its cost of providing City services to the developed property within the TIRZ. Pursuant to the Development Agreement,the Administrative Fee is as follows: Years 1 through 3(1999-2001) No Administrative Fee Years 4 through 8(2002-2006) 36 percent of the City Increment Years 9 through 30(2007-2028) 64 percent of the City Increment Provided that,the amount of City Tax Increment deposited and retained annually in the Tax Increment Fund for the applicable year shall in no event be less than: (i)$0.44 per$100.00 of valuation in years four through eight,and(ii) - $0.255 per$100.00 of valuation in years nine through thirty. For tax year 2006, the assessed value attributable to the TIRZ is$724,365,960. As described above, tax revenues generated from assessed value attributable to the TIRZ are deposited into the Tax Increment Fund and are not - available to make debt service payments on the Certificates. While a portion such revenues are to be retained by the City as Administrative Fees, such Administrative Fees may not be available to make debt service payments on the Certificates. • 19 Notice and Hearing Procedures The Property Tax Code establishes procedures for providing notice and the opportunity for a hearing for taxpayers in the event of certain proposed tax increases and provides for taxpayer referenda which could result in the repeal of certain tax increases. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values over $1,000, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. Levy and Collection of Taxes The City is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. The City has elected to have Brazoria County bill and collect taxes on behalf of the City. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City,the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations (the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the City held upon petition of 10%of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the "effective tax rate" until it has held a public hearing on the proposed tax rate and has otherwise complied with the Property Tax Code. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. Taxes are due on receipt of the tax bill,and become delinquent after January 31 of the following year,or on the first day of the calendar month next following the expiration of twenty-one (21) days after mailing of the tax bills, whichever occurs later. A delinquent tax account incurs an initial penalty of six percent(6%)of the amount of the tax and accrues an additional penalty of one percent.(1%)per month up to July 1, at which time the total penalty becomes twelve percent(12%). In addition, delinquent taxes accrue interest at one percent(1%)per month. If the tax is not paid by July 1, an additional penalty of up to twenty percent(20%)may under certain circumstances be imposed by the City.The Property Tax Code also makes provision for the split payment of taxes,discounts for early payments, partial payments of taxes and the postponement of the delinquency date of taxes under certain circumstances. Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property owner on January 1 of the year for which the tax is imposed.On January 1 of each year,a tax lien attaches to property to secure the payment of all taxes,penalties a-,' _ interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the City,having the power to tax the property.The City's tax lien is on a parity with tax liens of all other such taxing units.A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien,whether or not the debt or lien existed before the attachment of the tax lien.In the event a taxpayer fails to make timely payment of taxes due the City,the City may file suit to foreclose its lien securing payment of the tax, to enforce personal liability for the tax, or both. Whether a lien of the United States is on a parity with or takes priority over a tax lien of the City is determined by applicable federal law.In the absence of such federal law,the City's tax lien takes priority over a tax lien of the United States.The ability of the City to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, the foreclosure sale price attributable to market conditions,the taxpayer's right to redeem the property _ within two years of foreclosure,or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. i �, 20 I i Historical Analysis of Tax Collection -Collection Ratios- Tax Rate Fiscal Net Per$100 of %of Collections Year Tax Assessed - Assessed Adjusted Current Current and Ending Year Valuation(a) Valuation Tax Levy(a) Year Prior Years 9-30 1995 $ 844,357,847 $0.695000 $ 5,869,525 98.65% 99.72% 1996 1996 875,483,990 0.695000 6,343,113 98.31 99.43 1997 1997 1,012,049,410 0.695000 7,062,826 98.50 99.57 1998 1998 1,172,298,277 0.695000 8,147,473 98.10 99.27 1999 1999 1,322,581,461 0.695000 9,174,224 98.35 99.65 2000 2000 1,563,565,809 0.695000 10,864,049 97.66 99.31 2001 2001 1,760,551,863 0.686000 12,890,902 96.79 98.34 2002 2002 2,171,317,975 0.686000 14,869,170 98.02 . 100.33 2003 2003 2,355,280,316 0.696000 17,987,752 98.03 100.02 2004 2004 3,019,449,422 0.694800 22,145,299 98.08 99.68 2005 2005 3,816,235,030 0.674400 26,773,438 97.08 99.70 2006 2006 4,654,672,740(b) 0.652659 28,804,610 (In Process of Collection) 2007 (a) Includes assessed value attributable to the TIRZ. (b) Includes assessed value attributable to Brazoria County Municipal Utility'District No. 1,annexed by the City on December 31,2006. -Tax Rate Distribution- 2006 2005 2004 2003 2002 Maintenance $0.298974 $0.345480 $0.338900 $0.345700 $0.406000 Debt Service 0.353685 0.328920 0.355900 0.350300 0.280000 Total $0.652659 $0.674400 $0.694800 $0.696000 $0.686000 -Analysis of Delinquent Taxes- The following is an analysis,by tax year,of taxes delinquent as of September 30,2006. Uncollected Adjusted Percentage _ Tax Year As of September 30,2006 Tax Levy(a) of Tax Levy 2005 $563,291 $26,773,438 2.1% 2004 146,608 22,145,299 0.7 . 2003 96,388 17,987,752 0.5 2002 66,031 14,869,170 0.4 2001 59,188 12,890,902 0.5 2000 30,021 10,864,049 0.3 1999 33,913 9,174,224 0.4 1998 16,169 8,147,473 0.2 - 1997 12,990 7,062,826 0.2 1996 8,788 6,343,113 0.1 (a) The total tax levy has been adjusted to reflect additions and deletions from the tax roll for prior years. - -Delinquent Tax Collection Procedures- In addition to the legal procedures and penalties described under "Levy and Collection of Taxes", the City has retained a delinquent tax attorney on a contract basis to file suit to collect delinquent taxes due the City. The fees - due such attorney for acting as delinquent tax attorney are payable from an additional penalty imposed upon the delinquent taxpayer,not to exceed 20%of the tax due. 21 • � I Analysis of Tax Base -Tax Base Distribution- 2006 Tax Roll 2005 Tax Roll 2004 Tax Roll Type of Property Amount %_ Amount % Amount % Residential $3,717,506,240 74.6% $2,892,460,301 71.6% $2,306,313,150 70.6% Acreage 181,164,630 3.6 171,917,714 4.3 171,709,500 5.3 Vacant Lots/Tracts 226,948,950 4.6 238,624,160 5.9 158,938,710 4.9 Farm&Ranch 8,373,960 0.2 7,986,224 0.2 5,528,720 0.2 Commercial/Industrial 760,826,290 15.3 655,848,240 I6.2 545,849,480 16.7 Utilities 51,234,300 1.0 48,658,247 . 1.2 45,034,700 1.4 Real Inventory 22,885,800 0.5 12,121,454 0.3 14,500,240 0.4 Other 17,583,110 0.4 . 13,241,531 0.3 18,183,090 0.6 Gross Assessed Value $4,986,523,280 $4,040,857,870 $3,266,057,590 Less: Exemption (331,850,540) (224,622,840) (245,607,617) _ Net Assessed Value $4,654,672,740(a)(b)(c) $3,816,235,030(a)(d) _ $3,020,449,973(a)(e) (a) Value may differ from those shown elsewhere in this Official Statement due to subsequent adjustments to the tax roll. (b) Includes $724,365,960 in assessed value attributable to the TIRZ. Pursuant to an agreement between the City and the TIRZ,tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Bonds;however,a portion of such revenues are retained by the City for administrative services related to the TIRZ. See'TAX DATA—Tax Increment Reinvestment Zone"for a description of the agreement between the City and the TIRZ. (c) Includes$241,248,630 in assessed valuation from Brazoria County Municipal Utility District No. 1,which was r annexed by the City on December 31,2006. (d) Includes$472,467,612 in assessed value attributed to the TIRZ. (e) Includes$219,785,523 in assessed value attributed to the TIRZ. -Principal Taxpayers • - 2006 • 2005- 2004 • Taxable Taxable Taxable Assessed Assessed Assessed Principal Taxpayer Type of Property Valuation Valuation Valuation Weatherford U.S.Inc. Oil Field Equipment $ 33,607,360 $ 33,721,540 $ 34,027,450 Wal-Mart Real Estate Shopping Center 25,434,850 18,652,320 12,428,460 Centerpoint Energy,Inc. Utility 22,914,100 21,856,040 19,416,250 Shadow Creek Ranch Development Land Development 22,305,440 27,498,170 24,982,840 P,,.::.nd Inrstntents Ltd.Prt. Land Development 21,244,650 18,529,300 17,119,940 Waterford SCR,LP Land Development 19,088,150 (a) (a) HD Development Properties LP Land Development 13,485,360 11,466,010 (a) Lowe's Home Centers Retail Store 13,454,040 12,683,070 13,731,580 MHI Partnership Ltd. Land Development 13,206,850 12,094,900 (a) Perry Homes Home Construction 11,016,650 17,768,220 (a) Home Depot USA Inc. Retail Store (a) 9,069,980 9,756,700 Landar Mary's Creek Apartments Apartments (a) (a) 10,309,630 HCA Healthcare Corp. Health Care (a) (a) 10,454,400 D R Horton-Emerald Ltd. Home Construction (a) (a) 9,371,630 Total Ten Principal Taxpayers $195,756,450 $183,339,550 $161,598,880 • _ Percentage Ten Principal Taxpayers Comprise of Tax Roll 4.21% 4.80% 5 3 % (a) Not a principal taxpayer in such tax year. , 22 . -Tax Adequacy- Average Annual Debt Service Requirements based on Total New Debt Service(2007-2032) $13,699,995 Tax Rate of$0.31 per$100 assessed valuation against the 2006 Certified Assessed Valuation,at 95%collection,produces $13,708,011 Maximum Annual Debt Service Requirements based on Total New Debt Service(in the year 2018) $17,102,854 Tax Rate of$0.39 per$100 assessed valuation against the 2006 Certified Assessed Valuation,at 95%collection,produces $17,245,563 Estimated Overlapping Taxes Under Texas law, if ad valorem taxes levied by a taxing authority become delinquent, a lien is created upon the property which has been taxed, which lien is on a parity with any tax lien on such property in favor of the City. In addition to ad valorem taxes required to retire the aforementioned direct and estimated overlapping debt, certain taxing jurisdictions including those mentioned in Estimated Overlapping Debt are also authorized by Texas law to assess, levy, and collect ad valorem taxes for operation, maintenance, administrative and/or general revenue purposes. Set forth below is an estimation of ad valorem taxes levied on a $100,000 single-family residence by such jurisdictions, assuming the assessments are made at their claimed basis of assessment (100%). Such residence is further assumed to be located within Brazoria County wherein substantially all of the residential property within the City is located_ No recognition is given to local assessments for civic association dues, fire department • contributions,or other charges made by other than political subdivisions. -- 2006 Tax Estimated Taxing Jurisdiction Rate/$100 2006 Tax Bill The City $0.652659 $ 652.66 Brazoria County 0.321701 321.70 Brazoria Drainage District No.4 0.143845 143.85 Pearland ISO 1.662200 1.662.20 Estimated Total 2006 Tax Bill: ;2.780405 .• $2.780.41(a) (a) Ad valorem taxes are levied by separate municipal utility districts ("MUD") on property located within the specific MUD. These taxes are paid in addition to the above noted City taxes. Sales Tax -Authority- The City has adopted the provisions of Article 1066c,Vernon's Texas Civil Statutes,as amended, which grants the City the power to impose and levy a 1%sales tax. The City has also voted an additional 1/2%sales and use tax for economic development under Article 5190.6,Vernon's Texas Civil Statutes, as amended. The City may not and has not pledged the proceeds from the sales and use tax as security for the Certificates. 23 i 1 -Collection History- The State Comptroller,after deduction of a 2%servic e fee,currently remits the City's portion of sales tax collections monthly. By statute the Comptroller is required/to remit at least twice annually. The following is an analysis of the collection history of the City's sales and use tax: Ad Valorem Tax Comparisons Fiscal Year Sales and Use Equivalent Tax Rate %of Actual Ended 9-30 Tax Receipts Tax Year Equivalent Tax Levy 1994 $1,905,741 (1993) $0.261 36.48 1995 2,166,219 (1994) 0.284 40.74 1996 2,298,546 (1995) 0.272 39.16 1997 2,589,918 (1996) 0.298 40.83 1998 2,962,481 (1997) 0.297 41.94 1999 3,415,183 (1998) 0.291 41.92 2000 3,684,676 (1999) 0.279 40.16 2001 4,795,355 (2000) 0.307 44.14 - 2002 5,025,749 (2001) 0.285 38.99 2003 5,859,053 (2002) 0.270 39.40 2004 6,739,484 (2003) 0.260 37.47 2005 7,785,161 (2004) 0.258 37.09 2006 9,712,118 (2005) 0.253(a) 37.49(a) (a) Includes values for Brazoria County Municipal Utility District No. 1, which was annexed by the City on December 31,2006. SELECTED FINANCIAL DATA Historical Operations of the City's General Fund The following is a condensed statement of revenues and expenses of the City's General Fund for the past five fiscal years. The inclusion of the following table is not intended to imply that any revenues of the City,other than receipts from ad valorem taxes as provided in the Ordinance and the limited, subordinate pledge of Net Revenues of the _ System,are pledged to pay principal and interest on the Certificates. . . Fiscal Year Ended September 30 2006 2005 2004 2003 2002 REVENUES General Property Taxes(a) $11,413,806 $ 9,649,452 $ 8,752,162 $ 8,970,369 $ 8,054,173 Sales Taxes 9,712,118 7,785,161 6,739,484 5,859,053 5,025,749 Franchises 3,42E_352 3,097,163 2,883,188 2,533,475 2,453,829 '__ Licenses&Permits 4,0oo,914 3,863,592 3,427,957 2,682,456 2,256,638 Charges for Services 8,734,090 6,138,610 5,259,748 3,982,070 3,651,825 Fines&Forfeitures 1,934,882 1,883,381 1,561,850 1,377,552 845,322 Intergovernmental 448.502 . 871,196 716,136 615,436 -0- Other Revenues 769,479 1,066,315 855,628 324.501 908,154 Total Revenues $40,506,143 $34,354,870 $30,196,153 $26,344,912 $23,195,690 ' EXPENDITURES General Government $ 6,284,996 $ 6,664,735 $ 6,059,595 $ 5,678,275 $ 5,052,056 Public Safety 12,685,081 10,816,906 - 10,142,115 9,637,676 7,411,992 Public Works 9,727,972 10,449,814 8,709,151 8,769,722 7,603,804 Community Services 2,739,532 2,692,450 2,792,376 2,729,859 2,271,052 _ Capital Outlay 4,308,250 1,019,976 -0- -0- -0- Total $35,745,831 $31,643,881 $27,703,237 $26,815,532 $22,338,904 (a) Includes penalties and interest. Source: City's audited financial statements. 24 General Fund and Debt Service Fund Balance for the Past Five Ficral Years Fiscal Year Ended September 30 2006 2005 2004 2003 2002 General Fund $10,597,369 $8,202,771 $8,285,590 $5,361,732 $5,024,946 Debt Service Fund $ 4,658,301 $3,855,129 $3,007,752 $2,130,321 $2,229,529 Source: City's audited financial statements. Pension Fund The City participates in the Texas Municipal Retirement System(TMRS),an agency operated by the State of Texas. Employees of the City who participate in TMRS contribute a fixed percentage,currently 7%,of their gross pay and the City matching percent is currently 2 to 1. As employees leave municipal employment other than through retirement, they may withdraw from TMRS those funds they contributed,but forfeit their employer's contributions. Each municipal employers requirements for current contributions are offset by the amounts of such forfeitures. As of January 5, 2007, the City employed 401 full-time employees and 51 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's contribution for fiscal year 2006, amounted to approximately $1.7 million which includes amortization of prior service cost over 25 years. The City had no unfunded pension benefit obligation as of September 30, 2006. The liability for prior service benefits will be amortized over a period of twenty-five years or less by contributions from the City which are a level percentage of ,- payroll. Financial Statements • A copy of the City's Financial Statements for the fiscal year ended September 30, 2006, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available,for a fee,upon request. ADMINISTRATION OF THE CITY Mayor and City Council Policy-making and supervisory functions are the responsibility of and are vested in the Mayor and City Council for the City, under provisions of the "Charter of the City of Pearland" (the "Charter") approved by the electorate February 6, 1971. The Council is elected at large on the first Saturday in May. The Mayor and five Council members serve three-year staggered terms. The Mayor is entitled to vote only in the event of a tie and has no power to veto Council action. Members of the Council are described below: • Term Council Members Period Served Expires May Occupation Tom Reid 16 Years 2008 Retired Mayor Kevin Cole 3 Years(a) 2007 Insurance Broker Council Member Mayor Pro-Tem Helen Beckman 1 Year 2009 Retired Council Member Felicia Kyle 1 Year 2009 Attorney Council Member Richard Tetens 6 Years(b) 2007 Retired Council Member Steve Saboe 2 Years 2008 Management Council Member (a) Elected May 2004,however Councilman Cole has served a previous term(3 years)on the City Council. • (b) Elected May 2001,however Councilman Tetens has served two previous terms(6 years)on the City Council. 25 i 1 Administration Under provisions of the Charter,the City Council enacts local legislation, adopts budgets,determines policies and appoints the City Manager,who is charged with the duties of executing the laws and administering the government of the City. As the chief executive officer and head of the administrative branch of the City government,the City Manager is given the power and duties to: (1) Appoint and remove all department heads and all other employees in the administrative service of the City and-may authorize the head of a department to appoint and remove subordinates in his respective department; (2) Prepare the budget annually,submit it to City Council,and,be responsible for its administration; (3) Prepare and submit to City Council a complete report on the finances and administrative activities of the City; (4) Keep City Council advised of the financial condition and future needs of the City and make appropriate recommendations;and (5) Perform such other necessary duties as prescribed by the Charter or required by City Council. Members of the administrative staff are described below: • Name Position Period Served Bill Eisen City Manager 6 Years Nick Finan Assistant City Manager 2 Years Mike Hodge Assistant City Manager 2 Years Claire Manthei Director of Finance 2 Years Daniel Cameron Director of Public Works 14 Years Young Lorfing City Secretary 10 Years Doug Kneupper City Engineer 4 Years Darrin Coker City Attorney 10 Years Joseph Wertz Director of Projects 5 Years Christopher Doyle Police Chief 28 Years Consultants The City has retained several consultants to perform professional services in connection with the independent auditing of its books and records and other City activities. Several of these consultants are identified below: Bond Counsel Andrews Kurth LLP Houston,Texas Certified Public Accountants Null-Lairson,P.C. Pearland,Texas Financial Advisor RBC Capital Markets Houston,Texas LEGAL MATTERS Legal Opinions The City will furnish the Underwriter a transcript of certain certified proceedings prepared incident to the authorization and issuance of the Certificates,including a certified copy of the unqualified approving opinion of the Attorney General of Texas,as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The City also will furnish the approving legal opinion of Andrews Kurth LLP,Houston,Texas, Bond Counsel,to the effect that, based upon an examination of such transcript,the Certificates are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The legal opinion of Bond Counsel will further state that (1) the Certificates are payable, both as to principal and interest, from the levy of ad valorem taxes, within the limits prescribed by law, 26 r1 against taxable property within the City and (2) subject to the matters discussed under the caption "TAX EXEMPTION," interest on the Certificates is excludable from gross income for federal income tax purposes: The opinion of Bond Counsel is expected to be reproduced on the back panel of the Certificates over a certification by the City Secretary attesting that such legal opinion is dated as of the date of delivery of and payment for the Certificates and is a true and correct copy of the original opinion.Errors or omissions in the printing of such legal opinion on the Certificates shall not affect the validity of the Certificates nor constitute cause for the failure or refusal by the.Underwriter to accept delivery of and pay for the Certificates. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information describing the Certificates in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent upon the sale and delivery of the Certificates. The legal opinion will be printed on the Certificates. No-Litigation Certificate The City will furnish to the Underwriter a certificate,dated as of the date of delivery of the Certificates,executed by appropriate City officials,to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Certificates; restraining or enjoining the issuance, execution or delivery of the Certificates; affecting the provisions made for the payment of or security for the Certificates; in any manner questioning the authority or proceedings for the issuance,execution,or delivery of the Certificates;or affecting the validity of the Certificates. No Material Adverse Change • The obligations of the Underwriter to take and pay for the Certificates,and of the City to deliver the Certificates,are subject to the condition that,up to the time of delivery of and receipt of payment for the Certificates,there shall have been no material adverse change in the condition (financial or otherwise)of the City subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. TAX EXEMPTION In the opinion of Andrews Kurth LLP,Houston,Texas,Bond Counsel,interest on the Certificates is(1)excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), from gross income of the owners thereof for federal income tax purposes and(2)is not includable in'the alternative minimum taxable income - of individuals or corporations,except as described below. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the ordinance authorizing the issuance of the Certificates and has relied on representations by the City with respect to matters solely within the knowledge of the City, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Certificate proceeds and any facilities -- financed therewith, the source of repayment of the Certificates, the investment of Certificate proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Certificate proceeds and certain other amounts be paid periodically to the United States and that the City file an information report with the Internal Revenue Service(the"Service"). If the City should fail to comply with the covenants in the Ordinance, or if its, representations relating to the Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates,regardless of the date on which the event causing such taxability occurs. Interest on all tax-exempt obligations,such as the Certificates,owned by a corporation(other than an S corporation, a regulated investment company, a real estate investment trust(REIT), a real estate mortgage investment conduit • (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. 27 Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of,receipt or accrual of interest on or acquisition or disposition of the Certificates. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes,regulations,published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Service with respect to the matters addressed in the opinion of Bond Counsel,and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the City as the"taxpayer,"and the owners of the Certificates may have no right to participate in the audifprocess. In responding to or defending an audit of the tax-exempt status of the interest on the Certificates, the City may have different or conflicting interests from the owners of the Certificates. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit,regardless of its ultimate outcome. Under the Code,taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest,such as interest on the Certificates,received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations,such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies,property and casualty insurance companies,certain foreign corporations doing business in the United States,certain S corporations with Subchapter C earnings and profits,individual recipients of Social Security or Railroad Retirement benefits,taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a'FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the_consequences of investing in the Certificates. ; If a tax-exempt obligation,such as the Certificates,was acquired at a"market discount"and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue, the Code provides ordinary income tax treatment of gain recognized upon the disposition of such"market discount bond." A"market discount bond"is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or,in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., a market discount). Such treatment applies to"market discount bonds"to the extent the gain from the disposition thereof exceeds the accrued market discount of such bonds unless a statutory de minimis rule applies. The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of the Certificates. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates are offered at initial offering prices which are less than the stated *Pi?Pmption prices at maturity of such Certificates. If the initial offering prices of the Certificates are is,wer than the stated redemption price payable at maturity, the Certificates of that maturity (the "Discount Certificates") will be considered to have "original issue discount"for federal income tax purposes. An initial owner who purchases a Discount Certificate in the initial public offering of the Certificates at such an initial offering price will acquire such Discount Certificate with original issue discount equal to the difference between(a)the stated redemption price payable at the maturity of such Discount Certificate and (b) the initial offering price to the public of such Discount Certificate. Under existing law,such original issue discount will be treated for federal income tax purposes as additional interest on a Certificate and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Certificate continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Certificates under the caption "TAX EXEMPTION" generally applies to - original issue discount deemed to be earned on a Discount Certificate while held by an owner who has purchased such Certificate at the initial offering price in the initial public offering of the Certificates and that discussion should be considered in connection with this portion of the Official Statement. 28 In the event of a redemption,sale,or other taxable disposition of a Discount Certificate prior to its stated maturity, however,any amount realized by such initial owner in excess of the basis of such Discount Certificate in the hands of such owner(increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Certificate continues to be held by such initial owner) will be includable in gross income for federal -. income tax purposes. Because original issue discount on a Discount Certificate will be treated for federal income tax purposes as interest on a Certificate,such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Corporations that purchase Discount Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Certificate may be required to take into account such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a Certificate. See "TAX EXEMPTION" for a discussion regarding the alternative minimum taxable income consequences for corporations and for a reference to collateral federal tax consequences for certain other owners. The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Certificate or of the City. The portion of the - principal of a Discount Certificate representing original issue discount is payable upon the maturity or earlier redemption of such Certificate to the registered owner of the Discount Certificate at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Certificate is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determined under an actuarial method of accrual, using;the yield to maturity as the constant interest rate and semi-annual compounding. . The federal income tax consequences of the purchase,ownership,redemption,sale or other disposition of Discount Certificates by an owner that did not purchase such Certificates in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Certificates should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Certificates and with respect to the federal,state,local and foreign tax consequences of the purchase,ownership,redemption,sale or other disposition of such Discount Certificates. Premium Certificates Some of the Certificates are offered at initial offering prices which exceed the stated redemption prices payable at the maturity of such Certificates. If any of the Certificates of such maturities are sold to members of the public (which for this purpose excludes bond houses,brokers and similar persons or organizations acting in the capacity of wholesalers or underwriters) at such initial offering prices, each of the Certificates of such maturities ("Premium Certificates") will be considered for federal income tax purposes to have "bond premium"equal to the amount of such excess. The basis for federal income tax purposes of a Premium Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxable • disposition of the Certificate by the amount of amortizable bond premium. This reduction in basis will increas- ;t amount of any gain(or decrease the amount of any loss)recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Certificate by the initial purchaser. Generally,no corresponding deduction is allowed for federal income tax purposes,for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Certificate which is amortizable each year(or shorter period in the event of a sale or disposition of a Premium Certificate)is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. The federal income tax consequences of the purchase,ownership,redemption,sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Certificates of the same maturity may be determined according to rules - which differ from those described above. Moreover,all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption,sale or other disposition of Premium Certificates. 29 II' - CONTINUING DISCLOSURE OF INFORMATION - In order to provide certain continuing disclosure with respect to the Bonds in accordance with Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934,as the same may be amended from time to time ("Rule 15c2-12"), the City has entered into a Disclosure Dissemination Agent Agreement ("Disclosure Dissemination Agreement") for the benefit of the Holders of-the Bonds with Digital Assurance Corporation, L.L.C. ("DAC"), under which the City has designated DAC as Disclosure Dissemination Agent. The form of Disclosure Dissemination Agreement can be obtained on www.dacbond.com. In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The City will provide certain updated•financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY—Current Investments," "CITY TAX DEBT," "TAX DATA" (except under the subheading"Estimated Overlapping Taxes"),"SELECTED FINANCIAL DATA," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year ending in or after 2006. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to the Texas Municipal Advisory Council, the state information depository ("SID") designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission(the"SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents,as permitted by SEC Rule 15c2-12, as amended and in effect from time to time(the "Rule"). The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not commissioned or are not available by the required time,the City will provide unaudited financial statements and audited financial statements when and if they become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix "B" or such other accounting principles as the City,may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly,it must provide updated information by March 31 in each year,beginning March 31,2008,unless the City changes its fiscal year. If the City changes its fiscal year,it will notify each NRMSIR and the SID of the change. Material Event Notices The City will also provide timely notices of certain events to certain information vendors. The City will prov notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (1)principal and interest payment delinquencies;(2)non-payment related defaults;(3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (7)modifications to rights of holders of the Certificates;(8)calls;(9)defeasances;(10)release,substitution,or sale of property securing repayment of the Certificates; and (11) rating changes. Neither the Certificates nor the Ordinance makes any provision for debt service reserves or liquidity enhancement. In addition,the City will provide timely notice of any failure by the City to provide information,data,or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to _ either each NRMSIR or the Municipal Securities Rulemaking Board. Availability of Information From NRMSIRs and SID The City has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of and beneficial owners of the Certificates only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. 30 The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council of Texas is 600 West 8th Street,P.O.Box 2177,Austin,Texas 78768-2177,and its telephone number is(512)476-6947. The MAC has also received SEC approval to operate and has begun to operate,a"central post office"for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing.This central post office can be accessed and utilized at www.disclosureUSA.org ("DisclosureUSA"). The City may utilize DisclosureUSA for the filing of information relating to the Certificates. Limitations and Amendments The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations,condition,or prospects or agreed to update any information that is provided,except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Certificates at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, of its continuing disclosure agreement or from any statement made pursuant to its agreement. Holders or beneficial owners of Certificates may seek as their sole remedy a writ of mandamus to compel the City to comply with its agreement. No default by the City with respect to its continuing disclosure agreement shall constitute a breach of or default under the Ordinance for purposes of any other provision of the Ordinance. Nothing in this paragraph is intended or shall act to disclaim,waive,or otherwise limit the duties of the City under federal and state securities laws. The City's undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions. The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements,a change in law,or a change in the identity,nature,status or type of operations of the City if, but only if(i)the agreement,as so amended,would have permitted a purchaser to purchase or sell the Certificates in the offering made hereby in compliance with the Rule,taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate amount of the outstanding Certificates consent to such amendment or(b)a person unaffiliated with the City(such as nationally recognized bond counsel)determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid, and the City may amend the.agreement in its discretion in any other circumstance or manner, but in either case only to the extent that its right to do so would not prevent the Underwriters from purchasing the Certificates in the offering described herein in compliance with the Rule. If the City amends the agreement,it has agreed to include with any financial information or operating data next provided in accordance with its agreement described above under"Annual Reports"an explanation,in narrative form,of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Audited Financial Report of the City The City presently requires that an annual audit be performed by an independent public accounting firm in accordance with generally accepted auditing standards for governmental units. The most recent audit,and additional financial information are available for public inspection,or copies may be obtained by written request,to the extent permitted by law,addressed to the City, with such fee,if any,for copies as may from time to time be authorized by the City. Compliance With Prior Undertakings The City has complied in all material respects with its prior continuing disclosure agreements made in accordance with the Rule. 31 . GENER AL CONSIDERATIONS Sources and Compilation of Information The information contained in this Official Statement has been obtained primarily from the City and from other sources believed to be reliable. No representation is made as to the accuracy or completeness of the information derived from sources other than the City. The summaries of the statutes, orders, ordinances and other related documents are included herein subject to all of the provisions of such documents.These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. The information contained in this Official Statement in the section entitled "APPENDIX B - Audited Financial Statements of the City" has been provided by Patillo, Brown & Hill,.P.C., Waco,.Texas and has been included herein in reliance upon their authority as an expert in the fields of auditing and accounting. Bond Counsel has reviewed the information herein contained under the captions "THE CERTIFICATES" (except for sections captioned "Book-Entry-Only System," "Future Debt" and "Use of Proceeds"), "LEGAL MATTERS - Legal Opinions," "TAX EXEMPTION," "TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES," and "CONTINUING DISCLOSURE OF INFORMATION (except for the section captioned "Compliance With Prior Undertakings")," solely to determine whether such information fairly and accurately describes the Certificates, the Ordinance, and the law set out therein. Bond Counsel has neither independently verified other factual information contained in this Official Statement nor conducted an investigation of the affairs of the City for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon the limited participation of such firms as an assumption of responsibility for,or an expression of opinion of any kind with regard to,the accuracy or completeness of any of the other information contained herein. Neither this Official statement nor any statement that may have been made orally or in writing is to be constructed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. Certification as to Official Statement At the time of payment for and delivery of the Certificates, the City will furnish the Underwriter a certificate, executed by the City Secretary and Mayor, acting in their official capacities, to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in this Official Statement,on the date thereof and on the date of delivery were and are true and correct in all material respects;(b) insofar as the City and its affairs, including its financial affairs, are concerned,this Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary to make the statements herein, in the light of the circumstances•under which they were made, not misleading; and (c) insofar as the descriptions and statements, including'financial data contained in this Official Statement,of or pertaining to entities other than the City and their activities are concerned,such statements and data have been obtained from sources which the City believes to be reliable and that the City has no reason to believe that they are untrue in any material respect. Updating of Official Statement The City will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the City and, to the extent that information comes to its attention, in the other matters described in the Official Statement,until the delivery of the Certificates to the Underwriter. This Official Statement was duly authorized and approved by the City Council of the City of Pearland,Texas as of the date specified on the first page hereof. /s/Tom Reid Mayor City of Pearland ATTEST: /s/ Young Lorfing City Secretary City of Pearland 32 • APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF PEARLAND The following information has been derived from various sources,including the U.S.Census data,Texas Workforce Commission, "Sales Management Survey of Buying Power",Claritas,and City of Pearland,Texas officials. While such sources are believed to be reliable,no representation is made as to the accuracy thereof. Residential and Commercial Development Because of the City's proximity to downtown Houston, it has become an area of continuing growth in residential, commercial and some light industrial development. As of January 2007,there are numerous residential subdivisions either developed or under construction within the City with homes ranging in value from$75,000 to$400,000, the average being approximately$185,400. -Building Permits- Residential Commercial Other(a) Total Year 12-31 No. Value No. Value No. Value No. Value 1995 340 34,734,829 13 3,762,900 528 7,799,090 881 46,296,819 1996 478 38,301,224 19 5,189,850 392 85,320,262 889 128,811,066 1997 415 43,712,441 30 10,785,050 402 50,038,171 847 104,535,662 1998 506 60,691,036 23 12,696,415 422 40,739,351 951 114,126,808 1999 536 64,525,679 22 13,847,245 532 :48,265,402 1,090 126,638,386 2000 818 202,795,755 17 43,414,385 604 59,823,285 1,439 306,033,425 2001 1,245 212,152,849 20 10,868,583 705 21,129,833 1,970 244,151,265 2002 1,424 257,282,301 20 29,585,122 719 15,782,222 2,163 302,649,645 2003 1,684 312,354,189 49 41,504,192 742 17,717,326 2,475 371,575,707 2004 2,102 384,666,248 43 39,220,592 645 21,702,813 2,790 445,589,653 2005 2,610 479,228,095 51 40,675,200 664 30,299,897 3,325 550,203,192 2006 2,072 393,252,216 66 173,299,982 446 38,301,234 2,584 604,853,432 (a) Includes Apartments and public facilities. • Source: City of Pearland Major Employers The City has a well-rounded workforce with a significant percentage of workers employed in professional or executive positions or as administrative support for professionals. The industries employing the greatest number of Pearland's residents are manufacturing of durable goods,retail trade and education. Industrial activities within the City include the manufacturing of pipe, concrete building materials, mining equipment, lighting fixtures, large storage tanks and the fabrication and forging of steel. According to the Pearland Chamber of Commerce, the following is a list of the industrial employers located within the City with employment above 100. • 100—999 Employees Davis Lynch Randall's Home Depot Shaw Cor Pipe Protection Kemlon Strickland Chevrolet Kroger Super Target Lowe's Tele-Flow,Inc. Pauluhn Electric Manufacturing TurboCare Pearland,City of Weatherford Manufacturing Pro Fax 1000+Employees Pearland ISD Wal-Mart . ECONOMIC AND GROWTH INDICATORS U.S.Census of Population City of Pearland Brazo•ria County Number %Change Number %Change 1930 -- — 23,054 +11.84 1940 — — 27,069 +17.42 1950 -- -- 46,549 +71.96 1960 1,497 — 76,204 +63.71 :, 6,444 +330.46 108,312 , +42.13 1980 13,248 +105.59 169,587 +56.57 1990 18,927 +42.87 191,707 +13.04 2000 37,640 +98.87 241,767 +26.11 2005 69,808 +85.46 2006* 78,528 +9.63 * As of December 2006. Employment Statistics Source: Texas Workforce Commission it City of Pearland 2006(a) 2005 2004 2003 2002 2001 2000 1999 1998 i Labor Force 31,055 27,906 20,398 13,035 12,555 12,074 12,010 11,773 11,905 Employed 30,024 26,809 19,403 12,323 12,004 11,640 11,556 11,290 11,466 Unemployed 1,031 1,097 994 712 551 434 454 483 439 -- Rate 3.3 3.9 4.9 5.5 4.4 3.6 3.8 4.1 3.7 Brazoria County 2006(a) 2005 2004 2003 2002 2001 2000 1999 1998 Labor Force 139,841 132,814 125,175 116,777 110,179 106,660 106,312 104,330 105,383 - Employed 133,577 126,536 115,693 106,393 102,593 100,336 99,685 97,274 98,970 Unemployed 6,264 6,278 9,480 10,384 7,586 6,324 6,627 7,056 6,413 Rate 4.5 4.7 7.7 8.9 6.9 5.9 6.2 • 6.8 6.1 (a) As of November 2006. • Marketing Survey of Buying Power* Houston CMSA Brazoria County Population(000s) Total Population 5,341.3 271.9 18-24 10.0 • 9.9 25-34 1,4.8 . ' 13.7 35-49 23.1 23.9 50+ 23.6 24.5 Households 1,865.4 93.0 ' Retail By Store Group Sales(000's) Total Retail Sales $ 81,154,286 $3,203,521 Food&Beverage Stores 9,044,420 369,610 Food&Beverage Stores Estab. 8,160,895 231,535 General Merchandise 11,987,182 641,421 Furnit.&Home Furnish.and Electron.&Appin. 5,176,520 73,145 Motor Vehicle&Parts Dealers $ 22,198,875 $ 927,372 Total EBI($000) $107,30I,634 $5,067,825 Median Household EBI 42,818 45,928 $20,000-$34,999 20.8 I9.1 $35,000-$49,999 18.1 _ 18.6 $50,000 and Over 41.6 45.0 Buying Power Index 1.8831 0.858 * Statistical data from "Sales&Marketing Management-2005 Survey of Buying Power",copyright in 2005 Sales Management Survey of Buying Power. Further reproduction is forbidden. I ' S APPENDIX B 9 AUDITED FINANCIAL STATEMENTS OF THE CITY CITY OF PEARLAND, TEXAS E ' x A • 1 E X A r.,rm ANNUAL FINANCIAL REPORT Fiscal Year Ended September 30, 2006 P I r Officials Issuing Report Bill Eisen Nick Finan and Claire Manthei Rick Overgaard City Manager Mickiel Hodge Director of Finance Assistant Director of Assistant City Finance Managers 1 � FINANCIAL SECTION IlL 11 Granway Plaza,Suite 1515 ti Null Lairson One Sugar Creek Ctr.Blvd., Suite 920 Houston,TX 77046 Pearland,TX 77478 (713)621-1515 CERTIFIED PUBLIC ACCOUNTANTS 281.242.8600 Fax:(713)621-1570 PROFESSIONAL CORPORATION Fax:281.242.7333 • To the Honorable Mayor and Members of the City Council City of Pearland, Texas We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of City of Pearland, Texas, (the"City") as of and for the year ended September 30, 2006, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of City's management. Our responsibility is to express opinions on these financial statements based ; on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Pearland, Texas, as of September 30, 2006, and the respective • changes in financial position and cash flows,where applicable, thereof".:. the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated December 29, 2006 on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions or laws, regulations, contracts, and grants. That report,which has been issued separately from this document, is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. i - I j i The Management's Discussion and Analysis on pages 3 through 13, budgetary comparison information and Required Pension System Supplementary Information on pages 59 through 61 are not required parts 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 supplementary information. However, we did not audit the 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 City of Pearland, Texas' basic financial statements. Combining and individual nonmajor fund financial statements and schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. ".03,74,17<,/, Houston, Texas December 29,2006 • a r-6 2 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS As management of the City of Pearland, we offer readers of the City's financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30,2006. ' r FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2006, by $105.5 million (net assets). Of this amount, $9.6 million (unrestricted net assets) may be used to meet the City's ongoing obligations to citizens and creditors in accordance with the City's fund designation and fiscal policies. • The City's total net assets increased by$36.6 million. • At the close of the current fiscal year,the City of Pearland's governmental funds reported combined ending fund balances of $72.2 million, an increase of $13.4 million in comparison with the prior year. Approximately$53.8 million of this ending balance can be attributed to work in progress for capital projects. • As of September 30, 2006, the unreserved, undesignated fund balance for the General Fund was $10.0 million or 28%of total General Fund expenditures. • The City of Pearland's General Obligation and Certificates of Obligation debt increased to $186.6 million, a net increase of$38.1 million over the previous year. The key factor was the sale of$32.2 million in Permanent Improvement and Refunding Bonds. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City'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. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements — The government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private-sector business. The Statement of Net Assets presents information on all of the City'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 City is improving of deteriorating. The Statement of Activities presents information showing how the City's net assets changed during the fiscal year. All changes in net assets are reported when 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 the future fiscal periods(e.g.,uncollected taxes and earned but unused compensated absences). 3 It_ CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City of Pearland include general government, public safety, public works, community services and parks and recreation. The business-type activities of the City include water and sewer. The government-wide financial statements can be found on pages 17 through 19 of this report. The government-wide financial statements include not only the City of Pearland,itself(known as the primary government), but also a legally separate Economic Development Corporation, Tax Increment Reinvestment Zone (TIRZ) and the Development Authority of Pearland for which the City of Pearland is financially accountable. Financial information for these component units is reported separately from the financial information presented for the primary government,itself. 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 City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All funds of the City can be divided into two categories—governmental funds and proprietary funds. 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 statement focus on current sources and uses 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 a government'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 government's near-term financing decisions. Both the governmental funds balance sheet and the governmental fund :Luients of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. Beginning on page 20 of this report, information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances for the General,Debt Service,Capital Projects and other funds,which are considered to be major funds. Data from the other governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. The City of Pearland adopts an annual appropriated budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with the budget. - 4 • CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Proprietary Funds—The City maintains one type of proprietary fund. Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses an Enterprise Fund to account for its Water and Sewer Fund. Proprietary funds provide the same type of information as the government-wide financial statements, only in more-detail. The basic ro rie p p tary fund financial statements, which begin on page 34 of this report, provide separate information for the Water and Sewer Enterprise Fund since it is considered to be a major fund of the City. The basic proprietary fund financial statements can be found on pages 24 through 26 of this report. Combining Component Unit Financial Statements - The City's three discretely presented component units shown in aggregate on the face of the government-wide financial statements have individual information for each of the major discretely presented component units presented in the form of combining statements immediately following the fund financial statements of the primary government. 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 beginning on page 30 of this report. Other Information —In addition to the basic financial statements and accompanying notes, this report also presents other required supplementary information as well as combining and individual fund statements and schedules that further support the information in the financial statements. This information is presented immediately following the notes to the financial statements beginning on page 59 of this report. Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the City, assets exceeded liabilities by $105.5 million at the close of the most recent fiscal year. By far the largest portion of the City's net assets (74 percent) reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment); less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt,it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. 5 i CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF NET ASSETS September 30,2006 and 2005 Amounts in(000's) ' Governmental Activities Business-type Activities Totals x - 2006 2005 2006 2005 2006 2005 Current and other assets $ 79,129 $ 65,343 $ 21,256 ' $ 17,835 $ 100,385 $ 83,178 Capital assets 143,139 92,505 100,944 88,846 244,083 181,351 Total Assets 222,268 157,848 122,200 106,681 344,468 264,529 Other liabilities 6,072 8,854 3,166 6,662 9,238 15,516 Long-term liabilities outstanding 174,625 133,263 55,061 46,798 229,686 180,061 Total Liabilities 180,697 142,117 58,227 53,460 238,924 195,577 t Net assets: Invested in capital assets, nets of related debt 24,569 3,084 53,144 45,642 77,713 48,726 Restricted - 8,085 6,862 10,129 7,027 18,214 13,889 Unrestricted - 8,917 5,785 700 '552 9,617 6,337 Total Net Assets $ 41,571 $ 15,731 $ 63,973 $ 53,221 $ 105,544 S 68,952 , h An additional portion of the City's net assets (17 percent) represent resources that are subject to , external restrictions on how they may be used. The remaining balance of unrestricted net assets (9 percent)may be used to meet the government's ongoing obligations to citizens and creditors. t 6 i , CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF CHANGES IN NET ASSETS For the Years Ended September 30,2006 and 2005 Amounts in(000's) - Governmental Activities Business-type Activities Totals 2006 2005 2006 2005 2006 2005 Revenues Program revenues: Charges for services $ 14,094 S 12,309 $ 13,849 $ 11,220 $ 27,943 $ 23,529 Operating grants and contributions 1,426 1,155 474 1,900 1,155 Capital grants and contributions 15,749 1,118 13,434 8,365 29,183 9,483 _ Property taxes 21,845 19,805 21,845 19,805 Sales and use taxes 9,980 8,026 9,980 8,026 Franchise taxes 3,426 3,097 3,426 3,097 Unrestricted investment earnin; 2,991 1,863 682 399 3,673 2,262 Other 526 828 526 828 Total Revenues 70,038 48,201 28,439 • 19,984 98,478 68,185 Expenses ' General government $ 13,914 8,714 13,914 8,714 Public safety 12,471 11,857 12,471 11,857 Public works 6,562 12,858 6,562 12,858 p' Community services 2,895 2,939 2,895 2,939 1 Parks and recreation 2,952 2,952 Interest on long-term debt 6,559 5,115 6,559 5,115 Business-type activities: Water and sewer 16,533 13,624 16,533 13,624 a _ Total Expenses 45,352 41,483 16,533 . 13,624 61,886 55,107 Increase(decrease)in net assets before transfers 24,686 6,718 11,906 6,360 36,592 13,078 i Transfers 1,154 359 i (1,154) (359) Increase in net assets 25,840 7,077 10,752 6,001 36,592 13,078 Net assets-beginning 15,731 8,654 53,221 47,221 68,952 55,875 Net assets-r- Ii-:g $ ..1,571 S 15,731 $ '63,973 $ 53,221 $ 105,544 $ 68,952 At the end of the current fiscal year, the City is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate ' governmental and business-type activities. CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS The most significant changes in net assets occurred with a net increase in net assets invested in capital assets net of related debt of $29.0 million as a result of assets received due to the annexation of a municipal utility district and the contribution of capital assets from the City's discretely presented component units. The remaining increase in the government's net assets of approximately $7.6 million from the occurred in both restricted and unrestricted net assets primarily in governmental activities as discussed below. Governmental activities - Governmental activities increased the City's net assets by $25.8 million, thereby accounting for 71 percent of the total growth in the net assets of the City. Key elements of this increase are as follows: • Program revenues from operating and capital grants increased by $20.0 million from the prior year. This category of revenues reflects contributions from component units of -- infrastructure and funds for infrastructure and other projects. • Other significant changes in revenues can be seen in sales and use taxes. This category (primarily sales and hotel occupancy taxes) increased due to the strengthening of the local economy and continued increase in retail establishments within the City. • Transfer in from business-type activities of$1.2 million for discretionary contributions to the governmental debt service and contraction activities accounted another portion of this increase. Expenses and Program Revenues-Governmental Activities $25,000 $20,000 ■Expenses 7 ■Program Revenues c $15,000 0 c. $10,000 inlITION111.. II L MEW Leo a'`°� °may c" ,0 c b6Q 5 °c F s• �° ZA- co �Nm 8 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Governmental Activities Charges for services 16% Grants and Other _• contributions 4% 19% � rt Property taxes 25% Sales and use taxes . 25% �• Franchise taxes 11% Business-type activities -Business-type activities increased the City's net assets by$10.8 million, accounting for 29 percent of the total growth in the government's net assets. Key elements of this increase are as follows. • Charges for services increased approximately $2.6 million over the prior year primarily due to an increase in water usage due to lower than average rainfall levels. • Capital grants for infrastructure relating to water and sewer facilities (from impact fees and annexed municipal utility district assets) amounted to$13.4 million for the year. Expenses and Program Revenues-Business-type Activities $30,000 Expenses S25.000 IN Program Revenues $20.000 F 0 515,000 c I$10,000 , I $5.000 5- Water and sewer 9 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Business-type Activities Charges for services 49% Other 2% • • tiy tip. S` ♦ Grants and contributions 49% Increases in business activity expense for the year of approximately$2.9 million due to major repairs and renovations being completed in the current fiscal year also contributed to the increase. Transfers out to the governmental activities of$1.2 million offset the increase of net assets before transfers of$11.9 million. FINANCIAL ANALYSIS OF THE CITY'S FUNDS As noted earlier, fund accounting is used to demonstrate and ensure compliance with finance-related legal requirements. Governmental Funds-The focus of the City's governmental funds is to provide information of near- term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements, in particular,unreserved fund balance may serve as a useful measure of the City's net resources available for spending at the end of 0 - fiscal year. The City's governmental funds reflect a combined fund balance of$72.2 million. Of this, $10.0 million is unreserved and available for day-to-day operations of the City; $4.7 million is reserved for debt service and the balance is reserved or designated for capital projects and other projects. There was an increase in the combined fund balance of$13.4 million from the prior year. The increase in fund balance includes a$2.4 million increase in fund balance of the general fund as well as an increase in the capital projects fund of approximately $9.4 million due to the proceeds of recent bond issues. With a current year increase of$2.4 million, the General Fund's fund balance totaled$10.6 million at year end. 10 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS In the Capital Projects Fund, the City spent $36.9 million on various improvement projects. Additionally, the City issued $32.2 million in Permanent Improvement bonds and received contributions from the General Fund and component units totaling$2.6 million leaving an ending fund balance of$53.0 million. Proprietary Funds - As the City's business-type activities contain only one activity (water and sewer services) the City's proprietary funds provide the same type of information found in the government-wide financial statements. GENERAL FUND BUDGETARY HIGHLIGHTS During the year there was a $1.3 million increase in appropriations between the original and final amended budget. The increase in appropriations is attributable to carryover funding from prior year encumbrances and projects budgeted in the previous year but still in progress. Budget estimates for revenues and other sources increased by approximately $3.2 million for the year as well to reflect the increases in revenues (primarily sales tax) to reflect the actual revenues recognized during the year. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets -At the end of fiscal year 2006, the City's governmental activities and business- type activities had invested $143.1 million and$100.9 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net decrease of $7.0 million, or seven percent over the end of last fiscal year for the•business-type activities capital assets and a change of$50.6 million or 55%for the governmental'activities capital assets, Governmental Activities Business-Type Activities Totals L 2006 2005 2006 2005 2006 2005 Land S 3.715 $ 2,717 S 414 $ 368 $ 4,128 , $ 3,085 Construction in progress 74,022 45,327 21,083 19,4"f: ,..i 64,752 Infrastructure 44,160 34,583 47,781 57,229 91,941 91,812 Buildings and improvements 17,836 6,418 23,133 22,610 40,969 29,028 Machinery and equipment 3,406 3,460 8,532 8,348 11,938 11,808 Total Captial Assets S 143,139 $ 92,505 S 100,943 $ 107,979 S 244,082 S 200,484 �.� i - • , - - i V - Construction in progress at year-end represents numerous ongoing projects, the largest of which relate to street and water and Sewer improvement projects. 11 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS . Long-Term Debt-At the end of the current fiscal year, the City had total bonds, certificates of obligation, notes, and capital leases outstanding of$227.5 million. Of this amount, $90.3 million is composed of general obligation bonds,96.3 million is composed of certificates of obligation and $40.2 million represents revenue bonds secured solely by specified revenue sources. Governmental Activities Business-Type Activities Totals 2006 2005 2006 2005 2006 2005 General obligation bonds S 90,305 S 60,175 S S S 90,305 S 60,175 Revenue bonds - 40,170 32,480 40,170 32,480 Certificates of obligation 81,275 72,390 15,000 15,880 96,275 88,270 Capital leases payable 309 396 309 396 Compenated absences 3,099 3,315 418 415 3,517 3,730 S 171,889 S 136,276 S 55,588 S 48,775 S 227,477 S 185,051 The City had multiple debt issuances during the year involving general obligation refunding bonds, and certificates of obligation. The net effect of these issuances and the debt retired during the year , was an increase in total debt of$42.4 million or 22.9 percent. . Current ratings on debt issues are as follows: Mondv'x Investors Standard and Service Poors General obligation bonds A 1 A+ Revenue bonds A2 A In fiscal year 2006, the City received a ratings upgrade from Moody's Investor Service for its water and sewer revenue bonds,from an A3 to an A2. All of the City's bond issues have been successful in qualifying for bond insurance resulting in ratings of "Aaa", "AAA" and "AAA" ratings from Moody's, Standard & Poors and Fitch, respectively. Both the Pearland Economic Development Corporation(PEDC) and the Development Authority of Pearland (DAP), component units of the City, have issued debt. The PEDC bonds are rated "A2" and "A" from Moody's and Standard &Poors,respectively. The DAP bonds are rated BBB by Standard and Poors. Their bonds have also qualified for bond insurance. Therefore, the PEDC and DAP bonds are rated"Aaa"and"AAA"by Moody's and Standard&Poors,respectively. • 12 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES A primary factor in the 2007 budget is how the overall economy affects the City of Pearland's growth. Pearland continues to be one of the fastest growing cities in the Houston area. Developments, such as, Shadow Creek Ranch, the Lakes at Highland Glen and Southern Trials have all contributed to this growth. New single family housing starts totaled 2,312 for 2006 and construction value was $438 million. This continued growth creates the need to expand services and provide infrastructure. The Pearland City Council approved a $39.7 million General Fund budget for fiscal year 2006— 2007. This is a 4.5% increase over the 2005 —2006 adopted budget. This increase includes 23 full-time employees to provide for base services, keep up with growth, and to serve the anticipated annexation of Brazoria County MUD#1.The budget incorporates a tax rate reduction of 3.22%to$0.6527 per$100 of valuation. In the budgetary process, water and sewer revenues were anticipated to increase 25% through rate and volume increases. • REQUESTS FOR INFORMATION The financial report is designed to provide our citizens, customers, investors and creditors with a general overview of City's finances. If you have questions about this report or need any additional financial information, contact Claire Manthei, Director of Finance, at 3519 Liberty Drive, Pearland, Texas 77581, or call (281) 652-1600. For general information, visit the City's website at www.cityofpearland.com. 13 (this page intentionally left blank) 14 4 • BASIC FINANCIAL STATEMENTS 15 CITY OF PEARLAND,TEXAS STATEMENT OF NET ASSETS September 30,2006 Primary Government Discretely Presented Governmental Business-type Component Activities Activities Total Units ASSETS Cash and Equivalents $ 49,182,583 $ 43,622 $ 49,226,205 $ 6,389,549 Investments 24,024,670 24,024,670 3,448,107 Receivables,net of allowance for uncollectibles 5,837,850 1,808,617 7,646,467 864,825 Inventories 54,908 54,908 t__ Prepaid items 28,925 28,925 Restricted cash and investments 19,403,861 19,403,861 13,014,729 Capital Assets _ Capital assets not subject to depreciation 77,737,014 21,497,128 99,234,142 Capital assets,net of accumulated depreciation 65,402,066 79,446,744 144,848,810 Total Capital Assets 143,139,080 100,943,872 . 244,082,952 Total Assets - 222,268,016 122,199,972 . 344,467,988 23,717,210 LIABILITIES - Accounts payable and accrued liabilities 4,563,958 1,446,352 6,010,310 98,167 Accrued interest 625,110 187,814 812,924 89,265 Unearned revenues 650,530 20,802 671,332 Customer deposits 232,450 1,511,380 1,743,830 Long-term liabilities Due within one year 3,157,943 2,100,030 5,257,973 1,960,000 ' Due in more than one year 171,467,499 52,961,000 224,428,499 • . 38,749,728 —. Total liabilities 180,697,490 58,227,378' 238,924,868 40,897,160 NET ASSETS - Invested in capital assets,net of related debt 24,569,259 53,143,735 77,712,994 Restricted for. Debt Service 4,063,041 352,738 4,415,779 2,174,602 Other projects 4,021,258 9,776,345 13,797,603 Unrestricted 8,916,968 699,776 9,616,744 (19,354,552) Total net assets $ 41,570,526 $ 63,972,594 $ 105,543,120 $ (17,179,950) , See Notes to Financial Statements. 17 CITY OF PEARLAND,TEXAS Statement of Activities For the Year Ended September 30,2006 Program Revenue Operating Capital Grants Charges for Grants and and Functions/Programs Expenses Services Contributions Contributions Primary government Governmental Activities General government $ 13,913,528 $ $ 1,239,521 $ Public safety 12,471,207 2,627,073 111,239 Public works 6,561,555 4,331,168 15,742,684 Community services 2,894,851 6,311,659 55,002 Parks and recreation 2,952,329 824,518 20,674 6,000 - Interest on long-term debt 6,558,908 Total governmental activities 45,352,378 14,094,418 1,426,436 15,748,684 Business-type activities: Water and sewer 16,532,722 13,849,201 473,947 13,433,840 Total business-type activities 16,532,722 13,849,201 473,947 13,433,840 Total primary government $ 61,885,100 $ 27,943,619 $ 1,900,383 $ 29,182,524 Component Units Pearland Economic Development Corporation $ 8,910,132 $ $ $ TIRZ Developments 1,421,796 Development Authority of Pearland 9,250,386 • Total component units $ 19,582,314 $ $ $ General revenuer: Taxes: Property taxes Sales and taxe Franchise taxes Unrestricted investment earnings Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets-beginning Net assets-ending See Notes to Financial Statements. 18 Net(Expense)Revenue and Changes in Net Assets Primary Government t -, Governmental Business-type Component Activities Activities Total Units $ (12,674,007) $ $ (12,674,007) (9,732,895) (9,732,895) 13,512,297 13,512,297 3,471,810 3,471,810 (2,101,137) (2,101,137) (6,558,908) (6,558,908) (14,082,840) (14,082,840) 11,224,266 11,224,266 11,224,266 11,224,266 (14,082,840) 11,224,266 (2,858,574) 9 � $ (8,910,132) (1,421,796) (9,250,386) • (19,582,314) 21,845,231 21,845,231 5,354,319 9,979,706 9,979.7^- " 4,821,342 3,426,352 3,426,352 2,991,139 681,249 3,672,388 739,368 526,111 526,111 1,153,720 (1,153,720) 39,922,259 (472,471) 39,449,788 10,915,029 25,839,419 10,751,795 36,591,214 (8,667,285) 15,731,107 . 53,220,799 68,951,906 (8,512,665) $ 41,570,526 $ 63,972,594 $ 105,543,120 $ (17,179,950) 4 6 19 , CITY OF PEARLAND,TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30,2006 Other Total Capital Governmental Governmental - General Fund Debt Service Projects Fund Funds Funds ASSETS - Cash and cash equivalents $ 2,269,889 $ 2,640,419 $ 40,528,127 $ 3,744,148 $ 49,182,583 Investments 6,502,990 2,007,852 15,364,939 148,889 24,024,670 Receivables,net of allowance for uncollectibles 4,541,115 467,851 659,841 169,043 5,837,850 Inventories 54,908 54,908 Prepaid expenses 28,925 28,925 Total assets $ 13,397,827 $ 5,116,122 $ 56,552,907 $ 4,062,080 $ 79,128,936 LIABILITIES AND FUND BALANCES . Liabilities: Accounts payable $ 759,615 $ $ 3,051,161 $ 11,617 $ 3,822,393 Accrued expenditures 726,297 29,851 15,267 771,415 Deposits 232,450 232,450 Deferred revenue 1,082,096 427,970 530,000 29,205 2,069,271 Total liabilities 2,800,458 457,821 3,596,428 40,822 6,895,529 Fund balances: Reserved for: Inventories 54,908 54,908 Encumbrances 552,256 552,256 Prepaid expenses 28,925 28,925 Debt service 4,658,301 4,658,301 Unreserved,reported in General fund 9,961,280 9,961,280 Special revenue funds 3,215,232 3,215,232 Capital projects funds _ 52,956,479 806,026 53,762,505 Total fund balances 10,597,369 4,658,301 52,956,479 4,021,25R 72,233,407 Total Iiabilities and fund balances $ 13,397,827 $ 5,116,122 $ 56,552,907 $ 4,062,080 $ 79,128,936 See Notes to Financial Statements. 20 I ' CITY OF PEARLAND,TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS September 30,2006 Total fund balance,governmental funds $ 72,233,407 Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets used in governmental activities are not current financial resources and therefore are not reported in this fund financial statement,but are reported in the governmental activities of the Statement of Net Assets. 143,139,080 Certain other long-term assets are not available to pay current period expenditures and therefore are not reported in this fund financial statement,but are reported in the governmental activities of the Statement of Net Assets. 1,418,741 Some liabilities,(such as Capital Lease Contract Payable,Long-term Compensated Absences, and Bonds Payable),are not due and payable in the current period and are not included in the fund financial statement,but are included in the governmental activities of the Statement of Net Assets. Bonds and capital leases payable (171,526,300) Compensated absences (3,099,142) Accrued interest not reflected in Governmental funds (595,260) Net Assets of Governmental Activities in the Statement of Net Assets 41,570,526 See Notes to Financial Statements. _ 21, s ; • CITY OF PEARLAND,TEXAS STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30,2006 Other Total Capital Governmental Governmental General Fund Debt Service Projects Fund Funds Funds REVENUES Property taxes $ 11,413,806 $ 10,736,081 $ $ $ 22,149,887 Sales and use taxes .9,712,118 267,588 9,979,706 Franchise fees 3,426,352 3,426,352 Licenses and permits 4,066,914 4,066,914 Fines and forfeitures 1,934,882 102,708 2,037,590 Charges for services 8,734,090 8,734,090 Investment earnings 516,775 142,407 2,235,649 96,308 2,991,139 Intergovernmental 448,502 291,786 6,994,659 117,239 7,852,186 Other 252,704 1,157,710 333,596 1,744,010 Total revenues 40,506,143 11,170,274 10,388,018 - 917,439, 62,981,874 EXPENDITURES Current: General government 6,284,996 96,248 6,381,244 Public safety 12,685,081 184,516 12,869,597 Public works 9,727,972 9,727,972 Community services 2,739,532 31,256 2,770,788 Parks and recreation 4,308,250 66,548 4,374,798 Debt Service: , Principal 3,429,108 3,429,108 Interest and other charges 6,546,227 6,546,227 Bond issuance costs 224,849 224,849 Capital outlay 36,706,096 36,706,096 Intergovernmental 1,683,678 1,683,678 Total Expenditures 35,745,831 11,659,013 36,930,945 378,568 84,714,357 Excess(deficiency)of revenues over expenditures 4,760,312 (488,739) (26,542,927) 538,871 (21,732,483) OTHER FINANCING SOURCES (USES) General obligation debt issued 8,000,000 33,865,000 41,865,G.., Premium on general obligation debt 4,141 89,403 93,544 Payments to refunded bond escrow agent (8,004,139) (8,004,139) Transfers in 1,655,653 1,291,909 2,589,500 314,519 5,851,581 Transfers out (4,021,367) (589,828) (86,666) (4,697,861) Total other financing sources and uses (2,365,714) 1,291,911 35,954,075 227,853 35,108,125 Net change in fund balances 2,394,598 803,172 9,411,148 766,724 13,375,642 Fund balances-beginning 8,202,771 3,855,129 43,545,331 3,254,534 58,857,765 Fund balances-ending $ 10,597,369 $ 4,658,301 S 52,956,479 $ 4,021,258 $ 72,233,407 See Notes to Financial Statements. 22 , CITY OF PEARLAND,TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES,EXPENDITURES,AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended September 30,2006 Net change in fund balances-total governmental funds: S 13,375,642 Amounts reported for Governmental Activities in the Statement of Activities are different because: 1 , Governmental funds report outlays for capital assets as expenditures because such outlays use current financial resources. In contrast, the Statement of Activities reports only a portion of the outlay as expense. The outlay is allocated over-the assets'estimated useful lives as depreciation expense for the period. This is the amount by which capital outlays S45,438,872 exceeded depreciation S2,904,946 in the current period. 42,533,926 Capital Assets contributed by discretely presented component units that do not uepcesent current assets and are not reflected in the governmental fund financial statements. 8,100,000 Governmental funds do not present revenues that are not available to pay current obligations. In contrast,such revenues are reported in the Statement of Activities when earned. 246,261 Governmental funds report bond proceeds as current financial resources.In contrast,the Statement of Activities treats such issuance of debt as a liability. Governmental funds report repayment of bond principal as an expenditure,In contrast,the Statement of Activities treats such repayments as a reduction in long-term liabilities.This is the amount by which proceeds exceeded repayments. (38,344,382) Some expenses reported in the statement of activities do not require the use of current financial resources and these are not reported as expenditures in governmental funds: Accrued interest not reflected in Governmental funds (72,028) Change in net assets of governmental activities S 25,839,419 See Notes to Financial Statements. 1 _ 23 CITY OF PEARLAND,TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS -, September 30,2006 Business-type Activities- • Enterprise Fund Water and Sewer Fund ASSETS • Current assets: Cash and cash equivalents $ 43,622 Accounts Receivable,net of allowance for doubtful accounts 1,808,617 Restricted cash and cash equivalents 17,783,400 Restricted investments 1,620,461 Total current assets 21,256,100 Non-current assets: Capital Assets: • Land and improvements 413,699 Construction in progress 21,083,429 Infrastructure _ • 72,594,008 Buildings 23,132,786 Machinery and equipment 8,532,461 Less Accumulated depreciation (24,812,511) Total non-current assets 100,943,872 Total assets 122,199,972 LIABILITIES Current Liabilities: Accounts payable and accrued expenses 1,446,352 Accrued interest payable 187,814 Customer deposits 1,511,380 Deferred revenue 20,802 Compensated absences-current portion 60,030 Bonds and certificates of obligation payable-current portion 2,040,000 current liabilities 5,266,378 Non-current liabilities: Compensated absences 358,613 Bonds and certificates of obligation payable 52,602,387 Total non-current liabilities 52,961,000 Total liabilities 58,227,378 NET ASSETS Invested in capital assets,net of related debt 53,143,735 Restricted for debt service 352,738 - Restricted for capital projects 9,776,345 Unrestricted 699,776 Total net assets $ 63,972,594 See Notes to Financial Statements. 24 CITY OF PEARLAND,TEXAS • STATEMENT OF REVENUES,EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS For the Year Ended September 30,2006 Business-type Activities- Z • Enterprise Fund Water and Sewer REVENUES Fund Charges for services $ 13,849,201 • OPERATING EXPENSES Personal services 3,216,442 Supplies and materials 3,479,851 Contractual services 3,008,513 Repairs and maintenance 1,455,889 Other expenses 67,096 Depreciation 3,064,550 Total Operating Expenses 14,292,341 Operating income(loss) (443,140) NON-OPERATING REVENUES(EXPENSES) Earnings on investments 681,249 Operating grants and contributions 473,947 Interest expense (2,240,380) Total non-operating revenue(expenses) (1,085,185) Income(loss)before contributions and transfers (1,528,325) Capital contributions 13,433,840 Transfers in • 159,001 Transfers out (1,312,721) Change in net assets 10,751,795 Total net assets-beginning as restated 53,220,799 Total net assets-ending $ 63,972,594 • 4>.•. See Notes to Financial Statements. 25 CITY OF PEARLAND,TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30,2006 Business-type Activities- Enterprise Funds Water and Sewer Fund CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers and users $ 14,584,942 Disbursed for personnel services (3,273,604) Disbursed for goods and services (8,072,531) Net cash provided(used)by operating activities 3,238,807 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from other funds 159,001 Transfers to other funds (1,312,721) Operating grants and contributions 473,947 Net cash provided by(used by)noncapital financing activities (679,773) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from the sale of equipment Capital grants and contributions 8,731,013 Proceeds from the sale of bonds 14,166,547 Principal payments on debt (7,035,000) Issuance costs (596,956) Acquisition and construction of capital assets (11,669,778) Net cash used by capital and related financing activities 3,595,826 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (1,620,461) Interest received 681,249 Interest paid (2,330,024 Net cash provided by(used by)investing activities (3,269,236) Net decrease in cash and equivalents 2,885,624 Cash and equivalents,beginning of year 14,941,398 Cash and equivalents,at end of year $ 17,827,022 Unrestricted cash and equivalents 43,622 Restricted cash and equivalents 17,783 400 $ 17,827,022 See Notes to Financial Statements. 26 ' r I ' Business-type Activities- Enterprise Funds Water and Sewer Fund Reconciliation of operating income to net cash provided by operating activities Operating income(loss) $ (443,140) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 3,064,550 (Increase)decrease in accounts receivable 463,692 Increase(decrease)in accounts payable (61,182) Increase(decrease)in salaries payable (57,162) Increase(decrease)in customer deposits 257,610 Increase(decrease)in deferred revenue 14,439 Net cash provided by operating activities $ 3,238,807 1 1 I C i _ 27 CITY OF PEARLAND,TEXAS DISCRETELY PRESENTED COMPONENT UNITS-GOVERNMENTAL ACTIVITIES COMBINING STATEMENT OF NET ASSETS September 30,2006 Pearland Economic Development Development TIRZ Authority of Total Component Corporation Developments Pearland Units ASSETS Cash and equivalents $ 3,239,475 $ 3,129,862 $ 20,212 $ 6,389,549 Investments 3,448,107 3,448,107 Receivables-less allowance for uncollectibles 864,825 864,825 Restricted cash 10,840,127 2,174,602 13,014,729 Total assets 18,392,534 3,129,862 2,194,814 23,717,210 LIABILITIES Accounts payable and accrued expenses 26,768 54,573 • 16,826 98,167 Accrued interest 89,265 89,265 Non-current liabilities: Due within one year 405,000 1,555,000 1,960,000 Due in more than one year 19,742,117 19,007,611 38,749,728 Total liabilities 20,263,150 54,573 20,579,437 40,897,160 NET ASSETS Restricted-debt service 2,174,602 2,174,602 Unrestricted (1,870,616) 3,075,289 (20,559,225) (19,354,552) Total net.assets $ (1,870,616) $ 3,075,289 $ (18,384,623) $ (17,179,950) See Note to Financial Statements. 28 j r CITY OF PEARLAND,TEXAS DISCRETELY PRESENTED COMPONENT UNITS-GOVERNMENTAL ACTIVITIES COMBINING STATEMENT OF ACTIVITIES For the year ended September 30,2006 Net(Expense)and Changes in Net Assets Pearland Economic Development Development TIRZ Authority of Functions/Programs Expenses Corporation Developments Pearland Totals Component Unit Pearland Economic Development Corporation S 8,910,132 $ (8,910,132) $ $ $ (8,910,132) TIRZ Developments 1,421,796 (1,421,796) (1,421,796) Development Authority of Pearland 9,250,386 (9,250,386) (9,250,386) • $ 19,582,314 (8,910,132) (1,421,796) (9,250,386) (19,582,314) General revenues: Taxes: Property taxes- 5,354,319 5,354,319 Sales and use tax 4,821,342 4,821,342 Unrestricted investment earnings 582,217 71,559 85,592 739,368 Transfers (2,151,892) 2,151,892 Total general revenues 5,403,559 3,273,986 2,237,484 10,915,029 Change in net assets (3,506,573) 1,852,190 (7,012,902) (8,667,285) Net assets,beginning 1,635,957 1,223,099 (11,371,721) (8,512,665) Net assets,ending $ (1,870,616) $ 3,075,289 $ (18,384,623). $ (17,179,950) See Note to Financial Statements. 29 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Pearland, Texas, (the "City") was incorporated in December 1959, and adopted a "Home Rule Charter"February 6, 1971.The Charter,as amended,provides for a Council-Manager form of government and provides services authorized by its charter. Presently, these services include police and emergency medical, water and sewer services, drainage, sanitation, building and code inspection, planning, zoning, engineering, street repair and maintenance,park maintenance,recreational activities for citizens,and general administrative services.Fire protection is provided through a volunteer department.The City is governed by an elected mayor and five-member Council. The Mayor and all members are elected at large.The Mayor is allowed to vote only in case of a tie vote.The Mayor and each Council member hold office for a period of three years and until his/her successor is elected and qualified. Council members shall be limited to two full consecutive terms of office and there is no limitation on the office of the Mayor. The City Manager is appointed by Council and is responsible for implementation of Council policy,execution of the laws,and all day-to-day operations of the City. A. Financial Reporting Entity The City is an independent political subdivision of the State of Texas governed by an elected council and a mayor and is considered a primary government.As required by accounting principles generally accepted in the United States of America,these financial statements have been prepared based on considerations regarding the potential for inclusion of component units, which are other entities or organizations that are financially accountable to the City.Discretely presented component units,are reported in a separate column in the government-wide statements to emphasize that they are legally separate from the primary government.Based on these considerations,the City's financial statements include the following discretely presented component units: the Pearland Economic Development Corporation (PEDC); the Tax Increment Reinvestment Zone (TIRZ #2); and the Development Authority of Pearland. No other entities have Veen included in the City's reporting entity. Additionally, as the City is considered a primary government for financial reporting purposes, its activities are not considered a part of any other governmental or other type of reporting entity. Considerations regarding the potential for inclusion of other entities, organizations, or functions in the City's financial reporting entity are based on criteria prescribed by generally accepted accounting principles. These same criteria are evaluated in considerin'- -;=ethe. we City is a part of any other governmental or other type of reporting entity. The oveniding elements associated with prescribed criteria considered in determining that the City's financial reporting entity status is that of a primary government are:that it has a separately elected Governing body;it is legally separate;and it is fiscally independent of other state and local governments.Additionally prescribed criteria under generally accepted accounting principles include: considerations pertaining to organizations for which the primary government is financially accountable; and considerations pertaining to other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The component units discussed below are included in the City's reporting entity because of the significance of their operational or financial relationships with the City. 30 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) A. Financial Reporting Entity(continued) Discretely Presented Component Units: Pearland Economic Development Corporation(PEDC) In 1995,the citizens of Pearland established.the Pearland Economic Development Corporation (PEDC)to help the citizens and public officials of Pearland attract new businesses and existing businesses to expand. The mechanism to fund the operations of the corporations is through a sale tax levy at a rate of one-half of one percent(1/2%).The PEDC is fiscally dependent upon the primary government because, besides appointing the Board, the City Council also must approve the PEDC's budget and any debt issuances. Tax Increment Reinvestment Zone(TIRZ#2) In 1998,the Tax Increment Reinvestment Zone (TIRZ#2)was established for a period of 30 years or until dissolved by the City. The TIRZ#2 provides tax assisted property development and/or redevelopment in specific geographic areas in accordance with applicable state laws. Besides.appointing Board members, the City Council must`also approve any debt issuances done on behalf of the TIRZ. Development Authority of Pearland In 2004, the City created the Development Authorityof Pearland to provide financing for the development of the TIRZ#2. Proceeds from bond sales are to be used to reimburse developers and fund a debt service reserve.Besides appointing Board members,the City Council must also approve any debt issuances done on behalf of the TIRZ. B. Government-wide and Fund Financial Statements ' ' The government-wide financial statements (i.e.,the Statement of Net Assets and the Statement of Changes in Net Assets)report information about the City as a whole. These statements include all activities of the primary government and-its component units. For the most part, the effect of interfund activity has been eliminated from the government-wide statements. Exceptions to this general rule are charges between the City's business-type and governmental fiords. Elimination of these charges would distort the direct costs and program revenue, :. orte,. for the various functions concerned. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment.Program revenues include 1)charges to customers or applicants who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and 2)grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. 31 i CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) C.Measurement Focus,Basis of Accounting and Financial Statement Presentation The government-wide financial statements and all proprietary funds are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recognized when earned and expenses are recorded when a liability is incurred,regardless of the timing of the related cash flows.With this measurement focus,all assets and all liabilities associated with the operations of these activities are included on the statements of net assets.Proprietary fund equity consists of retained earnings. Proprietary fund-type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net total assets. Furniture and equipment capitalized in the Proprietary Fund Types are valued at cost. The governmental fund financial statements are presented on a current financial resources measurement focus and modified accrual basis of accounting. This is the manner in which these funds are normally budgeted. Revenues are recognized as soon as they are both measurable and available. Measurable means that the amount of the transaction:can be determined and available means collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period.Revenues susceptible to accrual include property taxes, • sales and use taxes, franchise fees, charges for services and interest on temporary investments. Other receipts become measurable and available when cash is received by the government and are recognized as revenue at that time. Under modified accrual accounting, expenditures are recognized in the accounting period in which the liability is incurred, if measurable, except for interest on general long-term debt, which is recognized when due. Since the governmental fund statements•are presented on a different measurement focus and basis of accounting than the government-wide statements' governmental column,a reconciliation is presented which briefly explains the adjustments necessary to reconcile fund-based financial statements with the governmental column of the government-wide presentation. In the fund financial statements,the accounts of the City are organized on the basis of funds,each of which is considered a separate accounting entity.The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses,as appropriate.Following is a description of the various funds: Governmental funds are those funds through which most governmental functions are typically financed.The City reports the following major governmental funds: The General Fund is used to account for all financial transactions not properly includable in other funds. The principal sources of revenues include local property taxes, sales and franchise taxes, licenses and permits, fines and forfeitures, and charges for services. Expenditures include general government, administrative services, public works, parks and recreation,community development,and public safety. 32 I � CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) - C.Measurement Focus,Basis of Accounting and Financial Statement Presentation(continued) The Debt Service Fund is used to account for the payment of interest and principal on all general obligation bonds and other governmental long-term debt of the City. The primary source of revenue for debt service is local property taxes. The Debt Service Fund is considered a major fund for reporting purposes. The Capital Projects Fund is used to account for the expenditures of resources accumulated from sales tax revenues and the sale of bonds and related interest earnings for capital improvement projects. The Capital Projects Fund is considered a major fund for reporting purposes. The City's Business type activities consist of the following funds: The Enterprise Funds are used to account for the operations that provide water and sewer utility services to the public.The services are financed arid operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses including depreciation) of providing goods or services to the general public on a continuing basis will be financed or recovered primarily through user charges. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. All assets, liabilities, equities,.revenues, expenses and transfers relating to the government's business activities are accounted for through proprietary funds. The measurement focus is on determination of net income, fmancial.position and cash flows. Operating revenues include charges for services. Operating expenses include costs of materials, contracts, personnel and depreciation. In accordance with GASB Statement No. 20, the City has elected to follow GASB statements issued after November 30, 1989, rather than the Financial Accounting Standards Board,in accounting for enterprise funds. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges between the City's water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include: 1) charges to customers or applicants for goods, services, or privileges provided 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenue.Likewise,general revenue includes all taxes. 33 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) C.Measurement Focus,Basis of Accounting and Financial Statement Presentation(continued) Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's Enterprise Fund are charges to customers for sales and services. Operating expenses for Enterprise Funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenue and expenses not meeting this definition are reported as nonoperating revenue and expense. D. 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 in the governmental funds. Open encumbrances are reported as reservations of fund balances since they do not constitute expenditures or liabilities.Encumbrances outstanding at year- end are appropriately provided for in the subsequent year's budget. E. Cash and Cash Equivalents The City's cash and cash equivalents are considered to be cash on hand,demand deposits,and short- teen investments with original maturities of three months or less from the date of acquisition. For the purpose of the statement of cash flows, the Proprietary Fund Types consider temporary investments with maturity of three months or less when purchased to be cash equivalents. The City pools cash resources of its various funds to facilitate the management of cash. Cash applicable to a particular fund is readily identifiable. The balance in the pooled cash accounts is available to meet current operating requirements. Cash in excess of current requirements is invested in various interest-bearing accounts and securities and disclosed as part of the City's investments. The City pools excess cash of the various individual funds to purchase these investments. These pooled investments are reported in the combined balance sheet as Investments in each fund based on each fund's share of the pooled investments.Interest income is allocated to each respective individual fund,monthly,based on their respective share of investments in the pooled investments. F. Investments Investments consist of United States (US) Government Agency securities. The City reports all investments at fair value based on quoted market prices at year-end date. G. Receivables All receivables are reported at their gross value and, where appropriate, are reduced by the estimated portion that is expected to be uncollectible. Trade accounts receivable in excess of 180 days comprise the trade accounts receivable allowance for uncollectibles. - 34 { CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) H. Due to and Due from Other Funds Interfund receivables and payables arise from interfund transactions and are recorded by all funds affected in the period in which the transactions are executed. These receivables and payables are classified as "due from other funds" or "due to other funds" or"due from component unit/primary government" or "due to component unit/primary government" if the`transactions are between the primary government and its component unit. Interfund receivables and payables which are not expected to be paid within 12 months are classified as loans from/loans to other funds, component units,or primary government. I. Inventories and Prepaid Items Inventory,which consists of fuel and auto parts for use in the City's vehicles,is stated at cost(first- in, first-out method). Expenditures are recognized as the fuel and auto parts are consumed rather when purchased. • J. Resiricted Assets Certain proceeds of the Enterprise Fund and Economic Development Corporation revenue bonds and certain resources set aside for their repayment are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Certain resources are also set aside for repayment of Development Authority bonds and are reported as restricted assets. K.Capital Assets Capital assets which include property, plant, equipment and..infrastructure, are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of one year.Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not ad to the value of the asset or materially extend assets'lives are not capitalized. The City has elected to delay implementation of the requirements of GASB Statement No.34 related to infrastructure (roads, sidewalks, etc.) assets acquired prior to October 1, 2002. The City has implemented the general provisions of GASB Statement No.34 and will complete the implementation of the retroactive provisions for infrastructure no later than September 30,2007. 35- CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) K.Capital Assets(continued) Property, plant, and equipment are depreciated using the straight-line method over the following useful lives: Estimated Asset Description Useful Life Buildings and improvements 20-45 Machinery and equipment 5-15 Infrastructure 40-50 L. Compensated Absences It is the City's policy to permit employees to accumulate earned but unused vacation, sick and holiday pay benefits. Employees hired prior to October 1,2005 earn vacation leave at the rate of 15 days per year from 1 to 15 years of service,20 days per year for service of 16 to 19 years,and 25 days per year for service of 20 years or more. Employees, who are not classified and are hired after October 1, 2005, earn vacation at a rate of 10 days per year from 1-6 years of service, 15 days per year for 7-15 years of service and 20 days for over 16 years of service.Effective October 1,2005,employees are no longer able to carry over unused vacation from one year to the next with the exception of police department personnel in classified positions Employees are required to use their vacation in the year it is earned Employees who are unable to use their vacation due to departmental scheduling or staffing problems, may,with the City Manager's approval,receive compensation for half of the remaining balance up to a maximum of forty(40)hours. City employees receive 11 paid holidays per year. Employees may be paid or may elect to receive compensatory time off for the holiday. Overtime is earned at one and one-half times the regular rate of pay.Err-tees mr, paid or receive compensatory time.The maximum accrual for overtime is 160 hours,except for employees involved in public safety,who can accrue up to 320 hours. All sick leave benefits are accumulated and paid to employees upon separation from the City. Vacation, sick and holiday pay benefits are accrued when incurred in the government-wide and proprietary fund financial statements.A liability for these amounts is reported in governmental funds only if they have matured,for example,as a result of employee resignations and retirements. M. Estimates The preparation of financial statements,in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. 36 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2—DEPOSITS(CASH)AND INVESTMENTS Authorization for Deposits and Investments • The Texas Public Funds Investment Act (PFIA), as prescribed in Chapter 2256 of the Texas Government Code,regulates deposits and investment transactions of the City. In accordance with applicable statutes, the City has a depository contract with an area bank (depository)providing for interest rates to be earned on deposited funds and for banking charges the City incurs for banking services received. The City may place funds with the depository in interest and non-interest bearing accounts. State law provides that collateral pledged as security for bank deposits must have a market value of not less than the amount of the deposits and must consist of: (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal and interest on which are unconditionally guaranteed or insured by the State of Texas; and/or(4)obligations of states, agencies,counties,cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent. City policy requires the collateralization level to be at least 102%of market value of principal and accrued interest. ' The Council has adopted a written investment policy regarding the investment of City funds as required by the Public Funds Investment Act (Chapter 2256, Texas Government Code). The investments of the City are in compliance with the City's investment policy. The City's investment policy is more restrictive than the PFIA requires. It is the City's policy to restrict its direct investments to obligations of the U.S. Government or U.S. Government Agencies, fully collateralized certificates of deposit, banker's acceptances, mutual funds, repurchase agreements and local government investment pools. The maximum maturity allowed is three years from date of purchase. The City's investment policy does not allow investments in collateralized mortgage obligations. Deposit and Investment Amounts The City's cash and investments are classified as: cash and cash equivalents, investments, and restricted cash : inver:a.ents; The cash and cash equivalents include cash on hand, deposits with financial institutions, and short-term investments, which have maturities at purchase of less than three months, consist mainly of certificates of deposit. The restricted cash and investments are assets restricted for specific use.The restricted cash and investments include cash on deposit with financial institutions. For better management of cash,the City pools the cash,based on the City's needs, into either bank/sweep accounts,or in longer-term investments in U.S. Government Securities. However, each fund's balance of cash and investments is maintained in the books of 1 the City. The deposit and investment policies for the Pearland Economic Development Corporation, TIRZ Developments,and Development Authority of Pearland are substantially the same as the City. 37 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 2—DEPOSITS(CASH)AND INVESTMENTS(continued) The following schedule shows the City's recorded cash and investments at year-end: Total Fair Value Primary Government Component Units Cash deposits $ 68,630,066 $ 19,404,278 FHLMC discount note 11,141,243 FNMA discount note 12,883,427 3,448,107 $ 92,654,736 $ 22,852,385 Quoted market prices are the basis of the fair value for US Treasury and Agency securities.The amount of increase or decrease in the fair value of investments during the current year is included in the City's investment income as follows: Interest income $ 4,218,159 unrealized gain(loss)on temporary investments 193,596 Investment earnings $ 4,411,755 Investment Risks Interest Rate Risk At year-end,the City had the following investments subject to interest rate risk disclosure,under U.S.generally accepted accounting principles: Weighted — Total Fair Average Maturity Value (days) Temporary Investments FHLMC discount note $ 11,141,243 108 FNMA discount note 16,331,534 105 $ 27,472,777 Portfolio weighted average maturity _ 106 The City measures interest rate risk using the weighted average maturity method for the portfolio. The City's investment policy specifies a maximum weighted average maturity of 365 days or 12 months based on the stated maturity date for each investment in the portfolio. To the extent possible, the City attempts to match investments with anticipated cash flow requirements. The City does not directly invest in securities with a stated maturity date more than three years or 1 095 days from ydate of purchase. The settlement date is considered the date of purchase. 38 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS 1 -' NOTE 2—DEPOSITS(CASH)AND INVESTMENTS(continued) Concentration of Credit Risk The City's investment policy does not address diversification requirements. However, as of September 30, 2006, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Total Fair Percentage of Investment Type Value Total Portfolio FHLMC discount note $ 11,141,243 41% FNMA discount note 16,331,534 59% Total $27,472,777 100% Credit Risk • Federal-Home Loan Mortgage Corporation Discount Notes and Federal National Mortgage Association Discount Notes (FNDN)agency notes were rated AAA by Standard&Poor's, AAA by Fitch Ratings,and Aaa by Moody's Investors Service. All credit ratings meet acceptable levels required by guidelines prescribed by both the PFIA and the City's investment policy. A public fund investment pool must be continuously rated no lower than AAA or AAAm or no lower than investment grade by at least one nationally recognized rating service and have a weighted average maturity no greater than 90 days. Investments with minimum required ratings do not qualify as authorized investments during the period the investment does not have the minimum rating. . Restricted Assets The Enterprise Funds have restricted certain cash and investments for customer deposits,reserve and emergency expenditures, capital improvements, cash restricted for others, and revenue bond debt service. Because of certain bond covenants,the Enterprise Fund is required to maintain prescribed amounts of resources that can be used only*c ,.:_istanding debt. Some of the proceeds from debt or from funds received from acquisition of Municipal Utility Districts are restricted for use on capital projects. Primary ( Government Component Units +_ r Revenue bond debt service 540,552 $ 2,174,602 Customer deposits 1,511,380 Capital improvements 17,351,929 10,840,127 Total $ 19,403,861 $ 13,014,729 39 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3-RECEIVABLES Receivables at September 30,2006 consist of the following: Primary Government: Governmental Funds: Otter Non Major Capital Projects Governmental General Fund Debt Service Fund Fund Funds Total Receivables Property taxes,including penalties and interest $ 1,224,251 $ 476,586 $ S $ 1,700,837 Sales and other taxes 1,727,831 1,727,831 Fines and forfeitures 605,116 80,256 685,372 Interest 38,927 38,927 Other 953,211 659,841 88,787 1,701,839 Allowance for uncollectibles (8,221) (8,735) • (16,956) S 4,541,115 $ 467,851 $ 659,841 $ 169,043 $ 5,837,850 Proprietary Funds: Water and Sewer Fund Receivables Customer accounts $ 2,232,550 • Interest 834 Allowance for uncollectibles (448,711) S 1,808,617 Component Units: • Pearland Economic Development Corporation Receivables Sales and other taxes $ 857,173 Interest 7,652 Total $ 864,825 40" CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 3—RECEIVABLES(continued) Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period.At the end of the current fiscal year,the various components of deferred revenue reported in the governmental funds were as follows: Unavailable Unearned Delinquent property taxes receivable-general fund $ 402,829 $ Delinquent property taxes receivable-debt service fund 427,970 Municipal fines and forfeitures 587,943 Surety-public improvements-capital projects fund 530,000 Grants and revenues prior to meeting all eligibility requirements 120,528 Total Deferred Revenue for Governmental Funds $ 1,418,742 $ 650,528 • Property Taxes Property taxes are levied by October 1 in conformity with Subtitle E, Texas Property Tax Code. Taxes are due on receipt of the tax bill and are delinquent if not paid before February 1 of the year following the year in which imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. The Central Appraisal District("CAD") PP of Brazoria County,Texas,establishes appraised values. Taxes are levied by the City Council based on the appraised values and operating needs of the City. The City contracts billing and collection of tax levies with the Brazoria County Tax Assessor-Collector. II 41 CITY PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 4 -CAPITAL ASSETS A summary of changes in the primary government's capital assets for the year ended September 30,2006, follows: - Primary Government Balance Balance September 30, Reclassification/ September 30, 2005 Increases (Decreases) 2006 Governmental Activities: Capital assets not being depreciated: Land $ 2,717,453 $ 997,321 $ $ 3,714,774 Construction in progress 45,326,958 28,695,282 74,022,240 Total capital assets not being depreciated 48,044,411 29,692,603 77,737,014 Other capital assets: Infrastructure 38,596,399 10,803,793 49,400,192 Buildings and improvements 12,901,650 11,774,745 24,676,395 Machinery and equipment 9,282,167 1,267,729 (758,198) 9,791,698 Furniture and fixtures Total other capital assets 60,780,216 23,846,267• (758,198) 83,868,285 • Less accumulated depreciation for: Infrastructure (4,014,681) (1,225,349) (5,240,030) Buildings and improvements (6,483,279) (356,%6) (6,840,245) • ' Machinery and equipment (5,821,517) (1,322,625) 758,198 (6,385,944) Total accumulated depreciation (16,319,477) (2,904,940) 758,198 (18,466,219) Other capital assets,net 44,460,739 20,941,327 65,402,066 Totals $ 92 505,150 $ 50,633 930 $ $ 143 139 080 Balance Balance September 30, • Reclassification/ September 30, 2005 Increases (Decreases) 2006 Business-type Activities: Capital assets not being depreciated: Land and intangibles $ 367,962 S 45,738 $ 413,699 Construction in progress 19,424,558 2,445,527 (786,656) 21,083,429 -- Total capital assets not being depreciated 19,792,520 2,491,265 (786,656) 21,497,128 Other capital assets: Water and sewer system 59,855,918 11,951,434 786,656 72,594,008 Buildings and improvements 22,610,028 522,758 23,132,786 ,- Machinery and equipment 8,347,893 196,716 (12,148) 8,532,461 Total other capital assets 90,813,839 12,670,908 774,508 104,259,255 — Less accumulated depreciation (21,760,109) (3,064,550) 12,148 (24,812,511) Other capital assets,net 69,053,730 9,606,358 786,656 79,446,744 Totals $ 88,846,230 S 12,097,623 S $ 100,943,872 • 42 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 4-CAPITAL ASSETS(continued) Depreciation was charged to programs as follows: General government $ 713,830 Public safety 541,950 Public works 1,504,390 Community services 144,770 Total Governmental Activity $ 2,904,940 Water and sewer $ 3,064,550 Total Business-Type Activity $ 3,064,550 The Cityhas active cri a construction projects as of September'30, 2006. The projects include various improvements to streets, drainage and facilities as well as and water and sewer improvements. At year-end,the City's contractual commitments on projects were as follows: Total In Remaining Project Description Progress Commitment Drainage Improvement 22,866,245 2,699,679 Building Improvements 98,610 16,307,390 Street Improvement 51,057,385 102,241,857 Water and sewer Improvements 21,083,429 64,029,657 Totals $ 95,105,669 $ 185,278,583 43 CITY PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT A. General Obligation Bonds and Certificates of Obligation The City issues general obligation bonds and certificates of obligation and, upon annexation and dissolution of Municipal Utility Districts, assumes unlimited tax and revenue obligations. The assumed obligations were used to acquire and construct major capital facilities. General obligation bonds, certificates of obligation,and assumed obligations from dissolved and annexed areas are for both governmental and business-type activities.The bonds are reported in the Proprietary Funds only if they are expected to be repaid from proprietary revenues. The general long-term bonds, certificates of obligation and assumed obligations are paid through the Debt Service Fund from tax revenues. The following is a summary of changes in the City's total governmental long-term liabilities for the year ended September 30, 2006. In general, the City uses the General and Debt Service funds to liquidate governmental long-term liabilities. Amounts Due Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Governmental Activities: Bonds payable: General obligation bonds $ 60,175,000 $ 32,165,000 $ (2,035,000) $ 90,305,000 $ 2,085,000 Certificates of obligation 72,390,000 9,700,000 (815,000) 81,275,000 490,000 Annexed utility district bonds 8,320,000 (8,320,000) Deferred amount for issuance premium 1,458,694 93,631 (63,361) 1,488,964 Less:deferred amounts on refunding (789,621) (111,623) 46,686 (854,558) Less:bond issuance costs (663,459) (371,840) •• 38,251 (997,048) Total bonds payable 132,570,614 49,795,168 (11,148,424) 171,217,358 2,575,000 Obligations under capital leases 395,659 92,043 (178,760) 308,942 184,880 Compensated absences 3,314,699 (215,557) 3;099,142. 398,063 Total Governmental Activities $ 136,280,972 S 49,887,211 $ (11,542,741) S 174,625,442 $ 3,157,943 Long-term liabilities applicable to the City's governmental activities are not due and payable in the current period, and accordingly, are not reported as fund liabilities in the governmental funds. Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. The full amount estimated to be required for debt service on general obligation debt is provided by(1) the debt service portion of the tax levy; (2) interest earned in the Debt Service Fund; and (3) operating transfers from both the General Fund and the Water and Sewer Enterprise Fund.Transfers from the Enterprise Funds are approved at the discretion of City Council and are not intended to service a specific bond series. 44 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) A summary of the terms of general obligation bonds and certificates of obligation,as of September 30,2006, �--� follows: - • Interest Debt Series Original Issue Matures Rate(•I.) Outstanding General Obligation Bonds General Obligation Bonds,Series 2001 1,900,000 $ 920,000 Permanent Improvement and Refunding Bonds,Series 2000 10,830,000 2009 4.80-4.90 5,665,000 Permanent Improvement and Refunding Bonds,Series 2003 15,000,000 2028 4.00-6.00 14,540,000 Permanent Improvement and Refunding Bonds,Series 2005 37,015,000 2029 3.25-5.00 37,015,000 Permanent Improvement and Refunding Bonds,Series 2006 32,165,000 2029 4.00-5.00 32,165,000 Total General Obligation Bonds $ 90,305,000 Certificates of Obligation Certificates of Obligation,Series 2001 11,650,000 2022 5.00-6.00 $ 10,020,000 - Certificates of Obligation,Series 2002 25,000,000: 2027 5.10-5.08 22,025,000 Certificates of Obligation,Series 2003 25,000,000 2023 3.00-4.50 18,630,000 Certificates of Obligation,Series 2004 21,000,000 2028 4.00-5.25 20,900,000 Ji Certificates of Obligation,Series 2006 9,700,000 2029 3.65-4.68 9,700,000 Total Certificates of Obligation $ 81,275,000 Prior Year Refunding In prior years, the City defeased certain general obligation and other bonds.by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payments on the refunded bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the City's financial statements. At September 30, 2006, $17.2 million of previously refunded bonds outstanding were considered defeased. Current Year Refunding of Long-Term Debt The City issued $8,165,000 of general obligation refunding bonds to provide resources to purchase U.S. Government State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of$8,001,623 of general obligation bonds. As a result, the refunded bonds of$7,890,000 are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net assets. The reacquisition price exceeded the net carrying amount of the old debt by$111,623.This amount is being netted against the new debt and amortized over the remaining life of the refunded debt,which is shorter than the life of the new debt issued. This advance refunding was undertaken to increase total debt service payments over the next 14 years by$3,960,438 and resulted in an economic gain of$9,121. t_ 45 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) Capital Lease Obligations The City has entered into certain capital lease agreements in order to purchase public safety and management information systems equipment and other construction related equipment. The capital lease obligations are paid out of the General and Debt Service Funds. Following is a summary of future lease payments due on this equipment: Lease Fiscal Year Obligations 2007 $ 184,880 2008 118,775 2009 15,993 Total 319,648 Less interest portion (10,706) Obligations under Capital Leases $ 308,942 • _ I 46 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS I NOTE 5-LONG-TERM DEBT(continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30,2006 are as follows: Governmental Activities - Fiscal Year General Obligation Certificates of Obligation Ending Principal Interest Principal Interest 2007 $ 2,085,000 $ 4,524,657 $ 490,000 $ 3,864,361 2008 2,185,000 4,040,961 540,000 3,771,183 2009 2,855,000 3,924,160 1,560,000 3,724,802 1 2010 2,195,000 3,815,399 2,790,000 3,611,780 2011 2,375,000 3,724,521 3,010,000 3,463,983 2012 2,530,000 3,624,636 3,340,000 3,308,771 2013 2,635,000 3,517,108 3,500,000 3,148,327 2014 2,750,000 3,402,561 3,655,000 2,989,991 2015 2,875,000 3,274,824 3,820,000 2,823,418 2016 3,015,000 3,135,033 4,000,000 2,648,723 2017 2,050,000 3,022,305 4,490,000 2,461,173 2018 2,240,000 2,935,330 4,605,000 2,260,313 2019 2,520,000 2,835,499 4,960,000 2,046,674 2020 2,715,000 2,718,046 5,120,000 1,814,293 2021 2,860,000 2,588,202 5,360,000 1,564,609 2022 3,015,000 2,450,797 5,605,000 1,301,499 2023 4,005,000 2,286,212 5;040,000 1,046,474 2024 ' 5,805,000 2,049,662 3,690,000 833,373 2025 6,115,000 1,756,950 3,835,000 650,456 2026 6,435,000 1,448,762 4,100,000 462,622 2027 6,770,000 1,135,256 4,280,000 263,244 I2028 8,960,000 763,538 2,635,000 99,825 2025 11,315,000 273,650 850,000 19,125 $ 90,305,000 $ 63,248,069 $ 81,275,000 $ 48,179,019 47 CITY PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS • NOTE 5-LONG-TERM DEBT(continued) B. Enterprise Fund Debt The following is a summary of changes in the City's total business-type long-term liabilities for the year ended September 30,2006. • Amounts Due Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Business-type Activities: Bonds payable: • Certificates of obligation $ 15,880,000 $ $ (880,000) $ 15,000,000 $ 915,000 Water and sewer revenue bonds 32,480,000 13,845,000 (6,155,000) 40,170,000 1,125,000 Premium on bond issuance 321,547 - .321,547 Deferred issuance costs (252,204) (596,956) (849,160) 48,107,796 13,569,591 (7,035,000) 54,642,387 2,040,000 Other liabilities: , Compensated absences 415,316 52,623. (49,296) 418,643 60,030 Total Business-type Activities $ 48,523,112 S 13,622,214 $ (7,084,296) $ 55,061,030 $ 2,100,030 A summary of the terms of certificates of obligation and revenue bonds recorded in the Enterprise Funds as of September 30,2006,is as follows: Interest Debt Series Original Issue Matures Rate(%) Outstanding Water and Wastewater Fund Water and Sewer System Revenue Bonds,Series 1996 B 8,870,000 2008 4.20-4.40 $ 1,010,000 Water and Sewer System Adjustable Rate Revenue Bonds,Series 1999(1) 8,000,000 2020 3.75 6,980,000 Water and Sewer System Revenue Bonds,Series 2001 10,000,000 2023 4.37-6.25 9,500,000 Water and Sewer System Revenue Bonds,Series 2003 9,500,000 2025 4.00-6.00 8,835,000 Certificates of Obligation,Series 1998 17,100,000 2018 3.10-3.80 15,000,000 Water and Sewer System Revenue and Refunding Bo.;.s,Series 2006 13,845,000 2031 3.74-4.82 13,845,000 Total Utility System Fund $ 55,170,000 1-. 48 • ' 1 CITY PEARLAND,TEXAS ,•- NOTES TO FINANCIAL STATEMENTS f NOTE 5-LONG-TERM DEBT(continued) The.annual requirements to amortize governmental activity revenue bonds and certificates of obligation outstanding at September 30,2006 are as follows: 1 Fiscal Year Revenue Bonds Certificates of Obligation Ending Principal Interest Principal Interest 2007 $ 1,125,000 $ 1,828,614 $ 915,000 $ 521,073 2008 1,180,000 1,783,380 945,000 492,006 2009 1,245,000 1,729,919 980,000 461,198 • 2010 1,305,000 1,669,361 1,015,000 428,271 2011 1,370,000 1,611,111 1,050,000 393,158 2012 1,43 5,000 1,543,986 1,090,000. 355,698 2013 1,500,000 1,474,224 1,125,000 316,100 2014 1,570,000 1,404,811 1,170,000 274,498 2015 1,640,000 1,337,811 1,210,000 230,760 2016 1,715,000 . 1,267,474 1,250,000 184,938 2017 1,895,000 1,193,461 2,090,000 121,790 2018 1,975,000 1,117,341 2,160,000 41,040 2019 2,055,000 1,037,494 2020 2,140,000 953,344 2021 2,225,000 864,994 2022 2,335,000 757,081 2023 2,445,000 643,781 2024 1,600,000 529,869 2025 1,600,000 461,494 ! r 2026 1,150,000 393,119 2027 , 1,205,000 338,494 2028 1,265,000 278,244 2029 1,330,000 214,994 2030 ' 1,395,000 146,831 2031 1,470,000 75,338 $ 40,170,000 $ 24,656,569 $ 15,000,000 $ 3,820,528 i . 49 CITY PEARLAND, TEXAS NOTES TO FINANCL4L STATEMENTS NOTE 5-LONG-TERM DEBT(continued) C. -Component Unit Long-Term Debt • The following is a summary of the long-term debt transactions of the Pearland Economic Development Corporation and the Development Authority of Pearland for the year ended September 30,2006: Amounts Due Balance Balance Within One Oct.1,2005 Additions (Reductions) Sept.30,2006 Year Pearland Economic Development Corporation Sales tax revenue bonds $ 10,590,000 $ 10,235,000 $ (345,000) $ 20,480,000 $ 400,000 Deferred amount for issuance premium 155,448 - (7,212) 148,236 Deferred loss on refunding (189,626) - 16,418 (173,208) Deferred issuance costs (256,439) (102,808) 13,138 (346,109) Compensated absences 14,540 44,500 (20,842) 38,198 5,000 Development Authority of Pearland Tax Increment Revenue Bonds 13,995,000 9,775,000 (1,535,000) 22,235,000 1,555,000 ^' Deferred issuance costs (927,778) (695,027) 32,702 (1,590,103) Deferred amount for issuance discount (86,013) 3,727 (82,286) $ 23,381,145 $ 19,170,652 $ (1,842,069) $ 40,709,728 $ 1,960,000 A summary of the terms of the revenue bonds recorded as long-term liabilities in the Pearland Economic Development Corporation and Development Authority of Pearland as of September 30, 2006 are as follows: Interest Debt Series Original Issue Matures Rate(%) Outstanding Pearland Economic Development Corporation Sales Tax Revenue Bonds,Series 2005 10,590,000 2026 1:30-4.42 $ 10,245,000 Sales Tax Revenue Bonds,Series 2006 10,235,000 -1030 3.66-4.75 10,235,000 Development Authority of Pearland Tax Increment Revenue Bonds,Series 2005 13,995,000 2028 2.50-5.00 13,180,000 Tax Increment Revenue Bonds,Series 2006 9,775,000 2028 3.50-4.75 9,055,000 Total Component Unit Long-Term Debt $ 42,715,000 • 50 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 5-LONG-TERM DEBT(continued) The annual requirements to amortize component unit revenue bonds outstanding at September 30, 2006 are as follows: - 1 Revenue Bonds Pearland Economic ~' Fiscal Year Development Corporation Development Authority of Pearland Ending Principal Interest Principal Interest 2007 $ 400,000 $ 1,003,562 $ 1,555,000 $ 1,038,268 2008 525,000 888,369 635,000 984,893 ' 2009 545,000 870,144 645,000 961,964 2010 565,000 851,669 670,000 937,214 2011 585,000 831,506 695,000 - 910,277 2012 610,000 809,256 725,000 881,262 , 2013 635,000 784,906 755,000 849,974 2014 660,000 757,406 790,000 816,346 2015 690,000 728,856 825,000 780,289 2016 720,000 698,956 865,000 742,194 q 2017 760,000 664,756 905,000 702,654 2018 795,000 628,669 945,000 659,841 2019 835,000 590,575 975,000 614,541 2020 875,000 556,125 1,025,000 567,741 2021 910,000 519,625 1,070,000 518,131 2022 950,000 481,075 1,I25,000 466,756 2023 995,000 439,200 1,180,000 411,350 2024 1,040,000 395,138 1,235,000 353,225 2025 1,090,000 348,538 1,300,000 289,956 2026 1,140,000 299,325 1,365,000 223,351 2027 1,190,000 247,838 1,440,000 .152,701 2028 1,255,000 188,338 1,510,000 78,176 2029 1,320,000 128,725 y 2030 1,390,000 66,025 + - $ 20,480,000 $ 13,778,581 $ 22,235,000 $ 1-:,>41,104 F. Legal Compliance „/ Long-term debt assumed by the City upon dissolution of annexed municipal utilitydistrict in fiscal P year 2006 has been recorded as part of the City's long-term debt.A portion of the assumed debt is related to assets recorded in the Water and Sewer Fund. Even though the debt is related to assets recorded in the Water and Sewer Fund, the debt is considered general obligation debt based on "4 Texas law.The annexed debt was defeased during fiscal year 2006. , 51 , • CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 6—FUND EQUITY/NET ASSETS The City records fund balance reserves on the fund level to indicate that a portion of the fund balance is legally restricted for a specific future use or to indicate that a portion of the fund balance is not available for expenditures NOTE 7-INTERFUND TRANSACTIONS A summary of interfund transfers,the purpose of which is to cover operational expenses/expenditures,for the year ended September 30,2006,is as follows: Transfers Out Transfers In Amounts Purpose — Transfer for engineering costs and other Capital Projects Fund General Fund $ 589,828 capital project costs General Fund Capital Projects Fund 2,589,500 Transfer fiords for capital projects costs General Fund Debt Service Fund 958,347 Debt service payments • Transfer of funds to park and recreation General Fund Non Major Governmental Funds 314,520 activities Annual scheduled transfer of funds for water General Fund Water and Sewer Fund 159,000 and sewer services Water and Sewer Fund General Fund 979,161 Transfer funds for administrative costs Water and Sewer Fund Debt Service Fund 333,562 Debt service payments Non Major Governmental Fund General Fund 86,666 Transfer funds for administrative costs $ 6,010,584 NOTE 8-DEFERRED COMPENSATION PLAN The City maintains, for its employees, a tax-deferred compensation plan meeting the requirements of Internal Revenue Code Section 457.The plan was established in the 1995 fiscal year by City Ordinance. and Nationwide Retirement Solutions and SRC Retirement Corporation were appointed as plan - administrators. The deferred compensation is not available to employees until termination, retirement, death, or unforeseen emergency. The plan's trust arrangements are established to protect deferred compensation amounts of employees under the plan from any other use other than intended under the plan (eventual payment to employees deferring the compensation) in accordance with federal tax laws. Amounts of compensation deferred by employees under plan provisions are disbursed bi-weekly by the City to a third party administrator.The third party administrator handles all funds in the plan and makes investment decisions and disburses funds to employees in accordance with plan provisions. 52 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 9-EMPLOYEE RETIREMENT SYSTEM Plan Description and Provisions The City provides pension benefits for all of its full-time employees through a nontraditional, joint contributory, defined benefit plan in the state-wide Texas Municipal Retirement System("TMRS"),one of 801 currently administered by TMRS,an agent multiple-employer public employee retirement system. Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City- financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee,with interest,prior to establishment of the plan.Monetary credits for service since the plan began are a percent (100%, 150%, or 200%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began,would be the total monetary credits and employee contributions accumulated, with interest, if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of his snln y in the last three years that are one year before the effective date.At retirement,the benefit is calculated as if the sum of the employee's accumulated • contributions, with interest, and the employer-financed monetary credits, with interest, were used to purchase an annuity. The plan provisions are adopted by the City Council of the City,within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Plan provisions for the City were as follows: Deposit Rate: 7% Matching Ratio(City to Employee): 2 to 1 A member is vested after 5 years Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. Contributions Under the state law governing TMRS,the Actuary annually determines the City's contribution rate.This rate consists of the normal cost contribution rate and the prior service contribution rate,both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to City matching percent,which are the obligation of the City as of an employee's retirement date,not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time his retirement becomes effective.The prior service contribution rate amortizes the unfunded (over funded)actuarial liability(asset) over the remainder of the plan's 25-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate.Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance to budget for it, there is a one-year delay between the actuarial valuation that is the basis for the rate and the calendar year when the rate goes into effect. �_� 53 CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 9-EMPLOYEE RETIREMENT SYSTEM(continued) The City's total payroll in fiscal year 2006 was $17.1 million and the City's contributions were based on a payroll of-S 17.0 million. Contributions made by employees totaled $1.2 million, and the City made contributions of$1.7 million during the fiscal year ended September 30,2006. Three year trend information is presented below: 2006 2005 2004 Annual Pension Cost(APC) $ 1,730,700 $ 1,480,301 $ 1,371,452 Percentage of APC Contributed 100% 100% 100% NPO at the End of Period $ - $ - $ - Because the actuary determines contribution rates on an annual basis and the City pays the calculated rate each month,the City will always have a net pension obligation(NPO)of zero at the beginning and end of the period,and the annually required contributions(ARC)will always equal contributions made. A schedule of funding progress for TMRS for the three most recent actuarial valuations may be found in the required supplementary information section of the City's Annual Financial Report. All assumptions for the December 31, 2005 valuations are contained in the 2005 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153,Austin,Texas 78714-9153.The following is a summary of the actuarial assumptions: Actuarial Cost Method Unit Credit Amortization Method Level Percent of Payroll Remaining Amortization Period 25 Years-Open Period Asset Valuation Method Amortized Cost Actuarial Assumptions: Investment Rate of Return 7% Projected Salary Increases None • Includes Inflation At 3.5% Cost-of-Living Adjustments None NOTE 10-COMMITMENTS AND CONTINGENCIES Litigation and Other Contingencies The City was involved in various lawsuits and arbitration proceedings at September 30,2006.The City and its legal counsel believe that any amounts,which the City might ultimately be required to pay,will _ not exceed underlying insurance coverage. 54 �, L CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 10-COMMITMENTS AND CONTINGENCIES(continued) Arbitrage Rebate In accordance with the provisions of the Internal Revenue Code, sections 103, 103A, and 148, as amended,a governmental debt issuance must qualify and maintain tax-exempt status by satisfying certain arbitrage requirements contained in these provisions.As part of the requirements,certain amounts earned on the non-purpose investment of debt issuance proceeds, in excess of the yield on an issue, earned as arbitrage, will be required to be paid to the U.S. Treasury.As part of this process, the City annually determines potential arbitrage liabilities on its debt issues, on component unit debt issues and on debt issues assumed by the City from various Municipal Utility Districts.As of September 30,2006,the City does not have any arbitrage liabilities. Reimbursement due to Developers In 2004, the City, along with the Reinvestment Zone Number Two (the Zone), and the Development Authority of Pearland (the Authority), component units of the,City, entered into an agreement with a developer to reimburse the developer all or a portion of the project costs to implement the Shadow Creek Ranch Development TIRZ (TIRZ Plan). As projects implementing the TIRZ Plan are completed, the Zone Board may recommend to the City that the Authority reimburse developers on behalf of the Zone and the City.The Zone Board will forward to the City and the Authority all of the necessary and required documentation supporting the requested reimbursement and a determination of the exact amount requested for reimbursement,including a calculation of the amount of interest to be reimbursed on funds advanced for the projects. In addition all monies available in the Tax Increment Fund shall be transferred to the escrow agent no less than once per year and no later than the fifteenth day of each August, subject to the retention by the City of: (1) an amount equal to the City's administrative costs connected with the Zone and the TIRZ Plan,as provided in the TIRZ plan �- - (36%of the City's Tax Increment,but not more than$0.255,in years four through eight,and 64% of the City's Tax Increment,but not more than$0.44,in years nine through 30) shall be retained by the City; (2) amounts required to be maintained in the Alvin ISD Suspense Account; (3) an amount sufficient to pay reasonable current and anticipated administrative and operating costs of the Zone, as determine by the Zone Board. NOTE 11-RISK MANAGEMENT The City is exposed to various risks of loss related to torts:theft of,damage to,and destruction of assets; `) errors and omissions;injuries to employees;and natural disasters.The City's risk management program mainly encompasses obtaining property and liability insurance through Texas Municipal League's Intergovernmental Risk-Pool(TML-IRP),and throu gh commercial insurance carriers.The participation of the City in TML-IRP is limited to payment of premiums. The City has not had any significant reduction in insurance coverage, and the amounts of insurance settlements have not exceeded insurance coverage for any of the last three years. The City also provides Workers' Compensation insurance on its employees through TML-Workers' Compensation Fund. Workers' Compensation premiums are subject to change when audited by TML- Workers'Compensation Fund.At year-end September 30,2006,the City believed the amounts paid on Workers'Compensation would not change significantly from the amounts recorded. 55 it CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS NOTE 12-SUBSEQUENT EVENTS Surface Water—Interim Water Supply Agreement with Gulf Coast Water Authority On November 6, 2006, the City of Pearland entered into an interim water supply agreement with the Gulf Coast Water Authority. The contract reserves the right for the City of Pearland to purchase up to 14.3 million GPD of the Brazos River surface water at a mutually agreed upon delivery point. The Authority has entered into a contract with the Chocolate Bayou Water Company to purchase all of the real and personal property, including water rights. The City of Pearland agrees to pay the Authority its pro-rate share(40.19%)of the debt($27,805,000 principal amount)that the Authority will issue to purchase these assets. In two years, the City of Pearland can either prepay it's obligation with respect to the outstanding principal amount of the bonds,through the issuance of City debt or the City . - can continue to pay the Authority it's pro-rata share of the annual debt service. Development Authority of Pearland Issuance Debt - -Y On October 2, 2006,the Development Authority of Pearland approved the issuance of$9,970,000 in Tax Increment Contract Revenue Bonds, Series 2006. The proceeds of the bonds will be used to pay eligible project costs pursuant to the Plan. The City and the TIRZ #2 Board have approved total reimbursements to the Developer of approximately $64.9 million. Pursuant to such reimbursement • approval, the Developer has been reimbursed $31.4 million, which includes $9,104,000 from this issuance and $2.2 million in a cash contribution in November of 2006. The Plan, as amended, estimates that throughout the life of the ITRZ, the Authority will finance total infrastructure project costs of approximately$160,750,000 Water/Sewer Rate Increase The City of Pearland increased water/sewer revenues 25% through a rate increase effective with October 1,2006 consumption. The rate increase will generate an additional$3.0 million in revenues. The increase is necessary to fund needed capital improvement projects, mainly the purchase of 10 MGD capacity in the expansion of the City of Houston Southeast Water Purification Plant and to meet bond coverage requirements. This is the first change in water and sewer rates for at least six years. Monthly Rates are as follows: Previous Current Water—Residential/Commercial Single Unit Base—2000 gallons $10.89 $11.98 Volume per 1000—over 2,000 gallons $2.02 $2.73 - Water—Residential/Commercial Multi-Unit Base—2000 gallons $9.90 $10.89 Volume per 1000—over 2,000 gallons $1.82 $2.71 Sewer Base—2000 gallons $11.39 $12.53 Volume per 1000—over 2,000 gallons $1.46 $2.06 56 APPENDIX C FORM OF BOND COUNSEL OPINION A N D R E W S 600 Travis,Suite 4200 Houston,Texas 77002 ATTORNEYS K U RT H LIP 713.220.4200 Phone 713.220.4265 Fax andrewskurth.com • March 22,2007 • WE HAVE ACTED as Bond Counsel for the City of Pearland, Texas (the "City"), in v'^ connection with an issue of certificates of obligation(the"Certificates")described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, dated March 1, 2007, in the aggregate principal amount of$23,250,000, maturing on March 1 in each year from 2008 through 2025, inclusive and on March 1 in the years 2026,2030 and 2032. The Certificates are issuable in fully registered form only, in denominations of$5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; .certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1 of this issue. WE HAVE NOT BEEN REQUESTED to examine,and have not investigated or verified, • any original proceed':_;.;, rec.,rus, data or other material, but have relied upon the transcript of certified proceedings. We have not'assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION,it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the Certificates constitute valid and legally binding obligations of the City enforceable in • accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws BeijingDallas Houston London LosAngelesNew York The Woodlands Washington.Austin e g . DC March 22,2007 Page 2 heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law; and (2) The Certificates are payable, both as to principal and interest, from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against taxable property within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates;and (3) The Certificates are further secured by a limited and subordinate pledge of the net revenues of the waterworks and sanitary sewer system of the City. The revenues to be derived from the operation of the City's water and sewer system after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, to the extent that ad valorem taxes may ever be insufficient or unavailable for said purpose; provided, however, that such pledge is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owr -^ the .-of for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Certificates in gross income for federal income tax purposes to be retroactive to - the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. �' March 22,2007 Page 3 INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit(REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled"TAX EXEMPTION'set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations,such as the Certificates, may result in collateral federal income tax consequences to, among others, fmancial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of. Social, Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the j_ consequences of investing in the Certificates. 7867/7866 • APPENDIX D , . SPECIMEN OF FINANCIAL GUARANTY INSURANCE POLICY AmbacAmbac Assurance Corporation - , - • One State Street Plaza, 15th Floor Financial Guaranty Insurance Policy New one:New2 York 10004 Telephhone: (212)668-0340 Obligor: Policy Number: Obligations: • Premium: -- Ambac Assurance Corporation-(Ambac),a Wisconsin stock insurance corporation, in consideration of the p.i ent of the premium and subject to the terms of this Policy,hereby agrees to pay to The Bank of New York,as trustee,or its• . - •r(the Insurance Trustee").for the benefit of the Holders,that portion of the principal of and interest on the above-descri• . •• igations (the-Obligations)which shall become Due for Payment but shall be unpaid by reason of Nonpayment b e Obligo Ambac will make such payments to the Insurance Trustee within one(1)business day following w -n • , .do •A• .-c of Nonpayment.Upon a Holder's presentation and surrender to the Insurance Trustee of such unpai• d.•gati•• . d a•.••• uncanceled and in bearer form and free of any adverse claim, the Insurance Trustee will d • • to the the . • •t • principal and interest which is then Due for Payment but is unpaid.Upon such disburse• bac ., 1 be•• - the owner of the surrendered Obligations and/or coupons and shall be fully subrogated to all of • Ho . ri: ..ymen •reon. In cases where the Obligations are issued in registered form,the Insurance Trustee •isb. • cipal to ol.er only upon presentation and surrender to the Insurance Trustee of the unpaid Obligation,u d of any claim,together with an instrument of assignment,in form satisfactory to Ambac and - nsurance I -dul71.000•the Holder or such Holder's duly authorized representative,so as to permit ownershi.of s ••• tion - + e name of Ambac or its nominee. The Insurance Trustee shall disburse interest to a • •er o ` ••11:. •••n o ,y upon presentation to the Insurance Trustee of proof that the claimant is the person entitl•. •. t o e Obligation and delivery to the Insurance Trustee of an instrument of assignment,in form satisfac•• • •• . , . 'nsurance Trustee,duly executed by the Holder or such Holder's duly authorized representa. - .. min, •• Am.. . I ri••. under such Obligation to receive the interest in respect of which the insurance dish , t was .•e. •• ••.c •- subrogated to all of the Holders' rights to payment on registered Obligations to the extent o . y insurance disb ts .• made. • In the event that a trustee or paying .• ••for , ••bligations 0 noti• that any payment of principal of or interest on an , . Obligation which has become Due f.- '., ent: . ••ich is mad; a Holder by or on behalf of the Obligor has been deemed a , .. preferential transfer and theretofo ••vered fr.m lder • TT nt to the United States Bankruptcy Code in accordance with a final.nonappealable order of a of co • • J -: L Holder will be entitled to payment from Ambac to the extent of such recovery if suificie nds•i availab e. , As used herein,the - - -. • -m•. any pe • o• er than(i)the Obligor or(11)any person whose obligations constitute the underlying secu • • ource o p yme • - I. gations who,at the time of Nonpayment,is the owner of an Obligation or of a coupon relating • - Obli.• • . As • in,"Due for Payment",when referring to the principal of Obligations,is when the sch . • mandato •emption date for the application of a required sinking fund Installment has been reach,• .•- : not fer any earlier date on which payment is due by reason of call for redemption(other than by application of q . sinking fu • • tallments), acceleration or other advancement of maturity; and, when r*°•.• to interest on the Ob.g dons - •• e e- uled date for payment of interest has been reached. As user _....n.Nonpayment means the failure of t •• i•. • -••v •ro sufficient funds to the trustee or paying agent for payment in full of all principal of and interest on the •U. igations ch are Due for Payment. This Pol 't fable. The premium on this Policy is not refundable for any reason,including payment of the Obligations prior to m•. - . This Policy does not insure against loss of any prepayment or other acceleration payment which at any time may become due in respect of any Obligation,other than at the sole option of Arnbac,nor against any risk other than Nonpayment. In witness whereof,Ambac has caused this Policy to be affixed with a facsimile of its corporate seal and to be signed by its duly authorized officers in facsimile to become effective as its original seal and signatures and binding upon Ambac by virtue of the countersignature of its duly authorized representative. _ '-' 1YeL44()/ 4"Ii — 4. 411C• coaroa.V.o.Ay .... Ve. OULIv.... j % President S SEAL !I': Secretary Effective Date: �`__•� Authorized Representative THE BANK OF NEW YORK acknowledges that it has agreed ` /(4,2 4 4 4 4 4 )?t-t m 0 to perform the duties of Insurance Trustee under this Policy Form No.:2B-0012 (1/01) Authorized Officer of Insurance Trustee A- _ } PAYING'AGENT/REGISTRAR AGREEMENT THIS PAYING AGENT/REGISTRAR AGREEMENT dated as of February 26, 2007 (together with any amendments or supplements hereto, the "Agreement") is entered into by and between the CITY OF PEARLAND, TEXAS (the "Issuer"), and WELLS FARGO BANK;N.A., • HOUSTON, TEXAS, as paying agent/registrar(together with any successor in such capacity, the "Bank"). WITNESSETH: WHEREAS, the Issuer has duly authorized and provided for the issuance of its City of Pearland, Texas Certificates of Obligation, Series 2007 (the "Certificates") in the aggregate principal amount of$23,250,000 to be issued as fully registered certificates; WHEREAS, all things necessary to make the Certificates the valid obligations of the Issuer, in accordance with their terms, will be done upon the issuance and delivery thereof; WHEREAS, the Issuer and the Bank wish to provide the terms under which the Bank will act as Paying Agent to pay the principal of, redemption premium, if any, and interest on the Certificates, in accordance with the terms thereof, and under which the Bank will act as Registrar for the Certificates; and WHEREAS, the Issuer and the Bank have duly authorized the execution and delivery of this Agreement; and all things necessary to make this Agreement the valid agreement of the parties, in accordance with its terms, have been done. NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to act as Paying Agent with respect to the Certificates, to pay to the Registered Owners of the Certificates, in accordance with the terms andpro visions of this Agreement and the ordinance � authorizing the issuance of the Certificates (the "Ordinance"), the principal of, redemption premium, if any, and interest on all or any of the L_+ Certificates. The Issuer hereby appoints the Bank as Registrar with respect to the Certificates. The Bank hereby accepts its appointment, and agrees to act as Paying Agent and Registrar with respect to the Certificates. HOU:2665294.2 Section 1.02. Compensation. • In consideration of the deposits of funds required to be made with the Bank by the Issuer pursuant to the provisions of the Ordinance, the Bank shall be paid the fees set forth in the Bank's fee schedule attached as Exhibit A hereto and agrees to abide by and accept the terms hereof and of the Ordinance relating to the duties of the Paying Agent/Registrar. ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the 4 A context otherwise requires: "Bank" means Wells Fargo Bank, N.A., Houston, Texas, a commercial which is a national bank duly organized and existing under the laws of the United States of America. "Certificate" or "Certificates" means any one or all of the "City of Pearland, Texas Certificates of Obligation, Series 2007"authorized by the Ordinance. L "Issuer"means the City of Pearland,Texas. "Ordinance"means the ordinance of the Issuer approved by its City Council on February 26, 2007, pursuant to which the Certificates are issued. "Paying Agent"means the Bank when it is performing the function of paying agent. "Person" means any individual, corporation, partnership,joint venture, associations,joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government or any entity whatsoever. is "Registrar"means the T .ink when it is perfornuag the function of registrar. "Registered Owner" means the Person in whose name any Certificate is registered in the books of registration maintained by the Bank under this Agreement. r— All other capitalized terms shall have the meanings assigned to them in the Ordinance. l.v - • 2 HOU:2665294.2 { ARTICLE THREE DUTIES OF THE BANK Section 3.01. Initial Delivery of the Certificates. The Certificates will be initially registered and delivered by the Bank to the purchaser designated by the Issuer as set forth in the Ordinance. If such purchaser delivers a written yr ? request to the Bank not later than five business days prior to the date of initial delivery, the Bank will, on the date of initial delivery, exchange the Certificates initially delivered for Certificates of authorized denominations, registered in accordance with the instructions in such request and the Ordinance. Section 3.02. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate funds have been provided to it for such purpose by or on behalf of the Issuer, timely pay on behalf of the Issuer the-principal of and interest on each Certificate in accordance with the provisions of the Ordinance. If the issue is to be Depository Trust Company (DTC) eligible, the Paying Agent will comply with all eligibility requirements as outlined and agreed upon in the eligibility questionnaire. Section 3.03. Duties of Registrar. The Bank shall provide for the proper registration of the Certificates and the timely exchange, replacement and registration of transfer of the Certificates in accordance with the provisions of the Ordinance. Any changes to Registered Owners for such exchange, replacement and registration shall be made by the Bank only in accordance with the Ordinance. The Bank will maintain the books of registration in accordance with the Bank's general practices and procedures in effect from time to time; provided, however, that the Bank agrees to maintain books of registration for the Certificates at the City Secretary's office in City of Pearland, Texas, which books of registration may be a copy of the rester which shall be kept current by the Bank. 1 Section 3.04. Unauthenticated Certificates. The Issuer shall provide an adequate inventory of unauthenticated Certificates to facilitate transfers. The Bank covenants that it will maintain such unauthenticated Certificates in safekeeping and will use reasonable care in maintaining such Certificates in safekeeping, which shall be not less than the care it maintains for debt securities of other government entities or corporations for which it serves as registrar, or which it maintains for its own bonds. 1- Section 3.05. Reports. Upon request of the Issuer, the Bank will provide the Issuer reports which will describe in reasonable detail all transactions pertaining to the Certificates and the books of registration for r 3 HOU:2665294.2 the period of time specified by the Issuer. The Issuer may also inspect and make copies of the information in the books of registration and such other documents related to the Certificates and in the Bank's possession at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. L The Bank will not release or disclose the content of the books of registration to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a subpoena, court order or as otherwise required by law. Upon receipt of a subpoena, court order or other lawful request, the Bank will notify the Issuer immediately so that the Issuer may contest the subpoena, court order or other request if it so chooses. Section 3.06. Canceled Certificates. All Certificates surrendered for payment, redemption, transfer, exchange or replacement, if surrendered to the Bank, shall be promptly canceled by it and, if surrendered to the Issuer, shall be delivered to the Bank and, if not already canceled, shall be promptly canceled by the Bank. The Issuer may at any time deliver to the Bank for cancellation any Certificates previously authenticated and delivered which the Issuer may have acquired in any manner • whatsoever, and all Certificates so delivered shall be prompily canceled by the Bank. All canceled Certificates held by the Bank shall be destroyed and evidence of such destruction shall be furnished to the Issuer. Section 3.07. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank by the Issuer. (b) The Bank shall not be liable to the Issuer for actions taken under this Agreement as long as it acts in good faith and exercises due diligence,reasonableness and care, as prescribed by law, with regard to its duties hereunder. (c) This Agreement is not intended to require the Bank to expend its own funds for performance of any of its duties hereunder. (d) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys. "" Section 3.08. Money Held by Bank. Money held by the Bank hereunder shall be held in trust for the benefit of the Registered Owners of the Certificates. The Bank shall be under no obligation to pay interest on any money received by it hereunder. All money deposited with the Bank hereunder shall be secured in the manner and to the fullest extent required by law for the security of funds of the Issuer. 4 HOU:2665294.2 Any money deposited with the Bank for the payment of the principal of or interest on any Certificates and remaining unclaimed by the Registered Owner after the expiration of three years 1 from the date such funds have become due and payable shall be reported and disposed of by the Bank in accordance with the provisions of Texas law including, to the extent applicable, Title 6 of the Texas Property Code, as amended. To the extent such provisions of the Property Code do not apply to the funds, such funds shall be paid by the Bank to the Issuer upon receipt of a written request therefor from the Issuer. The Bank shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with the foregoing provision. ARTICLE FOUR MISCELLANEOUS PROVISIONS Section 4.01. May Own Certificates. The Bank, in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent and Registrar for f, the Certificates. Section 4.02. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the i� parties hereof. Section 4.03. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 4.04. Notices. Any request, demand, authorization, direction, notice, consent, waiver or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown herein, or such other address as may have been given by one party to the other by 15 days' written notice. Section 4.05. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 4.06. Successors and Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their successors and assigns, whether so expressed or not. This Agreement shall not be assigned by the Bank without the prior written consent of the Issuer. fl 5 HOU:2665294.2 j I Section 4.07. Severability. If any provision of this Agreement shall be invalid or unenforceable, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired. Section 4.08. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy or claim hereunder. Section 4.09. Ordinance Governs Conflicts. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent and Registrar and if any conflict exists between this Agreement and the Ordinance, the Ordinance shall govern. The Bank agrees to be bound by the terms of the Ordinance with respect to the Certificates. Section 4.10. Term and Termination. This Agreement shall be effective from and after its date and may be terminated for any reason by the Issuer or the Bank at any time upon 60 days' written notice; provided, however, that no such termination shall be effective until a successor has been appointed and has accepted the duties of the Bank hereunder. In the event of early termination, regardless of circumstances, the Bank shall deliver to the Issuer or its designee all funds, Certificates and all books and records pertaining to the Bank's role as Paying Agent and Registrar with respect to the Certificates, including, but not limited to,the books of registration. Section 4.11. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit hereunder, in either the District Court of Harris County, Texas or the United States Federal District Court for the South-, i District of Texas, personal service of any process, and agree that service of process by certified or registered mail, return receipt requested, to the address set forth herein shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction in the State of Texas to determine the rights of any person claiming any interest hereunder. Section 4.12. Merger, Conversion, Consolidation or Succession. Any corporation into which the Bank may be merged or converted or with which it may he consolidated, or any corporation resulting from any merger, conversion, or consolidation to which the Bank shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Bank shall ipso facto be the successor of the Bank hereunder without the execution or filing of any paper or any further act on the part of either of the parties hereto. In case any•Bond shall have been registered, but not delivered, by the Bank then in office, any successor by merger, conversion, or consolidation to such authenticating Bank may 6 HOU:2665294.2 I adopt such registration and deliver the Bonds so registered with the same effect as if such successor Bank had itself registered the Bonds. r- Section 4.13. Bank Not a Trustee. This Agreement shall not be construed to require the Bank to enforce any remedy which any Registered Owner may have against the Issuer during any default or event of default under any agreement between any Registered Owner and the Issuer, including the Bond Order or to act as trustee for such Registered Owner. Section 4.14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 4.15. Governing Law. This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Texas. • L.. • 7 HOU:2665294.2 PAYING AGENT/REGISTRAR AGREEMENT THIS PAYING AGENT/REGISTRAR AGREEMENT dated as of February 26, 2007 (together with any amendments or supplements hereto, the "Agreement") is entered into by and between the CITY OF PEARLAND, TEXAS (the"Issuer"), and WELLS FARGO BANK,N.A., HOUSTON, TEXAS, as paying agent/registrar(together with any successor in such capacity, "Bank"). WITNESSETH: WHEREAS, the Issuer has duly authorized and provided for the issuance of its City of Pearland, Texas Certificates of Obligation, Series 2007 (the "Certificates") in the aggregate principal amount of$23,250,000 to be issued as fully registered certificates; WHEREAS, all things necessary to make the Certificates the valid obligations of the Issuer, in accordance with their terms,will be done upon the issuance and delivery thereof; WHEREAS,the Issuer and the Bank wish to provide the terms under which the Bank will act as Paying Agent to pay the principal of, redemption premium, if any, and interest on the Certificates, in accordance with the terms thereof, and under which the Bank will act as Registrar for the Certificates; and is WHEREAS, the Issuer and the Bank have duly authorized the execution and delivery of this Agreement; and all things necessary to make this Agreement the valid agreement of the parties, in accordance with its terms,have been done. NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The. Issuer hereby appoints the Bank to act as Paying Agent with respect to the Certificates, to pay to the Registered Owners of the Certificates, in accordance with the terms and provisions of this Agreement and the ordinance authorizing the issuance of the Certificates (the "Ordinance"), the principal of, redemption premium, if any, and interest on all or any of the Certificates. The Issuer hereby appoints the Bank as Registrar with respect to the Certificates. The Bank hereby accepts its appointment, and agrees to act as Paying Agent and Registrar with respect to the Certificates. HOU:2665294.2 Section 1.02. Compensation. In consideration of the deposits of funds required to be made with the Bank by the Issuer pursuant to the provisions of the Ordinance, the Bank shall be paid the fees set forth in the Bank's fee schedule attached as Exhibit A hereto and agrees to abide by and accept the terms hereof and of the Ordinance relating to the duties of the Paying Agent/Registrar. ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Bank" means Wells Fargo Bank, N.A., Houston, Texas, a commercial bank which is a national bank duly organized and existing under the laws of the United States of America. "Certificate" or "Certificates" means any one or all of the "City of Pearland, Texas Certificates of Obligation, Series 2007"authorized by the Ordinance. "Issuer"means the City of Pearland, Texas. "Ordinance" means the ordinance of the Issuer approved by its City Council on February 26, 2007,pursuant to which the Certificates are issued. "Paying Agent"means the Bank when it is performing the function of paying agent. "Person" means any individual, corporation, partnership,joint venture, associations,joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government or any entity whatsoever. "Registrar"means the Bank when it is performing the function of registrar. "Registered Owner" means the Person in whose name any Certificate is registered in the books of registration maintained by the Bank under this Agreement. All other capitalized terms shall have the meanings assigned to them in the Ordinance. { 2 HOU:2665294.2 ARTICLE THREE DUTIES OF THE BANK I Section 3.01. Initial Delivery of the Certificates. The Certificates will be initially registered and delivered by the Bank to the purchaser designated by the Issuer as set forth in the Ordinance. If such, purchaser delivers a written request to the Bank not later than five business days prior to the date of initial delivery, the Bank L_ will, on the date of initial delivery, exchange the Certificates initially delivered for Certificates of authorized denominations, registered in accordance with the instructions in such request and the Ordinance. Section 3.02. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate funds have been provided to it for such purpose by or on behalf of the Issuer, timely pay on behalf of the Issuer the principal of and interest on each Certificate in accordance with the provisions of the Ordinance. If the issue is to be Depository Trust Company (DTC) eligible, the Paying Agent will comply with all eligibility requirements as outlined and agreed upon in the eligibility questionnaire. ti Section 3.03. Duties of Registrar. The Bank shall provide for the proper registration of the Certificates and the timely exchange, replacement and registration of transfer of the Certificates in accordance with the provisions of the Ordinance. Any changes to Registered Owners for such exchange, replacement and registration shall be made by the Bank only in accordance with the Ordinance. The Bank will maintain the books of registration in accordance with the Bank's general practices and procedures in effect from time to time; provided, however, that the Bank agrees to maintain books of registration for the Certificates at the City Secretary's office in City of Pearland, Texas, L which books of registration may be a copy of the register which shall be kept current by the Bank. Section 3.04. Unauthenticated Certificates. The Issuer shall provide an adequate inventory of unauthenticated Certificates to facilitate transfers. The Bank covenants that it will maintain such unauthenticated Certificates in safekeeping and will use reasonable care in maintaining such Certificates in safekeeping, which shall be not less than the care it maintains for debt securities of other government entities or corporations for which it serves as registrar, or which it maintains for its own bonds. Section 3.05. Reports. Upon request of the Issuer,the Bank will provide the Issuer reports which will describe in reasonable detail all transactions pertaining to the Certificates and the books of registration for 3 HOU:2665294.2 the period of time specified by the Issuer. The Issuer may also inspect and make copies of the information in the books of registration and such other documents related to the Certificates and in the Bank's possession at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. The Bank will not release or disclose the content of the books of registration to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a subpoena, court order or as otherwise required by law. Upon receipt of a subpoena, court order or other lawful request, the Bank will notify the Issuer immediately so that the Issuer may contest the subpoena, court order or other request if it so chooses. Section 3.06. Canceled Certificates. All Certificates surrendered for payment, redemption, transfer, exchange or replacement, if surrendered to the Bank, shall be promptly canceled by it and, if surrendered to the Issuer, shall be delivered to the Bank and, if not already canceled, shall be promptly canceled by the Bank. The Issuer may at any time deliver to the Bank for cancellation any Certificates previously authenticated and delivered which the Issuer may have acquired in any manner whatsoever, and all Certificates so delivered shall be promptly canceled by the Bank. All canceled Certificates held by the Bank shall be destroyed and evidence of such destruction shall be furnished to the Issuer. Section 3.07. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank by the Issuer. (b) The Bank shall not be liable to the Issuer for actions taken under this Agreement as long as it acts in good faith and exercises due diligence,reasonableness and care, as prescribed by law, with regard to its duties hereunder. (c) This Agreement is not intended to require the Bank to expend its own funds for performance of any of its duties hereunder. (d) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys. Section 3.08. Money Held by Bank. Money held by the Bank hereunder shall be held in trust for the benefit of the Registered Owners of the Certificates. The Bank shall be under no obligation to pay interest on any money received by it hereunder. All money deposited with the Bank hereunder shall be secured in the manner and to the fullest extent required by law for the security of funds of the Issuer. 4 HOU:2665294.2 t I' _.' Any money deposited with the Bank for the payment of the principal of or interest on any Certificates and remaining unclaimed by the Registered Owner after the expiration of three years from the date such funds have become due and payable shall be reported and disposed of by the Bank in accordance with the provisions of Texas law including, to the extent applicable, Title 6 of the Texas Property Code, as amended. To the extent such provisions of the Property Code do not apply to the funds, such funds shall be paid by the Bank to the Issuer upon receipt of a written request therefor from the Issuer. The Bank shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with the foregoing provision. ARTICLE FOUR MISCELLANEOUS PROVISIONS Section 4.01. May Own Certificates. The Bank, in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent and Registrar for the Certificates. Section 4.02. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereof. Section 4.03. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 4.04. Notices. Any request, demand, authorization, direction, notice, consent, waiver or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown herein, or such other address as may have been given by one party to the other by 15 days' written notice. Section 4.05. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 4.06. Successors and Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their successors and assigns, whether so expressed or not. This Agreement shall not be assigned by the Bank without the prior written consent of the Issuer. 5 HOU:2665294.2 _ Section 4.07. Severability. If any provision of this Agreement shall be invalid or unenforceable, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired. Section 4.08. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy or claim hereunder. Section 4.09. Ordinance Governs Conflicts. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent and Registrar and if any conflict exists between this Agreement and the Ordinance, the Ordinance shall govern. The Bank agrees to be bound by the terms of the Ordinance with respect to the Certificates. Section 4.10. Term and Termination. This Agreement shall be effective from and after its date and may be terminated for any reason by the Issuer or the Bank at any time upon 60 days' written notice; provided, however, that no such termination shall be effective until a successor has been appointed and has accepted the duties of the Bank hereunder. In the event of early termination, regardless of circumstances, the Bank shall deliver to the Issuer or its designee all funds, Certificates and all books and records pertaining to the Bank's role as Paying Agent and Registrar with respect to the Certificates, including,but not limited to,the books of registration. Section 4.11. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit hereunder, in either the District Court of Harris County, Texas or the United States Federal District Court for the Southern District of Texas, waive personal service of any process, and agree that service of process by certified or registered mail, return receipt requested, tathe address set forth herein shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction in the State of Texas to determine the rights of any person claiming any interest hereunder. Section 4.12. Merger, Conversion, Consolidation or Succession. Any corporation into which the Bank may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion, or consolidation to which the Bank shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Bank shall ipso facto be the successor of the Bank hereunder without the execution or filing of any paper or any further act on the part of either of the parties hereto. In case any Bond shall have been registered, but not delivered, by the Bank then in office, any successor by merger, conversion, or consolidation to such authenticating Bank may 6 . L . HOU:2665294.2 adopt such registration and deliver the Bonds so registered with the same effect as if such successor Bank had itself registered the Bonds. Section 4.13. Bank Not a Trustee. This Agreement shall not be construed to require the Bank to enforce any remedy which any Registered Owner may have against the Issuer during any default or event of default under any agreement between any Registered Owner and the Issuer, including the Bond Order or to act as trustee for such Registered Owner. Section 4.14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. 1 Section 4.15. Governing Law. This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Texas. I L � f 7 HOU:2665294.2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. - CITY OF PEARLAND, TEXAS ciazBy: Tom Reid,Mayor Address: 3519 Liberty Drive Pearland, Texas 77581 ATTEST: • By: g L , ity ecre ary (• o tv WELLS FARGO BANK,N.A. 1t `%Ts ", •e� r By: •+..� Title: 4 4 �Dcseeee0000°e Trust ATTN: CorporateDepartment ATTEST: By: Title: (SEAL) 8 _ HOU:2665294.2 • IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CITY OF PEARLAND, TEXAS By: Tom Reid,Mayor Address: 3519 Liberty Drive Pearland, Texas 77581 ATTEST: By: Young Lorfing, City Secretary (SEAL) WELLS FARGO BANK,N.A. By: Title: . GAYTAN ASSISTANT VICE PRESIDER4T ATTN: Corporate Trust Department ATTEST: By: e' ` v LeA.‘0 Title: Vice Presidet t 06. 00.Qb e f SJ HOU:2665294.2- _ EXHIBIT A City of Pearland, Texas Certificates of Obligation, Series 2007 Fee Schedule • . • • • HOU:2665294.2 Gregory M.Hasty WELLS Wells Fargo Bank �/�J Corporate Trust Services _,AZ G 1445 Ross Avenue, 2nd Floor Dallas, Texas 75202 Tel: (214) 740-1548 Fax: (214)777-4086 SCHEDULE OF FEES $23,250,000 City of Pearland,Texas Certificates of Obligation, Series 2007 To act as PAYING AGENT& REGISTRAR Acceptance Fee: $0.00 Initial Fees as they relate to Wells Fargo Bank acting in the capacity of Paying Agent/Registrar—includes creation and examination of the Paying Agent/Registrar Agreement; acceptance of the appointment; setting up of Paying Agent/Registrar records and accounting records;,and coordination of closing. Acceptance Fee payable at time of Paying Agent/Registrar Agreement execution. Annual Administration Fee: $500.00 For ordinary administration services by Paying Agent/Registrar — includes daily routine account management; investment transactions; cash transaction processing in accordance with the agreement; and mailing of trust account statements to all applicable parties. Float credit received by the bank for receiving funds that remain uninvested are deemed part of the Paying Agent's compensation. The Annual Administration fees are payable in advance,with the first installment due at closing. Out of Pocket Expenses: We only charge for out of pocket expenses in response to specific tasks assigned. by the client. Therefore, we cannot anticipate what specific out of pocket items will be needed or what corresponding expenses will be incurred. Possible expenses would be, but are not limited to, express mail and messenger charges, travel expenmo^ to attend closing or other meetings. There are no charges for indirect out of pocket expenses. This fee schedule is based upon the assumptions listed above which pertain to the responsibilities and risks involved in Wells Fargo undertaking the role of Paying Agent/Registrar. These assumptions are.based on information provided to us as of the date of this fee schedule. Our fee schedule is subject to review and acceptance of the final documents. Should any of the assumptions, duties or responsibilities change, we reserve the right to affirm, modify or rescind our fee schedule. Submitted by:Gregory M.Hasty-March 9,2007 Vice President/Business Development Wells Fargo Bank (214)740-1548 Pipeline ID#49352 • • .. • GENERAL CERTIFICATE STATE OF TEXAS . • COUNTIES OF BRAZORIA AND HARRIS § • CITY OF PEARLAND We, the undersigned officers of the City of Pearland,Texas(the"City"), do hereby make and execute this certificate for the benefit of the Attorney General of the State of Texas and all . . • other persons interested in the City's $23,250,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, dated March 1, 2007 (the "Certificates"), now in the process of issuance,as follows: (1) The City is •a duly incorporated Home Rule City, having more than 5,000. inhabitants, operating and existing under the Constitution and laws of the State of Texas and the duly adopted Home Rule Charter of the City, which Charter has not been changed since the • approval by the Attorney General of the State of Texas of the City of Pearland,Texas Water and Sewer System Revenue Bonds, Series 2007, dated February 1, 2007, which were the last obligations issued by or on behalf of the City. (2) Th.e Certificates are being issued to provide funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit (i) the design and construction of a multi-purpose municipal facility located in the 2600 block of Cullen Parkway, (ii) renovations to the police facility located at 2703 Veterans Drive, (iii) renovations to the community center located at 3523 Liberty Drive, (iv) renovations to Fire Station #1 located at 2020 Old Alvin Road, (v)renovations to Fire Station#4 located at 8333 Freedom Drive and (vi) professional services rendered in connection witil the above listed projects. ) (3) The currently effective ad valorem tax appraisal roll of the City (the "Tax Roll") is the Tax Roll prepared and approved during the calendar year 2007, being the most recently • approved Tax Roll of the City; the taxable property in the City has been appraised, assessed and valued as required and provided by the Texas Constitution and Property Tax Code(collectively, ' "Texas law"); the Tax Roll for the year has been submitted to the City Council of the City as required by Texas law, and has been approved and recorded by the City Council;and according to the Tax Roll for the year, the net aggregate taxable value of taxable property in the City(after deducting the amount of all applicable exemptions required or authorized under Texas law), ) upon which the annual ad valorem tax of the City has been or will be imposed or levied, is $4,654,672,740. • • • • • • HOU2665310.2 • • • (4) From February 26,2007 to the date hereof the following individuals were the duly elected and qualified Mayor, and City Council of the City holding the offices opposite their names: • Tom Reid Mayor • Richard Tetens .Mayor Pro-Tern Helen Beckman Councilmember Steve Saboe Councilinember Felicia Kyle Councilmember Kevin Cole Councilmember • (5) From February 26, 2007, to the date hereof, Young Lorfing has been the duly appointed and qualified City Secretary of the City. • (6) The Certificates were sold at a price equal to the par value thereof plus accrued interest to the date of delivery by means of a competitive sale to UBS Securities LLC. A copy of the Winning Bid is attached as.Exhibit A. , (7) Except as described in the Official Statement, neither the revenues nor the properties of the System are in any way pledged or hypothecated other than the pledge of the Net Revenues of the System to the Bonds now in the process of issuance,the City's Water and Sewer System Revenue Bonds, Series 2007, Certificates of Obligation, Series 2006, Certificates of Obligation, Series 2004, Certificates of Obligation, Series 2003, Certificates of Obligation, Series 2001, Certificates of Obligation, Series 1998, Water and Sewer System Revenue and Refunding Bonds, Series 2006, Water and Sewer System Revenue Bonds,'Series 2003, Water and Sewer System Revenue Bonds, Series 2001, Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999, and Water and Sewer System Revenue Bonds, Series 1996-B. (8) Attached to this certificate as Exhibit B.is a true, full and correct debt service schedule for the Certificates. Attached as Exhibit C is a true, full and correct debt service schedule for all of the City's outstanding tax supported debt, including the Certificates. 'The principal amount of the City's total outstanding tax supported debt,is$219,365,000. The following is a true;full and current schedule of System'revenues,remaining after the payment of all operation and maintenance expenses thereof("Net Revenues"),and for the previous three fiscal years: Fiscal Year Ended September 30, 2004 2005 2006 • $7,700,176 $3,638,349 $3,875,582 • (9) Attached to this certificate as Exhibit D is a true, full and current resolution establishing the utility rates of the System that are currently in effect. , • (10) The City is not in default as to any covenant, condition or obligation on any prior bonds or other obligations payable from the Net Revenues of the System. • HOU26653102 • SIGNED AND SEALED this February 26, 2007. CITY OF PEARLAND, TEXAS f?se4--====)01-k, • Secre Mayor (CITA° ,eo � •° ppi a16 I4p9� '! oo = � X o 7� o° ^ o° o °° • '#0�eosaaaoaoofloev°°%,%# • • HOU:2665310.2 • Exhibit A Winning Bid • • HOU:26653102 • • OFFICIAL BID FORM February 26,2007 Mayor and City Ca ubcil • City of Peariand - 3519 Liberty Drive • Pearland,Texas 77581 Gentlemen: Subject to the terms of your Official Notice of Sale and Official Statement, dated February 5, 2007, which are incorporated herein by reference,we hereby submit the following bid for the$23,250,000 CITY OF PEARLAND, GATES OF OBLIGATION,SERIES 2007,dated March 1,2007. This offer is being made for all TEXAS,CERTIFICATES said Certificates and for not less than all. • • For said legally issued Certificates of Obligation,we will pay you the par value thereof,plus accrued interest from their date to the date of delivery to us for the Certificates maturing and bearing interest per annum as follows: { Maturity Principal Interest Maturity Principal Interest Date - Amount • Rate Date • • Amount Rate March 1,2008(a) $ 50,000 S. % March 1,2021(a)(b) $1,170,000 5.LS % March 1,2009(a) 50,000 00 March 1,2022(aXb) 1,230,000 C.sS March 1,2010(a) 100,000 �2 s March 1,2023(a)(b) •' 1,295,000 S.SS March 1,2011(a) 150,000 S LS March 1,2024(aXb) 1,360,000 .L March 1,2012(a) 200,000 5 LS March 1,2025(aXb) 1,430,000r S.LS March 1,2013(a) 250,000 . i March 1,2026(a)(b) 1,500,00011 _Elf_ .. March 1,2014(a) 300,000 .S LS March 1,2027(a)(b) 1,580,000'r'L S. L S March 1,2015(a) 350,000 _1 !.>i Mardi 1,2028(aXb) 1,660,00071 $.li ' March 1,2016(a) 400,000 S.i5 March 1,2029(aXb) 1,745,000'R 3.= • March 1,2017(a) 450,000 • sc S.S March 1,2030(eXb) 1.540,000TL •L March 1,2018(aXb) 1,005,000 1.1 • March 1,2031(aXb) 1,600,000'r'3 1/.2 S • % March 1,2019(aXb) 1,060,000 •k: •' March 1,2032(aXb) 1,660,000f3 LS March 1,2020(aXb) 1,115,000 .7.5 (a) At the option of the Purchaser,any or all of such serial maturities may be designated as term certificates • ' .. subject to mandatory sinking fund redemption as follows;provided that the mandatory sietzl ,fund amount in each year shall equal the amounts shown above as maturing in such year. Term Bonds Years of First • Maturity Date Mandatory .. Principal Amount Interest (March 1) Reda,. .:on of Term Bonds Rate g0/6 gf $ Li?SD1 seO.. f.LS % 103e of 6 FLSI coo 3.1.5 % 2 3 L. 20 S( 3, L69 oo0 ((•ZS % . (b) Subject to optional redemption and payment,at the option of the City, in whole or,from time to time,in part, on March 1, 2017, or on any date thereafter at a price equal to the principal amount thereof,plus accrued interest to the date fixed for redemption. f 1 . • • Interest cost,-m-accordance-with the above bid,is:--- ..— • • Total Interest Cost from March 1,2007_........».»........»..»»...�.....».»..».»...___ _ $ ;Of 97 S.ee. • NET INTEREST COST......:...:...».........»........ ...... . S 1 - CV • NET EVE INTEREST RATE.»».»»..».. »..».».. __ _ Go qb The Initial Certificates shall be registered in the•name of Cede & Co. which will,upon payment for • the Certificates,be cancelled by the Paying Agent/Registrar.The Certificates will then be registered in the name of Cede&Co.(DTC's partnership nominee),under the Book-Entry-Only System. Cashier's Check of the Frost Nationalg Austin ,Texas,in the amount of$465,000 which • represents our Good Faith Deposit Iti tauralt ItW ¢ (has been made available to you prior to the opening of this Bid), and is submitted in accordance with the terms as set forth in the "Official Notice of Sale" and "Official Statement" We agree to accept delivery of the Certificates utilizing the Book-Entry-Only System through DTC and make • payment for the Initial Certificates in immediately available funds in the Corporate Trust Office,Wells Fargo Bank, N.A.,Houston,Texas,not later than 10:00 AM,CST,on Much 22,2007,or thereafter on the date the Certificates • are tendered for delivery,pursuant to the terms set forth in the Notice of Sale and Bidding Instructions.It will be the• obligation of the purchaser of the Certificates to complete the DTC Eligibility Questionnaire. • . The undersigned agrees to complete, execute and deliver to the City,by the•date of delivery of the Certificates,a certificate relating to the "issue price"of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale,with such changes thereto as may be acceptable to the City and its Bond Counsel. Respectfully.submitted, • UBS Secui�ties LLC • {� � * 1 :,fi / I • � ��:. By V" • Authorized Representative Lewis W. .Pollok, II Director ACCEPTED this 26"day of February,2007,the City Council,City of Pearland,Texas.. • j �. y Mayorono il (0Q9?o) Ael .... ... . . :. . , 'may - • toli iI/IIIIIN i • Ciy •or your information you will find attached a list of the group of purchasers associated with us in this proposal) . . . • • • Exhibit B Debt Service Schedule for the Certificates Fiscal Year Ending The Certificates 9-30 Principal Interest 2007 S 528,638 2008 S 50,000 1,056,025 2009 50,000 1,053,525 2010 100,000 1,049,650 2011 150,000 1,043,088 2012 200,000 1,033,900 2013 250,000 1,022,088 2014 300,000 1,007,650 2015 350,000 990,588 2016 400,000 970,900 . 2017 450,000 •'94888 2018 1,005,000 910,394 2019 . 1,060,000 856,188 2020 .1,115,000 799,094 2021 1,170,000 739,113 2022 1,230,000 676,113 2023 1,295,000 609,831 2024 ! 1,360,000 540,138 2025 1,430,000 466,900 2026 1,500,000 389,988 2027 1,580,000 324,938 2028 1,660,000 272,288 2029 • 1,745,000 • ' 216,956 • 2030 1,540,000 163,575 2031 1,600,000 • 104,550 2032 1.660.000 35.275 ;17_809_975 • HOU_26653102 Exhibit C Debt Service Schedule for All of the City's Outstanding Tax Supported Debt Fiscal Year Total Ending Debt Service 9-30 Requirements 2007 S13,964,201 2008 14,156,757 2009 15,686,551 2010 15,857,541 2011 16,079,119 2012 16,402,115 2013 16,434,010 2014 16,474,389 2015 16,506,492 „ 2016 16,536,391 2017 16,568,509 2018 17,102,854 2019 14,424,589 2020 14,429,261 2021 . 14,431,152 2022 14,428,741 2023 14,438,751 . 2024 14,434,786 5 2025 14,411,089 2026 14,497,995 2027 14,514,471 2028 14,555,878 2029 14,588,651 . 2030 1,875,753 2031 1,704,550 • 2032 1.695.275 5356.199.870 a . HOU:2665310.2 Exhibit D Resolution Establishing Utility Rates of the System HOU:26653102 • II it E • TEXao p - • • AS sr. S9 CERTIFICATION THE STATE OF TEXAS § COUNTIES OF BRAZORIA, HARRIS, & FORT BEND § • I, Young Lorfing, City Secretary of the City of Pearland, Texas, hereby certify that the attached constitutes a true and correct copy of ORDINANCE NO. 870-4; duly passed and approved on its First and Only Reading by the City Council on the 18th day of September, 2006. Witness my hand and seal of the City of Pearland, Texas, this 30th day of January 2007 at Pearland, Texas. • ngL g• T 4:744',/ • 01111 Moil. Otrri�' . Se ary 111101a111111 `,,` 3519 LIBERTY DRIVE • PEARLAND,TEXAS 77581-5416 •281-652-1600•www.ci.pearland.bc.us Mad m Paroled Rom.► • ORDINANCE NO. 870-4 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS, DETERMINING CHARGES FOR WATER AND SEWER SERVICES FURNISHED BY THE CITY, AS PROVIDED IN CHAPTER 30, ARTICLE II, SECTION 30-35 AND SECTION 30-38 OF THE CODE OF ORDINANCES; REPEALING PREVIOUS WATER AND SEWER S SERVICE RATE SCHEDULES; PROVIDING A PENALTY FOR VIOLATION; CONTAINING A AN EMERGENCY CLAUSE, A SAVINGS CLAUSE AND A SEVERABILITY CLAUSE; PROVIDING FOR CODIFICATION, PUBLICATION, AND AN EFFECTIVE DATE. WHEREAS, Chapter 30, Article II, Section 30-35 and Section 30-38 of the Code of Ordinances of the City of Pearland, Texas provides that the rates and charges for the consumption of utility services and inspection services furnished by the City shall be determined by the City Council from time to time, and the same shall be on file in the office of the City Secretary; now, therefore, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF.PEARLAND, TEXAS: Section 1. That Section 30-35 (b), Charges Required, of Article II, Rates and Charges, of Chapter 30 Utilities, of the City of Pearland Code of Ordinances, is hereby amended to add the following: "(4)Any person responsible for discharging into an interceptor or a grease,grit,lint,oil • or similar trap shall incur a one hundred dollar ($100.00) annual Application/Inspection Fee." Section 2: That Section 30-38, Determination of Charges, of Article II,Rates and Charges, of.Chapter 30, Utilities, of the City of Pearland Code of Ordinances, is hereby amended to read as follows: . "I. Definitions. Residential Unit-Any structure or.part thereof used•to fulfill the housing requirements of one ormore persons living together as a single family. • ORDI NANCE NO. 870-4 Commercial Unit - Any other structure. or part thereof used to fulfill the housing requirements of not more than one business establishment or of not more than one establishment of any other kind, but a business unit shall not include any kind of multi- family establishment. . . Multi-Unit Residence or Business- A.building consisting of two or more residential or commercial units. User-Any person,firm or corporation connected to the City water system for the purpose of receiving water service. II. Water Rates. All property upon which any building has been or may hereafter be erected having a connection with any mains or pipes presently existing or which may be hereafter constructed and used in connection with the City water system shall pay the following rates each month for water service furnished by the City; Residential Unit or Commercial Unit Consisting of a Single Unit: Up to and including first 2000 gallons ' `$11.98 minimum All over 2000 gallons $2.73 per 1000 gallons . Multi-Unit Residence or Business: 0 Up to and including first 2000 gallons . $10.89 minimum per unit All over 2000 gallons. • . 0 $2.71 per 1000 gallon usage ' The rate of$11.98 shall be the minimum monthly rate for all water users including the users for less than a monthly period. . . 2 • • • • • ORDINANCE NO. 870-4 • • • If the user's water meter becomes inoperative and fails to register, the user will be charged at the average monthly consumption as shown by the meter when in order. All water that passes through the meter shall be charged for, whether used or not. III. Sewer Rates. The following rates or charges for the use and service of the sewage system of the City of Pearland are determined as follows: • -, 1. Commercial and Industrial Users Having City Water Service: . • • The monthly sewer service charge for all Commercialand Industrial Users having City Water Service will be $12.53 minimum for 2000 gallons of water usage.or. less and $2.06 per 1000 gallons for water usage over 2000 gallons. . 2. *Commercial and Industrial Users Not Having City Water Service: The monthly sewer service charge for all Commercial and Industrial Users having sewer service but not having City Water Service will be as follows: • • (a) For customers with a metered well, $2:06 per 1000 gallons of comparable bill for City Water Service. The City will install, at the customers expense, a water meter in the private water supply.and read the meter monthly to • determine the amount of water consumption. $12.53 Monthly Minimum charge. 0 (b) For customers without a metered well, the monthly sewer charge shall be based on a water consumption of 10,000 gallons. 3. Commercial and Industrial Users Who Have Waste Water Discharge Split Between the Sanitary Sewer and Other Methods of Discharge: • In the event only a portion of the user's waste water is discharged into the• Sanitary Sewer, the City Council, upon the user's request, shall estimate what portion of the water usage is discharged into the Sanitary Sewer and his monthly sewer charge will be figured accordingly. $12.53 Monthly Minimum Charge. 4. Commercial and Industrial Users Who Use the Water That is a Part of Their - Product or Production Process and That is Not Discharged into the Sanitary . Sewer System: . • If water is a part of a Commercial or Industrial use's product or is used in his production process in such a manner that there is no discharge into the Sewer • 3 • • • ORDINANCE NO. 870-4 System,then, upon the user's request,the City Council will establish the amount of water used for such purpose and his monthly sewer charge will be figured accordingly. $12.53 Monthly Minimum Charge. 5. Residential Users Having City Water and Sewer Service: The monthly sewer service charge for all users having City Water will be$12.53 minimum for 2000 gallons of water usage or less and $2.06 per 1000 gallons for water usage over 2000 gallons. 6. Residential Users Having-City Sewer Service but not having City Water Service: • The monthly sewer service charge for all Residential Users having sewer service but not having City Water Service will be as follows: (a) For customers with a metered well, $ 2.06 per 1000 gallons of comparable bill for City Water Service. The City will install, at the customer=s expense,a water meter in the private water supply and read the meter monthly to determine the amount of water consumption. :$12.53 Monthly Minimum charge. (b) For customers without a metered well, the monthly sewer charge shall be based on a water consumption of 10,000 gallons. 7. Multi-Unit Building, Residence or Business: Each unit of a multi-unit, residence or businc,s which is separately metered will be charged a monthly sewer service charge at the rate of$12.53 for 2000 gallons of water usage or less and $ 2.06 per 1000 gallons for water usage over 2000 - gallons. 8. Multi-Unit Building With Common Water Meter for All Units: A multi-unit residence or business in which the units are served through a common water meter will be billed at the rate of$12.53 minimum for 2000 gallons of water usage or less.and $2.06 per 1000 gallons of water usage over 2000 gallons. (Multi-unit being defined as being a building, residence or business• consisting of two or more units)." 4 • ORDINANCE NO. 870-4 Section 3. Repealer..All previously adopted water and sewer rate schedules in conflict herewith shall be and are hereby repealed but only to the extent of such conflict. - • Section 4. Penalty. Any person who shall.violate the provisions.of this section • shall be deemed guilty of a misdemeanor and shall, upon conviction by a court of competent jurisdiction, be punished by 'a fine in any sum not exceeding Two Hundred Dollars ($200.00). Section 5. Savings. All rights and remedies,which have accrued in favor of the City under this Chapter and amendments thereto, shall be and are preserved for the benefit of the City. Section 6. Severability. If any section,subsection,sentence,clause, phrase or portion of this Ordinance is for any reason held invalid, unconstitutional or otherwise unenforceable by any court of competent jurisdiction, such portion shall be deemed a separate, distinct, and independent provision and such holding shall not affect the'validity of the'remaining portions thereof. Section 7. Codification. It is the intent of the City Council of the City of Pearland,Texas,that the provisions of this Ordinance shall be codified in the City's official Code of Ordinances as provided hereinabove. Section 8. Publication. The City Secretary shall cause this Ordinance, or its caption and penalty,to be published in the official newspaper of the City of Pearland,upon passage of such Ordinance. • • ORDINANCE NO. 870-4 Section 9. Effective Date. This Ordinance shall become effective at the time of the Cycle 14 billing in October 2006. PASSED and APPROVED ON FIRST AND ONLY READING this the 18th day of September, A. D., 2006. • it TOM REID MAYOR . ATTEST: • _12 //' t VOTING RECORD FIRST AND ONLY READING al NG 'R "N , Tyr C SEPTEMBER 16.2006 ig S ' RETARY Voting'Aye'-Coundlmembers Saboe,Beckman,Tetens. APPROVED AS TO FORM: Kyle,and Cole. • •l Niw✓+ /L . �.�' Voting No-- to Motion passed 5 5 to O. • DARRIN M. COKER PUBLICATION DATE September 20,2006 CITY ATTORNEY EFFECTIVE DATE: September 29,2006 PUBLISHED AS REQUIRED BY SECTION 3.10 OF • THE CHARTER OF THE CITY OF PEARLAND,TEXAS • • • • • 1 • AFFIDAVIT OFPUBLICATION The Pearland Reporter News -- - 2404 South Park Pearland, Texas 77581 State of Texas Brazoria and Harris Counties • I, Lloyd Morrow, hereby certify that the notice hereby appended was published in THE REPORTER NEWS, a newspaper of general circulation in Brazoria, Hams and Galveston Counties, for / issues, as follows: � No- Q- / Date "/ 20 2 • No. Date _ • 20 No. Date 20 No. Date • 20 • No. DateOciti VAluia 20 CFO Subscribe and sworn to before me this 6724 day of V 201— V ►A� ,sto d zo,o: -ura Ann Emmons, Publisher I • tom: 0 ,.••W.�.�^."• Notary Public, State of Texas '2-. 7 " kirl � � w s .$ a� 1 61 211.E i ` i� oiclu. i �1, gg a m ijill . .egill240 lAI P2 ' 111211 Illii il -0311 I Les: i !ig ' thi1J1 1-As 11-115 •#' M . 1 I! 1iIH1PE I 11;1111! P. 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' 1 . .• . • • .,. • SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE THE STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § We, the undersigned officers of the City of Pearland, Texas (the "City"), certify that we officially signed, by our manual or facsimile signatures, on behalf of the City, the following described certificates of obligation,to wit: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, dated March 1,2007, and aggregating$23,250,000(the"Certificates"). That the Certificates have been duly and officially executed by the undersigned with their manual or facsimile signatures in the same manner appearing hereon, and the undersigned hereby adopt and ratify their respective signatures in the manner appearing on each of the Certificates, whether in manual or facsimile form, as the case may be, as their own signatures. That on the date of such signing and on the date hereof, we were and are the duly chosen, qualified and acting officers authorized to execute the Certificates, and holding the official titles set forth below opposite such signatures. We further certify that no litigation is pending or, to our knowledge, threatened in any court in any way affecting the existence or boundaries of the City or the titles of its officers to their respective positions or their authority to act on the City's behalf or to restrain or enjoin the issuance or delivery of the Certificates, or the levy, collection or application of the ad valorem taxes or revenues pledged or to be pledged to pay the principal of and interest on the Certificates, or the pledge thereof, or in any way contesting or affecting the validity of the Certificates, the ordinance dated Febraaiy 26, 2007, authorizing the issuance, sr' . and delivery of the Certificates (the "Ordinance"), or contesting the powers of the City or the authorization of the Certificates or the Ordinance, or contesting in any way the accuracy, completeness or fairness of the Official Statement. We further certify that the seal that has been impressed, or placed in facsimile, upon each of the Certificates is the legally adopted, proper and only official seal of the City, such official seal being impressed upon this certificate. We further certify that no petition or other request has been filed with or presented to any official of the City requesting that any of the proceedings authorizing the Certificates be submitted . to a referendum or other election. We further certify that Bill Eisen is the City Manager of the City and his signature set forth below is genuine. • HOU:2665413.1 We further certify that the information and data contained in the General Certificate dated February 26,2007 remain true and correct as of this date. WITNESS OUR HANDS AND THE SEAL OF THE CITY this/77-440-47.._ ,2007. SIGNATURES TITLE OF OFFICE c= )-or!2 IRO Mayor, City of Pearland, Texas r � City Secretary, City of Pearland,Texas City Manager, City of Pearland,Texas ,`��oot11a1tLANe jlio� (( . CircfgR- „ • / j���f 0101641NO,``` Before me, on this day personally appeared the foregoing individuals,known to me to be the persons whose names were subscribed in my presence to the foregoing instrument. Given under my hand and seal of office this 1.6 &i (S Rcxrc\ A O U 1 • e,u1Q.A-A Notary Public Typed or Printed Name: Dom 5 Psysvi\.Q My Commission Expires: o auulluluWupm, �O. A `.\ ..I' oF t ' �% 0..F:1.PIREs..•• p9: p\0 HOU:2665413.1 �1 FEDERAL TAX CERTIFICATE CITY OF PEARLAND,TEXAS Certificates of Obligation,Series 2007 ' r I, the undersigned officer of the City of Pearland, Texas of Brazoria and Harris Counties, Texas, a political subdivision of the State of Texas (together with any successor to its duties and functions, the "City") make this certification for the benefit of all persons interested in the exclusion from gross income and certain other treatment for federal income tax purposes of the interest to be paid on the City's Certificates of Obligation, Series 2007, (the"Obligations") in the aggregate principal amount of$23,250,000,which are being issued and delivered simultaneously with the delivery of this certificate(the"Certificate"). I do hereby certify as follows: - 1. General. I am the duly chosen, qualified and acting officer of the City for the office shown below my signature. In such capacity, I am charged, along with others, with responsibility for issuing the Obligations. I am familiar with the facts, estimates and expectations certified herein, and I am duly authorized to execute and deliver this Certificate. I am familiar with the provisions of the ordinance adopted on February 26, 2007, authorizing the issuance of the Obligations (the "Ordinance"), and particularly the provisions thereof relating to the treatment of the Obligations and the interest thereon for federal income tax purposes. I am aware of the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), • including Sections 103 and 141 through 150 thereof, and the Treasury Regulations (the "Regulations") promulgated under the Code. This Certificate is being executed and delivered pursuant to the relevant provisions of the Code and Sections 1.141-1 through 1.141-15, 1.148-0 through 1.148-11, 1.149(d), 1.149(g)-1, 1.150-1 and 1.150-2 of the Regulations. Certain terms used herein have the same meanings as given to those terms in the Code and the Regulations. Capitalized terms used in this Certificate (unless otherwise indicated herein) shall have the meanings ascribed to them in the Ordinance. iV 2. Reasonable Expectations. As an officer of the City responsible for issuing the Obligations, the undersigned hereby certifies,in good faith, that the City's expectations, as of the Issue Date (as defined herein), regarding the amount and use of the gross proceeds of the Obligations and other matters relevant to the treatment of interest on the Obligations for federal income tax purposes are accurately and completely stated herein, that all of such ekr;::ctations are reasonable and are based on the facts and estimates stated in this Certificate, that all of the facts and estimates stated in this Certificate are accurate. The undersigned has relied on certain representations made by UBS Securities LLC the Initial Purchaser, with respect to the Obligations (the "Initial Purchaser") in the Certificate Regarding Issue Price, attached hereto as Exhibit A and certain representations of RBC Dain Rauscher,Inc. doing business under the name RBC Capital Markets, the financial advisor to the City (the "Financial Advisor") in the Certificate of Financial Advisor, attached hereto as Exhibit B. The undersigned is aware of no other facts, estimates or circumstances which would indicate that any of the expectations stated _herein are not reasonable. 3. Description of Governmental Purposes. The City is issuing the Obligations LJ pursuant to the Ordinance to provide funds,which will be used to finance: HOU:2673042.2 1 ' (a) the design and construction of a multi-purpose municipal facility, renovations to an existing police facility and a community center, and two existing fire stations (collectively, the"Project"); and (b) to pay the costs issuing the Obligations. 4. Proceeds of the Obligations. The sales proceeds from the sale of the Obligations is $23,412,584.50, which represents the aggregate principal amount of the Obligations of $23,250,000.00 plus net original issue premium of$162,584:50. 5. Use of Proceeds of the Obligations. The sales proceeds from the sale of the Obligations will be expended and applied by the City as follows: (a) Proceeds of the Obligations in the amount of$23,120,000.00 will be used by the City to pay costs of the Project. (b) Proceeds of the Obligations in the amount of approximately $130,000.00 will be used by the City to pay costs of issuance of the Obligations. (c) Proceeds of the Obligations in the amount of $83,584.50 represents the Underwriter's compensation and will be retained by the Initial Purchaser from the sales proceeds as a cost to the City of issuing the Obligations. (d) Proceeds of the Obligations in the amount of$79,000.00 will be disbursed on the date hereof to pay the insurance premium for the Obligations. 6. Pre-Issuance Accrued Interest In addition to the sale proceeds described in paragraph 5, the City will receive, upon the issuance of the••Obligations, the amount of $61,674.38 representing interest on the Obligations accruing during the period from March 1, 2007, to the date hereof. Such amount will be deposited in the City of Pearland, Texas Certificates of Obligation, Series 2007 Debt Service Fund (the"Debt Service Fund") and, along with all investment earnings therefrom, will be disbursed to pay p y interest on the Obligations on September 1, 2007, the first interest payment date on the Obligations. Because the amount of $61,674.38 represents accrued interc;t on the Obligations for a period of less than one year and will be used to pay interest on the Obligations within one year from the Issue Date, such amount constitutes pre-issuance accrued interest on the Obligations and, as such, is not considered proceeds. 7. Investment Proceeds. The City has estimated the total amount of investment proceeds to be received with respect to the Obligations to be approximately $1,290,000.00. Earnings on the investment of proceeds of the Obligations described in paragraph 5(a) will be used in addition to the amounts described in paragraph 5(a) to pay costs associated with the Project. The total cost of the Project is expected to equal or exceed the sum of the amount - described in paragraph 5(a) and the investment earnings thereon which are to be used to pay costs of the Project. Earnings on the investment of proceeds of the Obligations described in paragraph 5(b) will be used in addition to the amounts described in paragraph 5(b) to pay the costs of issuance of the Obligations. The City will have no investment earnings on the amount described in paragraph 5(c) as such amount will be retained by the Initial Purchaser as a cost to -2- HOU:2673042.2 • I the City of issuing the Obligations. Earnings on the investment of proceeds of the Obligations described in paragraph 5(d)will be used for the purposes described in paragraph 5(d). 8. Replacement Proceeds. There are no amounts on hand, and there are no amounts expected to be received, other than amounts identified herein as proceeds of the Obligations and amounts to be held in the Debt Service Fund for the payment of debt service on the Obligations (as discussed in paragraphs 6 and 12) which have or will have at any time a sufficiently direct nexus to the Obligations or to any governmental purpose of the Obligations to conclude that such amounts would have been used for that governmental purpose if the proceeds of the Obligations were not used or to be used for that governmental purpose. More specifically (a) Sinking Funds and Pledged Funds. Other than the Debt Service Fund and the amounts and investments on deposit therein from time to time, there are not now r__f and will not be at any time while the Obligations are outstanding— (i) any debt service fund, reserve fund;replacement fund, any similar fund, or any amount or investment reasonably expected to be used, directly or -indirectly (such as, by the generation of income to be used), to pay principal or interest on the Obligations; and (ii) any fund, amount, or investment that is directly or indirectly pledged to pay principal or interest on the Obligations. A pledge includes, but is not limited to, any arrangement, regardless of its form, which provides reasonable assurance that the amount will be available to pay principal or interest, even if the City encounters financial difficulty. A pledge to a guarantor or an agreement to maintain an amount at a particular level or balance for the direct or indirect benefit of bondholder or a guarantor would constitute a pledge for this purpose. (b) No Other Replacement Proceeds. There will be no other replacement l_ proceeds allocable to the Obligations. Based on the reasonable expectations of the City as of the date hereof, the term of the Obligations is not longer than, and the City will not allow the Obligations to remain outstanding longer than, is reasonably necessary for the overnmental purposes for which the Obligations are being issued. The weighted average maturity of the Obligations does not exceed 120 percent of the reasonably expected economic life of the capital projects being financed by the Obligations, determined in the same manner as provided under Section 147(b) of the Code. In addition, none of the proceeds of the Obligations will be used to finance working capital expenditures. 9. No Overissuance. Based on the expectations set forth in the preceding paragraphs, the amount of the proceeds from the issuance of the Obligations,plus all investment _proceeds to be received with respect to the Obligations, does not exceed by any amount, the amount required for the governmental purposes for which the Obligations are being issued, as described in paragraph 3 above. 10. Temporary Period Requirements for the Obligations. -3- HOU:2673042.2 { J � ; (a) Pre-Issuance Accrued Interest. The amount described in paragraph 6 represents pre-issuance accrued interest on the Obligations for a period not in excess of one year and will be expended within one year; therefore, such amount may be invested at an unrestricted yield. (b) Expenditure Test. The City expects at least 85 percent of the net sale proceeds of the Obligations will have been expended prior to March 22,2010 for costs of the Project. All net sale proceeds of the Obligations not expended prior to March 22, 2010 will be invested on and after such date until fmal expenditure at a yield (as defined in paragraph 14) which is not materially higher than the yield on the Obligations, except as set forth in paragraph 17 below. (c) Time Test. The City has incurred or,will incur within six months of the date hereof a substantial binding obligation to a third party pursuant to which the City is obligated to expend at least five percent of the net sale proceeds of the Obligations on the Project. (d) Due Diligence. The City expects that the Project will proceed with due diligence to completion and that the net sale proceeds of the Obligations will be expended on the Project with reasonable dispatch. (e) Investment Proceeds. The City expects that all amounts derived from the investment of monies received from the sale of the Obligations and from the reinvestment of such investment proceeds will be expended within three years from the date hereof or within one year after receipt of such investment income, whichever is later. All investment proceeds of the Obligations not expended prior to such date will be invested on and after such date until final expenditure at a yield which is not materially higher than the yield on the Obligations, except as provided in'paragraph 17 below. The term "net sale proceeds" shall mean any amount actually or constructively received from the sale of the Obligations, including amounts constituting the underwriter's discount or compensation and accrued interest, other than pre-issuance accrued interest, less amounts invested as part of a reasonably required reserve or replacement fund or as part of a minor portion for the Obligations. 11. Flow of Funds. Under the Obligations, the City is obligated to levy, assess and collect an ad valorem tax on property located in the City in an amount sufficient to pay debt service on the Obligations. All taxes levied, assessed and collected by the City for and on account of the Obligations will be deposited into the Debt Service Fund(as defined below). _i 12. Debt Service Fund. The City created pursuant to the Ordinance the Debt Service Fund (as defined above) to be used primarily to achieve a proper matching of revenues and debt L _ service on the Obligations within each bond year. The City expects that the taxes levied, assessed and collected each year, and amounts received from investment of moneys held in the Debt Service Fund, will be sufficient to pay debt service each year on the Obligations. The City will t_a adjust the annual tax rates as necessary, taking into account other moneys available or to be • available for the payment of debt service on the Obligations. The portion of the Debt Service -4- HOU:2673042.2 L_ - Fund which will be depleted by the payment of debt service on the Obligations at least once each bond year, except for a reasonable carryover amount not to exceed the greater of(a)one year's earnings on the Debt Service Fund for the immediately preceding bond year or(b) one-twelfth of the principal and interest payments on the issue for the immediately preceding bond year, will constitute a.bona fide Debt Service Fund and will be treated as a separate fund (the "Bona Fide Portion") for purposes of this Certificate. Amounts, other than proceeds of the Obligations, remaining in the Debt Service Fund, after the annual payment of all principal of and interest and premium, if any, on the Obligations, other than the reasonable carryover amount described in the preceding sentence will be treated for purposes of this Certificate as a separate fund (the "Reserve Portion"). The City reasonably expects that the sum of any amounts in the Debt Service Fund which (i) are allocable to such Reserve Portion or (ii) are allocable to the Bona Fide Portion, but are not spent for the payment of debt service on the Obligations within 13 months after the date of receipt of such amount, will not exceed the least of(x) 10 percent of the Issue Price (as defined in paragraph 13), (y)the maximum annual principal and interest requirements on the Obligations, or (z) 125 percent of the average annual principal and interest requirement on the Obligations, at any time so long as the Obligations are outstanding. To the extent any such accumulations exceed such amount, the excess amount will be invested at a yield not in excess of the yield on the Obligations, except as set forth in paragraph 17 below. 13. Issue Price. The term "Issue Price," with respect to the entire issue of Obligations, means the aggregate of the initial offering prices for all of the Obligations,plus pre- issuance accrued interest as of date of issue on the entire issue of Obligations (unless as ih otherwise indicated herein). For substantially identical Obligations, the Issue Price is the first price at which a substantial amount (i.e., at least ten percent) was sold to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters • and wholesalers). Based on the foregoing and on the Certificate Regarding Issue Price, attached as Exhibit A and incorporated herein by reference, the Issue Price of the Obligations, without taking into account any costs of issuance or pre-issuance accrued interest,is$23,412,584.50. 14. Yield on the Obligations. For purposes of this Certificate, the term"y ield" shall have the meaning ascribed to it in Section 148(h) of the Code and the Regulations in effect thereunder and, when used with respect to the Obligations, shall mean that interest rate which when used as a discount factor to compute the present value as of the Issue Date of all scheduled payments of principal of and interest on the Obligations produces an amount equal to (i) the Issue Price of the Obligations, plus (ii)pre-issuance accrued interest on the Obligations as of the Issue Date. Yield on the Obligations shall not take into account or reflect any underwriter's discount or cost of issuance of the Obligations. For purposes hereof, yield is and shall be calculated on the basis of a 360-day year with interest compounded semi-annually. The Obligations due 2026, 2030 and 2032 (the "Term Obligations") are subject to mandatory redemption. The yield on the Term Obligations is calculated by treating the outstanding stated principal amounts payable on the mandatory redemption dates as payments on t. _such dates based on representations of the Financial Advisor that the stated redemption price at maturity of such Term Obligations does not exceed the issue price of such Term Obligations by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity and the number of years to the date of the weighted average maturity (determined by taking into account the mandatory redemption schedule)of such Term Obligations. 11 -5- HOU:2673042.2 The yield on the Bonds subject to optional redemption and maturing in the years 2018 through 2026 (the "Yield-to-Call Bonds") is computed by treating each of the Yield-to-Call Bonds as retired at par plus accrued interest on March 1, 2017,because such Bonds are issued at an Issue Price that exceeds the stated redemption price at maturity of such Bonds by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Bonds and the number of complete years to the first optional redemption date for the Yield- to-Call Bonds. The treatment of the Yield-to-Call Bonds as retired on March 1, 2017, produces the lowest yield on the Bonds. The yield with respect to the Obligations subject to optional redemption is computed by treating each Obligation as retired at the stated redemption price on the final maturity date because (i) the City has no present intention to redeem prior to maturity the Obligations which are subject to optional redemption, (ii)no Obligation is subject to optional redemption at any time for a price less than the retirement price at final maturity plus accrued interest, (iii)no Obligation is subject to optional redemption within five years of the Issue Date, (iv) no Obligation subject to optional redemption is issued at an Issue Price that exceeds the stated redemption price at maturity of such Obligation by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Obligation and the number of complete years to the first optional redemption date for such Obligation; and (v)no Obligation subject to optional redemption bears interest at a rate that increases during the term of the Obligation. The insurance premium (the "Insurance Premium") paid to insure the Obligations, constitutes a fee for a qualified guarantee; thus the Insurance Premium in the amount of $79,000.00 will be treated as additional interest on the Obligations for the purpose of calculating the yield on the Obligations. The Insurance Premium represents a fee for a qualified guarantee based on the representations set forth below and in the [Certificate of Underwriter] attached hereto as Exhibit A: (a) Interest Savings. The present value of the interest savings expected to be - realized as a result of such guarantee exceeds the present value of the Insurance Premium discounted at a rate equal to the yield on the Obligations which results assuming recovery of the Insurance Premium. (b) Guarantee In Substance. The guarantee imposes secondary liability on Ambac Assurance Corporation ("AMBAC") that unconditionally shifts substantially all of the credit risk for all or part of the payments on the Obligations. AMBAC is not a co- obligor and does not expect to make any payments other than payments for which it will be reimbursed immediately. AMBAC and related parties thereto will not use more than t__ ten percent of the gross proceeds of the Obligations that are guaranteed by AMBAC. (c) Reasonable Charges. The Insurance Premium does not exceed a reasonable arms-length charge for the transfer of credit risk. The Insurance Premium is separately stated from all other fees and payments payable by the City to AMBAC for any other direct or indirect services other than transfer of the credit risk. The Insurance Premium does not include payment for the cost of underwriting or remarketing the Obligations or for the cost of casualty insurance for property fmanced or refinanced by -6- HOU:2673042.2 L_ the Obligations. The Insurance Premium is not refundable upon redemption of the Obligations prior to maturity. The yield on the Obligations, calculated in this manner and as stated in the Certificate of Financial Advisor, attached hereto as Exhibit B,is 4.246091 percent. 15. No Other Issues. There are no obligations issued by the City or any related party of the City which (a) are sold at the same time as the Obligations (within 15 days), (b)are reasonably expected to be paid from the same source of funds as the Obligations and (c)have been or will be sold pursuant to the same plan of financing as the Obligations. 16. No Other Sinking Funds. Other than the Debt Service Fund, there are no other funds or accounts comprised of investment property established by and on behalf of the City (a) which are expected to be used, or expected to generate earnings to be used, to pay debt service on the Obligations, or which are reserved or pledged as collateral for payment of debt service on the Obligations and (b) for which there is reasonable assurance that amounts therein will be - available to pay debt service on the Obligations if the City encounters fmancial difficulties. Use of amounts in the Debt Service Fund is described above. There is no other fund established, or to be created- or established, which would be treated as a sinking fund with respect to the Obligations. 17. Minor Portion. The City expects that the gross proceeds of the Obligations, including all proceeds received with respect to the Obligations and all investment proceeds received on such amounts, and all other amounts pledged or anticipated to be used to pay principal of and interest on the Obligations, other than amounts representing a portion of the Bona Fide Portion of the Debt Service Fund, will be expended in accordance with paragraphs 5 and 10 above. To the extent that such amounts remain unexpended or are otherwise on hand " following the periods set forth in paragraph 10 above exceeds the amount specified in this paragraph, the City will invest such amounts, other than a minor portion in an amount not exceeding the lesser of 5 percent of the sale proceeds of the Obligations or $100,000 in the aggregate, at a yield not materially higher than the yield on the Obligations. f LLy 18. Compliance with Rebate Requirements The City has covenanted in the Ordinance that, unless the Obligations meet an exception to the rebate requirement, it will take all necessary steps to comply with the requirement that rebatable arbitrage earnings on the investment of the gross proceeds of the Obligations, within the meaning of Section 148(f) of the Code, be rebated to the federal government. Specifically, the City will (i) maintain separate records regarding the amount and timing of disbursements of proceeds of the Obligations (ii) maintain records regarding the investment of the gross proceeds of the Obligations as.may be required to calculate the amount earned on the investment of the gross proceeds of the Obligations which are part of a reasonably required reserve or replacement fund separately from records of amounts in other funds or accounts maintained for the Obligations amounts on deposit in the funds and accounts of the City allocable to other bond issues of the City or moneys which do not represent gross proceeds of any obligation of the City (iii) calculate at such times as required by applicable Regulations,the rebatable amount earned from the investment of the gross proceeds of any obligation of the City, (iv) calculate at such times as required by applicable • Regulations, the rebatable amount earned from the investment of the gross proceeds of the -7- HOU:2673042.2 Obligations which are part of a reasonably required reserve or replacement fund, and(v)pay,not less often than every fifth anniversary date of the delivery of the Obligations or on such other dates as permitted or required by applicable Regulations, all amounts required to be rebated and all penalties required to be paid to the federal government. The City acknowledges that the purposes of compliance with Section 148 of the Code, gross proceeds of the Obligations must be accounted for on the basis of a reasonable, consistently applied method of accounting, not employed in whole or in part as an artifice or device. The City will employ accountants or other persons with expertise in performing the rebate calculations as is necessary to insure compliance with the Code. The City will employ legal counsel as is necessary to resolve the interpretive issues involved in complying with the rebate requirements of the Code. Further,the City will not indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Obligations. In the event that the City fails to comply with the rebate requirements of the Code, the City agrees to take all steps available under the Code to bring the Obligations into compliance with the Code; such steps include paying any penalty, interest or other amounts which will allow the City to return to compliance with the rebate requirements of the Code. If the City is required to pay rebate or other amounts, such as penalties and interest, to the United States with respect;to the Obligations pursuant to Section 148(0-of the Code in order to prevent the Obligations frbm constituting arbitrage bonds or being otherwise classified or treated such that interest on the Obligations would not be excludable from the gross income of the holders thereof for federal income tax purposes, the City will timely make such payments from available funds of the City and the City reasonably expects that it will have the ability to make such payments from available funds of the City in the event such payments become necessary. The undersigned reasonably expects that the City will fulfill its covenants and representations in this regard. The City hereby makes the following elections with respect•to the proceeds of the Bonds subject to the rebate requirement: DO NOT ELECT ELECT N/A ❑ ❑ ® 1. To use actual facts to apply the provisions of paragraphs (e) through (m) of section 1.148-7 of the Regulations. ❑ 0 2. To exclude earnings on a reasonably required reserve or replacement fund from the definition of "available Constructions Proceeds" for purposes of the spending requirements. Section 1.148-7(i)(2) of the Regulations. ` ❑ ❑ ® 3. To treat the portion of the Obligation that is not a refunding issue as two, and only two, separate issues, one of which (a) meets the definition • of a construction issue and (b) is reasonably expected as of the date hereof to finance all of the construction -8- HOU:2673042.2 - expenditures to be financed by the Obligations. Section 1.148-7(j)(1) of the Regulations. ❑ ❑ ® 4. To pay a penalty (the "1-1/2" penalty) to the United States in lieu of the obligation to pay arbitrage rebate on available Construction Proceeds in the event that the Obligations fail to satisfy any of the semiannual spending requirements for the two-year rebate exception. Section 1.148-7(k)(1) of the Regulations. 19. Not a Refunding. No portion of the proceeds of the Obligations are expected to be used to pay any interest on or principal of any issue of governmental obligations other than the Obligations. 20. Not a Reimbursement. Except for certain preliminary expenditures, if any (as defined in Section 1.150-2(0(2) of the Regulations) not exceeding 20 percent of the Issue Price - of the Obligations, none of the proceeds of the Obligations will be allocated to, or otherwise used, to reimburse any expenditure paid, either actually or constructively,by the City prior to the Issue Date. 21. Not a Hedge Bond. Not more than 50 percent of the proceeds of the Obligations will be invested in non-purpose investments (as defined in Section 148(f)(6)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 149(g)(3)(A)(ii) of the Code, and the City reasonably expects that at least 85 percent of the spendable proceeds of the Obligations will be used to carry out the governmental purposes of f-, the Obligations within the three-year period beginning on the date the Obligations were issued. 22. No Change In Use. The City does not expect to dispose of any portion of the Project related to the Obligations, or to change the use of the proceeds of the Obligations while 1 any of the Obligations are outstanding. 23. No Abusive Arbitrage Device. The Obligations are not and will not be a part of r an issue in which an abusive arbitrage device (as defined in Section 1.148-10(a) of the Regulations) is used. Without limiting the foregoing, the Obligations are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations, by (i) enabling the City to exploit the difference between tax-exempt and taxable interest rates to gain a material financial advantage, and (ii) increasing the burden on the market for tax-exempt obligations. In this regard, the City - - issued the Obligations for the primary purpose of accomplishing the bona fide governmental purposes set forth in paragraph 3 of this Certificate. Based on all the facts and circumstances, the City has not issued the Obligations in an amount higher than is reasonably necessary to accomplish the governmental purposes of the Obligations,the City has not issued the Obligations • earlier than is reasonably necessary to accomplish the governmental purposes of the Obligations and the City is not allowing the Obligations to remain outstanding longer than is reasonably -9- HOU:2673042.2 I r , necessary to accomplish the governmental purposes of the Obligations. The City would have issued the Obligations regardless of any arbitrage benefit, which it may realize in connection with the Obligations. In fact, the City reasonably expects that even if the Obligations were not tax-exempt obligations and if market rates of interest on taxable and tax-exempt obligations were equal to each other and to the rates at which the Obligations are in fact now being issued, the City would have issued the Obligations,notwithstanding the loss of any opportunity to borrow at r- , lower tax-exempt rates and invest at higher taxable rates. (a) No Impermissible Sinking Fund. No portion of the Obligations has a maturity determined primarily for the purpose of creating a sinking fund with respect to the Obligations the yield on which will be blended with the yield on the investment of other proceeds of the Obligations to reduce the negative arbitrage related to such investment. (b) No Working Capital. Except for an amount that does not exceed 5 percent of the Sale Proceeds of the Obligations (and that is-directly related to capital expenditures financed by the Obligations), the City will only expend proceeds of the Obligations for(i) costs that would be chargeable to the capital accounts of the Project if the City's income were subject to federal income taxation and (ii)interest on the Obligations in an amount that does not cause the aggregate amount of interest paid on all of the Obligations to exceed that amount of interest on the Obligations that is attributable to the period that commences on the date hereof and ends on the later of(A)the date that is three years from the issue date of the Obligations or (B) the date that is one year after the date on which the Project is placed in service. (c) No Sale of a Conduit Loan. No portion of the gros s proceeds of the Obligations has been or will be used to acquire, finance or refinance a conduit loan. 24. Allocations and Accounting. The proceeds of the Obligations will be allocated to expenditures not later than 18 months after the later of the date the expenditure is made or the date the Project is placed in service, but in no event later than the date that is 60 days after the fifth anniversary of the date hereof or the retirement of the last Obligations, if earlier. The allocation of proceeds will be made by employing the direct-tracing method of accounting, unless the City elects otherwise. 25. No Arbitrage. On the basis of the foregoing facts, estimates and circumstances, it is expected that the proceeds of the Obligations will not be used in a manner that would cause any of the Obligations to be an "arbitrage bond"within the meaning of Section 148 of the Code and the Regulations. To the best of the knowledge and belief of the undersigned, there are no other facts, estimates or circumstances that would materially change such expectations. 26. No Private Use,Payments or Loan Financing. (a) General. The City reasonably expects, as of the date hereof, that no action or event during the entire stated term of the Obligations will cause either the "private business tests" or the "private loan financing test," as such terms are defined in the Regulations, to be met. r -10- HOU:2673042.2 (i) No portion of the proceeds of the Obligations will be used in a trade or business of a nongovernmental person. For purposes of determining use, the City will apply rules set forth in applicable Regulations and Revenue Procedures promulgated by the Internal Revenue Service, including, among . others, the following rules: (A) any activity carried on by a person other than a natural person or a state or local governmental unit will be treated as a trade or business of a nongovernmental person; (B) the use of all or any portion of the proceeds of the Obligations is treated as the direct use of proceeds; (C) a nongovernmental person will be treated as a private business user of proceeds of the Obligations as a result of ownership, actual or beneficial use of the proceeds pursuant to a lease, or a management or incentive payment contract, or certain other arrangements such as a take-or-pay or other output-type contract; and (D) the private business use test is met if a nongovernmental person has special legal entitlements to use directly or indirectly the proceeds of the Obligations. (ii) The City has not taken and will not take any deliberate action that would cause or permit the use of any portion of the proceeds of the Obligations to change such that such portion will be deemed to be used in the trade or business -of a nongovernmental person for so long as any of the Obligations remain outstanding (or until an opinion of nationally recognized bond counsel is received to the effect that such change in use will not adversely affect the excludability from gross income for federal income tax purposes of interest payable on the Obligations). For this purpose any action within the control of the City is treated as a deliberate action. A deliberate action occurs on the date the City enters into a binding contract with a nongovernmental person for use of the proceeds of the Obligations that is not subject to any material contingencies. (iii) No portion of the proceeds of the Obligations will be directly or indirectly used to make or finance a loan to any person other than a state or local governmental unit. (b) Dispositions of Personal Property in the Ordinary Course. Dispositions of personal property financed with any portion of the proceeds of the Obligations will occur in the ordinary course of an established governmental ptugram and will satisfy the following requirements: (i) The weighted average maturity of the portion of the Obligations financing personal property is not greater than 120 percent of the reasonably expected actual use of such personal property for governmental purposes; (ii) The reasonably expected fair market value of such personal property on the date of disposition will be not greater than 25 percent of its cost; (iii) Such personal property will no longer be suitable for its governmental purposes on the date of disposition; and -11- HOU:2673042.2 (iv) The City is required to deposit amounts received from such disposition in a commingled fund with substantial tax or other governmental revenues and the City reasonably expects to spend such amounts on governmental programs within 6 months from the date of commingling. 27. Weighted Average Maturity. As calculated by the Financial Advisor in the manner described below and set forth in the Certificate of Financial Advisor, Exhibit B hereto, the weighted average maturity of the Obligations is 17.072 years which is the sum of the products of the Issue Price of each group of identical Obligations and the number of years to maturity (determined separately for each group of identical Obligations and taking into account mandatory redemptions), divided by the aggregate sale proceeds of the Obligations. [SIGNATURE PAGE FOLLOWS] • -12- HOU:2673042.2 WITNESS MY HAND,this 22nd day of March, 2007. CITY OF PEARLAND,TEXAS 4:By: Claire Manthei Director of Finance EXHIBIT A—Certificate Regarding Issue Price EXHIBIT B—Certificate of Financial Advisor • • • • • 4J I I -13- HOU:2673042.2 { EXHIBIT A • CERTIFICATE REGARDING ISSUE PRICE i HOU:2673042.2 03/20/2007 15:27 212-969-7795 UBS SECLRITIES LLC PAGE 02/03 L CERTIFIC ATE REGARDING ISSUE PRICE The undersigned hereby certifies with respect to the sale of S23,250,000 City of Pearland, Texas (the "Issuer"), Certificates of Obligation,Series 2007(the"Certificates"): 1. The undersigned is a duly su horized representative of the underwriter or of the manager of the syndicate of'underwriters (the "Underwriter.;") which has purchased the Certificates at competitive sale. In this capacity,the undersigned is familiar with the Facts stated herein. 2. The term"initial Ofkring 'rices" means the respective initial offering prices for the Certificates of each maturity(expressed as a dollar amou it or percentage of principal amount and exclusive of accrued interest) as set forth in the following table: i L Principal initial Principal Initial _� Amount Year of C'ffering Amount Year of Offering Maturing Maturity _Price Maturing Maturity Price = $ 50,000 March 1,2008 ,C11, % $1,170,000 March 1,2021 3.94 % -" 50,000 March 1,2009 S,isle% 1,230,000 March 1,2022 100,000 March 1,2010 ,CET% 1,295,000 March 1,2023 Oo 150,000 March 1,2011 _ t_% 1,360,000 March 1,2024 .O/ % • 200,000 March 1,2012 3,70 % 1,430,000 March 1,2025 % 250,000 _ March i,2013 .3.7 °/a 1,500,000 March i,2026 '/o2- % 300.000 March 1,2014 .1,S% 1,580,000 March 1,2027 350,000 March 1,201$ 3.79 % 1,660,000 March 1,2028 % t 400,000 March 1,2016 ,‘.g?% 1,745,000 March 1,2029 % 450,000 March 1,2017 ,3,$1 % 1,540,000 March 1,2030 444/3 % 1,005,000 March 1,2018 3.qO % 1,6i00,000 March 1,2031 % r 1.060 000 March 1,2019 �° r 3.9�`yo 1,660,000 March 1,2032 y y /o 1.115,000 March 1,2020 .A.9 k% 3. The Underwriters have male a bona fide public offering to the public of all of the Certificates at the prices to the public set forth above in pa ragraph 2. The prices set forth above in paragraph 2 were determined on the date the Certificates were purchased r y the Underwriters based on the Underwriters'reasonable expectations regarding the initial public offering prices. !lased on our records and other information available to us,which we have no reason to believe is not correct,at least 10 percent of the Certificates maturing in the year 2030,were sold to the public at initial offering prices not greater than the respective prices shown above.or, in the case of Certificates sold on a yield basis,at yields nc I lower than the respective yields shown in paragraph 2 above. For the remaining maturities of the Certificates,the'Jnderwriters reasonably expected,as of the date such Certificates were purchased by the Underwriters,to sell a sul istantial amount of ea b maturity of such Certificates to the public at 1 prices not greater than the respective prices shown in paragraph 2 above or, in the cast of Certificates sold on a yield basis,at yields no lower than the respa tive yields shown it par.d mph 2 above. 4. The term"Sale Date"meat is the first day on which there was a binding contract in writing for the • sale of the Certificates by the Issuer to the U rderwritera on specific terms that were not later modified or adjusted in any material respect. In the case of the Certi icates,the Sale Date hi February 26,2007. - 5. The term "Issue Date" mans the first day en which there is physical delivery of the written evidence of the Certificates in exchange for the purchase price (but not earlier than the day interest on the Certificates begins to accrue for federal inc ome tax purposes). In the case of the Certificates, the Issue Date is March 22,2007. - 6. The term "Public" shall not include bond houses, brokers, and similar persons or organizations - acting in the capacity of wholesalers or uncle writers. • 03/20/2007 15:27 212-969-7795 UBS SECURITIES LLC PAGE e3/03 7. The accrued interest an the Certificates as of the Issue Date is$ 61,67t V/ The aggregate of the respective Initial Offering Prices of all of•the Certificates,exclusive of accrued interest and without adjustment for any costs of issuance,is S2...teal R. . The Underwriter[has] [has not]purchased bond insurance or another form of credit enhancement ("Guarantee")from securing the payment of he principal of,or interest on,any of the Certificates. With respect to the Guarantee, d Q��p a. The provider of th:Guarantee is I]fI. 'f ti. (the"Guarantor"). b. The fee or prcmi'ttn paid to the Guarantor for the Guarantee is $ %!,001 OD (the "Premium"). The Premium is set forth in the Guarantor's commitment, does not exceed a reasonable charge for the transfer of the credi.risk provided by the Guarantee, and does not include any direct or indirect payment or compensation (such as rating agency fees)for any service other than the transfer of such credit risk. The Guarantor has not provided any service other than the Guarantee,except for any such service for which the Guarantor ha: charged a reasonable arm's length price which will be in addition to, and stated separately from,the Prerr ium. No portion of the Premium is refundable upon the redemption or defeasance of any of the Certificates. c. As a result of the Guarantee, the interest rates on the Certificates, arc less than those which would have been necessary is order to sell the Certificates at the respective Initial Offering Prices without the Guarantee. A.s of the I:.sue Date,the present value of su¢h interest savings expected to result • from the Guarantee is greater than the present value of fie Premium, using the yield on the Certificates (computed for this purpose by tie iting the Premium as additional interest an the Certificates) as the discount rate. We understand that the Issuer will rely on the above in making certain representations to Andrews Kurth LLP, Houston, Texas, Bond Counsel, and in complying with the condi..ions of the internal Revenue Code of 1986, as amended, and the Treasury Regulations in•:ffeet thereunder, neca:ssary for interest on the Certificates to be and remain excludable from gross income for fed:ral income tax/purposes, EXECUTED and DELIVERED this /96cdt /V 2007. ahS cc aietTi s LG G (Name of Underwriter or Mane er). Title: _JC,gede1 S11 448ti ?x.;14/4/72 • • EXHIBIT B CERTIFICATE OF FINANCIAL ADVISOR The undersigned hereby certifies with respect to the sale of$23,250,000 City of Pearland, Texas Certificates of Obligation, Series 2007 (the"Obligations"),as follows: 1. The undersigned is a duly authorized representative of RBC Dain Rauscher, Inc., doing business under the name RBC Capital Markets, the financial advisor (the "Financial Advisor") to the City of Pearland, Texas (the "City") in connection with the sale and delivery of the Obligations. In this capacity, the undersigned is familiar with the facts stated herein. 2. The term "yield" shall have the meaning ascribed to it in Section 148(h) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder. In the case of the Obligations, the term "yield" means that interest rate which when used as a discount factor in computing the present value as of the date hereof of all scheduled payments of principal of and interest on the Obligations produces an amount equal to the Issue Price of the Obligations, plus pre-issuance accrued interest. No underwriters' discount, issuance costs, or costs of carrying or repaying the Obligations has been taken into account for purposes of computing the yield on the Obligations. For purposes hereof, yield shall be calculated on the basis of a 360-day year with interest compounded semi-annually. The Obligations due 2026, 2030 and 2032 (the "Term Obligations"), are subject to ato mandry redemption. The yield on the Term Obligations is calculated by treating the outstanding stated principal amounts payable on the mandatory redemption dates as payments on such dates because the stated redemption price at maturity of such Term Obligations does not exceed the issue price of such Term Obligations by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity and the number of years to the date of the weighted average maturity (determined by taking into account the mandatory redemption schedule) of such Term Obligations. • The yield on the Bonds subject to optional redemption and maturing in the years 2018 through 2026 (the "Yield-to-Call-Bonds") is computed by treating each of these Yield-to-Call- Bonds as retired at par plus accrues interest on March 1, 2017, because such Yield-to-Call- Bonds are issued at an Issue Price that exceeds the stated redemption price at maturity of such • Yield-to-Call-Bonds by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Yield-to-Call-Bonds and the number of complete years to the first optional redemption date p p for the Yield-to-Call-Bonds,and the treatment of these Yield-to-Call-Bonds as retired on March 1, 2017,produces the lowest yield on the Yield-to-Call- Bonds. The yield with respect to the Obligations subject to optional redemption is computed by treating each Obligation as retired at the stated redemption price on the final maturity date because (i) the City has no present intention to redeem prior to maturity the Obligations which are subject to optional redemption, (ii) no Obligation is subject to optional redemption at any time for a price less than the retirement price at final maturity plus accrued interest, (iii) no • Obligation is subject to optional redemption within five years of the Issue Date, (iv) no B-1 HOU:2673042.2 Obligation subject to optional redemption is issued at an Issue Price that exceeds the stated redemption price at maturity of such Obligation by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Obligation and the number of complete years to the first optional redemption date for such Obligation;.and (v) no Obligation subject to optional redemption bears interest at a rate that increases during the term of the Obligation. Based on representations in the Federal Tax Certificate and the Issue Price Certificate, the insurance (the premium "Insurance Premium" ) paid to insure the Obligations, constitutes a fee for a qualified guarantee; thus the Insurance Premium in the amount of $79,000.00 will be treated as additional interest on the Obligations for the purpose of calculating the yield on the Obligations. The yield on the Obligations, calculated in this manner and based on an amount equal to $23,474,258.88, which represents the Issue Price of the Obligations of $23,412,584.50 as set forth in the Certificate Regarding Issue Price, attached as Exhibit A to the Federal Tax Certificate to which this Certificate is attached,plus pre-issuance accrued interest of$61,674.38, I_ is 4.246091 percent. 3. The Financial Advisor calculated the weighted average maturity of the Obligations to be 17.072 years, which is the sum of the products of the Issue Price of each group of identical Obligations and the number of years to maturity (determined separately for each group of identical Obligations and taking into account mandatory redemptions), divided by the aggregate sale proceeds of the Obligations. 4. With respect to the issuance of the Obligations, the representations set forth in paragraph 23 of the Federal Tax Certificate are, to the best of our knowledge, true, correct and complete. [SIGNATURE PAGE FOLLOWS] { B-2 HOU:2673042.2 theCityrely Financial Advisor hereby authorizes to on the statements made herein in connection with making the representations set forth in the Federal Tax Certificate to which this Certificate is attached and in connection with compliance by the City with the provisions of the Code regarding the exclusion from gross income of the interest on the Obligations. Further, we hereby authorize Andrews Kurth LLP, Bond Counsel to the City to rely on the statements made herein in connection with its opinion that interest on the Obligations is excludable from gross income for federal income tax purposes. EXECUTED and DELIVERED as of and on March 22,2007. RBC CAPITAL MARKETS vj By: (2) 6ie Name �ihd O tifi!'vcof Title: l fica-bw B-3 HOU:2673042.1 catoaLt rdtt PEARLAND P( lASING • PAGE 82/93 Form 8038.E Information Return for Tax-Exempt Governmental Obligations (Rev. November 2000) ► Under Internal Revenue Code section 149(e) ► instructions- ' separate instruction (R No a lna Dustily ev. OMB Np.t5A5.0720 ^r's*^��recva+b area Caution:if the issue price is under S700,000, use Form 8038-Gc, Part I Reporting Authority 1 Issuer s name If Amended Return, check here 9. 0 City of Pearland,Texas 2 Issuer's employer identification number 3 Number and street(or P.O.box IF malt Is not delivered to street address) 74 6028909 Ma Liberty Drive Room/sultc 4 Report number 5 City,town,or post office,state,and ZIP code 3 2007.2 Pearland,Texas 77581 8 Date of issue ' 7 Name of issue 03122/2007 City of Pearland,Texas Certificates of Obligation,Series 2007 a CUSIP number 9 Name and title of officer or legal representative whom the IRS may call for more infotmatlon 10 Telephone 704883 j Kathryn V,Garner,Bond Counsel pi+one number of officer or legaall representative Part II Type of Issue (check applicable box(es) price) and enter the issue ( 713 )220.3948 11 ❑ Education ,See instructions and attach schedule 11 12 0 Health and hospital 13 0 Transportation 13 14 ❑ Public safety 13 15 ❑ Environment(Including sewage bonds) 14 I 16 0 Housing 15 ' 17 0 Utilities 16 18 © Other. Describe ► Construction of public buildings. _77. 19 If obligations are TANS or RANs, check box► ons 18 23,412,5134.50 20 If obi) anions are in the form of a lease or installment sate,lrcheck box areBANs, check box 10. ❑ Description of Obligations. Complete for the entire issue for which this form is❑ bein filed. (a)Final maturity date (b)Issue price (e)Stated redemption . (d)Weighted - prim 21 03/01/2032 at maturity average maturity (e)Yield S 23,412,584.50 $ 23,250,000.00 17,072 l_ Part IV - Uses of Proceeds of Bond Issue includin• underwriters'discount ears 4.246091 9% 22 Proceeds used for accrued Interest 23 Issue price of enure Issue (enter amount from line 21, column(b)) NM 61,674.38 ral 24 Proceeds used for bond issuance costs(including underwriters'discount) 24 213,584.50 Z3,412,584.50 25 Proceeds used for credit enhancement 26 Proceeds allocated to reasonably required reserve or replacement fund . , . 79,000.00 • 27 Proceeds used to currently refund prior issues 28 Proceeds used to advance refund prior Issues 0,00 m 29 Total(add lines 24 through 28) " 0004 . ,584 30 Nonrefundinq proceeds of the issue(subtract line 29 from line 23 and enter amount here). 29 ,50 Part V Description of Refunded Bonds(Complete this part only for refunding bonds.) 30 23,120,000000.00 31 Enter the remaining weighted average maturity of the bonds to be currently refunded , • ►32 Enter the remaining weighted average maturity of the bonds to be advanceyears 33 Enter refun the last date on which the refunded bonds will be called dad • ► years 34 Enter the dat s)the refunded bonds were Issued ► ► Miscellaneous 35 Enter the amount of the state volume cap allocated to the issue under section 141( b)(5)Enter the amount of gross proceeds Invested or to be Invested In a guaranteed investment contract(see(nstructions) MI b Enter the final maturity date of the guaranteed investment contract► 37 Pooled financings: a Proceeds of this issue that are to be used to make loans to other governmental units �tt] b If this issue is a loan made from the proceeds of another tax-exempt Issue, check box P. ❑ and enter the name of the issuer ► 39 If the Issuer has designated the issue under section 265 3 and the date of the issue ► 39 If the Issuer has elected to pay a penalty In lieu of arbitrage)rebat(e,check 111) ibox issuer exception), check box lb CI 40 If the issuer has Identified a hedge. check box I. 0 Is. CIUnundopenalties or perjury.I declare trul I have examined this return and accompany ingSChGdules and smtemems,and to inc best of my knowledge Sign _ Here (10n;A6 .t— � �13. 4-7I'Signature of issuer's authorl:ed nopresentaWe Clain Mtlgthe(,Uirs ctor of f inancc • • Date I Type or print nunC.and flue For Paperwork Reduction Act Notice, see page 2 of the Instructions. cat.tvo,637735 • Form 8038-G (Rev. 11.20001 • I OFFICIAL STATEMENT CERTIFICATE THE STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § I, the undersigned Mayor of the City of Pearland, Texas (the "City"), acting solely in my official capacity, do hereby certify on behalf of the City that: 1. I have reviewed the Official Statement of the City dated February 26, 2007 (the "Official Statement"), relating to the $23,250,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007. 2. To the best of my knowledge and belief, as of the date hereof, the descriptions and statements of or pertaining to the City contained in the Official Statement, on the date thereof, on the date of sale of the Certificates, and on the date hereof, are true and correct in all material respects. 3. To the best of my knowledge and belief, as of the date of the Official Statement and the date hereof, insofar as it relates to the City and its affairs, including its financial affairs, the Official Statement did not and does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made,not misleading; 4. To the best of my knowledge and belief, the descriptions and statements of or pertaining to entities other than the City and such entities' activities, including financial data, have been obtained from sources which are believed to be reliable and there is no reason to believe that such descriptions and statements are untrue in any material respect. 5. There has been no material adverse change in the financial condition of the City since September 30, 2006, the date of the last audited financial statements of the City appearing in the Official Statement. [Signature Page Follows] L- HOU:2665273.1 EXECUTED this ZZ day of 14.a..eL'(it , 2007, the date of payment for and delivery of the Bonds. 714 Tom Reid Mayor, City of Pearland, Texas • HOU:2665273.1 CERTIFICATE OF BOND INSURER In connection with the issuance of $23,250,000 in aggregate principal amount of City of Pearland, Texas (the "Obligor"), Certificates of Obligation, Series 2007, dated March 1, 2007 (the "Obligations"), Ambac Assurance Corporation ("Ambac") is issuing a Financial Guaranty Insurance Policy (the "Insurance Policy") guaranteeing the payment of principal and interest when due on the Obligations, all as more fully set out in the Insurance Policy. On behalf of Ambac,the undersigned hereby certifies that: Ambac (i) the Insurance Policy is an unconditional and recourse obligation of Ambac (enforceable by or on behalf of the holders of the Obligations) to pay the scheduled payments of interest and principal on the Obligations in the event of a Nonpayment as defined in the Insurance Policy; (ii) the insurance premium of $79,000.00 was determined in arm's length negotiations in accordance with our standard procedures, is required to be paid as a condition to the issuance of the Insurance Policy and represents a reasonable charge for the transfer of credit risk; (iii) no portion of such premium represents a payment for any direct or indirect services other than the transfer of credit risk,including costs of underwriting or remarketing the Obligations or the cost of insurance for casualty of Obligation financed property; (iv) we are not co-obligors on the Obligations and do not reasonably expect that we will be called upon to make any payment under the Insurance Policy; and (v) the Obligor is not entitled to a refund of any portion of the premium for the Insurance Policy in the event that the Obligations are retired prior to their stated maturity. IN WITNESS WHEREOF, Ambac Assurance Corporation has caused this certificate to be executed in its name on this 22nd day of March,2007,by one of its officers duly authorized as of such date. AMBAC ASSURANCE CORPORATION By: 1 _ Dwigh wa Vice President and Assistant General Counsel I AN D R E W S 600 Travis,Suite 4200 Houston,Texas 77002 ATTORNEYS K U RT H LLP 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com March 22, 2007 WE HAVE ACTED as Bond Counsel for the City of Pearland, Texas (the "City"), in connection with an issue of certificates of obligation(the "Certificates") described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, dated March 1, 2007, in the aggregate principal amount of $23,250,000, maturing on March 1 in each year from 2008 through 2025, inclusive and on March 1 in the years 2026, 2030 and 2032. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1 of this issue. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the Certificates constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws HOU:2664499.2 Austin Beijing Dallas Houston London Los Angeles New York The Woodlands Washington, DC March 22, 2007 Page 2 heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law; and (2) The Certificates are payable, both as to principal and interest, from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against taxable property within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates; and (3) The Certificates are further secured by a limited and subordinate pledge of the net revenues of the waterworks and sanitary sewer system of the City. The revenues to be derived from the operation of the City's water and sewer system after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, to the extent that ad valorem taxes may ever be insufficient or unavailable for said purpose; provided, however, that such pledge is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. purpose at anytime, in one or The Cityhas reserved the right to issue, for anylawful more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. HOU:2664499.2 March 22, 2007 Page 3 INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled"TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. 7867/7866 • HOU:2664499.2 I A ATTORNEY GENERAL OF TEXAS GREG ABBOTT March 20, 2007 THIS IS TO CERTIFY that the City of Pearland, Texas (the "Issuer") has submitted to me City of Pearland,Texas Certificates of Obligation,Series 2007(the "Certificates"),in the aggregate principal amount of$23,250,000,for approval. The Certificates are dated March 1, 2007, numbered R-1 through R-20, and were authorized by an Ordinance of the Issuer passed on February 26, 2007 (the "Ordinance"). I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to me without undertaking to verify the same by independent investigation. I express no opinion relating to the official statement or any other offering material relating to the Certificates. Based on my examination,I am of the opinion, as of the date hereof and under existing law, as follows (capitalized terms, except as herein defined, have the meanings given to them in the Ordinance): (1) The Certificates have been issued in accordance with law and are valid and binding obligations of the Issuer. (2) The Certificates are payable from the,proceeds of an annual ad valorem tax levied, within the limits prescribed by law, against all taxable property in the Issuer and are 1-7 additionally payable from and secured by a junior and subordinate lien on and pledge of the Net Revenues, in an amount not to exceed$10,000. Therefore, the Certificates are approved. Ah/06771 Alp ey Ge 6r 1 of the State of Texas No.46139 f Book No.2007A MAA POST OFFICE Box 12548, AUSTIN, TEXAS 78711-2548 TEL:(512)463-2100 WWW.OAG.STATE.TX.US An Equal Employment Opportunity Employer • Printed on Recycled Paper • OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora, ❑ Bond Clerk QX Assistant Bond Clerk in the office of the Comptroller of the State of Texas, do hereby certify that, acting under the direction and authority of the Comptroller on the 20th day of March, 2007, I signed the name of the Comptroller to the certificate of registration endorsed upon the: City of Pearland. Texas Certificates of Obligation, Series 2007, numbered R-1/R-20, dated March 1. 2007, and that in signing the certificate of registration I used the following signature: IN WITNESS WH OF I have exUCuted this c ifi ate this the 20th day of March, 2007. I, Susan Combs, Comptroller of Public Accounts of the State of Texas, certify that the person who has signed the above certificate was duly designated and appointed by me under authority vested in me by Chapter 403, Subchapter H, Government Code, with authority to sign my name to all certificates of registration, and/or cancellation of bonds required by law to be registered and/or cancelled by me, and was acting as such on the date first mentioned in this certificate, and that the bonds/certificates described in this certificate have been duly registered in the office of the Comptroller, under Registration Number 72621. GIVEN under my hand and seal of office at Austin, Texas, this the 20th day of March, 2007. t ; SUSAN COMBS Comptroller of Public Accounts of the State of Texas • OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, SUSAN COMBS, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of - the Attorney General approving the: • City of Pearland, Texas Certificates of Obligation, Series 2007 numbered R-1/R-20, of the denomination of $ various, dated March 1, 2007, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 20th day of March, 2007, under Registration Number 72621. Given under my hand and seal of office, at Austin, Texas, the 20th day of March, 2007. ' Apt_ akfraw....... SUSAN COMBS Comptroller of Public Accounts of the State of Texas is a _ ' Ambac Assurance Corporation One State Street Plaza NewYork,NY 10004 212.668.0340 Fax:212.509.9190 A member of the A,nbac Financial Groups Inc. March 22,2007 City of Pearland RBC Dain Rauscher Inc. 3519 Liberty Drive 1001 Fannin Street Pearland,TX 77581 Houston,TX 77002 UBS Securities LLC Andrews Kurth LLP 1285 Avenue of the Americas 600 Travis Street Ambac New York,NY 10019 Houston,TX 77002 Wells Fargo Bank . 1000 Louisiana Street Houston,TX 77002 Ladies and Gentlemen: This opinion has been requested of the undersigned, a Vice President and an Assistant General Counsel of Ambac Assurance Corporation, a Wisconsin stock insurance corporation("Ambac Assurance"),in connection with the issuance by Ambac Assurance of a certain Financial Guaranty Insurance Policy,effective as of the date hereof(the"Policy"), insuring $23,250,000 in aggregate principal amount of City of Pearland, Texas (the "Obligor"), Certificates of Obligation, Series 2007, dated March 1, 2007 (the "Obligations"). In connection with my opinion herein, I have examined the Policy and such statutes, documents and proceedings as I have considered necessary or appropriate under the circumstances to render the following opinion,including, without limiting the generality of the foregoing, certain statements contained in the Official Statement of the Obligor dated February 15, 2007 relating to the Obligations (the"Official Statement")under the headings "FINANCIAL GUARANTY INSU RANCE" and APPENDIX D — SPECIMEN OF FINANCIAL GUARANTY INSURANCE POLICY". Based upon the foregoing and having regard to legal considerations I deem relevant, I am of the opinion that: 1. Ambac Assurance is a stock insurance corporation duly organized and validly existing under the laws of the State of Wisconsin and duly qualified to conduct an insurance business in the State of Texas. 2. Ambac Assurance has full corporate power and authority to execute and deliver the Policy, and the Policy has been duly authorized, executed and delivered by Ambac Assurance and constitutes a legal, valid and binding obligation of Ambac - Assurance enforceable in accordance with its terms, except to the extent that the enforceability (but not the validity) of such obligation may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar law or enactment now or hereafter enacted affecting the enforcement of creditors' rights. j I 3. The execution and delivery by Ambac Assurance of the Policy will not, and the consummation of the transactions contemplated thereby and the satisfaction of the terms thereof will not, conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Authority,Articles of Incorporation or By-Laws of Ambac Assurance, or any restriction contained in any contract, agreement or instrument to which Ambac Assurance is a party or by which it is bound or constitute a default under any of the foregoing. 4. Proceedings legally required for the issuance of the Policy have been taken by Ambac Assurance and licenses, orders, consents or other authorizations or 11 bbac approvals of any governmental boards or bodies legally required for the enforceability of the Policy have been obtained; any proceedings not taken and any licenses, authorizations or approvals not obtained are not material to the enforceability of the Policy. 5. The statements contained in the Official Statement under the heading "FINANCIAL GUARANTY INSURANCE", insofar as such statements constitute summaries of the matters referred to therein, accurately reflect and fairly present the information purported to be shown and, insofar as such statements describe Ambac Financial Group, Inc. (the "Company") and Ambac Assurance, fairly and accurately describe the Company and Ambac Assurance. 6. The form of the Policy contained in the Official Statement under the heading "APPENDIX D — SPECIMEN OF FINANCIAL GUARANTY INSURANCE POLICY"is a true and complete copy of the form of the Policy. The opinions expressed herein are solely for your benefit, and may not be relied upon by any other person. Very truly yours, C Dwight Kwa Vice President and Assistant General Counsel 04/30/2007 12:08 212-969-7795 - UBS SECURITIES LLC PAGE 02/02 $23,250,000 CITY C F PEARLAND,TEXAS CERTIFICATES OF OBLIGATION SERIES 2007 RECEIJ AND CROSS ECEItT March 22,2007 I, the undersigned, a duly auth)rized representative of Wells Fargo Bank, N.A., hereby acknowledge receipt of the full purch Ise price for the City's Certificates of Obligation, Series 2007,in the total amount of$23,31167 4.38 on the date hrreof. WELLS FARGO BANK,N.A. • • By: Name:_ Title:• I, the undersigned, a duly a ithorized .reprwentahve of UBS Securities. LLC, hereby acknowledge receipt from the City oi'the initial certificates of its•$23,250,000.00 Certificates of Obligation, Series 2007,dated March 1,2007. UBS SECURITIES L.L.C. • Name: Steven Piller Title: Executive Director, 0,7 Name: Michael Azzin io Title:, Director HOU2676266.1 • $23,250,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION SERIES 2007 RECEIPT AND CROSS RECEIPT March 22, 2007 I, the undersigned, a duly authorized representative of Wells Fargo Bank, N.A., hereby acknowledge receipt of the full purchase price for the City's Certificates of Obligation, Series 2007, in the total amount of$23,311674.38 on the date hereof. WELLS FARGO BANK,N.A. By: Name: •��.�;ic ;�. uh r' r� J Title: ASSISTANT VICE PRESIDENT I, the undersigned, a duly authorized representative of UBS Securities LLC, hereby acknowledge receipt from the City of the initial certificates of its $23,250,000.00 Certificates of Obligation, Series 2007, dated March 1,2007. • UBS SECURITIES L.L.C. By: Name: Title: HOU:2676266.1 REGISTRAR'S RECEIPT The undersigned duly authorized representative of Wells Fargo Bank, N.A., the Registrar of the,following described certificates: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007, in`the total authorized aggregate amount of$23,250,000 certifies that it has duly registered the above-mentioned Certificates in accordance with the Ordinance, dated February 26, 2007 and that such Certificates have been delivered to the purchaser thereof. EXECUTED AND DELIVERED this March 22, 2007. WELLS FARGO BANK,N.A. By: Name. `JOSE A.GAYTAN Title:ASSISTANT VICE PRESIDENT' HOU:2676275.1 N �' Ambac • • Ambac Assu . ce Corporation IOne State Str . Plaza, 15th Floor • New York,Ne• York 10004 Financial Guaranty Insurance Policy Telephone:(21 )668-0340 - Obligor: CITY OF PEARLAND,TEXAS• policy umber: 26306BE 1 • Obligations: $23,250,000.Certificates of Obligation,Series 2007,dated Premi .: $79,000.00 March 1,2007 and consisting of (AS FURTHER DESCRIBED ON THE REVERSE HEREOF) _z Ambac Assurance Corporation (Ambac), a Wisconsin stock insurance corporation, in consideratio. of the payment of the premium and subject to the terms of this Policy,hereby agrees to pay to The Bank of New York,as . ee,or its successor(the Insurance Trustee"),for the benefit of the Holders,that portion of the principal of and interest on the a.•ye-described obligations ' (the"Obligations)which shall become Due for Payment but shall be unpaid by reason.of Nonpayment by the Obligor. a Ambac will make such payments to the Insurance Trustee within one(1)business day following written .otification to Ambac of 4 Nonpayment.Upon a Holder's presentation and surrender to the Insurance Trustee of such unpaid Obli 'ons or related coupons, uncanceled and in bearer form and free of any adverse claim,the Insurance Trustee will disburse to Holder the amount of principal and interest which is then Due for Payment but is unpaid.Upon such disbursement,-Ambac all become the owner of the surrendered Obligations and/or coupons and shall be fully subrogated to all of the Holder's rights t.payment thereon. • '' In cases where the Obligations are issued in registered form,the Insurance Trustee shall disburse princip: to a Holder only upon presentation and surrender to the Insurance Trustee of the unpaid Obligation,uncanceled and free of •, adverse claim,together • with an instrument of assignment,in form satisfactory to Ambac and the Insurance Trustee duly execu ••by the Holder or such Holder's duly authorized representative,so as CO permit ownership of such Obligation to be registe • in the name of Ambac or its nominee. The Insurance Trustee shall disburse interest to a Holder of a registered Obligation o, y upon presentation to the Insurance Trustee of proof that the claimant is the person entitled to the payment of interest on the Obligation and delivery CO the Insurance Trustee of an instrument of assignment,in form satisfactory to Ambac and the Insuran •Trustee,duly executed by the Holder or such Holder's duly authorized representative,transferring to Ambac all rights under . h Obligation to receive Ii the interest in respect of which the insurance disbursement was made.Ambac shall be subrogated to • I of the Holders' rights CO payment on registered Obligations to the extent of any insurance disbursements so made. In the event that a trustee or paying agent for the Obligations has notice that any payment of prin.,pal of or interest on an Obligation which has become Due for Payment and which is made to a Holder by or on behalf of-the+a bligor has been deemed a preterertial transfer and theretofore recovered from the Holder pursuant to the United States Bank 1•try Code in accordance with a final,nonappealable order of a court of competent jurisdiction,such Holder will be entitled to •ayment from Ambac to the extent of such recovery if sufficient funds are not otherwise available. As used herein,the term"Holder"means any person other than(i)the Obligor or Cu)any person wh.. obligations constitute the underlying security or source of payment for the Obligations who, at the time of Nonpay at, is the owner of an Obligation or of a coupon relating to an Obligation. As used herein,"Due for Payment",when ref•sing to the principal of Obligations,is when the scheduled maturity date or mandatory redemption date for the application • a required sinking fund installment has been reached and does not refer to any earlier date on which payment is due by rea .n of call for redemption (other than by application of required sinking fund installments),acceleration or other advancemen of maturity;and,when referring to interest on the Obligations,is when the scheduled date for payment of interest has been eached: As used herein, "Nonpayment'means the failure of the Obligor to have provided sufficient funds to the trustee or pa ing agent for payment in full of all principal of and interest on the Obligations which are Due for Payment. This Policy is noncancelable. The premium on this Policy is not refundable for any reason,including p. merit of the Obligations prior to maturity. This Policy does not insure against loss of any prepayment or other acceleration pa .•.nt which at any time may ' become due in respect of any Obligation,other than at the sole option of Ambac,nor against any risk o . r than Nonpayment. In witness whereof,Ambac has caused this Policy to be affixed with a facsimile of its corporate seal an. to be signed by its duly authorized officers in facsimile to become effective u its original seal and signatures and binding upo Ambac by virtue of the j , countersignature of its duly authorized representative. %� t°a roe ire''°*1 0--A-A--4— ''P-...Q.J-a - .-sec7e---"P ,,S.1,,__ -ss --...eoN 11 President. %`• •S/ t r i 0 Secretary / ' ! / March 22 2007 1\'.`.'ro..„:"�• ;1 Effective Date: • \%``.•• • • ••rued Repr- nta .1 THE BANK OF NEW YORK acknowledges that it has agreed r o , to perform the duties of Insurance Trustee under this Policy. Form No.:2B-G012(1/01) Authorized Offi. r of Insurance Trustee A- 10945 1 I • Obligations: $10,535,000 in aggregate principal amount of Bonds maturing n • March 1 in the years 2008 through 2024,both inclusive; $2,930,000 in aggregate principal amount of Term Bonds ma 'ng on March 1,2026; $6,525,000 in aggregate principal amount of Teiin Bonds ma .rig on March 1,2030; and $3,260,000 in aggregate principal amount of Term Bonds maturing on March 1,2032. The Paying Agent is Wells Fargo Bank,N.A.,Houston Texas. • • • • • • • • • i5 The undersigned hereby certifies that this document is a true and correct copy rf the Financial Guaranty Insurance Polk. . ,•uilcy No.263066E issued by AMBAC ASSURANCE CORPORATION. Assistant Secretary Date:March 20,2007 • I , itin bac Ambac Assu cc Corporation do CT Corpo ion Systems • 44 East Mifflin Street Madison,Wisc,nsin 53703 Administrative •ice:. j • One State Stre- Plaza New York,Ne York 10004 Telephone: (2 )668-0340 IMPORTANT NOTICE To obtain information or make a complaint you may contact the Texas Department of I urance to obtain information on companies,coverages,rights or complaints at: , 1-800-252-3439 You may write the Texas Department of Insurance at: P.O.Box 149104,Austin,Texas 78714-9104. FAX:(512)475-177 PREMIUM OR CLAIM DISPUTES • • Should you have a dispute concerning your premium or about a claim you should co tact Ambac Assurance Corporation first. If the dispute is not resolved,you may contact the Texas F.epartment of • Insurance. ATTACH THIS NOTICE TO YOUR POLICY: This notice is for information onl and does not become a part or condition of the attached document. • • Form No.: 25-5080(7/97) ss STANDARD 55 water Street,38th Floor New York,NY 10041.0003 te121:438a74 &POOR'S woe no.:820357 March 20,2007 - q Ambac Assurance Corporation One State Street Plaza 15th FL New York,NY 10004 Attention: Ms. Yolanda Ortiz,Insurance Coordinator • Re: $23,250,000 City of Pearland, Texas, Certificates of Obligation,Series 2007, dated:March 1,2007, consisting of$10,535,000 Bonds due:March 1,2008-2024;$2,939,000 Term lJ Bonds due:March 1,2026;$6,525,000 Term Bonds due:March 1,2030;$3,260,000 Term Bonds due:March 1, 2032, (POLICY#26306BE) Dear Ms. Ortiz:. Standard&Poor's has reviewed the rating on the above-referenced obligations. After such j review,we have changed the rating to"AAA"from"A+". The rating reflects our assessment of . the likelihood of repayment of principal and interest based on the bond insurance 7olicy your Y r company is providing. Therefore,rating adjustments may result from changes in he financial ti position of your company or from alterations in the documents governing the issue. The rating is not investment,financial,or other advice and you should not and cannot rely upon the rating as such. The rating is based on information supplied to us by.you but does not represent an audit. We undertake no duty of due diligence or independent vetification of any information. The assignment of a rating does not create a fiduciary relationship between us and you or between us and other recipients of the rating. We have not consented to and will not consent to being named an"expert"under the applicable securities laws, including without limitation, Section 7 of the Securities Act of 1933. The rating is not a"market rating"nor is it a recommendation to buy, hold,or sell the obligations. This letter constitutes Standard&Poor's permission to you to disseminate the above-assigned rating to interested parties. Standard&Poor's reserves the right to inform its own clients, subscribers, and the public of the rating. Standard&Poor's relies on the issuer and its counsel,accountants,and other experts for the accuracy and completeness of the information submitted in connection with the rating. This rating is based on financial information and documents we received prior to the issuance of this letter. Standard&Poor's assumes that the documents you have provided to us are final. If any _subsequent changes were made in the final documents,you must notify us of such changes by sending us the revised final documents with the changes clearly marked. • It • Ms.Yolanda Ortiz a. Page March 20,2007 • Standard&Poor's is pleased to be of service to you. For more information pleas visit our. website at www.standardandpoors.com. If we can be of help in any other way,pl-ase contact us. Thank you for choosing Standard&Poor's and we look forward to working with,ou again. • Sincerely yours, • Standard&Poor's Ratings Services . a division of The McGraw-Hill Companies,Inc. A6+,44,0 acoliet•eleiV610 • • • ak • • , • • • • • • 'if - Moody's Investo s Service 99 Church Street New York, NY March 21, 2007 r -� • Ambac One State Street Plaza New York, NY 10004 To Whom It May Concern: Moody's Investors Service has assigned the rating of Aaa (Ambac Insur:d - PolicyNo. 26306BE) to the $23,250,000.00, City of Pearland, Texas -Certificate- of Obligation, Series 2007, dated March 1, 2007 which sold on February .6, 2007. The rating is based upon an insurance policy provided by Ambac. Should you have any questions regarding the above, please do not hesi'=te to contact Karen Malkowski at(201) 395-6370. • Sincerely yours, r, ;KM. 56/7421 Joann Hempel _ ' Vice President/S-nior Credit Officer u JH / PS _ Mar-12-2007 03:36pm From- T-6AA P 003 F-367 UNITED STATES OF AMERICA STATE OF TEXAS NUMBER DENOMINATION R-1 $50,000 CITY OF PEARLAND,TEXAS REGISTERED CERTIFICATE OF OBLIGATION REGISTERED SERIES 2007 INTEREST RATE: DATED DATE: M Y. -.a "9:D ATE: CUSIP: 5.000% March 1,2007 I " • 704862YB 1 REGISTERED OWNER:UBS SECURITIES LLC - - ,•r . • PRINCIPAL AMOUNT:FIFTY THOUS• DOLLARS . zy THE CITY OF P • , � - , ! a municipal corporation of the State of Texas(the "City"), for value received, here...'`•romis— •- •ay to the Registered Owner identified above or its • registered assigns, on the ma• 't s •to s• ;fled above (or on earlier redemption as herein provided), upon presentation and s •:; r o i' ficate at the principal corporate trust office of Wells Fargo Bank, N.A., Houston, -- its s' cessor (the "Paying Agent/Registrar"), the principal amount r identified above (o rf • u �� e --. . shall not have been paid or deemed to have been paid upon prior redemption) pa .� ' : y or currency of the United States of America which on the date of payment of such_ ,1 is le_•I tender for the payment of debts due to the United States of America, and to p. t • •-• .n at the rate shown above, calculated on a basis of a 360-day year composed of twelve •. t "4 .om the later of the Dated Date identified above or the most recent interest • payment .="i o .-•ch interest has been paid or duly provided for. Interest on this Certificate is payable on Septemb e i 0 07, and each March 1 and September 1 thereafter until maturity or earlier redemption of this Certificate, by check sent by United States mail, first class, postage prepaid, by the Paying Agent/Registrar to the Registered Owner of record as of the close of business on the fifteenth day of the calendar month immediately preceding the applicable interest payment date, as shown on the registration books kept by the Paying Agent/Registrar. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Certificate at the principal corporate trust office of the Paying Agent/Registrar. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the"Certificates")in the aggregate principal amount of S23,250,000 issued pursuant to - an ordinance adopted by the City Council of the City on February 26, 2007 (the "Ordinance") for the •purpose of providing all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit (i) the design and construction of a multi-purpose municipal facility located in the 2600 block of Cullen Parkway, (ii) renovations to the police facility located at 2703 Veterans Drive, (iii)renovations to the community center located at 3523 Liberty Drive, (iv) renovations to Fire Station #1 located at 2020 Old Alvin Road, (v) renovations to Fire Station #4 located at 8333 Freedom Drive and(vi)professional services rendered in connection with the above listed projects. Page 1 of 7 HOU:2669947.2 1 -7 • THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate either(i)is registered by the Comptroller of Public? Accounts of the State of Texas by due execution of the registration certificate endorsed hereon or(ii) is authenticated by the Paying Agent/Registrar by due execution of the authentication certificate endorsed hereon. THE CITY RESERVES THE RIGHT, at'its option, to redeem, prior to their maturity, Certificates maturing on and after March 1, 2018, in whole or in part, on March 1, 2017, or any date 1r thereafter, at par plus accrued interest to the date fixed for redemption. • THE CERTIFICATES MATURING on March 1, 2026, 2030 and 2032 (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Principal Mandatory Redemption Amounts Dates Term Bonds Maturing March 1,2026 March 1,2025 $ 1,430,000 • March 1,2026(maturity) 1,500,000 Term Bonds Maturing March 1,2030 March 1,2027 $ 1,580,000 March 1,2028 1,660,000 March 1,2029 1,745,000 March 1,2030 (maturity) 1,540,000 • Term Bonds Maturing March 1,2032 March 1,2031 $ 1,600,000 March 1,2032.(maturity) 1,660,000 The particular Term Certificates to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 1 of each year in which Term Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Certificates that have been optionally redeemed on or before January 1 of such year and which have not been made the basis for a previous reduction CERTIFICATES MAY BE REDEEMED IN PART only in integral multiples of$5,000. If a Certificate subject to redemption is in a denomination larger than$5,000,a portion of such Certificate may be redeemed, but only in integral multiples of $5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of $5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. •Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. NOTICE OF ANY SUCH REDEMPTION, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the books of registration kept by the Paying Agent/Registrar, not less than thirty (30) days before the date fixed for such redemption. By the date Page 2 of 7 HOU:2669947.2 • • • • fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such_payment.is made, all as provided above,.the.Certificates which .to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities,they shall not bear • interest after the date fixed for redemption,and they shall not be regarded as being outstanding except for the purpose of being paid with the funds so provided for such payment. THIS CERTIFICATE IS TRANSFERABLE only upon presentation and surrender at the- principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of$5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. • THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period • immediately prior to the date fixed for redemption;provided,however,that such limitation shall not apply to the.transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. . THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of • any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a' Certificate. Any fee or charge of the Paying • Agent/Registrar for a transfer or exchange shall be paid by the City. . THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges' and agrees to be bound by all the terms and conditions of the Ordina'ace. IT IS HEREBY DECLARED AND REPRESENTED that this Certificate has been duly and validly issued and delivered; that all acts, conditions and things required or proper to be performed, exist and to be done precedent to or in the issuance and delivery of this Certificate have been performed, exist and have been done in accordance with law;that the Certificates do not exceed any constitutional or • statutory limitation; and that annual ad valor- _.:axes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and such principal matures, have been levied and ordered to be levied, within the limits prescribed by law, against all taxable property in the City and have been irrevocably pledged for such payment. . IT IS FURTHER DECLARED AND REPRESENTED that the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof(the "Net Revenues"), in an amount not to.exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or mare installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. Page 3 of 7 L_. HOU:2669947.1 - . • .. -.".. , . . . • . . - . . . . __, REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is filed • with the Paying Agent/Registrar,for the full provisions thereof,to all of which the Registered Owners of the Certificates assent by acceptance of.the Certificates„ . . IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and this Certificate to be signed by the Mayor, countersigned by the City Secretary by their manual,lithographed or printed facsimile signatures. • , • CITY OF PEARLAND,TEXAS l - C...'.." )‘'''S.41/ )4%424;4..• • , &Oil II 11101a. .• .. . •. .. •O'corcARLA461 • Mayor • wifrd se I 1. - .. . . , 3 ai-1 .--.. ....sp.4...,.„-- g , • . ' . a . • _ • _is City.S i Amy '/ • . -"Illitittessiw - . " . t_. . • . . • , - ' ,...,_ . . . f - • • . . , • . . , . .--. I . • - . . . .4._ . . • . . •• . , • I____, • . l • . . . - . . • . 1-- • . • _ • . _ I , • .,_._ • Page 4 of 7 ,__ • HOU:2669947.I • • • • • _ • THE STATE OF TEXAS- REGISTERN . . - • OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS t I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas,and that this certificate has been registered by the. Comptroller of Public Accounts of the State of Texas. MAR 2 0 2607 WITNESS MY SIGNATURE AND.SEAL OF OFFICE this 4• C mptroller of Public Accounts • of the State of Texas [SEAL] • • • • • • • • • • • • • • • • Page 5 of 7 HOU:2669947.1 • • STATEMENT OF INSURANCE_ Financial Guaranty Insurance Policy No.26306BE (the"Policy")with respect to payments due for principal of and interest on this Bond has been issued b Ambac Assurance y Corporation("Ambac Assurance").The Policy has been delivered to The Bank of New York,New York,New York,as.the Insurance Trustee under said Policy and will be held by such Insurance Trustee or any successor insurance trustee.The Policy is on file and available for inspection at the principal office of the Insurance Trustee and a copy thereof may be secured from Ambac Assurance or the Insurance Trustee.All payments required to be made under the Policy shall be made in accordance with the provisions thereof.The owner of this Bond acknowledges and consents to the subrogation rights of Ambac Assurance as more fully set forth in the Policy. • • • • • C� . G • Page 6 of 7 HOU2669947.1 • • • • • . • ASSIGNMENT For value received,the undersigned hereby sells,assigns and transfers unto (Please print or type name,address and zip code of Transferee) • • (Please insert Social Security or Taxpayer Identification Number of Transferee) the within Bond and all, rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer the within Bond on the books kept for registration thereof,with full power of substitution in the premises. • DATED: • • Signature Guaranteed: Registered Owner f-- NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the NOTICE: Signature must be guaranteed by a face of this bond in every particular, without any member firm of the New York Stock Exchange or a alteration,enlargement or change whatsoever. commercial bank or trust company. . • • • • • • Page 7 of 7 • HOU:2669947.1 • • • • • OFFICIAL BID FORM •• . • Februaty 26,2007 • Maya and.City Council __ City of Pearland ' - . 3519 Liberty Drive _ Pearland,Texas 77581 Gentlemen: • • - - Subject to the terms of your Official Notice of Sale and Official Statement, dated February 5, 2007, which are ;�;, incorporated herein by reference,we hereby submit the following bid for the S23,250,000 CITY OF PEARLAND, TEXAS,CERTIFICATES OF OBLIGATION,SERIES 2007,dated March 1,2007. This offer is being made for all said Certificates and for not less than alL • . . • - For said legally issued Certificates of Obligation,we will pay you the par value thereof,plus accrued interest from their date to the date of delivery to us for the Certificates maturing and bearing interest per annum as follows: _ Maturity Principal Interest . Maturity Principal Interest ' • Date - Amount ' _Race _ Date Amount Rate March 1,2008(a) S 50,000 S.00 % March 1,2021(a)(b) $1,170.000 .5.is % ,_' March 1,2009(a) 50,000 00 March 1,2022(aXb) 1,230,000 . f.IS- ' • March 1,2010(a) 100,000 March 1,2023(aXb) - 1,295,000 . S.sr . f March 1,2011(a) 150,000 SI LS March 1,2024(aXb) 1,360,000 . 5.25 March 1,2012(a) 200,000 S. sS . March 1,2025(aXb) 1,430,000ri 5.LS March 1,2013(a) 250,000 S. LS March 1,2026(aXb) 1,500.000Tt S 2 S March 1,2014(a) 300,000 S.as March 1,2027(aXb) : 1,580,00011. B• L S • - March 1,2015(a) 350,000 •L .Marsh 1,2028(a)(b) 1,660,000't1 AS- March 1,2016(a) 400,000 •_.5 March 1,2029(aXb) 1,745,000T' 3.1 March 1,2017(a) 450,000 . S.L 5 March 1,2030(a)(b) 1,540,000T L .L • .• March 1,2018(aXb) 1,005,000 la f_S ' March 1,2031(aXb) 1,600,000T3 g(•Z S March 1,2019(aXb) 1,060,000 .k: March 1,2032(aXb) 1,660,000n _Y ZS March 1,2020(aXb) .1,115,000 .L S . . . • • • (a) At the option of the Purchaser,any or all of such serial maturities may be designated as term certificates - subject to mandatory sinking fund redemption as follows;provided that tL;:Y;andatory sinking fund amount in each year shall equal the amounts shown above as maturing in such year. • • Term Bonds Years of First . Maturity Date Mandatory Principal Amount Interest (March 1) Rede....:on of Term Bonds Rate 20Zfi EL*. $ ZifJD 090. ;.L5 % _ 2os0 of . j z, Zo S f • 3{L6o,pov Kss % . • % • • (b) Subject to optional redemption and payment,at the option of the City, in whole or,from time to time,in •. part, on March 1, 2017, or on any date thereafter at a price equal to the principal amount thereof,plus • accrued interest to the date fixed for redemption. S 1 . . . • . • . ',./. • , - • , _ . • • • • • 1 . . • - . • • - . .._ • .. . • Interest costrinaccordancth the above bld,lc . - __. __ __. Total Interest Cost from Mardi 1,2007 . S I 014! §.... NET lNTEREST COST-- $/ 00 NET EFFECTIVE INTEREST RATE 6444,426o% - . • The Initial Certificates shall be registered in the name of Co.& & Co. ,which will,upon payment for • . • the Certificates,be cancelled by the Paying Agent/Registrar.The Certificates will then be registered in the name of 1 _ Cede&Co.(D1'C's partnership nominee),under the Book-Entry-Only System. Cachier's Check of the Frost Nat ional Bank Austin ,TUBS,in the amount of$465,000 which represents our Good Faith Deposit AltlitEatkietilibT*FOT(has been made available to you prior to the• opening of this ) /c. Bid), and is submitted in accordance with the tams as set forth in die "Official Notice of Sale" and "Official Statement." ' • , • We agree to accept delivery of the Certificates utilizing the Book-Entry-Only System through DTC and make payment for the Initial Certificates in immediately available funds in die Corporate Trust Office,Wells Fargo Bank, N.A.,Houston,Texas,not later than 10:00 AM,CST,on March 22,2007,•or thereafter on the date the CertifiCates • . are tendered for delivery,pursuant to the terms set forth in the Notice of Sale and Bidding Instructions.It will be the obligation of the purchaser of the Certificates to complete the DTC Eligibility Questioimaire. . . , • • The undersigned.agrees to complete, execute and deliver to the City,by thedate of delivery of the Certificates,a • certificate relating to the Issue price"of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale,with such changes thereto as may be acceptable to the City and its Bond Counsel. - . . Respectfully submitted, i 4 • , i • - . • • • • • . , . • • • •• • . . . UBS Securities LLC 0 • / I . , . . .. . . .. . ( ISI411-":741-01—)4 • - By - - 4 fi — - •. . . /Authorized Representative Lewis W. .Pollok,III Director ACCEPTED this 26*day of February,2007,the City Council,City of Pearland,Texas.• , . , . . . ... . '( • oolreja.44/601111111044. • ' • Aerzt .•••". • .• ,-/ iA. /- 4 It. Mayor . ,_ , --4 z:s • ---s 1 i ik... •....i.1.1 i .. . • .._ . . 44 • ' ' . ' 1_ lc-.,.•ST: . • . • '410 a.0. • : • . • .. .. . . . • '41111100 i ../ • . . • 4 •.. 2 e./ //,,_ Ace.,:i_.:.--,. . • ay,-• Air • . .. . • . or your information you will find attached a list of the group of purchasers associated with us in this proposal) . __ • , , ... 3� CITY OF PEARLAND,TEXAS $23,250,000 CERTIFICATES OF OBLIGATION SERIES 2007 The following information is included in the transcript submitted to the Office of the Attorney General for the purpose of obtaining Attorney General approval of the issuance of the referenced bonds, as required by H.B. 1564, 74th Legislature, Regular Session(Tex. Laws 1995, ch. 383, at 2930). A. An additional copy of the Final Official Statement and the following information, if not included in the Final Official Statement or such statement has not been prepared. 1. Name of bond issue: City of Pearland, Texas Certificates of Obligation, Series 2007 2. a) par amount of issue: $23,250,000 b) dollar amount of bond premium, if any: $1,088.12 c) dollar amount of bond original issue discount, if any: N/A 3. Dated date: March 1, 2007 4. Closing date (expected delivery date, on or about): March 22, 2007 5. By year, maturity amounts, coupon rates,prices or yields: See Exhibit A. (If no reoffering yield (NRO)indicated,please provide yield separately.) 6. Call provisions, including premiums, if any: See Official Statement 7. Mandatory redemption provisions: See Official Statement 8. Debt-service schedule, principal and interest, and annual totals, with fiscal year identified: See Exhibit A. 9. Use of derivative products associated with financing: N/A 10. If applicable, schedule of bonds refunded, including, by year, principal amount, coupon, and interest cost: N/A 11. Pledge: tax (ad valorem, sales, other), revenue, combination: Ad valorem tax and subordinate revenue 12. Type of credit enhancement(including PSF guarantee): Ambac Assurance Corporation 13. Rating service(s) and rating(s) assigned to issue: Moody's "Aaa" Standard.&Poor's "AAA" B. Additional Information 1. Type of sale: Competitive Bid 2. Pricing: -! Negotiated sale: Competitive sale: February 26; approx. 7:00 p.m 3. If purchaser of bonds is a governmental entity, such as the Texas Water Development Board, please name purchaser: N/A 4. If a refunding bond issue, please provide final schedule of cash and present value savings (loss): I N/A 5. If a school district refunding bond issue, and the refunding involves "old debt" per the Texas Education Code, please provide schedule of principal and interest payments of refunding bonds associated with "old debt": N/A r _ If the same issue also involves "new debt," please provide a schedule of principal and interest payments on the "new debt" portion as well. These two schedules together should equal total debt service by maturity: All of the refunded bonds represent (and accordingly all of the refunding bonds are associated with)"new debt." N/A I 6. CAB's and CIB's—please provide the per annum bond interest rates by maturity as shown in the bond order document: N/A HOU:2670835.1 7. Costs of Issuance—please provide best estimate of costs. If final costs are significantly different, please submit changes directly to the Texas Bond Review Board. Call (512)463-1741 or(512)475-4802 (FAX). 1-_- SERVICE FIRM ONE-TIME FEE ANNUAL FEE(a) Bond Rating Mood Y's (i$14,500 s doll ) Standard & $15,500 - Poor's Fitch N/A Other General Costs of Issuance(b) $99 500 $500 An S.ecialized Costs of Issuance c . . �:,� �: .., N/A Credit Facility N/A Bond Insurance $79,000 Total Underwriting Spread (d) - ? '' : 'A $83,584.50 ,- Did underwriter pay rating fee(s) No Which one(s)? Did underwriter pay bond insurance fee? Yes _ PARTICIPANTS FIRM Financial Advisor RBC Capital Markets - Bond Counsel Andrews Kurth LLP Paying Agent/Registrar; Authenticating_Agent Wells Fargo Bank,N.A. Underwriters None Trustee - None - Underwriter's Counsel None Administrator None (a) relates to the ongoing fees or recurring costs of a financing for services such as paying agent, remarketing agent, credit provider and other similar services (may be expressed as a formula as j appropriate) (b) e.g., bond counsel, financial advisor,paying agent,printing, AG approval (c) e.g., remarketing fees, escrow verification fees;etc. (d) the cost for marketing and selling the bonds, including takedown, structuring fee, underwriting risk and expenses. PERSON COMPLETING FORM: Telephone No. (713) 220-3845 Name: Kelly Kenyon Fax No. (713) 238-7306 HOU:2670835.1 Exhibit A • • HOU:2670835.1 A N D R E W S 600 Travis, Suite 4200 ATTORNEYS K U R T H LLP Houston,Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com March 22, 2007 AMBAC Assurance Corporation One State Street Plaza New York,NY 10004 Re: $23,250,000 City of Pearland, Texas, Certificates of Obligation, Series 2007 (the "Certificates") • Ladies and Gentlemen: We have this day issued our opinion as Bond Counsel in connection with the referenced Certificates. Please be advised that you may rely upon such opinion as if it were addressed to • you. Very truly yours, i--�• ` :L . . R te--- _ - 7867/7868 • . HOU:2660547.1