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Ord. 1337 2008-02-11 CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM . REVENUE BONDS SERIES 2008 ay i TRANSCRIPT OF PROCEEDINGS • • Andrews Kurth LLP 600 Travis, Suite 4200 Houston,Texas 77002 (713)220-4200 HOU:648931.1 CITY OF PEARLAND,TEXAS $14,950,000 Water and Sewer System Revenue Bonds Series 2008 L ti INDEX OF CONTENTS Closing Memorandum 1 BOND PROCEEDINGS AND DOCUMENTS Ordinance Authorizing Issuance of the Series 2008 Bonds 2 ; Paying Agent/Registrar Agreement 3 Preliminary Official Statement and Official Notice of Sale 4 ' Official Statement 5 CERTIFICATES Signature Identification and No-Litigation Certificate 6 General Certificate 7 Federal Tax Certificate 8 1 Form 8038G 9 Official Statement Certificate 10 Additional Bonds Certificate 11 Certificate of Financial Advisor to the City 12 hr v f Certificate Regarding Reserve Fund 13 Official Statement Certificate of the Bond Insurer 14 OPINIONS Approving Opinion of Bond Counsel 15 Opinion of Counsel to Insurer 16 Opinion of Attorney General of Texas with Certificate of Comptroller of Public Accounts 17 Reliance Letter to Bond Insurer 18 HOU:2773137.1 • !i MISCELLANEOUS Receipt and Cross-Receipt 19 Registrar's Receipt 20 Bond Review Board Questionnaire 21 Specimen Bond 22 Surety Policy 23 Insurance Policy 24 Rating Agency Letters 25 Winning Bid 26 Notice of Issuance of Additional Bonds 27 i I I i 1 , 2 HOU:2773137.1 • ti RBCJohn H.Robuck � � Associate pPublic Finance RFC Markets Phone(713)651-3340 '�- Fax(713)651-3347 March 14,2008 Mr.Jose Gaytan Wells Fargo Bank,N.A. Corporate and Municipal Markets Group 400 West 15th Street, ls`Floor Austin,Texas 78701 Re: $14,950,000 City of Pearland,Texas Water and Sewer System Revenue Bonds,Series 2008 r-� Dear Jose: } The delivery of the above captioned bonds(the"Bonds")is scheduled for Tuesday,March 18,2008,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. Prior to closing, Robert W. Baird & Co., Inc. ("Baird") will make arrangements to pay the insurance premium of $258,000.00 to Financial Assurance Inc.("FSA")as follows: The Bank of New York ABA#: 021 000 018 Acct.Name:Financial Security Assurance Inc. Account No.: 8900297263 Policy No.:210084-N Attn:Lillie Santana (212)339-3537 ***Include Policy Number on Wire*** Ir At or prior to closing,Baird will wire$14,982,363.87 in immediately available funds calculated as follows: Principal Amount of the Bonds $14,950,000.00 Plus: Accrued Interest 32,363.87 $14,982,363.87 Baird will wire the aforementioned sum of$14,982,363.87 to Wells Fargo Bank("WFB")as indicated below. 1- , r Wells Fargo Bank ABA 121000248 A/C 0001038377 For further credit to 99990909 Re:City of Pearland,Texas Attn:Jose Gaytan(512)344-7306 Z_�I Mr.Jose Gaytan March 14,2008 Page 2 I ; WFB will disburse the total amount of$14,982,363.87 as follows: 1. $14,950,365.48 (representing $14,800,000.00 in project fund proceeds, $32,363.87 in accrued interest and $118,001.61 in issuance costs on the Bonds)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. $31,498.39 representing Surety Bond Premium shall be wired to FSA as follows;and The Bank of New York ABA Routing Number:021 000 018 Acct.Name:Financial Security Assurance Account Number: 89000297263 Policy Number:210084-R Attn.:Lillie Santana(212)339-3537 ***Include Policy Number on Wire*** 3. $500.00 shall be withdrawn by WFB from the proceeds of the Bonds and credit such sum to its account as the Paying Agent Annual Administration Fee for the Series 2008 Bonds. If I may be of further assistance,please do not hesitate to contact me at 713-651-3340. Sincerely, 911/4•04—, John H.Robuck y t Associate cc: Rick Witte,Andrews Kurth LLP Marcus Deitz,Andrews Kurth LLP Bill Eisen,City of Pearland ' Claire Manthei,City of Pearland Charles Massaro,Robert W.Baird&Co.,Inc. Charlie Galarza,Robert W.Baird&Co.,Inc. Lillie Santana,FSA Frank Ildebrando,RBC Capital Markets Ryan O'Hara,RBC Capital Markets Karen Blogg,RBC Capital Markets 1 ' a, �1 t r 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 11, 2008, 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 Steve Saboe Mayor Pro Tem Woodrow "Woody" Owens Council Member Helen Beckman Council Member Felicia Kyle Council Member Kevin Cole Council Member Young Lotfing City Secretary and all of suchpersons werepresent except Woodrow Owens, thus constitutinga quorum. P Whereupon, amongother business, the following was transacted at said meeting: a written P ORDINANCE AUTHORIZING ISSUANCE OF CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008; PRESCRIBING THE TERMS AND CONDITIONS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; AUTHORIZING THE PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE BONDS; AUTHORIZING THE PURCHASE OF BOND INSURANCE; MAKING OTHER PROVISIONS REGARDING SUCH BONDS AND MATTERS INCIDENT THERETO; AUTHORIZING EXECUTION AND DELIVERY OF A PAYING AGENT/REGISTRAR AGREEMENT; CONTAINING OTHER MATTERS RELATED 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 1 HOU:2770558.4 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 February 11, 2008. Secr ary Mayor Y O PEARL ERAS CITY OF PEARLAND, TEXAS (sEAi,) 2 HOU:2770558.2 J CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS SERIES 2008 ORDINANCE NO. 1337 • HOU:2770558.4 TABLE OF CONTENTS Page ARTICLE I FINDINGS AND DETERMINATIONS 1 Section 1.1. Findings and Determinations 1 ARTICLE II DEFINITIONS AND INTERPRETATIONS 1 Section 2.1. Definitions 1 Section 2.2. Interpretations 5 ARTICLE III TERMS OF THE SERIES 2008 BONDS 5 Section 3.1. Name,Amount,Purpose, Authorization 5 Section 3.2. Numbers,Date and Denomination 5 Section 3.3. Interest Payment Dates, Interest Rates and Maturities 5 t I Section 3.4. Redemption Prior to Maturity 6 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before July 15 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before July 15 of such year and which have not been made the basis for a previous reduction. 7 Section 3.5. Manner of Payment, Characteristics,Execution and Authentication 7 Section 3.6. Approval by Attorney General; Registration by Comptroller 8 Section 3.7. Authentication 8 Section 3.8. Special Record Date 8 Section.3.9. Ownership 8 Section 3.10. Book-Entry Only System 9 Section 3.11. Payments and Notices to Cede&Co. 10 Section 3.12. Successor Securities Depository; Transfer Outside Book-Entry Only System 10 Section 3.13. Registration,Transfer, and Exchange 10 Section 3.14. Cancellation of Series 2008 Bonds 11 Section 3.15. Mutilated, Lost, or Stolen Series 2008 Bonds 11 ti ARTICLE IV FORM OF SERIES 2008 BONDS AND CERTIFICATES 12 Section 4.1. Forms 12 Section 4.2. Legal Opinion; CUSIP Numbers 12 ARTICLE V SECURITY AND SOURCE OF PAYMENT FOR THE BONDS 12 Section 5.1. Pledge and Source of Payment 12 Section 5.2. Rates and Charges 13 Section 5.3. Special Funds 13 Section 5.4. Flow of Funds 13 Section 5.5. Interest and Sinking Fund 14 Section 5.6. Reserve Fund 15 Section 5.7. Deficiencies in Funds 16 Section 5.8. Investment of Funds; Transfer of Investment Income 16 . 1 i HOU:2770558.4 t Section 5.9. Security for Uninvested Funds 17 ti ARTICLE VI ADDITIONAL BONDS 17 Section 6.1. Additional Bonds 17 Section 6.2. Subordinate Lien Obligations 18 Section 6.3. Special Project Bonds 18 ARTICLE VII COVENANTS AND PROVISIONS RELATING TO BONDS 19 Section 7.1. Punctual Payment of Bonds 19 Section 7.2. Power to Own and Operate System; Ratemaking Power 19 Section 7.3. Maintenance of System 19 Section 7.4. Sale or Encumbrance of System 19 { Section 7.5. Insurance 19 Section 7.6. Accounts, Records and Audits 20 Section 7.7. Competition 20 Section 7.8. Pledge and Encumbrance of Net Revenues 20 Section 7.9. Covenants with Respect to Certain Assumed Water District Bonds 20 Section 7.10. Registered Owners' Rights and Remedies 21 Section 7.11. Defeasance 21 Section 7.12. Legal Holidays 22 Section 7.13. Unavailability of Authorized Publication• 22 Section 7.14. No Recourse Against City Officials 22 Section 7.15. Amendment to Ordinance 22 ARTICLE VIII CONCERNING THE PAYING AGENT/REGISTRAR 23 " Section 8.1. Acceptance 23 Section 8.2. Fiduciary Account 23 Section 8.3. Bonds Presented 23 Section:8.4. Series 2008 Bonds Not Timely Presented 23 Section 8.5. Paying Agent/Registrar May Own Series 2008 Bonds 24 Section 8.6. Successor Paying Agents/Registrars 24 ARTICLE IX PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF SERIES 2008 BONDS 24 Section 9.1. Sale of Series 2008 Bonds; Insurance 24 Section 9.2. Approval,Registration and Delivery 25 Section 9.3. Offering Documents;Ratings 25 Section 9.4. Application of Proceeds of Series 2008 Bonds 26 Section 9.5. Tax Exemption 26 ARTICLE X CONTINUING DISCLOSURE UNDERTAKING 28 Section 10.1. Annual Reports 28 Section 10.2. Material Event Notices 29 Section 10.3. Limitations,Disclaimers, and Amendments 30 Section 10.4. Definitions 31 ARTICLE XI MISCELLANEOUS 31 Section 11.1. Related Matters 31 Section 11.2. Severability 31 Section 11.3. Open Meeting 32 ii HOU:2770558.4 Section 11.4. Governing Law 32 Section 11.5. Repealer 32 Section 11.6. Emergency 32 Section 11.7. Effective Date 32 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before July 15 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before July 15 of such year and which have not been made the basis for a previous reduction. 3 iii HOU:2770558.4 i ; CITY OF PEARLAND ORDINANCE NO. 1337 ORDINANCE AUTHORIZING ISSUANCE OF CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008; PRESCRIBING THE TERMS AND CONDITIONS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; AUTHORIZING THE PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE BONDS; AUTHORIZING THE PURCHASE OF BOND INSURANCE; MAKING OTHER PROVISIONS REGARDING SUCH BONDS AND MATTERS INCIDENT THERETO; AUTHORIZING EXECUTION AND DELIVERY OF A PAYING AGENT/REGISTRAR AGREEMENT; CONTAINING OTHER MATTERS RELATED THERETO; AND DECLARING AN EMERGENCY BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: ARTICLE I FINDINGS AND DETERMINATIONS Section 1.1. Findings and Determinations. It is hereby officially found and determined that: (a) The City is authorized by Chapter 1502, Texas Government Code, as amended, to issue revenue bonds payable from the revenues of its water and sewer system for the purpose of constructing repairs, improvements, additions and extensions to the City's waterworks and sanitary sewer system. (b) The City Council now deems it to be in the best interest of the City to issue, sell and deliver the Series 2008 Bonds (hereinafter defined) as hereinafter authorized. (c) The conditions precedent to the issuance of additional bonds which are contained in the ordinances authorizing the issuance of the Previously Issued Bonds and the Series 2008 Bonds (both hereinafter defined) have been met, and the City is authorized to issue the revenue bonds and make the pledges and covenants set forth herein. ARTICLE II DEFINITIONS AND INTERPRETATIONS Section 2.1. Definitions. In this Ordinance, the following terms shall have the following meanings,unless the context clearly indicates otherwise: "Act" shall mean Chapter 1502,Texas Government Code, as amended. HOU:2770558.4 "Additional Bonds" shall mean the additional revenue bonds permitted to be issued by the City pursuant to Section 6.1 hereof. "Average Annual Principal and Interest Requirements" shall mean the average annual principal and interest requirements for all Bonds. Upon the issuance of the Series 2008 Bonds, the Average Annual Principal and Interest Requirements are hereby determined to be$5,957,196 and shall be recomputed upon the issuance of each series of Additional Bonds and set forth in each ordinance authorizing the issuance of Additional Bonds. For purposes of calculating the Average Annual Principal and Interest Requirements with respect to any variable rate Additional Bonds, interest on such bonds shall be calculated in accordance with Section 6.1 of this - Ordinance. "Bond Insurer" shall mean Financial Security Assurance, Inc. "Bonds" shall mean any or all of the Previously Issued Bonds, the Series 2008 Bonds and any Additional Bonds from time to time hereafter issued,but only to the extent such Bonds remain Outstanding within the meaning of this Ordinance. "Business Day" shall mean any day other than (1) a Saturday or a Sunday, (2) a legal holiday or the equivalent on which banking institutions generally are authorized or required to close in New York, New York or Houston, Texas or any other city in which is located the principal corporate trust office of the Paying Agent/Registrar or (3) a day on which the New i ' York Stock Exchange is closed in whole or in part. "City" shall mean the City of Pearland, Texas, and, where appropriate, the City Council thereof and any successor to the City as owner of the System. "Code" shall mean the Internal Revenue Code of 1986, as amended. "DTC" shall mean The Depository Trust Company of 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. "Fiscal Year" shall mean the City's fiscal year, which currently runs from October 1 to September 30,but which may be changed from time to time by the City. "Gross Revenues" shall mean all revenues, income and receipts of every nature derived or received by the City from the operation and ownership of the System; the interest income from the investment or deposit of money in the Revenue Fund and the Reserve Fund (each L hereinafter defined in Article V hereof); and any other revenues hereafter pledged to the payment of all Bonds. Gross Revenues shall not include any of (i) grants from, or payments by, any federal, state or local governmental agency or authority or any other entity or person, the use of which is restricted by law or by the terms of the grant or payment to capital expenditures of the System, (ii) capital assets, debt service funds or debt service reserve funds of water districts or 2 HOU:2770558.4 other public or private sewer systems annexed, acquired or otherwise assumed by the City or(iii) any interest earned on items (i)or(ii) above. "Interest Payment Date," when used in connection with any Series 2008 Bond, shall mean March 1 or September 1 of each year as applicable commencing September 1, 2008. "Maintenance and Operation Expenses" shall mean the reasonable and necessary expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs and extensions necessary to render efficient service (but only such repairs and extensions as, in the judgment of the governing body of the City, are necessary to keep the System in operation and render adequate service to the City and the inhabitants thereof, or such as might be necessary to meet some physical accident or conditions which would otherwise impair the Bonds), and all payments (including payments of amounts equal to all or a part of the debt service on bonds issued by other political subdivisions and authorities of the State of Texas) under contracts which are now or hereafter defined as operating expenses by the Legislature of Texas. Depreciation shall never be considered as a Maintenance and Operation Expense. Maintenance and Operation Expenses shall include, without limitation, all payments under contracts for the impoundment, conveyance or treatment of water or otherwise which are now or hereafter defined as operating expenses by the Legislature of Texas and the treatment of such payments as Maintenance and Operation Expenses shall not be affected in any way if, subsequent to entering into such contracts, the City acquires as a part of the System title to any properties or facilities used to impound, convey or treat water under such contracts, or if the City contracts to acquire title to such properties or facilities as a part of the System upon the final payment of debt service on the bonds issued to finance such properties or facilities. "Net Revenues" shall mean all Gross Revenues remaining after deducting the j Maintenance and Operation Expenses. "Ordinance" shall mean this Bond Ordinance and all amendments hereof and supplements hereto. "Outstanding" when used with reference to the Bonds shall mean, as of a particular date, all such bonds theretofore delivered except: (a) any such bond canceled by or on behalf of the City at or before said date; (b) any such bond defeased pursuant to the defeasance provisions of the ordinance authorizing its issuance, or otherwise defeased as permitted by applicable law; and (c) any such bond in lieu of or in substitution for which another bond shall have been delivered pursuant to the ordinance authorizing the issuance of such bond. "Owner" or "Registered Owner" when used with respect to any Bond, shall mean the person or entity in whose name such Bond is registered in the Register. Any reference to a particular percentage or proportion of the Owners of the Bonds of a particular class or series of Bonds shall mean the Owners at a particular time of the specified percentage or proportion in aggregate principal amount of all Bonds or the Bonds of such class or series then Outstanding. "Paying Agent/Registrar" shall mean Wells Fargo Bank, N.A., and its successors in that capacity. 3 HOU:2770558.4 "Previously Issued Bonds" shall mean the Outstanding City of Pearland, Texas Water and Sewer System Adjustable Rate Revenue Bonds, Series 1996B, City of Pearland, Texas, Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999, City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2001, City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2003, the City of Pearland, Texas; Water and Sewer System Revenue and Refunding Bonds, Series 2006 and the City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2007. "Purchaser" shall mean Robert W. Baird &Co., Inc. "Record Date" shall mean, with respect to any Interest Payment Date, the fifteenth day of the month, whether or not a Business Day,next preceding each Interest Payment Date. "Register" shall mean the books of registration kept by the Paying Agent/Registrar in which are maintained the names and addresses of and the principal amounts registered to each Owner of Series 2008 Bonds. • "Series 2008 Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2008, authorized by this Ordinance. "Special Project" shall mean, to the extent permitted by law, any water or sewer system property, improvement or facility declared by the City not to be part of the System, for which the costs of acquisition, .construction, and installation are qpaid from proceeds of a financing transaction other than the issuance of bonds payable from ad valorem taxes or revenues of the System and for which all maintenance and operation expenses are payable from sources other than ad valorem taxes or revenues of the System, but only to the extent that and for so long as all or any part of the revenues or proceeds of which are or will be pledged to secure the payment or repayment of such costs of acquisition, construction, and installation under such financing transaction. "Subordinate Lien Obligations" shall mean the obligations permitted to be issued by the City pursuant to Section 6.2 hereof. "Surety Policy" shall mean and include a surety bond, bond insurance policy or other credit agreement, as authorized by Section 1502.064, Texas Government Code, provided that the issuer of any Surety Policy shall be rated in the highest rating category at the time of issuance of such Surety Policy by A.M. Best Company, Standard & Poor's Ratings Group, or Moody's Investors Service. A Surety Policy shall insure all Bonds and Additional Bonds on a pro rata basis. A Surety Policy may include a letter of credit or other agreement or instrument, including any related reimbursement or financial guaranty agreement, whereby the issuer is obligated to provide funds up to and including the maximum amount and under the conditions specified in such agreement or instrument. "System" shall mean all properties, facilities, improvements, equipment, interests, rights and powers constituting the water and sewer system of the City, and all future extensions, replacements, betterments, additions, improvements, enlargements, acquisitions, purchases and repairs to the System, includingwithout limitation, all those heretofore or hereafter acquired as a P Y � q result of the annexation and dissolution of water districts or the acquisition of the properties or t_r 4 HOU:2770558.4 assets of any other public, private or non-profit entities. The System shall not include any 1y Special Project. 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 and the Table of Contents 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 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 Bonds and the validity of the lien on and pledge of the Net Revenues to secure the payment of the Bonds. 1 ' ARTICLE III TERMS OF THE SERIES 2008 BONDS Section 3.1. Name, Amount, Purpose, Authorization. The City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 shall be issued in fully registered form, without coupons, in the aggregate principal amount of FOURTEEN MILLION NINE HUNDRED FIFTY THOUSAND DOLLARS ($14,950,000) for the purpose of constructing certain repairs, improvements, additions and extensions to the System and payment of expenses of issuance of the Series 2008 Bonds, all under and pursuant to the authority of the Act and all other applicable law. Section 3.2. Numbers, Date and Denomination. The Series 2008 Bonds shall be initially issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in Section 3.3 hereof. The Series 2008 Bonds shall be dated as of March 1, 2008, and shall be issued in denominations of$5,000 of principal amount or any integral multiple thereof. Section 3.3. Interest Payment Dates, Interest Rates and Maturities. The Series 2008 Bonds shall bear interest from the later of the March 1, 2008, or the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate or rates per annum set forth below, calculated on the basis of a 360-day year composed of twelve 30-day months and payable semiannually on March 1 and September 1 of each year, commencing September 1, 2008, until maturity or prior redemption. • The Series 2008 Bonds shall mature and become payable on the dates and in the respective principal amounts set forth below, subject to prior redemption as set forth in this Ordinance: Bond Maturity Principal Interest Number (09/01) Amount Rate R-1 2009 $ 150,000 3.250% R-2 2010 190,000 3.250 R-3 2011 205,000 3.250 R-4 2012 225,000 3.250 R-5 2013 235,000 3.250 R-6 2014 255,000 4.500 5 HOU:2770558.4 Bond Maturity Principal Interest Number (09/01) Amount Rate R-7 2015 275,000 4.500 R-8 2016 290,000 4.500 R-9 2017 315,000 4.500 R-10 2018 340,000 4.500 R-11 2019 370,000 4.500 R-12 2020 395,000 4.500 R-13 2021 420,000 4.500 R-14 2022 ' 440,000 4.125 R-15 2023 460,000 4.200 R-16 2024 490,000 4.300 *** *** *** *** R-17 2026 1,050,000 5.000 *** *** *** *** R-18 2028 1,155,000 5.000 *** *** *** *** R-19 2032 3,630,000 5.000 *** *** *** *** R-20 2034 4,060,000 4.500 Section 3.4. Redemption Prior to Maturity. (a) The City reserves the right, at its option, to redeem prior to maturity Series 2008 Bonds maturing on or after September 1, 2019, in whole or in part, in principal installments of$5,000 or any integral multiple thereof, on September 1, 2018, or any date thereafter, at a price equal to the principal amount of the Series 2008 Bonds or portions thereof called for redemption plus accrued interest to the date of redemption. (b) The Series 2008 Bonds maturing on September 1 in the years 2026, 2028, 2032 and 2034 (the "Term Bonds") 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 Series 2008 Bonds or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Bonds Maturing September 1,2026 September 1,2025 $510,000 September 1,2026(maturity) 540,000 Term Bonds Maturing September 1,2028 September 1,2027 $560,000 September 1,2028(maturity) 595,000 Term Bonds Maturing September 1,2032 September 1,2029 $600,000 September 1,2030 580,000 September 1,2031 560,000 September 1,2032(maturity) 1,890,000 6 HOU:2770558.4 Term Bonds Maturing September 1,2034 September 1,2033 $1,980,000 September 1,2034(maturity) 2,080,000 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before July 15 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before July 15 of such year and which have not been made the basis for a previous reduction. (c) Series 2008 Bonds may be redeemed only in integral multiples of $5,000 of principal amount. If a Series 2008 Bond subject to redemption is in a denomination larger than $5,000, a portion of such Series 2008 Bond may be redeemed, but only in integral multiples of$5,000. In selecting portions of Series 2008 Bonds for redemption, the Registrar shall treat each Series 2008 Bond as representing that number of Series 2008 Bonds of$5,000 denomination which is obtained by dividing the principal amount of such Series 2008 Bond by $5,000. Upon surrender of any Series 2008 Bond for redemption in part, the Registrar, in accordance with Section 3.11 hereof, shall authenticate and deliver in exchange therefor a Series 2008 Bond or Bonds of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Series 2008 Bond so surrendered. (d) Not less than thirty (30) days prior to a redemption date for the Series 2008 Bonds, a notice of redemption will be sent by U.S. mail, first class postage prepaid, in the name of the City to each Owner of a Series 2008 Bond to be redeemed in whole or in part at the address of such Owner appearing on the Register at the close of business on the Business Day next preceding the date of mailing. Such notices shall state the redemption date, the redemption price, the place at which Series 2008 Bonds are to be surrendered for payment and, if less than all Series 2008 Bonds outstanding are to be redeemed, the numbers of Series 2008 Bonds or portions thereof to be redeemed. Any notice of redemption so mailed as provided in this Section will be conclusively presumed to have been duly given, whether or not the Owner receives such notice. By the date fixed for redemption, due provision shall be made with the Registrar for payment of the redemption price of the Series 2008 Bonds or portions thereof to be redeemed. When Series 2008 Bonds have been called for redemption in whole or in part and notice of redemption has been given as herein provided, the Series 2008 Bonds or portions thereof so redeemed shall no longer be regarded to be outstanding, except for the purpose of receiving payment solely from the funds so provided for redemption, and interest which would otherwise accrue or compound after the redemption date on any Series 2008 Bond or portion thereof called for redemption shall terminate on the date fixed for redemption. Section 3.5. Manner of Payment, Characteristics, Execution and Authentication. The Paying Agent/Registrar shall be the paying agent for the Series 2008 Bonds. The Series 2008 Bonds shall be payable, shall have the characteristics, shall be signed and executed, shall be sealed, and shall be authenticated, all as provided Form of Bond included as Exhibit A to this Ordinance. The Series 2008 Bonds initially delivered shall also have attached or affixed to each 7 HOU:2770558.4 such Series 2008 Bond the registration certificate of the Comptroller of Public Accounts of the State of Texas. The Series 2008 Bonds shall be signed on behalf of the City by the Mayor and countersigned by the City Secretary by their manual, lithographed, or facsimile signatures thereon. Such facsimile signature on the Series 2008 Bonds shall have the same effect as if each of the Series 2008 Bonds had been signed manually and in person by each of said officials. If • any officer of the City whose manual or facsimile signature shall appear on the Series 2008 Bonds, as provided in the Form of Bond included as Exhibit A hereto, shall cease to be such. officer before the authentication of the Series 2008 Bonds or before the delivery of the Series 2008 Bonds, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the Series 2008 Bonds over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Series 2008 Bonds, but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the • validity of the Bonds. Section 3.6. Approval by Attorney General; Registration by Comptroller. The Initial Series 2008 Bond shall be delivered to the Attorney General of the State of Texas for examination and approval and shall be registered by the Comptroller of Public Accounts of the State of Texas. The manually executed registration certificate of such Comptroller substantially in the form provided in Exhibit A of this Ordinance shall be affixed or attached to the Initial Series 2008 Bonds. • Section 3.7. Authentication. Except for the Series 2008 Bonds to be initially issued, which need not be authenticated, only such Series 2008 Bonds as shall bear thereon a certificate of authentication substantially in the form provided in Exhibit A 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 Series 2008 Bond so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.8. Special Record Date. If interest on any Series 2008 Bond is not paid on any Interest Payment Date and continues unpaid for 30 days thereafter, the Paying Agent/Registrar 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 Registered Owner of an affected Series 2008 Bond as of the close of business on the day prior to the mailing of such notice. Section 3.9. Ownership. Subject to.the further provisions of this Section, the City, the Paying Agent/Registrar, and any other person may treat the person in whose name any Series 8 HOU:2770558.4 2008 Bond is registered on the Register as the absolute Owner of such Series 2008 Bond for the purpose of making and receiving payment of the principal of or interest on such Series 2008 Bond, and for all other purposes, whether or not such Series 2008 Bond 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 Owner of any Series 2008 Bond in • accordance with this Section 3.9 shall be valid and effectual and shall discharge the liability of the City and the Paying Agent/Registrar upon such Series 2008 Bond to the extent of the sums • paid. Section 3.10. Book-Entry Only System. The definitive Series 2008. Bonds shall .be initially issued in the form of a separate single fully registered Series 2008 Bond for each of the maturities thereof. Upon initial issuance, the ownership of each such Series 2008 Bond shall be registered in the name of Cede & Co., as nominee of DTC, and except as provided in Section 3.12 hereof, all of the Outstanding Bonds 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 beingmailed to the Owner at P 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 Series 2008 Bonds 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 Series 2008 Bonds. 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 Series 2008 Bonds, (b) the delivery to any DTC Participant or any other person, other than a Registered Owner of a Series 2008 Bond, as shown on the Register, of any notice with respect to the Series 2008 Bonds, includinganynotice of redemption or (c) the payment to P P P Y _! any DTC Participant or any other person, other than a Registered Owner of a Series 2008 Bond as shown in the Register, of any amount with respect to principal of Series 2008 Bonds, premium, if any, or interest on the Series 2008 Bonds. Except as provided in Section 3.11 of this Ordinance, the City and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Series _1 2008 Bond is registered in the Register as the absolute owner of such Series 2008 Bond for the purpose of payment of principal of, premium, if any, and interest on Series 2008 Bonds, for the purpose of giving notices of redemption and other matters with respect to such Series 2008 Bond, for the purpose of registering transfer with respect to such Series 2008 Bond, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of Series 2008 1 Bonds, premium, if any, and interest on the Series 2008 Bonds 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 Series 2008 Bonds to the extent of the sum or sums so paid. No person other than an owner shall receive a Series 2008 Bond evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. 9 HOU:2770558.4 Section 3.11. Payments and Notices to Cede & Co. Notwithstanding any other. provision of this Ordinance to the contrary, as long as any Series 2008 Bonds are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, premium, if any, and interest on the Series 2008 Bonds, and all notices with respect to such Series 2008 Bonds shall be made and given, respectively, in the manner provided in the representation letter of the City to DTC. Section 3.12. 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 Series 2008 Bonds that they be able to obtain certificated Series 2008 Bonds, the City or the Paying Agent/Registrar shall (a) 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 Series 2008 Bonds to such successor securities depository or (b) notify DTC of the availability through DTC of Series 2008 Bonds and transfer one or more separate Series 2008 Bonds to DTC Participants having Series 2008 Bonds credited to their DTC accounts. In such event, the Series 2008 Bonds 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 a Registered Owner of a Series 2008 Bond transferring or exchanging Series 2008 Bonds shall designate, in accordance with the provisions of this Ordinance. Section 3.13. Registration, Transfer, and Exchange. The Paying Agent/Registrar shall keep the Register at its principal corporate trust office and, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of Series 2008 Bonds in accordance with the terms of this Ordinance. Each Series 2008 Bond shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar, duly endorsed for transfer, or 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 Series 2008 Bond in proper form for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within three (3) Business Days after such presentation, a new Series 2008 Bond or Series 2008 Bonds, registered in the name of the transferee or transferees, in the same maturity and aggregate principal amount and bearing interest at the same rate as the Series 2008 Bond or Series 2008 Bonds so presented. All Series 2008 Bonds shall be exchangeable upon presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar for a Series 2008 Bond or • Series 2008 Bonds of the same maturity in any authorized denomination and interest rate, in an aggregate amount equal to the unpaid principal amount of the Series 2008 Bond or Series 2008 Bonds presented for exchange. The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver exchange Series 2008 Bonds in accordance with the provisions of this Section 3.11. Each Series 2008 Bond delivered in accordance with this Section 3.11 shall be • 10 HOU:2770558.4 entitled to the benefits and security of this Ordinance to the same extent as the Series 2008 Bond or Series 2008 Bonds in lieu of which such Series 2008 Bond is delivered. • • The City or the Paying Agent/Registrar may require the Owner of.any Series 2008.Bond 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 Series 2008 Bond. 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 Series 2008 Bond 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 this restriction shall not apply to the transfer or exchange by the Registered Owner•of the unredeemed portion of a Series 2008 Bond called for redemption in part. Section 3.14. Cancellation of Series 2008 Bonds. All Series 2008 Bonds paid or redeemed in accordance with this. Ordinance, and all Series.2008 Bonds in lieu of which exchange Series 2008 Bonds or replacement Series 2008 Bonds 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 furnish the City with appropriate certificates of destruction of such Series 2008 Bonds. Section 3.15. Mutilated, Lost, or Stolen Series 2008 Bonds. Upon the presentation and surrender to the Paying Agent/Registrar of a mutilated Series 2008 Bond, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Bond of like maturity, interest rate, and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Owner of such Series 2008 Bond 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. If any Series 2008 Bond is lost, apparently destroyed, or wrongfully taken, the City, pursuant to the applicable laws of the State of Texas, and in the absence of notice or knowledge that such Series 2008 Bond has been acquired by a bona fide purchaser, shall execute and the Paying Agent/Registrar shall authenticate and deliver, a replacement Series 2008 Bond of like maturity, interest rate, and principal amount, bearing a number not contemporaneously outstanding,provided that the 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 Series 2008 Bond; S . (b) furnished such security or indemnity as may be required by the Paying Agent/Registrar and the City to save 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 11 !_ HOU:2770558.4 a � (d) met any other reasonable requirements of the City and the Paying • Agent/Registrar. If, after the delivery of such replacement Series 2008 Bond, a bona fide purchaser of the original Bond in lieu of which such replacement Bond was issued presents for payment such original Series 2008 Bond, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Series 2008 Bond 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 Series 2008 Bond has become or is about to become due and payable, the City in its discretion may, instead of issuing a replacement Series 2008 Bond, authorize the Paying Agent/Registrar to pay such Series 2008 Bond. • Each replacement Series 2008 Bond delivered in accordance with this Section 3.13 shall • be entitled to the benefits and security of this Ordinance to the same extent as the Series 2008 Bond or Series 2008 Bonds in lieu of which such replacement Series 2008 Bond is delivered. ARTICLE IV FORM OF SERIES 2008 BONDS AND CERTIFICATES Section 4.1. Forms. The form of the Series 2008 Bonds, including the form of the Paying Agent/Registrar's Authentication Certificate, the form of Assignment, the form of the Comptroller's Registration Certificate and the form of the Statement of Insurance, if any, which shall be attached or affixed to the Initial Series 2008 Bonds, shall be, respectively, as described in Exhibit A to this Ordinance, with such additions, deletions, and variations as may be necessary or desirable and not prohibited by this Ordinance. Section 4.2. Legal Opinion; CUSIP Numbers. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the Series 2008 Bonds over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Series 2008 Bonds, but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the validity of the Bonds. ARTICLE V SECURITY AND SOURCE OF PAYMENT FOR THE BONDS Section 5.1. Pledge and Source of Payment. The City hereby covenants and agrees that Gross Revenues of the System shall, as collected and received by the City, be deposited and paid into the special funds hereinafter established, and shall be applied in the manner hereinafter set forth, in order to provide for the payment of all Maintenance and Operation Expenses and to provide for the payment of principal of, interest on and any redemption premiums on the Bonds and all expenses of paying same; and to provide for the disposition of the remaining Net Revenues. The Bonds shall constitute special obligations of the City that shall be payable solely from and shall be equally and ratably secured by a first lien on and pledge of the Net Revenues 12 . HOU:2770558.4 as collected and received by the City from the operation and ownership of the System, which Net . Revenues shall, in the manner herein provided, be set aside for and are hereby pledged to the payment of the Bonds in the Interest and Sinking Fund and the Reserve Fund as hereinafter provided, and the Bonds shall be, in all respects, on a parity with and of equal dignity with one another. The Owners of the Bonds shall never have the right to demand payment of either the principal of, interest on or any redemption premium on the Bonds out of any funds raised or to be raised by taxation. Section 5.2. Rates and Charges. So long as any Bonds remain Outstanding, the City. shall fix, charge and collect rates and charges for the use and services of the System which are calculated to be fully sufficient to produce Net Revenues in each Fiscal Year at least equal to 115% of the principal and interest requirements scheduled to occur in such Fiscal Year on all Bonds then Outstanding, plus an amount equal to the sum of all deposits required to be made to the Reserve Fund in such Fiscal Year (but in no event shall Net Revenues ever be less than the amount required to establish and maintain the Interest and Sinking Fund and the Reserve Fund as hereinafter provided) and, to the extent that funds for such purpose are not otherwise available, to pay all other outstanding obligations payable from the Net Revenues of the System, including all amounts owed by the City to a provider of a Surety Policy, if any, as and when the same become due. For the purpose of complying with its obligation to fix, charge and collect rates and • charges, as herein provided, the City shall be entitled to rely on the certificate described in Section 6.1 of this Ordinance, as therein provided, in determining the amount of interest anticipated to be paid in respect of Bonds bearing interest at a variable rate. The City will not grant or permit any free service from the System, except for public buildings and institutions operated by the City. In addition, the City will not grant or permit any free service from the System permitted by the previous sentence if to do so would violate any condition or covenant to which the City is bound in connection with any federal grant agreement or otherwise. Section 5.3. Special Funds. The following "Special Funds" shall be established, maintained and accounted for as hereinafter provided so long as any of the• Bonds remain Outstanding: (a) Revenue Fund; (b) Interest and Sinking Fund; and (c) Reserve Fund. All of such Funds shall be maintained as separate accounts on the books of the City. The Interest and Sinking Fund and the Reserve Fund shall constitute trust funds which shall be held in trust for the Owners of the Bonds and the proceeds of which shall be pledged to the payment of the Bonds. All of the Funds named above shall be used solely as herein provided so long as any Bonds remain Outstanding. Section 5.4. Flow of Funds. Gross Revenues of the System shall be deposited as collected into the Revenue Fund. Moneys from time to time on deposit to the credit of the Revenue Fund shall be applied in the following manner and in the following order of priority: 13 HOU:2770558.4 (a) First, to pay Maintenance and Operation Expenses and to provide by encumbrance for the payment of all obligations incurred by the City for Maintenance and Operation Expenses and to establish and maintain an operating reserve equal to one month's estimated Maintenance and Operation Expenses; • (b) Second, to make all deposits into the Interest and Sinking Fund required by any ordinance authorizing the issuance of Bonds; (c) Third, to reimburse the provider of a Surety Bond any amounts advanced under such Surety Bond; (d) Fourth, to pay interest to any provider of a Surety Bond any amounts advanced under such Surety Bond; j ! (e) Fifth, to make all deposits into the Reserve Fund required by any ordinance authorizing the issuance of Bonds; (f) Sixth, to make all deposits, as may be required by any ordinance of the City authorizing the issuance of certain Subordinate Lien Obligations described in Section 6.2 hereof, in order to provide for the payment of and security for such Subordinate Lien Obligations; and (g) Seventh, for any lawful purpose: Section 5.5. Interest and Sinking Fund. On or before the last Business Day of each month so long as any Bonds remain Outstanding, after making all required payments and provision for payment of Maintenance and Operation Expenses, there shall be transferred into the Interest and Sinking Fund from the Revenue Fund the following amounts: (a) Such amounts, in approximately equal monthly installments, as will be sufficient to accumulate the amount required to pay the interest scheduled to become due on the Bonds on the next Interest Payment Date; and (b) Such amounts, in approximately equal monthly installments, as will be sufficient to accumulate the amount required to pay the next maturing principal of the Bonds (i.e., the principal amount payable on the next September 1), including the principal amounts of, and any redemption premiums on, any Bonds payable as a result of the operation or exercise of any mandatory or optional redemption provision contained in any ordinance authorizing the issuance of Bonds. Whenever the total amounts on deposit to the credit of the Interest and Sinking Fund and the Reserve Fund shall be equivalent to the sum of the aggregate principal.amount of all Outstanding Bonds plus the aggregate amount of all interest accrued and to accrue thereon, no further payments need be made into the Interest and Sinking Fund or the Reserve Fund, and such Bonds shall not be regarded as being Outstanding except for the purpose of being paid with the moneys on deposit in such Funds. 14 _h HOU:2770558.4 J A Moneys deposited to.the credit.of the Interest and SinkingFund shall be used solely for Y P the purpose of paying principal (at maturity, prior.redemption or tender, or to purchase Bonds in the open market to be credited against mandatory redemption requirements), interest and redemption premiums on the Bonds, plus all bank charges and other costs and expenses relating --, to such payment. On or before each date principal becomes due and/or each Interest Payment Date on the Bonds, the City shall transfer from the Interest and Sinking Fund to the Paying Agent for the ti ! Bonds an amount equal to the principal of, interest on and any redemption premiums payable on. the Bonds on such date, together with an'amount equal to all bank charges and other costs and expenses relating to such payment. The Paying Agent shall destroy all paid Bonds and shall provide the City with an appropriate certificate of destruction. • •• ry Section 5.6. Reserve Fund. On or before the last Business Day of each month so long Ias any Bonds remain Outstanding, after making all required payments and provision for payment of Maintenance and Operation Expenses and after making all required transfers into the Interest and Sinking Fund, there shall be transferred into the Reserve Fund from the Revenue Fund amounts equal to one-sixtieth (1/60th) of the Average Annual Principal and Interest Requirements on the Bonds unless or until there has been accumulated in the Reserve Fund money and investments in an aggregate amount at least equal to the Average Annual Principal and Interest Requirements on the Bonds; provided that additional deposits into the Reserve Fund sufficient to provide for the increased reserve requirements resulting from the issuance of any Additional Bonds shall be made by not later than 60 months from the date of issuance of such Additional Bonds as required by Section 6.1(d)hereof. Such additional deposits into the Reserve Fund in connection with the issuance of any Additional Bonds shall be made each month in amounts equal to one-sixtieth (1/60th) of the. Average Annual Principal and Interest Requirements on the Bonds and such Additional Bonds. After such amount has accumulated in the Reserve Fund and so long thereafter as such fund contains such amount, no further deposits shall be required to be made into the Reserve Fund, and any excess amounts in the Fund may be transferred to the Revenue Fund; but if and whenever the balance in-the Reserve Fund is reduced below such amount, monthly deposits into such Fund shall be resumed and continued in amounts at least equal to one-twelfth (1/12th) of the Average Annual Principal and Interest Requirements on the Bonds until the Reserve Fund has been restored to such amount. The Reserve Fund shall be used to pay the principal of and interest on the Bonds at any time when there is not sufficient money available in the Interest and Sinking Fund for such purpose and it may be used finally to pay and retire the last Bonds to mature or be redeemed. The requirements of the immediately preceding paragraph of this Section notwithstanding, the City may provide a Surety Policy or Policies issued in amounts equal to all or part of the Average Annual Principal and Interest Requirements on the Bonds in lieu of depositing cash into the Reserve Fund; provided, however, that no such Surety Policy may be so substituted unless (i)the ordinance authorizing the substitution of the Surety Policy for all or part of the Average Annual Principal and Interest Requirements on the Bonds contains a finding that such substitution is cost effective and (ii) the City obtains an opinion of nationally recognized bond counsel that such substitution is permitted by applicable Texas law then in effect. If a Surety Policy or Policies are issued in accordance with the preceding sentence, such Surety Policy or Policies shall be drawn upon and reimbursed on a pro rata basis. 15 HOU:2770558.4 r ' In the event a Surety Policy issued to satisfy all or a part of the City's obligation with respect to the Reserve Fund causes the amount then on deposit in the Reserve Fund to exceed the Average Annual Principal and Interest Requirements on all Bonds, the City may transfer such excess amount to any fund or funds established for the payment of or security for Bonds or any Subordinate Lien Obligations (including any escrow established for the final payment of any such obligations pursuant to Chapter 1207, Texas Government Code); provided, however, that no funds constituting bond proceeds shall be transferred for the benefit of the Subordinate Lien Obligations. Section 5.7. Deficiencies in Funds. If in any month there shall not be deposited into any fund maintained pursuant to this Article the full amounts required hereinabove, amounts equivalent to such deficiency shall be set apart and paid into such Special Fund or Funds from the first available and unallocated moneys in the Revenue Fund, and such payment shall be in addition to the amounts otherwise required to be paid into such Funds during any succeeding month or months. To the extent necessary, the rates and charges for the System shall be increased to make up for any such deficiencies. Section 5.8. Investment of Funds; Transfer of Investment Income. (a) Money in the Revenue Fund, the Interest and Sinking Fund and the Reserve Fund may, at the option of the City,be invested in time deposits or certificates of deposit secured in the manner required by law for public funds, or be invested in direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America, in obligations of any agencies or instrumentalities of the United States of America or as otherwise permitted by state law; provided that all such deposits and investments shall be made in such manner(which may include repurchase agreements for such investments with any national bank) that the money required to be expended from any Special Fund will be available at the proper �—r time or times, and provided further that in no event shall such deposits or investments of moneys in the Reserve Fund mature later than the final maturity date of the Bonds: All such investments shall be valued in terms of current market value no less frequently than the last Business Day of the City's Fiscal Year, except that any direct obligations of the United States of America - State and Local Government Series shall be continuously valued at their par value or principal face amount. Any obligation in which money is so invested shall be kept and held in an official depository of.the City, except as hereinafter provided. For purposes of maximizing investment returns, money in such funds may be invested, together with money in other funds or with other money of the City, in common investments of the kind described above, or in a common pool of such investments which shall be kept and held at an official depository of the City, which shall not be deemed to be or constitute a commingling of such money or funds provided that safekeeping receipts or certificates of participation clearly evidencing the investment or investment pool in which such money is invested and the share thereof purchased with such money or owned by such fund are held by or on behalf of each such fund. If necessary, such investments shall be promptly sold to prevent any default. (b) All interest and income derived from such deposits and investments shall be credited monthly to the Special Fund from which such investment was made. 16 HOU:2770558.4 � I r7 Section 5.9. Security for Uninvested Funds. So long as any Bonds remain Outstanding, all uninvested moneys on deposit in, or credited to, the Revenue Fund, the Interest and Sinking Fund and the Reserve Fund shall be secured by the pledge of security as provided by law for cities in the State of Texas. ARTICLE VI ADDITIONAL BONDS Section 6.1. Additional Bonds. The City reserves the right to issue, for any lawful purpose, including the refunding' of any previously issued Bonds or any other bonds or obligations of the City issued in connection with the System or payable from Net Revenues, one or more series of Additional Bonds on a parity with the Outstanding Bonds and any Additional Bonds then Outstanding, payable from, and secured by a first lien on, the Net Revenues of the System;provided,however,that no Additional Bonds may be issued unless: —' (a) All Additional Bonds shall mature only on September 1 and interest thereon shall be payable only on March 1 and September 1; (b) The Interest and Sinking Fund and the Reserve Fund each contains the amount of money then required to be on deposit therein; - - (c) For either the preceding Fiscal Year or any consecutive 12-month period out of the 15-month period immediately preceding the month in which the bond ordinance authorizing such Additional Bonds is adopted(the"Base Period")'either: • (1) Net Revenues are certified by the Director of Finance of the City to have been equal to at least one hundred and forty percent (140%) of the Average Annual Principal and Interest Requirements on all Bonds, after giving effect to the issuance of the Additional Bonds to be issued; or (2) Net Revenues, adjusted to give effect to any rate increase or annexation of territory placed into effect or consummated prior to the adoption of the ordinance authorizing the Additional Bonds to the same extent as if such rate increase or annexation had been placed into effect or consummated prior to the commencement of the Base Period, would have been equal to at least the amount required in paragraph (1) above, as certified by an independent consulting engineer or independent firm of consulting engineers; Provided, however, that this requirement shall not apply to the issuance.of any series of Additional Bonds for refunding purposes that will not have the result of increasing the average annual principal and interest requirements on the Bonds; and (d) Provision is made in the•bond ordinance authorizing the Additional Bonds then proposed to be issued for (1) additional payments into the Interest and Sinking Fund sufficient to provide for the payment of the increased principal of and interest on the Bonds resulting from the issuance of such Additional Bonds, and (2) additional payments into the Reserve Fund sufficient to provide for the accumulation therein of the increased 17 HOU:2770558.4 a I reserve requirement resulting from the issuance of such Additional Bonds, by not later than sixty(60) months from the date of issuance of such Additional Bonds. • The provisions of this Section 6.1(a) notwithstanding, the City may issue Additional Bonds that bear interest at a variable rate. Such variable rate bonds may mature on dates other than September 1 and interest thereon may be payable on dates other than March 1 or September 1; provided that the issuance of Additional Bonds as variable rate bonds may not cause the total amount of Outstanding Bonds that are variable rate bonds to exceed 50% (20% as long as the Series 1999 Bonds shall remain outstanding) of the aggregate principal 'amount of all. { Outstanding Bonds and Subordinate Lien Obligations at the time of such issuance. For purposes of calculating the funding requirements for the Reserve Fund and for the purposes of calculating compliance with the conditions precedent to the issuance of Additional Bonds pursuant to • Section 6.1(c) and the rate covenant set forth in Section 5.2, any Bonds that are variable rate bonds shall be assumed to bear interest at a rate which shall be estimated and certified by the financial advisor to the City as the rate that would be borne by such variable rate bonds if they were at the date of such certification issued as Bonds bearing a fixed rate of interest to their scheduled maturity or maturities. Section 6.2. Subordinate Lien Obligations. The City reserves the right to issue, for any r lawful purpose, bonds, notes or other obligations secured in whole or in part by liens on the Net Revenues that are junior and subordinate to the lien on Net Revenues securing payment of the Bonds. Such Subordinate Lien Obligations may be further secured by any other source of payment lawfully available for such purposes. In the event that the City should decide to issue such Subordinate Lien Obligations as variable rate bonds, for purposes of calculating the funding requirements for the reserve fund for such Subordinate Lien Obligations, the variable rate bonds shall be assumed to bear interest at the rate of 10% per annum, and for purposes of calculating compliance with any conditions precedent to the issuance of additional Subordinate Lien Obligations and any rate covenants relating to such Subordinate Lien Obligations, the variable rate bonds shall be assumed to bear interest at the higher of 9% per annum or the highest variable rate over the preceding twenty-four(24)months. Deposits may be made pursuant to Section 5.4(f) of this Ordinance into such funds as may be created and maintained for the payment of and security for Subordinate Lien Obligations described in this Section (including a reserve fund not to exceed the Average Annual Principal and Interest Requirements on such Subordinate Lien Obligations and any provisions for curing deficiencies in such funds), but only to the extent that the aggregate Outstanding principal amount of such Subordinate Lien Obligations does not exceed 50% of the aggregate principal amount of Bonds and Subordinate Lien Obligations Outstanding on the date of such calculation. Section 6.3. Special Project Bonds. The City reserves the right to issue revenue bonds secured by liens on and pledges of revenues and proceeds derived from Special Projects. 18 HOU:2770558.4 ARTICLE VII COVENANTS AND PROVISIONS ' RELATING TO BONDS Section 7.1. Punctual Payment of Bonds. The City covenants that it will punctually pay or cause to be paid the interest on and principal of all Bonds according to the terms thereof and will faithfully do and perform, and at all times fully observe, any and all covenants, _. undertakings, stipulations and provisions contained in this Ordinance and in any other ordinance authorizing the issuance of such Bonds. • • Section 7.2. Power to Own and Operate System; Ratemaking Power. The City covenants that it has all necessary power and authority to own and operate the System as herein described and provided and that it possesses, and shall exercise, all necessary power and authority to establish, fix, increase, impose and collect rates and charges for the use and services' of the System in the amounts required to comply with the covenants and provisions contained herein. Section 7.3. Maintenance of System. So long as any Bonds remain Outstanding, the City covenants that it will at all times maintain the System, or within the limits of its•authority cause the same to be maintained, in good condition and working order and will operate the same, or cause the same to be operated, in an efficient and economical manner at a reasonable cost and t in accordance with sound business principles. In operating and maintaining the System, the City will comply with all contractual provisions and agreements entered into by it and with all valid rules, regulations, directions or orders of any governmental, administrative or judicial body promulgating same, noncompliance with which would materially and adversely affect the operation of the System. Section 7.4. Sale or Encumbrance of System. So long as any Bonds remain Outstanding, the City covenants that it will not sell, dispose of or, except as permitted in Article VI, further encumber the System; provided, however, that this provision shall not prevent the City from disposing of any portion of the System which is being replaced or is deemed by the a—, City to be obsolete, worn out, surplus or no longer needed for the proper operation of the System. l Net proceeds from any such disposition may be deposited in the Revenue Fund and, notwithstanding any other provision contained herein, shall be used only for System purposes. Any .agreement pursuant to which the City contracts with a person, corporation, municipal corporation or political subdivision to operate the System or to lease and/or operate all or part of the System shall not be considered as an encumbrance of the System. Section 7.5. Insurance. The City covenants that it will keep the System insured. with insurers of good standing, against risks, accidents or casualties against which and to the extent customarily insured against by political subdivisions of the State of Texas operating similar properties, to the extent that such insurance is available. All net proceeds of such insurance shall be applied to repair or replace any insured property that is damaged or destroyed, or shall be deposited in the Revenue Fund, or shall be used to redeem Outstanding Bonds. The cost of all such insurance, together with any additional insurance, shall be a part of the Maintenance and Operation Expenses. i � 19 HOU:2770558.4 r- 1 Section 7.6. Accounts,Records and Audits. So long as any Bonds remain Outstanding, the City covenants that it.will maintain a proper and complete system of records and accounts pertaining to the operation of the System in which full,true and proper entries will be made of all dealings, transactions, business and affairs which in any way affect or pertain to the System or the Gross Revenues or the Net Revenues thereof. The City shall, after the close of each Fiscal Year, prepare financial statements of the System, and have those financial statements audited by an independent certified public accountant or independent firm of certified public accountants. After the audit, the City shall furnish a copy of these audited financial statements, together with the independent certified public accountant's report thereon, without cost, to the Municipal. Advisory Council of Texas, the major municipal rating agencies, and any Owners of Bonds who shall request the same. All expenses incurred in preparing such audits shall be Maintenance and Operation Expenses. • Section 7.7. Competition. To the extent it legally may, the City covenants that it will not grant any franchise or permit for the acquisition, construction or operation of any competing facilities which might be used as a substitute for the System and will prohibit the operation of any such competing facilities to the extent that such competing facilities would impair the City's ability to pay principal of or interest on the Bonds. • Section 7.8. Pledge and Encumbrance of Net Revenues. The City covenants that it has the lawful power to create a lien on and to pledge the Net Revenues to secure the payment of the Bonds, and has lawfully exercised such power under the Constitution and laws of the State of Texas. The City further covenants that, other than to the payment of the Bonds, the Net Revenues are not and will not be made subject to any other lien, pledge or encumbrance to secure the payment of any debt or obligation of the City, unless such lien, pledge or encumbrance is junior and subordinate to the lien and pledge securing payment of the Bonds. Section 7.9. Covenants with Respect to Certain Assumed Water District Bonds. So long as any Bonds remain Outstanding,the City covenants as follows: (a) To the extent it legally may, the City will impose, and strictly enforce, the requirement upon all water districts located within the City's extraterritorial jurisdiction that any bonds issued by such water districts which are secured in whole or in part by pledges of or liens on water or sewer system revenues shall provide that all such pledges of and liens on water or sewer system revenues shall automatically terminate upon the annexation and dissolution of the district by the City; • (b) The City shall use its best efforts to redeem, refund or defease all annexed water district bonds assumed by the City which by their own terms are secured in whole or in part by pledges of or liens on water or sewer system revenues which .do not terminate upon annexation and dissolution by the City of such water district, or otherwise to provide for the discharge of such pledges or liens on water or sewer system revenues; and (c) Pursuant to Section 43.075, Texas Local Government Code (successor to Article 1182c-1, Vernon's Texas Civil Statutes, as amended), the City shall, unless it has theretofore made adequate provision for the payment thereof, annually levy and cause to 1 I 20 HOU:2770558.4 be collected taxes upon all taxable property of the City sufficient to pay principal of and • interest, as they respectively become due and payable, on all assumed bonds, warrants . . • and other obligations that were issued by water districts that have been annexed to, and dissolved by, the City, and which are by their own terms secured in whole or in part by a lien on or pledge of water or sewer system revenues which did not terminate upon the. annexation and dissolution by the City of such water district. , Section 7.10. Registered Owners' Rights and Remedies. This Ordinance shall constitute a contract between the City and the Owners of the Series 2008 Bonds from time to time Outstanding and this Ordinance shall be and remain irrepealable until the Series 2008 Bonds and the interest thereon shall•be fully paid or discharged or provision therefor shall have been made as provided herein. In the event of a default in the payment of the principal of or interest on any of the Series 2008 Bonds or a default in the performance of any duty or covenant provided by law or in this Ordinance, the Owner or Owners of any of the Series 2008 Bonds may pursue all • legal remedies afforded by the Constitution and laws of the State of Texas to compel the City to • remedy such default and to prevent further default or defaults. Without in any way limiting the • generality of the foregoing, it is expressly provided that any Owner of any of the Series 2008 Bonds may at law or in equity, by suit, action, mandamus, or other proceedings, enforce and compel performance of all duties required to be performed by the City under this Ordinance, including the making and collection of reasonable and sufficient rates and charges for the use and services of the System, the deposit of the revenues thereof into the Special Funds herein provided, and the application of such revenues in the manner required in this Ordinance. Section 7.11. Defeasance. The City may defease the provisions of this Ordinance and . discharge its obligations to the Registered Owners of any or all of the Series 2008 Bonds to pay • the principal of and interest thereon in any manner now or hereafter permitted by law, including by depositing with the Paying Agent/Registrar or with the State Treasurer of the State of Texas either: (a) cash in an amount equal to the principal amount of such Series 2008 Bonds plus interest thereon to the date of maturity or redemption; 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 quality by a nationally recognized investment • rating firm not less 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 21 HOU:2770558.4 1 1 • 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 Series 2008 Bonds are to be redeemed prior to their respective dates of maturity, provision shall have been made for giving notice of redemption as provided in this Ordinance. Upon such deposit, such Series 2008 Bonds 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 7.12. Legal Holidays. In any case where the date of maturity of interest on or principal of the Series 2008 Bonds or the date fixed for redemption of any Series 2008 Bonds shall be in the City a legal holiday or a day.on which the Paying Agent/Registrar for the Series 2008 Bonds is authorized by law to close, then payment of interest or principal need not be made on such date but may be made on the next succeeding day not in the City a legal holiday or a day on which such Paying Agent Registrar is authorized by law to close with the same force and effect as if 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. Section 7.13. Unavailability of Authorized Publication. If, because of the temporary or permanent suspension of any newspaper, journal or other publication, or, for any reason, publication of notice cannot be made meeting any requirements herein established, any notice required to be published by the provisions of this Ordinance shall be given in such other manner • and at such time or times as in the judgment of the City or of the Paying Agent/Registrar (or paying agent) for the Series 2008 Bonds shall most effectively approximate such required •• publication and the giving of such notice in such manner shall for all purposes of this Ordinance be deemed to be in compliance with the requirements for publication thereof. Section 7.14. No Recourse Against City Officials. No recourse shall be had for the payment of principal of or interest on any Series 2008 Bonds or for any claim based thereon or on this Ordinance against any official of the City or any person executing any Series 2008 Bonds. Section 7.15. Amendment to Ordinance. The City may, with the consent of Owners holding a majority in aggregate principal amount of the Bonds then Outstanding affected thereby, amend, add to, or rescind any of the provisions of this Ordinance; provided that,without the consent of all Owners of Outstanding Bonds, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of, premium, if any, and interest on the Bonds, reduce the principal amount thereof, the redemption price therefor, or the rate of • interest thereon,or in any other way modify the terms of payment of the principal of, premium, if any, or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required to be held by Owners for consent to any such amendment, addition, or rescission. 22 HOU:2770558.4 ARTICLE VIII CONCERNING THE PAYING AGENT/REGISTRAR Section 8.1. Acceptance. Wells Fargo Bank, N.A. is hereby appointed as the initial Paying Agent/Registrar for the Series 2008 Bonds. 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 fees and/or deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. The registration of and payment of the principal of, premium, if any, and interest on the Series .2008 Bonds when due shall be effectuated pursuant .to the terms of a Paying Agent/Registrar Agreement to be entered into by and between the City and the Paying Agent/Registrar, which shall be substantially in the form attached hereto as Exhibit B, the terms and provisions of which are hereby approved, and the Mayor and/or the Mayor Pro Tern are 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 and affix• the City's seal thereto. j ! Section 8.2. Fiduciary Account. All money transferred to the Paying Agent/Registrar under this Ordinance (except sums representing Paying Agent/Registrar's fees) shall be held in a fiduciary account for the benefit of the City, shall be the property of the City, and shall be disbursed in accordance with this Ordinance. . Section 8.3. Bonds Presented. Subject to the provisions of Section 8.4, all matured • Series 2008 Bonds properly and timely presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Series 2008 Bonds shall be canceled as provided herein. Section 8.4. Series 2008 Bonds Not Timely Presented. The Paying Agent/Registrar } shall remit to the City, upon receipt of the certificate provided for herein, a sum equal to the aggregate face amount of all Series 2008 Bonds which have not been presented for payment prior to the date specified in such certificate. Such certificate shall: • (a) Specify the Series 2008 Bonds or portions thereof to which it applies and the amount of each; (b) Specify the date on which the City believes itself to be no longer obligated to pay such Series 2008 Bonds or portions thereof by virtue of the expiration of the applicable statute of limitations under the laws of the State of Texas; and (c) Be signed by the Mayor and attested by the City Secretary. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Series 2008 Bonds remaining unclaimed by any Registered Owner after the expiration of three years from 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 the Paying 11 L__ 23 ( HOU:2770558.4 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 Owners of the Series 2008 Bonds by virtue of actions taken in compliance with this Section. Section 8.5. Paying Agent/Registrar May Own Series 2008 Bonds. The Paying Agent/Registrar in its individual or any other capacity, may become the Owner or pledgee of Series 2008 Bonds with the same rights it would have if it were not the Paying Agent/Registrar. • Section 8.6. Successor Paying Agents/Registrars. The City covenants that at all times while any Series 2008 Bonds are Outstanding it will provide a legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar for the Series 2008 Bonds. If the Paying Agent/Registrar or its successor for any reason no longer acts as j • Paying Agent/Registrar hereunder, the City covenants that it will appoint a bank in the same city as the Paying Agent/Registrar initially appointed to perform the duties of Paying Agent/Registrar hereunder. Any successor Paying Agent/Registrar shall be either a national or state banking institution, and a corporation organized and doing business under the laws of the United States of America or any state, which is authorized under such laws to exercise trust powers and is subject to supervision or examination by federal or state authority. The City reserves the right to change the Paying Agent/Registrar for the Series 2008 Bonds on not less than sixty (60) days written notice to the Paying Agent/Registrar, as long as any such notice is effective not less than sixty (60) days prior to the next succeeding principal or interest payment date on the Series 2008 Bonds. 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 first-class mail, 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 IX PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF SERIES 2008 BONDS Section 9.1. Sale of Series 2008 Bonds; Insurance. The sale of the Series 2008 Bonds to the Purchaser at a price of the.par value thereof, plus accrued interest on the Series 2008 Bonds, is hereby approved, and delivery of the Series 2008 Bonds 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 bidder offering the lowest interest cost for the Series 2008 Bonds as a result of invitations for competitive bids. It is further officially found, determined and declared that the Series 2008 Bonds have been sold at public sale to the bidder offering the lowest net effective interest cost, which is hereby determined to be a net effective interest rate of 4.685052%, 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 Series 2008 Bonds. 24 HOU:2770558.4 The City hereby acknowledges that the sale of the Bonds is contingent upon the issuance If-k of a policy of municipal bond insurance and a debt service reserve fund insurance policy from the Bond Insurer insuring the timely payment of principal of and interest on the Bonds. The terms and conditions of such policies, as set out in Exhibit C hereto, are incorporated herein for all purposes for so long as such policies remain in effect. The appropriate officials and representatives of the City are hereby authorized and directed to execute such documents and certificates, including any credit agreements related thereto, and to do any and all things r necessary or desirable to obtain such policies, and the printing on the Bonds of an appropriate legend or statement regarding such insurance, as provided by the Bond Insurer, is hereby approved. Section 9.2. Approval, Registration and Delivery. The Mayor and the City Secretary • are hereby authorized to have control and custody of the Series 2008 Bonds and all necessary r records and proceedings pertaining thereto pending their delivery, and the Mayor of the City, the • • • City Secretary of the City, the City Manager of the City and other officers and employees of the City are hereby authorized, directed and instructed to make such certifications and to execute - such instruments (including by printed facsimile signature, the Series 2008 Bonds) as may be necessary to accomplish the delivery of the Series 2008 Bonds and to assure the investigation, examination, and approval thereof by the Attorney General of Texas and the registration of the initial Series 2008 Bonds by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Series 2008 Bonds, the Comptroller of Public Accounts of the State of Texas (or a deputy designated in writing to act for him) shall be requested to sign manually the r ? registration certificate prescribed herein to be attached or affixed to each Series 2008 Bond initially delivered and the seal of the Comptroller of Public Accounts of the State of Texas shall be impressed or printed or lithographed thereon. Delivery of the Series 2008 Bonds is subject to the unqualified approving opinion as to the legality of the Series 2008 Bonds of the Attorney L General of Texas and of Andrews Kurth LLP,Houston, Texas, Bond Counsel. Section 9.3. 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 Series 2008 Bonds, and any addenda, supplement or amendment thereto, and ratifies and approves the distribution of such Preliminary L Official Statement and Official Statement in the offer and sale of the Series 2008 Bonds and in the reoffering of the Series 2008 Bonds by the Purchaser, with such changes therein or additions sue, thereto as the officials executing same may deem advisable, such determination to be conclusively evidenced by their 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 Series 2008 Bonds 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 (i) Official Notice of Sale and the Preliminary Official Statement and (ii) the Official Statement are attached hereto as Exhibits D and E,respectively. 25 HOU:2770558.4 I \ { 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 Series 2008 Bonds from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and such actions are hereby ratified and confirmed. .. Section 9.4. Application of Proceeds of Series 2008 Bonds. Proceeds from the sale of the Series 2008 Bonds shall, promptly upon receipt by the City,be applied as follows: (a) First, accrued interest and premium, if any, shall be deposited into the Interest and Sinking Fund; and (b) Second, the remaining proceeds from the sale of the Series 2008 Bonds shall be deposited to a separate construction fund of the City and,used for the purposes set forth in Section 3.1 of this Ordinance and to pay all expenses arising in connection with the issuance of the Series 2008 Bonds. Any proceeds of the Series 2008 Bonds remaining after making all such deposits and payments shall be deposited into the Interest and Sinking Fund. Section 9.5. Tax Exemption. The City intends that the interest on the Bonds 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 Bonds. For this purpose, the City covenants that it will monitor and control the receipt, investment, expenditure and use of all gross proceeds of the Bonds (including all property the acquisition, construction or improvement of which is to be financed directly or indirectly with the proceeds of the Bonds) and take or omit to take such other and further actions as may be required by Sections 103 and 141 through 150 of the Code and the Regulations to cause interest on the Bonds to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Bonds 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 Bonds to (i) provide funds for repairs, improvements, additions and extensions to the System, which will be owned and operated by the City and (ii) to pay the costs of issuing the Bonds. The City will not use any portion of the proceeds of the Bonds to pay the principal of or interest or 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 Bonds to constitute"private activity bonds" within the meaning of Section 141(a) of the Code. (c) Principal of and interest on the Bonds will be paid solely from Pledged Revenues collected by the City, investment earnings on such collections, and as available, proceeds of the Bonds. (d) Based upon all facts and estimates now known or reasonably expected to be in existence on the date the Bonds are delivered, the City reasonably expects that the proceeds of 26 HOU:2770558.4 the Bonds will not be used in a manner that would-causethe Bonds or any portion thereof to be an"arbitrage bond"within the meaning of Section 148 of the Code. (e) At all times while the Bonds are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Bonds in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Bonds , 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 Bonds. To the extent necessary to prevent the Bonds 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 Bonds to be less than the yield that is materially higher than the yield on the Bonds. • (f) The City will not take any action or knowingly omit to take any action that, if taken or omitted, would cause the Bonds 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 Bonds 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 Bonds will be used to carry out the.governmental purpose of the Bonds within the three-year period beginning on the date of issue of the Bonds. (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 Bonds, if any, be rebated to the federal government. Specifically,.the City will (i) maintain records regarding the receipt, investment, and expenditure of the gross proceeds of..the Bonds 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 Bond 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 Bonds 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 27 HOU:2770558.4 the Bonds 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 Bonds not been rl 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 Bonds on such form and in such place as the Secretary may prescribe. (k) The City will not issue or use the Bonds as part of an "abusive arbitrage device" (as defined in Section 1.148-10(a) of the Regulations). Without limiting the foregoing, the Bonds 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, or(ii) increasing the burden on the market for tax-exempt obligations. i- (1) Proper officers of the City charged with the responsibility for issuing the Bonds are hereby directed to make, execute and deliver certifications as to facts, estimates or circumstances in existence as of the date of issuance of the Bonds 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 Bonds, the City will take such actions as are necessary and appropriate to assure the continuous accuracy of the representations contained in such certificates. • (m) The covenants and representations made or required by this Section are for the benefit of the Bond holders and any subsequent Bond holder, and may be relied upon by the . Bond holders and any subsequent Bond holder and bond counsel to the City. In complying with the foregoing covenants, the City may rely upon an unqualified opinion issued to the City by 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 Bonds 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 9.5 shall survive the defeasance and discharge of the Bonds for as long as such matters are relevant to the exclusion of interest on the Bonds from the gross income of the owners for federal income tax purposes. ARTICLE X CONTINUING DISCLOSURE UNDERTAKING Section 10.1. Annual Reports. The City shall provide annually to each NRMSIR and any STD, within six months after the end of each fiscal year ending in or after 2008, financial information and operating data with respect to the City of the general type described in Exhibit F hereto. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit F hereto 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 28 HOU:2770558.4 provided. If audited financial statements are not soprovided, then the Cityshall provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID, when and if audited financial statements, become available, but if such audited financial statements are unavailable the City will provide such financial statements on an unaudited basis within the above-described six-month period. • 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. 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, or may be provided in any other manner consistent with the Rule. Section 10.2. 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 Series 2008 Bonds, 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 Series 2008 Bonds; G. Modifications to rights of holders of the Series 2008 Bonds; H. Series 2008 Bond calls; I. Defeasances; J. Release, substitution, or sale of property securing repayment of the Series 2008 Bonds; 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 10.1 of this Ordinance by the time required by such Section. 29 HOU:2770558.4 ! I { I Section 10.3. 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 Series 2008 Bonds within the meaning of the Rule, except that the City in any event will give the notice required by Section 10.2 of any Series 2008 Bond 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 Owners and beneficial owners of the Series 2008 Bonds, 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 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 Series 2008 Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE OWNER OR BENEFICIAL OWNER OF ANY SERIES 2008 BOND 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 this 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 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, but only if (1) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell Series 2008 Bonds in the primary offering of the Series 2008 Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such i amendment, as well as such changed circumstances, and (2) either (a) the Owners 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 Series 2008 Bonds consent to such amendment or (b) a person or entity that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the Owners and beneficial owners of the Series 2008 Bonds. If the City so amends 30 HOU:2770558.4 the provisions of this Article, it shall include with any amended financial information or operating data next provided in accordance with Section 10.1 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 prevent an underwriter from lawfully purchasing or selling Series 2008 Bonds in the primary offering of the Series 2008 Bonds. Section 10.4. Definitions. As used in this Article, the following terms have the meanings ascribed to such terms below: • "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 XI MISCELLANEOUS Section 11.1. Related Matters. In order that the City shall satisfy, in a timely manner, all of its obligations under the Ordinance, the Mayor, the City Secretary and other appropriate officers and agents of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for issuance and delivery of the Series 2008 Bonds, including executing by manual or facsimile signature and delivering on behalf of the City all certificates, L- consents, receipts, requests, notices, investment agreements and other documents as may be reasonably necessary to satisfy the City's obligations under the Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of such Ordinance. If requested by the Attorney General of Texas or his representatives, the Mayor may authorize such ministerial changes in the written text of this Ordinance as are necessary to obtain the Attorney General's approval and as he determines are consistent with the intent and purposes of this Ordinance, which determination shall be final. Section 11.2. 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 unenforceability of such Section, paragraph, clause or provision shall not affect any of the remaining provisions of this Ordinance. 31 HOU:2770558.4 � I Section 11.3. 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 the City Hall of the City for the time required by law preceding this meeting, as required by the Open Meetings Act, Chapter 551, Texas Government Code, as amended, 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 11.4. Governing Law. This Ordinance shall be construed in accordance with and governed by the laws of the State of Texas. Section 11.5. Repealer. All ordinances, or parts thereof inconsistent herewith, are hereby repealed to the extent of such inconsistency. Section 11.6. Emergency. It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Series 2008 Bonds 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 11.7. Effective Date. This Ordinance shall be in force and effect from and after its passage on the date shown below. • 32 HOU:2770558.4 A SED AND APPROVED on first reading pursuant to Sectior.3.10 of the City Charter �/fr this r l , 2008. Mayor, City of Pearland, Texas ATTEST: Se tary, Ci►; of land, Texas ,�'• (SEAS' tl: Exhibit.A Form of Bond Exhibit B Paying Agent/Registrar Agreement Exhibit C Official Notice of Sale Exhibit D Preliminary Official Statement -- Exhibit E Official Statement . . Exhibit F Description of Annual Financial Information S-1 HOU:2770558.2 EXHIBIT A FORM OF BOND United States of America State of Texas NUMBER DENOMINATION IR- $ �,- REGISTERED REGISTERED CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS SERIES 2008 2INTEREST RATE: DATED DATE: 2MATURITY DATE: 2CUSIP: March 1, 2008 September 1, REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS 3THE CITY OF PEARLAND, TEXAS (the "City"), a municipal corporation duly incorporated under the laws of the State of Texas, for value received hereby promises to pay, but solely from certain Net Revenues as hereinafter provided, to the Registered Owner identified above or registered assigns, on the Maturity Date specified above, upon presentation and surrender of this Series 2008 Bond at the designated payment office of Wells Fargo Bank, N.A. in Houston, Texas (the "Paying Agent/Registrar"), the principal amount identified above, 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 the United States of America, and to pay, solely from such Net Revenues, interest thereon at the rate described below, calculated on the basis of a 360- day year, composed of twelve 30-day months, from the later of the Dated Date identified above 1 Initial Bond shall be numbered T-1. 2 Omitted from Initial Bond. 3 The first sentence of the Initial Bond shall read as follows: "THE CITY OF PEARLAND, TEXAS (the "City"), a municipal corporation duly incorporated under the laws of the State of Texas,for value received hereby promises to pay,but solely from certain Net Revenues as hereinafter provided, to the Registered Owner identified above or registered assigns, on the Maturity Date specified below,upon presentation and surrender of this Series 2008 Bond at the designated payment office of Wells Fargo Bank, N.A. in Houston, Texas (the "Paying Agent/Registrar"), the principal amount set forth in the following schedule: [Insert information regarding years of maturity, principal amounts and interest rates from Section 3.3 of the Ordinance], 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 the United States of America, and to pay, solely from such Net Revenues, interest thereon at the rate described above, calculated on the 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." I A-1 HOU:2770558.4 or the most recent interest payment date to which interest has been paid or duly provided for. Interest on this Series 2008 Bond is payable by check sent by United States mail, first class, postage prepaid, payable on March 1 and September 1, beginning on September 1, 2008, mailed to the Registered Owner as shown on the books of registration kept .by the Paying Agent/Registrar as of the fifteenth calendar day of the month next preceding each interest payment date. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Series 2008 Bond at the principal corporate trust office of the Paying Agent/Registrar. THIS SERIES 2008 BOND IS ONE OF A DULY AUTHORIZED SERIES OF BONDS - (the "Series 2008 Bonds") aggregating $14,950,000, issued for the purpose of constructing certain repairs, improvements, additions and extensions to the City's waterworks and sanitary sewer system and payment of costs of issuance of the Series 2008 Bonds, all under and pursuant to Chapter 1502, Texas Government Code, as amended, and an ordinance adopted bythe Cityon PP February 11, 2008 (the "Ordinance"), and other applicable law. Capitalized terms used herein without definition are defined in the Ordinance. THIS SERIES 2008 BOND AND THE SERIES OF WHICH IT IS A PART are special obligations of the City that are payable from and are equally and ratably secured by a first lien on • and pledge of the Net Revenues collected and received by the City from the operation and ownership of the City's water and sewer system as defined and provided in the Ordinance, which Net Revenues are required to be set aside and pledged to the payment of the Outstanding Bonds, as described in the Ordinance, the Series 2008 Bonds, and all Additional Bonds issued on a parity therewith, in the Interest and Sinking Fund and the Reserve Fund maintained for the payment of all such Bonds, all as more fully described and provided for in the Ordinance. THIS SERIES 2008 BOND AND THE SERIES OF WHICH IT IS A PART ARE PAYABLE SOLELY FROM SUCH NET REVENUES AND NEITHER THE STATE, NOR ANY POLITICAL SUBDIVISION OR AGENCY OF THE STATE, SHALL BE OBLIGATED TO PAY THE SAME OR THE INTEREST THEREON AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE, THE CITY, OR ANY OTHER POLITICAL CORPORATION, SUBDIVISION OR AGENCY THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2008 BONDS. THE OWNER HEREOF SHALL NEVER HAVE THE RIGHT TO DEMAND PAYMENT OF THIS SERIES 2008 BOND OUT OF ANY FUNDS RAISED OR TO BE RAISED BY AD VALOREM TAXATION. REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is on file in the office of the Paying Agent/Registrar, and to all of the provisions of which the Registered Owner of this bond by the acceptance hereof hereby assents, for definitions of terms; the • description of and the nature and extent of the security for the Series 2008 Bonds; the priority for the application and use of the income and revenues of the System; the Net Revenues pledged to• the payment of the principal of and interest on the Series 2008 Bonds; the nature and extent and manner of enforcement of the lien and pledge securing the payment of the Series 2008 Bonds; the terms and conditions for the issuance of additional revenue obligations, including Additional Bonds; the terms and conditions for amending the Ordinance; the terms and conditions relating to the transfer or exchange of this bond; the rights, duties, and obligations of the City and the A-2 HOU:2770558.4 • Paying Agent/Registrar; the terms and provisions upon which the liens, pledges, charges and covenants made therein may be discharged at or prior to the maturity of this bond, and deemed to be no longer Outstanding thereunder; and for the other terms and provisions thereof. Capitalized terms used herein,unless otherwise defined,have the same meanings assigned in the Ordinance. THE CITY RESERVES THE RIGHT, at its option, to redeem the Series 2008 Bonds L maturing on September 1, 2019, and thereafter prior to their scheduled maturities, in whole or in part, in integral multiples of $5,000 on September 1, 2018, or any date thereafter at par plus accrued interest on the principal amounts called for redemption to the date fixed for redemption. . THE SERIES 2008 BONDS MATURING on September 1 in the years 2026, 2028, 2032 and 2034 (the "Term Bonds") 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 Series 2008 Bonds or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Bonds Maturing September 1,2026 September 1,2025 • $510,000 - September 1,2026(maturity) 540,000 Term Bonds Maturing September 1,2028 September 1,2027 $560,000 I September 1,2028(maturity) 595,000 Term Bonds Maturing September 1,2032 September 1,2029 $600,000 September 1,2030 580,000 — September 1,2031 560,000 September 1,2032(maturity) 1,890,000 Term Bonds Maturing September 1,2034 September 1,2033 $1,980,000 September 1,2034(maturity) 2,080,000 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before July 15 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before July 15 of such year and which have not been made the basis for a previous reduction. • NOT LESS THAN. THIRTY (30) DAYS prior to a redemption date, a notice of redemption will be sent by U.S. mail, first class postage prepaid, in the name of the City to each registered owner of a Series 2008 Bond to be redeemed in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing. When Series 2008 Bonds or portions thereof have been called for redemption and due provision has been made to redeem the same, the amounts so redeemed shall be payable solely from the funds provided for redemption, • and interest which would otherwise accrue on the Series 2008 Bonds or portions thereof called for redemption shall terminate on the date fixed for redemption. A-3 HOU:2770558.4 l�l (_ 4THIS SERIES 2008 BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Resolution unless this Bond is authenticated by the Paying Agent/Registrar by due execution of the authentication certificate endorsed hereon. THIS SERIES 2008 BOND IS TRANSFERABLE only upon presentation and surrender at the designated payment office of the Paying Agent/Registrar, duly endorsed for transfer or accompanied by an assignment duly executed by the Registered Owner or his authorized representative, subject to the terms and conditions of the Ordinance. THIS SERIES 2008 BOND IS EXCHANGEABLE at the corporate trust office of the Paying Agent/Registrar for bonds in the principal amount of $5,00,0 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 Series 2008 Bond called for redemption in whole or in part during the 45 day period immediately prior to the date fixed for redemption. THE REGISTERED OWNER of this..Series 2008 Bond, by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. THE CITY has covenanted in the Ordinance that it will at all times provide a legally qualified Paying Agent/Registrar for the Series 2008 Bonds and will cause notice of any change of Paying Agent/Registrar to be mailed to each Registered Owner. THE CITY HAS RESERVED THE RIGHT TO ISSUE ADDITIONAL PARITY BONDS, subject to the restrictions contained in the Ordinance, which may be equally and ratably payable from, and secured by a first lien on and pledge of, the Net Revenues in the same manner and to the same extent as the Outstanding Bonds, which includes this Series 2008 Bond and the series of which it is a part. IT IS HEREBY DECLARED AND REPRESENTED that this Series 2008 Bond has been duly and validly issued and delivered; that all acts, conditions, and things required or proper to be performed, to exist, and to be done precedent to or in the issuance and delivery of this Series 2008 Bond have been performed, have existed, and have been done in accordance with law; that the Series 2008 Bonds do not exceed any statutory limitation; and that provision has been made for the payment of the principal of and interest on this Series 2008 Bond and all of the Series 2008 Bonds by the creation of the aforesaid lien on and pledge of the Net Revenues. IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and has caused this Series 2008 Bond to be executed by the Mayor and countersigned by the City Secretary by manual, lithographed, or printed facsimile signatures. 4 In the Initial Bond,this paragraph shall read as follows: "THIS SERIES 2008 BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Resolution unless this Bond is registered by the Comptroller of Public Accounts of the State of Texas by registration certificate attached or affixed hereto." A-4 HOU:2770558.4 CITY OF PEARLAND, TEXAS Mayor (SEAL) COUNTERSIGNED City Secretary . • • A-5 HOU:2770558.4 • * * * * * [FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE] The following form of Comptroller's Registration Certificate shall be attached or affixed to each of the Series 2008 Bonds initially delivered. THE STATE OF TEXAS REGISTER NO. OFFICE OF THE COMPTROLLER n s OF PUBLIC ACCOUNTS I hereby certify that there is on file and of record in my office a certificate of the Attorney General of the State of Texas to the effect that this bond and the proceedings for the issuance hereof have been examined by him as required by law, that he finds that it has been issued in conformity with the Constitution and laws of the State of Texas and that it is a valid and binding special obligation of the City of Pearland, Texas, payable from the revenues and other funds pledged to its payment by and in the proceedings authorizing the same, and I do further certify that this bond has this day been registered by me. WITNESS MY SIGNATURE AND SEAL OF OFFICE this Comptroller of Public Accounts of the State of Texas [SEAL] A-6 f HOU:2770558.4 [FORM OF AUTHENTICATION CERTIFICATE] The following form of Authentication Certificate shall appear on each of the Series 2008 Bonds. ?Y AUTHENTICATION CERTIFICATE Registration Date: This bond is one of the Series 2008 Bonds described in and delivered pursuant to the within-mentioned Ordinance; and, except for the Series 2008 Bonds initially delivered, this bond has been issued in conversion of and exchange for or replacement of a bond, bonds or a portion of a bond or bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. WELLS FARGO BANK,N.A. By:Authorized Signature: Date of Authentication: • • • zJ A-7 HOU:2770558.4 i ! [FORM OF ASSIGNMENT] The following form of assignment shall appear on each of the Series 2008 Bonds. ASSIGNMENT For value received, the undersigned hereby sells, assigns, and transfers unto (Social Security or Other Identifying Number) (Print or type name, address, and zip code of transferee) the within bond and hereby irrevocably constitutes and appoints attorney to transfer said bond on the books kept for registration thereof,with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE: The signature must be guaranteed NOTICE: The signature on this assignment by a commercial bank or a member firm of a must correspond with the name of the national securities exchange. Notarized or Registered Owner as it appears on the face of witnessed signatures are not acceptable. the within bond in every particular, without alteration or enlargement or any change whatever. * * * * STATEMENT OF INSURANCE Financial Security Assurance Inc. ("Financial Security"),New York,New York, has delivered its municipal bond insurance policy with respect to the scheduled payments due of principal of and interest on this Bond to Wells Fargo Bank,N.A, Houston, Texas, or its successor, as paying agent for the Bonds (the "Paying Agent"). Said Policy is on file and available for inspection at the principal office of the Paying Agent and a copy thereof maybe obtained from Financial Security or the Paying Agent. A-8 HOU:2770558.4 EXHIBIT B PAYING AGENT/REGISTRAR AGREEMENT See Tab3 • • • HOU:2770558.4 r- • EXHIBIT C • TERMS AND CONDITIONS OF MUNICIPAL BOND INSURANCE POLICY AND DEBT SERVICE RESERVE FUND POLICY • • • • • • HOU:2770558.4 EXHIBIT D OFFICIAL NOTICE OF SALE AND PRELIMINARY OFFICIAL STATEMENT See Tab 4 7. • � I . i 1 �-1 t j I I I HOU:2770558.4 EXHIBIT E • OFFICIAL STATEMENT See Tab 5 HOU:2770558.4 • r I EXHIBIT F DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Article X of this Ordinance: Annual Financial Statements and Operating Data The financial information and operating data with respect to the City to be provided annually in accordance with such Article are as specified below: 1. The financial statements of the City for the most recently concluded fiscal year. r-, Accounting Principles The accounting principles referred to in Article X are the accounting principles described in the notes to the financial statements referred to in paragraph 1 above. . HOU:2770558.4 PAYING AGENT/REGISTRAR AGREEMENT THIS PAYING AGENT/REGISTRAR AGREEMENT dated as of February 11, 2008 - (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., 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 Water and Sewer System Revenue Bonds, Series 2008 (the `Bonds"), in the aggregate principal amount of$14,950,000 to be issued as fully registered bonds; S__I WHEREAS, all things necessary to make the Bonds 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 Bonds, in accordance with the terms thereof, and under which the Bank will act as Registrar for the Bonds; 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 Bonds, to pay to the Registered Owners of the Bonds, in accordance with the terms and provisions of this Agreement and the ordinance authorizing the issuance of the Bonds (the "Ordinance"), the • principal of, redemption premium, if any, and interest on all or any of the Bonds. The Issuer hereby appoints the Bank as Registrar with respect to the Bonds. The Bank hereby accepts its appointment, and agrees to act as Paying Agent and Registrar with respect to the Bonds. r HOU:2773259.1 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., a commercial bank duly organized and existing under the laws of the United States of America. "Bond" or "Bonds" means any one or all of the "City of Pearland, Texas Water and • Sewer System Revenue Bonds, Series 2008" 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 11, 2008,pursuant to which the Bonds 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 Bond 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:2773259.1 ARTICLE THREE DUTIES OF THE BANK Section 3.01. Initial Delivery of the Bonds. The Bonds 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 will, on the date of initial delivery, exchange the Bonds initially delivered for Bonds 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 Bond 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 Bonds and the timely exchange, --' replacement and registration of transfer of the Bonds 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 comply with the terms of Section 1203.021, Texas Government Code, as amended, and more specifically agrees also to maintain books of registration for the Bonds at the City Secretary's office in City of Pearland, Texas, which books of registration may be a copy of the register which shall be kept current by the Bank. • Section 3.04. Unauthenticated Bonds. The Issuer shall provide an adequate inventory of unauthenticated Bonds to facilitate, transfers. The Bank covenants that it will maintain such unauthenticated Bonds in safekeeping and will use reasonable care in maintaining such Bonds 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. i 3 HOU:2773259.1 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 Bonds and the books of registration for 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 Bonds 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 Bonds. All Bonds 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 i 1 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 Bonds previously authenticated and delivered which the Issuer may have acquired in any manner whatsoever, and i- all Bonds so delivered shall be promptly canceled by the Bank. All canceled Bonds 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. 4 HOU:2773259.1 U 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 Bonds. 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. Any money deposited with the Bank for the payment of the principal of or interest on any Bonds 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 Bonds by virtue of actions taken in compliance with the foregoing provision. ARTICLE FOUR MISCELLANEOUS PROVISIONS Section 4.01. May Own Bonds. The Bank, in its individual or any other capacity, may become the owner or pledgee of Bonds with the same rights it would have if it were not the Paying Agent and Registrar for the Bonds. 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 j ! 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. 5 HOU:2773259.1 it , { 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. 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 Bonds. Section 4.10. Term and Termination. This Agreement will terminate on the date of the final payment by the Bank issuing its checks for the final payment of principal and interest on the Bonds. 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, Bonds and all books and records pertaining to the Bank's role as Paying Agent and Registrar with respect to the Bonds, including, but not limited to,the books of registration. 6 HOU:2773259.1 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,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, at the expense of the Issuer, 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 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 Ordinance or to act as trustee for such Registered Owner. _^I 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. 7 HOU:2773259.1 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CITY OF PEARLAND, T S By: G' eb_it Mayor, City of Pearland, Texas ADDRESS: 3519 Liberty Drive Pearland, Texas 77581 ATTEST: d/ • Se tart', Citif P./land, Texas (SEAL)•. p;Rtgy IT( ,••� WELLS FARGO BANK,N.A. By. Title: ADDRESS: 1021 Main Street, Suite 2403 Houston, Texas 77002 ATTEST: By: Title: 11 (SEAL) HOU:2773259.1 • IN WITNESS WHEREOF,the parties hereto have executed this Agreement as of the day and year first above written. CITY OF PEARLAND, TEXAS 1 By: • Mayor, City of Pearland, Texas ADDRESS: 3519 Liberty Drive Pearland, Texas 77581 ATTEST: City Secretary, City of Pearland, Texas (SEAL) • WELLS FARGO BANK,N.A. By: Title: - T ADDRESS: 1021 Main Street, Suite 2403 • Houston, Texas 77002 ATTEST: By:. Title: r GR G STITES a N(I?PRESIDENT : 00064 4,4 NAP t \ SEAL ,,.: 4L tfP HOU:2773259.1 EXHIBIT A Fee Schedule HOU:2773259.1 1 ° Gregory M. Hasty Wells Fargo Bank WELLS Corporate Trust Services FARGO 1445 Ross Avenue, 2nd Floor Dallas, Texas 75202 Tel: (214) 740-1548 Fax: 1-866-303-5281 SCHEDULE OF FEES City of Pearland Water and Sewer System Revenue Bonds, Series 2008 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 expenses 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-February 26, 2008 Vice President/Business Development Wells Fargo Bank (214) 740-1548 Pipeline ID#58514 OFFICIAL STATEMENT DATED FEBRUARY 11,2008 In the opinion of Bond Counsel, interest on the Bonds 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 consequences. NEW ISSUE: BOOK-ENTRY-ONLY Ratings: Moody's Investors Service,Inc. "Aaa" Standard&Poor's Ratings Services "AAA" $14,950,000 CITY OF PEARLAND,TEXAS (A political subdivision of the State of Texas located within Brazoria,Fort Bend and Harris Counties) WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008 Dated: March 1,2008 Due: September 1,as shown below Principal of and interest on the$14,950,000 City of Pearland,Texas,Water and Sewer System Revenue Bonds,Series 2008(the"Bonds") are payable by Wells Fargo Bank,N.A.,Houston,Texas,the paying agent/registrar(the"Paying Agent/Registrar"). Interest on the Bonds is payable on March 1 and September 1 of each year, commencing September 1, 2008 and thereafter until maturity or prior redemption. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC")pursuant to the Book-Entry-Only System described herein. The Bonds will be issued in denominations of$5,000 of principal amount or any integral multiple thereof. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of the Bonds will be payable by the Paying Agent/Registrar to Cede&Co.,which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See "THE BONDS— Book-Entry-Only System" herein. The Bonds maturing on September 1,2019 and thereafter are subject to redemption prior to their scheduled maturities on September I,2018 or any date thereafter, at the option of the City. Upon redemption the Bonds will be payable at a price equal to the principal amount thereof plus accrued interest to the date of redemption. See"THE BONDS-Description"and"THE BONDS-Redemption Provisions." The Bonds are special obligations of the City of Pearland,Texas(the"City")and are payable solely from a first lien on and pledge of the Net Revenues(hereinafter defined)of the City's waterworks and sanitary sewer system. See"THE BONDS—Source of Payment." The Bonds are authorized by an ordinance (the "Ordinance") approved by the City Council. Proceeds of the Bonds will be used for waterworks and sanitary sewer system improvements and to pay the costs of issuance of the Bonds. See "THE BONDS — Use of Proceeds." The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Bonds by FINANCIAL I '.1 FS1 SECURITY ASSURANCE INC. SEE"BOND INSURANCE." PRINCIPAL AMOUNTS,MATURITIES,INTEREST RATES,PRICES AND CUSIP NUMBERS S5,055,000 Serial Bonds Initial Initial Maturity Principal Interest Reoffering Maturity Principal Interest Reoffering (September 1) Amount Rate Yieldtal CUSIP(b) (September 1) Amount Rate Yiele CUSIP(b) 2009 $150,000 3.250% 2.000% 704883HL4 2017 $315,000 4.500% 3.430% 704883HU4 2010 190,000 3.250 2.170 704883HM2 2018(c) 340,000 4.500 3.600 704883HV2 2011 205,000 3.250 2.420 704883HN0 2019(c) 370,000 4.500 3.780 704883HW0 2012 225,000 3.250 2.640 704883HP5 2020(c) 395,000 4.500 3.950 704883HX8 2013 235,000 3.250 2.810 704883HQ3 2021(c) 420,000 4.500 4.080 704883HY6 2014 255,000 4.500 2.970 704883HR1 2022(c) 440,000 4.125 4.180 704883HZ3 2015 275,000 4.500 3.100 704883HS9 2023(c) 460,000 4.200 4.260 704883JA6 2016 290,000 4.500 3.300 704883HT7 2024(c) 490,000 4.300 4.340 704883JB4 S9,895,000 Term Bonds $1,050,000 Term Bond Due September 1,2026(b)(c)(d)Interest Rate 5.000% (Price$105.706)CUSIP Number 704883 JC2 $1,155,000 Term Bond Due September 1,2028(b)(c)(d)Interest Rate 5.000% (Price$104.991)CUSIP Number 704883 JDO $3,630,000 Term Bond Due September 1,2032(b)(c)(d)Interest Rate 5.000% (Price$104.204)CUSIP Number 704883 JE8 $4,060,000 Term Bond Due September 1,2034(b)(c)(d)Interest Rate 4.500%(Price$97.431)CUSIP Number 704883 JF5 (a) The initial yields will be established by and are the sole responsibility of the Purchasers (hereinafter defined), and may subsequently be changed. (b) CUSIP numbers have been assigned to the Bonds by Standard&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 Bonds. Neither the City, the Financial Advisor nor the Purchasers are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Bonds maturing on September 1,2018 and thereafter,are subject to redemption,at the option of the City on September 1,2017,at the par value thereof plus accrued interest to the date of redemption. See"THE BONDS—Redemption Provisions." (d) Subject to mandatory redemption in the years and in the amounts set forth herein under the caption"THE BONDS—Redemption Provisions —Mandatory Redemption." The Bonds 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 to the City, as to the validity of the issuance of the Bonds under the Constitution and the laws of the State of Texas. See "LEGAL MATTERS." Delivery of the Bonds is expected to be on or about March 18,2008. USE OF INFORMATION IN OFFICIAL STATEMENT 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. NEITHER THE CITY, THE FINANCIAL ADVISOR, THE PURCHASERS NOR BOND COUNSEL MAKE j ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN I. THIS OFFICIAL STATEMENT REGARDING DTC OR ITS BOOK-ENTRY-ONLY SYSTEM. :t -; THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND IS "' NOT INTENDED AS A SUMMARY OF THIS OFFERING. INVESTORS SHOULD READ THIS ENTIRE }`' OFFICIALESSENTIAL STATEMENTTOMAKING, INCLUDINGANINFORMED THEINVESTMENT ATTACHEDDECISION.APPENDICES, TO OBTAIN INFORMATION 4, f' Other than with respect to information concerning Financial Security Assurance Inc. ("Financial Security") contained under the caption "BOND INSURANCE" and APPENDIX D "Specimen of Municipal Bond Insurance Policy"herein,none of the information in this Official Statement has been supplied or verified by Financial Security Wand Financial Security makes no representation or warranty, express or implied, as to (i) the accuracy or ,;L completeness of such information; (ii)the validity of the Bonds, or(iii)the tax exempt status of the interest on the Bonds. r j i i -i- TABLE OF CONTENTS USE OF INFORMATION IN OFFICIAL Water and Sewer Rates 18 STATEMENT i Historical Operations of the System 19 INTRODUCTORY STATEMENT 3 SELECTED PROVISIONS OF THE REVENUE SALE AND DISTRIBUTION OF THE BONDS 3 BOND ORDINANCE 19 Sale of the Bonds 3 Definitions 19 Prices and Marketability 3 Pledge and Source of Payment 20 Securities Laws 3 Rates and Charges 20 Municipal Bond Ratings 4 Flow of Funds 21 BOND INSURANCE 4 Reserve Fund 21 Bond Insurance Policy 4 Additional Bonds 22 Financial Security Assurance Inc. 4 ADMINISTRATION OF THE CITY 23 OFFICIAL STATEMENT SUMMARY 5 Mayor and City Council 23 INTRODUCTION 7 Administration 23 PLAN OF FINANCING 7 Consultants 24 Purpose 7 LEGAL MATTERS 24 THE BONDS 7 Legal Opinions 24 Description 7 No-Litigation Certificate 24 Redemption Provisions 7 No Material Adverse Change 25 Notice of Redemption 8 TAX EXEMPTION 25 Paying Agent/Registrar 9 TAX TREATMENT OF ORIGINAL ISSUE Transfer,Exchange and Registration 9 DISCOUNT AND PREMIUM BONDS 26 Record Date for Interest Payment 9 Discount Bonds 26 Book-Entry-Only System 10 Premium Bonds 27 Source of Payment 11 CONTINUING DISCLOSURE OF Authority for Issuance 12 INFORMATION 27 Use of Proceeds 12 Annual Reports 28 Future Debt 12 Material Event Notices 28 Legal Investments and Eligibility to Secure Availability of Information From NRMSIRs Public Fund in Texas 12 and SID 28 Remedies in the Event of Default 13 Limitations and Amendments 29 INVESTMENT AUTHORITY AND Compliance With Prior Undertakings 29 INVESTMENT OBJECTIVES OF THE CITY 13 FINANCIAL ADVISOR 29 Legal Investments 13 GENERAL CONSIDERATIONS 29 Investment Policies 14 Financial Guaranty Industry Disclosure 29 Additional Provisions 15 Sources and Compilation of Information 30 Current Investments 15 Forward-Looking Statements Disclaimer 30 CITY REVENUE DEBT 16 Certification of the Official Statement 30 Debt Statement 16 Updating of Official Statement 31 Revenue Bond Debt Service Schedule 17 THE SYSTEM 18 Description of the System 18 APPENDIX A-Economic and Demographic Characteristics of the City APPENDIX B-Audited Financial Statements of the City APPENDIX C-Form of Bond Counsel Opinion APPENDIX D-Specimen of Municipal Bond Insurance Policy -ii- INTRODUCTORY STATEMENT Information contained in this Official Statement, including APPENDIX B, has been obtained from the City of Pearland,Texas(the"City")in connection with the offering by the City of its$14,950,000 Water and Sewer System Revenue Bonds, Series 2008(the"Bonds")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 BONDS Sale of the Bonds After requesting competitive bids for the Bonds, the City has accepted the bid resulting in the lowest net interest cost,which bid was tendered by a syndicate composed of Robert W. Baird&Co., Inc.("Purchaser")to purchase the Bonds bearing the interest rates shown on the cover page hereof at a price of the par value thereof, plus accrued interest to the date of delivery. The net effective interest rate on the Bonds was 4.685052%as calculated pursuant to Chapter 1204,Texas Government Code.. Prices and Marketability The delivery of the Bonds is conditioned upon the receipt by the City of a certificate executed and delivered by the Purchasers on or before the date of delivery of the Bonds stating the prices at which a substantial amount of the Bonds 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 Bonds after a bona fide offering of the Bonds is made by the Purchasers at the yields specified on the cover page. Information concerning reoffering yields or prices is the responsibility of the Purchasers. The prices and other terms respecting the offering and sale of the Bonds may be changed from time to time by the Purchasers after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering price, including sales to dealers who may sell the Bonds into investment accounts. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE PURCHASERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS 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 Bonds 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 Bonds have not been registered or qualified under the Securities Act,of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be offered, sold or otherwise transferred. This- disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration 'or qualification provisions in such jurisdictions. -3- Municipal Bond Ratings _ In connection with the sale of the Bonds, 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 Bonds with the understanding that upon delivery of the Bonds, a municipal bond insurance policy insuring the timely payment of the principal of and interest on the Bonds will be issued by Financial Security Assurance Inc. Moody's and S&P have assigned underlying ratings of "A2" and "A" respectively on the Bonds. 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 upward, 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 the ratings may have an adverse effect on the market price of the Bonds. BOND INSURANCE Bond Insurance Policy Concurrently with the issuance of the Bonds, Financial Security Assurance Inc. ("Financial Security")will issue its Municipal Bond Insurance Policy for the Bonds (the "Policy"). The Policy guarantees the scheduled payment of principal of and interest on the Bonds when due as set forth in the form of the Policy included as an exhibit to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Financial Security Assurance Inc. Financial Security is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. ("Holdings"). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian corporation, and of Dexia Credit Local, a direct wholly-owned subsidiary of Dexia, S.A. Dexia, S.A.,through its bank subsidiaries, is primarily engaged in the business of public finance,banking and asset management in France, Belgium and other European countries. No shareholder of Holdings or Financial Security is liable for the obligations of Financial Security. At September 30, 2007, Financial Security's combined policyholders' surplus and contingency reserves were approximately $2,691,965,000 and its total net unearned premium reserve was approximately $2,201,808,000 in accordance with statutory accounting principles. At September 30, 2007, Financial Security's consolidated shareholder's equity was approximately $2,975,654,000 and its total net unearned premium reserve was approximately$1,721,678,000 in accordance with generally accepted accounting principles. The consolidated financial statements of Financial Security included in, or as exhibits to, the annual and quarterly reports filed after December 31, 2006 by Holdings with the Securities and Exchange Commission are hereby incorporated by reference into this Official Statement. All financial statements of Financial Security included in, or as exhibits to, documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d)of the Securities Exchange Act of 1934 after the date of this Official Statement and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement. Copies of materials incorporated by reference will be provided upon request to Financial Security Assurance Inc.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department(telephone(212)826-0100). The Policy does not protect investors against changes in market value of the Bonds, which market value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. Financial Security makes no representation regarding the Bonds or the advisability of investing in the Bonds. Financial Security makes no representation regarding the Official Statement, nor has it participated in the preparation thereof, except that Financial Security has provided to the Issuer the information presented under this caption for inclusion in the Official Statement. -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, Fort Bend and Harris Counties, Texas. See "ADMINISTRATION OF THE CITY" and "APPENDIX A - Economic and Demographic Characteristics of the City"herein. The Bonds $14,950,000 Water and Sewer System Revenue Bonds, Series 2008 (the "Bonds"), are dated March 1, 2008. The Bonds include $5,055,000 principal amount of serial bonds maturing September 1 in each of the years 2009 through 2024, inclusive (the "Serial Bonds") and $9,895,000 principal amount of term bonds maturing September 1 in the years 2026, 2028, 2032 and 2034 (the "Term Bonds"). The Serial Bonds and the Term Bonds are collectively referred to herein as the"Bonds." See"THE BONDS-Description." Other Characteristics The Bonds are issued in fully registered form in integral multiples of $5,000. The Bonds maturing on and after September 1, 2018, are subject to redemption, at the option of the City, on September 1, 2017 or any date thereafter. See "THE BONDS - Redemption Provisions." Term Bonds are also subject to mandatory sinking fund redemption as described under the heading"THE BONDS—Redemption Provisions." Paying Agent/Registrar The initial paying agent/registrar is Wells Fargo Bank,N.A., Houston, Texas, (the "Paying Agent/Registrar"). See "THE BONDS - Paying Agent/Registrar." Source of Payment Principal of and interest on the Bonds are payable from a first lien on and pledge of the Net Revenues (hereinafter defined) from the operations of the City's waterworks and sanitary sewer system on a parity with the City's outstanding water and sewer revenue bonds. The Bonds are not a charge upon any other income or revenues of the City, and shall never constitute an indebtedness or pledge of the general credit or taxing powers of the City. See "THE BONDS - Source of Payment." Use of Proceeds Proceeds of the Bonds will be used for waterworks and sanitary sewer system improvements and to pay the costs of issuance of the Bonds. See"THE BONDS-Use of Proceeds." Municipal Bond Insurance Financial Security Assurance Inc.("Financial Security"). See"BOND INSURANCE"and"MUNICIPAL BOND RATINGS." Ratings Moody's Investors Service,Inc.(Financial Security) "Aaa" Standard&Poor's Ratings Group(Financial Security) "AAA" See"MUNICIPAL BOND RATINGS." Moody's Investors Service,Inc.(Underlying) "A2" Standard&Poor's Ratings Group(Underlying) "A" Payment Record The City has never defaulted on the timely payment of principal of and interest on its indebtedness. -5- -Selected Financial Information- (Unaudited) The Revenue Bonds Outstanding Revenue Supported Bonds(as of February 1,2008) $79,180,000 Plus the Bonds 14,950,000 Total Revenue Supported Debt $94,130,000 Reserve Fund (a) Coverage Based on Revenue Available for Debt Service(as of September 30,2007): Average Annual Debt Service of$5,957,196(2008-2034) 1.43 x Maximum Annual Debt Service of$6,529,838(2031) 1.31 x Water Connections(as of January 1,2008) 26,513 Sewer Connections(as of January 1,2008) 25,396 Summary of Revenues Available for Debt Service: Fiscal Year Ended September 30 2007(c) 2006 2005 2004 2003 Revenues $20,676,958 $15,004,397 $11,742,030 $12,310,134 $13,904,665(b) Expenditures 12,151,436 11,227,791 8,103,681 7,773,695 6,281,753 Revenue Available for Debt Service $ 8,525,522 $ 3,776,606 $ 3,638,349 $ 4,536,439 $ 7,622,912 (a) The Reserve Fund in the approximate amount of$5,957,196 is provided by various debt service reserve fund surety policies issued in connection with the issuance of various series of water and sewer revenue bonds on parity with the Bonds. Certain providers of these surety policies,excluding Financial Security,have recently experienced ratings downgrades. See"GENERAL CONSIDERATIONS—Financial Guaranty Industry Disclosure." (b) Includes Impact Fees. (c) Unaudited. -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")of its Water and Sewer System Revenue Bonds,Series 2008(the"Bonds"). The Bonds are issued pursuant to the Texas Constitution,the general laws of the State of Texas,particularly Chapter 1502,Texas Government Code,as amended,and an ordinance authorizing issuance of the Bonds(the"Ordinance") adopted by the City Council of the City(the"Council"). There follows in this Official Statement descriptions of the Bonds, 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. PLAN OF FINANCING Purpose The Bonds are being issued for waterworks and sanitary sewer system improvements and to pay the costs of issuance related to the Bonds(see"THE BONDS—Sources and Uses of Funds"herein). THE BONDS Description The Bonds are dated March 1, 2008, bear interest from such date at the stated interest rates indicated on the cover page of this Official Statement, which interest is payable September 1, 2008, and each March 1 and September 1 thereafter until the earlier of maturity or prior redemption. The Bonds are issued in fully registered form in denominations of$5,000 each or any multiple thereof. Principal of the Bonds is payable at the principal payment office of Wells Fargo Bank, N.A., Houston, Texas (the "Paying Agent/Registrar"). Interest on the Bonds 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. See"THE BONDS-Paying Agent/Registrar." The definitive Bonds will be initially registered only in the name of Cede& Co., as nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede& Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See"THE BONDS—Book-Entry- Only System"herein. Redemption Provisions -Optional Redemption- The Bonds maturing on September 1, 2018 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on September 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 Bonds are to be redeemed,the City may select the maturities of Bonds to be redeemed. If less than all the Bonds of any maturity are to be redeemed,the Paying Agent/Registrar(or DTC while the Bonds are in Book-Entry-Only form)shall determine by lot the Bonds, or portions thereof, within such maturity to be redeemed. If an Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond(or the principal amount thereof to be redeemed)shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date,provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. -7- -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 September 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"): $1,050,000 Term Bonds Maturing on September 1,2026 Mandatory Redemption Date Principal Amount September 1,2025 $ 510,000 September 1,2026(Final Maturity) 540,000 $1,155,000 Term Bonds Maturing on September 1,2028 Mandatory Redemption Date Principal Amount September 1,2027 $ 560,000 September 1,2028(Final Maturity) 595,000 $3,630,000 Term Bonds Maturing on September 1,2031 Mandatory Redemption Date Principal Amount September 1,2029 $ 600,000 September 1,2030 580,000 September 1,2031 560,000 September 1,2032(Final Maturity) 1,890,000 $4,060,000 Term Bonds Maturing on September 1,2034 Mandatory Redemption Date Principal Amount September 1,2033 $1,980,000 September 1,2034(Final Maturity) 2,080,000 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 Bonds 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 Paying Agent/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 At least 30 days prior to the date fixed for any such redemption, the City shall cause a written notice of such redemption to be deposited in the United States mail, postage prepaid, addressed to each registered owner at the address shown on the Registration Books of the Paying Agent/Registrar at the close of business on the Business Day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. UPON THE GIVING OF THE NOTICE OF REDEMPTION AND THE DEPOSIT OF THE FUNDS NECESSARY TO REDEEM SUCH BONDS, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND INTEREST ON SUCH BONDS OR PORTION THEREOF SHALL CEASE TO ACCRUE, IRRESPECTIVE OF WHETHER SUCH BONDS ARE SURRENDERED FOR PAYMENT. -8- The Paying Agent/Registrar and the City,so long as a Book-Entry-Only System is used for the Bonds,will send any notice of redemption, notice of proposed amendment to the Ordinance or other notices with respect to the Bonds only to DTC.Any failure by DTC to advise any DTC participant,or of any DTC participant or indirect participant to notify the beneficial owner,shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of,portions of the Bonds by the City will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book- Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Ordinance and will not be conducted by the City or the Paying Agent/Registrar. Neither the City nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants,or beneficial owners of the selection of portions of the Bonds for redemption(see"THE BONDS—Book-Entry-Only System"). Paying Agent/Registrar The initial Paying Agent/Registrar is Wells Fargo Bank,N.A.,Houston,Texas.In the Ordinance,the City retains the right to replace the Paying Agent/Registrar.The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class,,postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. - Transfer,Exchange and Registration In the event the Book-Entry-Only System should'be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange or transfer. Bonds may be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred or exchanged, at the'designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of$5,000 for any one maturity and for a like aggregate principal amount as the Bonds surrendered for exchange or transfer. See "THE BONDS—Book-Entry- Only System"herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. ' Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption;provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. Record Date for Interest Payment ' The record date("Record Date")or the interest payable on the Bonds on any interest payment date means the close of business on the 15th day of the preceding month. In the event of a non-payment of interest on 'a scheduled payment date,and for 30 days thereafter, a new record date for such interest payment(a"Special Record Date")will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received -9- from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date," which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to•the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. Book-Entry-Only System This section describes how ownership of the Bonds is to be transferred and how the principal of premium, if any, and interest on the Bonds are to be paid to and credited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but take 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 Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or(3)DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's.partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for the Bonds in the aggregate principal amount thereof 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 instrument 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 corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard& Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owners entered into the transaction. Transfers of ownership interest in the Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds,except in the event that use of the book-entry system for the Bonds is discontinued. -10- To facilitate subsequent transfers,all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee,Cede&Co.,or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede&Co..or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participant to whose account such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them,subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's procedures. Under its usual procedures,DTC mails an Omnibus Proxy to the County as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date(identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Bonds will be made to DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information,from the City or the Paying Agent/Registrar on payable dates 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 in the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Paying Agent 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 to DTC is the responsibility of the City, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement Of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City and the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained,Bond 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)under the circumstances set forth in the Order. In that event, Bond certificates will be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds,but(i)the rights of ownership must be exercised through DTC and the Book-Entry-Only System,and(ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. Source of Payment The Bonds are special obligations of the City payable,both as to principal and interest,solely from and secured by a first lien on and pledge of the Net Revenues (as hereinafter defined) of the City's waterworks and sanitary sewer system (the "System") after the payment of maintenance and operating expenses of the System. The Ordinance defines Net Revenues as all Gross Revenues remaining after deducting Maintenance and Operation Expenses. Gross Revenues are defined as all revenues, income and receipts of every nature (other than those specifically excluded as described in the Ordinance) derived or received by the City from the operation and ownership of the System and the interest income from the investment or deposit of money in the Revenue Fund, the Interest and Sinking Fund and the Reserve Fund. The Bonds are not a charge upon any other income or revenues of the City and -11- shall never constitute an indebtedness or pledge of the general credit or•taxing powers of the City. The Ordinance does not create a lien or mortgage on.the System and any judgment against the City may not be enforced by levy and execution against any property owned by the City, except the Net Revenues. See "SELECTED PROVISIONS OF THE REVENUE BOND ORDINANCE"and"THE BONDS-Remedies in the Event of Default." As additional security for the Bonds, a Reserve Fund has been established pursuant to the Ordinance which is to be funded in an amount equal to the average annual debt service requirements of the Bonds, and any additional bonds issued on a parity with the Bonds. The City has made application for a debt service reserve fund surety bond to be substituted for the Reserve Fund in connection with the issuance of the Bonds. See"SELECTED PROVISIONS OF THE REVENUE BOND ORDINANCE." A description of matters relating to the debt service reserve fund surety bond is attached hereto as"APPENDIX E—Reserve Fund Surety Bond." Authority for Issuance The Bonds are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas, including particularly Chapter 1502, Texas Government Code, as amended, and the provisions of the Ordinance adopted by the City Council, which specifically authorizes the sale and issuance of the Bonds. Further reference to the Ordinance is hereby made. Use of Proceeds Proceeds from the Bonds are being used to provide funds for the projects listed below. The proceeds will also be used to pay the costs of issuance of the Bonds, including the Financial Advisor's fee and Bond Counsel's fee, all of which are contingent upon the sale of the Bonds,as well as other administrative costs incurred. Projects Amount SWEC Treatment Plant Expansion $ 7,480,000 Houston Southeast Water Purification Plant 6,235,000 Cullen Water Main 950,000 SH35 North Force Main 135,000 Cost of Issuance 150,000 Total $14,950,000 Future Debt The City's capital project plan calls for the issuance of approximately $23.1 million in additional water and sewer revenue bonds over the next 3 years. Legal Investments and Eligibility to Secure Public Fund in Texas Section 1201.041 of the Public Security Procedures Act(Chapter 1201,Texas Government Code)provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies,fiduciaries,and trustees,and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas,the Public Funds Investment Act, Chapter 2256,Texas Government Code,requires that the Bonds be assigned a rating of"A"or its equivalent as to investment quality by a national rating agency. See "SALE AND DISTRIBUTION OF THE BONDS — Municipal Bond Ratings"herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. -12- Remedies in the Event of Default The Ordinance requires the City to maintain water and sewer charges sufficient to produce Net Revenues at least equal to 115%of the annual payment of debt service for such fiscal year and provides for a lien on Net Revenues in the Interest and Sinking Fund and a Reserve Fund for the benefit of the Bonds and the outstanding revenue bonds. The Ordinance does not provide any other security for the payment of the Bonds, or any express remedies in the event of default, makes no provision for acceleration of maturity of the Bonds in the event of default, and does not provide for a trustee to protect the rights of the holders of the Bonds. The Ordinance does not provide for the appointment of a trustee to represent the interests of the Bondholders 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 Bonds and, under State law, there.is no right to the acceleration of maturity of the Bonds upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Bonds could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the 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 maintain or increase water and sewer charges sufficient to produce revenues to pay principal of and interest on the Bonds as they become 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 Bonds are valid and binding obligations for all purposes according to their terms. However,the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("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 bondholders 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 Bonds are qualified with respect to the customary rights of debtors relative to their creditors and by general principles of equity which permit the exercise of judicial discretion. See "THE BONDS — Book-Entry-Only System" herein for a description of the duties of DTC with regard to ownership of Bonds. Initially, the only registered owner of the Bonds will be The Depository Trust Company. See "THE BONDS—Book-Entry-Only System"herein. 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 State law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations,the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties,cities,and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6)bonds issued, assumed or guaranteed by the State of Israel;(7)certificates of deposit meeting the requirements of the Texas Public Funds Investment Act(Chapter 2256, -13- Texas Government Code)that are issued by or through an institution that either has its main office or a branch in the State, and 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 clauses (1) through (6) 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; (9) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least"A-1"or"P-1" or the equivalent by at least one nationally recognized credit rating agency;(10)commercial paper with a stated maturity of 270 days or less that is rated at least"A-1" or"P-I" 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 registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$1 for each share; and(12)no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than"AAA" or its equivalent. In addition, obligation proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of obligation proceeds invested under such contract,other than the prohibited obligations described below. A political subdivision such as the City may enter into securities lending programs if(i)the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by(a) obligations that are described in clauses (1)through (6)above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or(c)cash invested in obligations described in clauses(1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State; and (iv) the agreement to lend securities has a term of one year or less. 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 "AAAm" or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract,the City must do so by order,ordinance,or resolution. 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 a 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. -14- Under Texas law, City investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly the investment officers of the 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 of each pooled fund group, (4)the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5)the maturity date of each separately invested asset, (6)the account or fund or pooled fund group for which each individual investment was acquired, and(7)the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and(b)state law.No person may invest City funds without express written authority • from the City Council. 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 personal 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 City 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 an 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 agreement funds to no greater than the term of the reverse repurchase agreement;(7)restrict its investment in mutual funds in the aggregate to no more than 15 percent of its monthly average fund balance, excluding obligation proceeds and reserves and other funds held for debt service,and to invest no portion of obligation proceeds,reserves and funds held for debt service, in mutual funds; and (8)require local government investment pools to conform to the new disclosure,rating,net asset value,yield calculation,and advisory board requirements. Current Investments The City's investment balances on January 1,2008 were as follows: Face Principal Market Market Amount Invested Principal Principal Money Market Funds $165,066,410 $165,066,410 $165,066,410 $165,066,410 Government Securities 24,000,000 23,439,795 23,522,800 23,493,748 Certificates of Deposit 3,792,295 3,792,295 3,792,295 3,792,295 Total Portfolio $192,858,705 $192,298,500 $192,381,505 $192,352,453 -15- CITY REVENUE DEBT Debt Statement The following tables,calculations and narratives relate to the Bonds. The Bonds are not a charge upon any other income or revenues of the City and shall never constitute an indebtedness or pledge of the general credit or taxing powers of the City. See"THE BONDS-Source of Payment." -Bonded Indebtedness- Outstanding Revenue Supported Bonds(as of January 1,2008) $79,180,000 Plus the Bonds 14,950,000 Total Revenue Supported Debt $94,130,000 Reserve Fund (a) (a) The Reserve Fund in the approximate amount of$5,957,196 is provided by various debt service reserve fund surety policies issued in connection with the issuance of various series of water and sewer revenue bonds on parity with the Bonds. Certain providers of these surety policies,excluding Financial Security,have recently experienced ratings downgrades. See"GENERAL CONSIDERATIONS—Financial Guaranty Industry Disclosure." [Remainder of Page Intentionally Left Blank] -16- Revenue Bond Debt Service Schedule The following is a combined schedule of the principal and interest due on the City's outstanding water and sewer revenue supported bonds and the Bonds. Fiscal Plus: The Bonds Year Current Total New Total Ending Total Debt Principal Debt Service 9/30 Service Principal Interest and Interest Requirements 2008 $ 4,897,598 $ 342,676 $ 342,676 $ 5,240,274 2009 5,056,978 $ 150,000 685,353 835,353 5;892,331 2010 5,612,645 190,000 680,478 870,478 6,483,122 2011 5,606,594 205,000 674,303 879,303 6,485,896 2012 5,599,972 225,000 667,640 892,640 6,492,612 2013 5,598,468 235,000 660,328 895,328 6,493,795 2014 5,589,518 255,000 652,690 907,690 6,497,208 2015 5,585,735 275,000 641,215 916,215 6,501,950 2016 5,581,061 ' 290,000 628,840 918,840 6,499,901 2017 5,570,212 315,000 615,790 930,790 6,501,002 2018 5,561,928 340,000 601,615 941,615 6,503,543 2019 5,552,247 370,000 586,315 956,315 6,508,562 2020 5,542,878 395,000 569,665 964,665 6,507,543 2021 5,539,194 420,000 551,890 971,890 6,511,084 2022 5,538,531 440,000 532,990 972,990 6,511,521 2023 5,539,731 460,000 514,840 974,840 6,514,571 2024 5,537,069 490,000 495,520 985,520 6,522,589 2025 5,538,944 510,000 474,450 984,450 6,523,394 2026 5,536,569 540,000 448,950 988,950 6,525,519 2027 5,540,944 560,000 421,950 981,950 6,522,894 2028 5,536,694 595,000 393,950 988,950 6,525,644 2029 5,558,644 600,000 364,200 964,200 6,522,844 2030 5,608,956 580,000 334,200 914,200 6,523,156 2031 5,664,638 560,000 305,200 865,200 6,529,838 2032 . 1,890,000 277,200 2,167,200 2,167,200 2033 1,980,000 182,700 2,162,700 2,162,700 2034 2,080,000 93,600 2,173,600 2,173,600 Total $132,495,748 $14,950,000 $13,398,548 $28,348,548 $160,844,293 • Average Annual Requirements(2008-2034) $5,957,196 Maximum Annual Requirement(2031) $6,529,838 -17- THE SYSTEM Description of the System The Public Works Department, Water Production and Sewer Treatment Division are charged with providing safe drinking water through both ground and surface water applications. The current system has ten (10) producing water wells with approximately 400 miles of water line pipe. The average monthly well pumping capacity is approximately 471 million gallons. Surface water is purchased from the City of Houston and a Municipal Utility District (MUD) and averages a little over 8 million gallons per month. There are plans to move away from well consumption because of the subsidence problem experienced on the Gulf Coast and to reduce dependence on ground water,and move exclusively to surface water. The Public Works Department is also responsible for all wastewater treatment activities. Presently the City has five (5)treatment plants capable of treating up to 10.5 million gallons per day or 37 million per day at peak flow. The City has 78 lift stations and approximately 355 miles of sanitary sewer line pipe. Water and Sewer Rates The City currently serves 26,513 water customers and 25,396 sewer customers. The following is a summary of the City's current water and sewer rates which became effective October 1,2007. -Water Rates- Minimum Usage over 2,000 gallons Residential or Commercial Single-Unit $11.98 $2.93 per 1,000 gallons Residential or Business Multi-Unit $10.89 $2.93 per 1,000 gallons -Sewer Rates- Minimum Usage over 2,000 gallons Residential Single-Unit $12.53 $2.24 per 1,000 gallons of water usage Residential or Business Multi-Unit $12.53 $2.24 per 1,000 gallons of water usage Commercial and Industrial Users $12.53 $2.24 per 1,000 gallons of water usage (a) Users not having water service will be charged the same rates as determined by a meter on the private water supply. For users without a metered water well,the monthly charge will be based on'a water consumption of 10,000 gallons. -18- Historical Operations of the System Fiscal Year Ended September 30, 2007(a) 2006 2005 . 2004 2003 REVENUES Water and Sewer Services $17,753,958 $13,849,201 $10,947,737 $11,840,005 $ 8,763,107 Impact Fees 0 0 0 0 4,881,756 Other Revenue 348,983 473,947 271,762 52,871 63,708 Interest Income 2,574,017 681.249 399.275 417,258 196,094 Total Revenues $20,676,958 $15,004,397 $11,618,774 • $12,310,134 $13.904 665 EXPENDITURES Production&Wastewater $ 7,478,059 $ 6,603,310 $ 4,507,571 $ 4,887,517 $ 2,938,682 Distribution&Collection 1,715,189 1,803,437 1,415,078 1,455,607 • 1,120,729 Accounting 1,557,650 1,379,937 1,124,626 1,053,388 497,211 Construction 804,671 761,624 767,233 2,842,867 1,162,591 Other 595,867 679.483 792,301 638.004 562,540 Total Expenditures $12,151,436 $11,227,791 $ 8,606,709 $10,877,383 $ 6,281,753 Net Revenues $ 8,525,522 $ 3,776,606 $ 3,011,965 $ 1,432,751 $ 7,622,912 Connections: Water 26,513 23,474 19,419 17,266 15,312 Sewer 25,396 23,214 19,993 17,350 15,402 Source: City's audited financial statements. (a) Unaudited. SELECTED PROVISIONS OF THE REVENUE BOND ORDINANCE Definitions The following are selected terms that are defined in the Ordinance. "Definitions" in the Ordinance, the following terms shall have the following meanings, unless the context clearly indicates otherwise: "Gross Revenues"shall mean all revenues,income and receipts of every nature derived or received by the City from the operation and ownership of the System; the interest income from the investment or deposit of money in the Revenue Fund and the Reserve Fund(each hereinafter defined in Article V hereof);and any other revenues hereafter pledged to the payment of all Bonds. Gross Revenues shall not include any of(i)grants from, or payments by, any federal, state or local governmental agency or authority or any other entity or person, the use of which is restricted by law or by the terms of the grant or payment to capital expenditures of the System, (ii)capital assets, debt service funds or debt service reserve funds of water districts or other public or private sewer systems annexed, acquired or otherwise assumed by the City or(iii)any interest earned on items(i)or(ii)above. "Maintenance and Operation Expenses" shall mean the reasonable and necessary expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs and extensions necessary to render efficient service (but only such repairs and extensions as, in the judgment of the governing body of the City, are necessary to keep the System in operation and render adequate service to the City and the inhabitants thereof, or such as might be necessary to meet some physical accident or conditions which would otherwise impair the Bonds), and all payments(including payments of amounts equal to all or a part of the debt service on bonds issued by other political subdivisions and authorities of the State of Texas) under contracts which are now or hereafter defined as operating expenses by the Legislature of Texas. Depreciation shall never be considered as a Maintenance and Operation Expense. Maintenance and Operation Expenses shall include, without limitation, all payments under contracts for the impoundment,conveyance or treatment of water or otherwise which are now or hereafter defined as operating expenses by the Legislature of Texas and the treatment of such payments as Maintenance and Operation -19- Expenses shall not be affected in any way if, subsequent to entering into such contracts,the City acquires as a part of the System title to any properties or facilities used to impound,convey or treat water under such contracts, or if the City contracts to acquire title to such properties or facilities as a part of the System upon the final payment of debt service on the bonds issued to finance such properties or facilities. "Net Revenues"shall mean all Gross Revenues remaining after deducting the Maintenance and Operation Expenses. "System"shall mean all properties,facilities,improvements,equipment, interests,rights and powers constituting the water and sewer system of the City, and all future extensions, replacements, betterments, additions, improvements, enlargements, acquisitions,purchases and repairs to the System, including without limitation,all those heretofore or hereafter acquired as a result of the annexation and dissolution of water districts or the acquisition of the properties or assets of any other public,private or non-profit entities. The System shall not include any Special Project. Pledge and Source of Payment The City hereby covenants and agrees that Gross Revenues of the System shall, as collected and received by the City, be deposited and paid into the special funds hereinafter established, and shall be applied in the manner hereinafter set forth, in order to provide for the payment of all Maintenance and Operation Expenses and to provide for the payment of principal of, interest on and any redemption premiums on the Bonds and all expenses of paying same; and to provide for the disposition of the remaining Net Revenues. The Bonds shall constitute special obligations of the City that shall be payable solely from and shall be equally and ratably secured by a first lien on and pledge of the Net Revenues as collected and received by the City from the operation and ownership of the System,which Net Revenues shall, in the manner herein provided,be set aside for and pledged to the payment of the Bonds in the Interest and Sinking Fund and the Reserve Fund as hereinafter provided, and the Bonds shall be, in all respects,on a parity with and of equal dignity with one another. The Owners of the Bonds shall never have the right to demand payment of either the principal of, interest on or any redemption premium on the Bonds out of any funds raised or to be raised by taxation. Rates and Charges So long,as any Bonds remain Outstanding, the City shall fix, charge and collect rates and charges for the use and services of the System which are calculated to be fully sufficient to produce Net Revenues in each Fiscal Year at least equal to 115%of the principal and interest requirements scheduled to occur in such Fiscal Year on all Bonds then Outstanding, plus an amount equal to the sum of all deposits required to be made to the Reserve Fund in such Fiscal Year(but in no event shall Net Revenues ever be less than the amount required to establish and maintain the Interest and Sinking Fund and the Reserve Fund as hereinafter provided) and, to the extent that funds for such purpose are not otherwise available, to pay all other outstanding obligations payable from the Net Revenues of the System, including all amounts owed by the City to a provider of a Surety Policy, if any, as and when the same become due. For the purpose of complying with its obligation to fix, charge and collect rates and charges, as herein provided, the City shall be entitled to rely on the certificate described in the Ordinance, as therein provided, in determining the amount of interest anticipated to be paid in respect of Bonds bearing interest at a variable rate. The City will not grant or permit any free service from the System, except for public buildings and institutions operated by the City. In addition,the City will not grant or permit any free service from the System permitted by the previous sentence if to do so would violate any condition or covenant to which the City is bound in connection with any federal grant agreement or otherwise. • -20- Flow of Funds Gross Revenues of the System shall be deposited as collected into the Revenue Fund. Moneys from time to time on deposit to the credit of the Revenue Fund shall be applied in the following manner and in the following order of priority: (a) First, to pay Maintenance and Operation Expenses and to provide by encumbrance for the payment of all obligations incurred by the City for Maintenance and Operation Expenses and to establish and maintain an operating reserve equal to one month's estimated Maintenance and Operation Expenses; (b) Second, to make all deposits into the Interest and Sinking Fund required by any' ordinance authorizing the issuance of Bonds; (c) Third,to reimburse the provider of a Surety Bond any amounts advanced under such Surety Bond; (d) Fourth,to pay interest to any provider of a Surety Bond any amounts advanced under such Surety Bond; (e) Fifth, to make all deposits into the Reserve Fund required by this Ordinance, and any resolution authorizing the issuance of Additional Bonds; (f) Sixth, to make all deposits, as may be required by any ordinance of the City authorizing the issuance of certain Subordinate Lien Obligations described in Section 6.2 hereof, in order to provide for the payment of and security for such Subordinate Lien Obligations;and (g) Seventh,for any lawful purpose. Reserve Fund On or before the last Business Day of each month so long as any Bonds remain Outstanding, after making all required payments and provision for payment of Maintenance and Operation Expenses and after making all required transfers into,the Interest and Sinking Fund,there shall be transferred into the,Reserve Fund from the Revenue Fund amounts equal to one-sixtieth (1/60th) of the Average Annual Principal and Interest Requirements on the Bonds unless or until there has been accumulated in the Reserve Fund money and investments in an aggregate amount at least equal to the Average Annual Principal and Interest Requirements on the Bonds; provided that additional deposits into the Reserve Fund sufficient to provide for the increased reserve requirements resulting from the issuance of any Additional Bonds shall be made by not later than 60 months from the date of issuance of such Additional Bonds as required by the Ordinance. Such additional deposits into the Reserve Fund in connection with the issuance of any Additional Bonds shall be made each month in amounts equal to one-sixtieth (1/60th) of the Average Annual Principal and Interest Requirements on the Bonds and such Additional Bonds. After such amount has accumulated in the Reserve Fund and so long thereafter as such fund contains such amount,no further deposits shall be required to be made into the Reserve Fund, and any excess amounts in the Fund may be transferred to the Revenue Fund; but if and whenever the balance in the Reserve Fund is reduced below such amount, monthly deposits into such Fund shall be resumed and continued in amounts at least equal to one-twelfth (1/12th) of the Average Annual Principal and Interest Requirements on the Bonds until the Reserve Fund has been restored to such amount. The Reserve Fund shall be used to pay the principal of and interest on the Bonds at any time when there is not sufficient money available in the Interest and Sinking Fund for such purpose and it may be used finally to pay and retire the last Bonds to mature or be redeemed. The requirements of the immediately preceding paragraph of this Section notwithstanding, the City may provide a Surety Policy or Policies issued in amounts equal to all or part of the Average Annual Principal and. Interest Requirements on the Bonds in lieu of depositing cash into the Reserve Fund;provided,however,that no such Surety Policy may be so substituted unless (i)the ordinance authorizing the substitution of the Surety Policy for all or part of the Average Annual Principal and Interest Requirements on the Bonds contains a finding that such substitution is cost effective and (ii) the City obtains an opinion of nationally recognized bond counsel that such substitution is permitted by applicable Texas law then in effect. -21- In the event a Surety Policy issued to satisfy all or a part of the City's obligation with respect to the Reserve Fund causes the amount then on deposit in the Reserve Fund to exceed the Average Annual Principal and Interest Requirements on all Bonds, the City may transfer such excess amount to any fund or funds established for the payment of or security for Bonds or any Subordinate Lien Obligations (including any escrow established for the final payment of any such obligations pursuant to Chapter 1207,Texas Government Code). Additional Bonds The City reserves the right to issue,for any lawful purpose, including the refunding of any previously issued Bonds or any other bonds or obligations of the City issued in connection with the System or payable from Net Revenues, one or more series of Additional Bonds on a parity with the Outstanding Bonds and any Additional Bonds then Outstanding, payable from, and secured by a first lien on,the Net Revenues of the System; provided, however, that no Additional Bonds may be issued unless: (a) All Additional Bonds shall mature only on September 1 and interest thereon shall be payable only on March 1 and September 1; (b) The Interest and Sinking Fund and the Reserve Fund each contains the amount of money then required to be on deposit therein; (c) For either the preceding Fiscal Year or any consecutive 12-month period out of the 15-month period immediately preceding the month in which the bond ordinance authorizing such Additional Bonds is adopted(the"Base Period")either: (1) Net Revenues are certified by the Director of Finance of the City to have been equal to at least one hundred and forty percent(140%)of the Average Annual Principal and Interest Requirements on all Bonds, after giving effect to the issuance of the Additional Bonds to be issued;or (2) Net Revenues, adjusted to give effect to any rate increase or annexation of territory placed into effect or consummated prior to the adoption of the ordinance authorizing the Additional Bonds to the same extent as if such rate increase or annexation had been placed into effect or consummated prior to the commencement of the Base Period,would have been equal to at least the amount required in paragraph(1)above,as certified by an independent consulting engineer or independent firm of consulting engineers; Provided, however, that this requirement shall not apply to the issuance of any series of Additional Bonds for refunding purposes that will not have the result of increasing the average annual principal and interest requirements on the Bonds; and (d) Provision is made in the bond ordinance authorizing the Additional Bonds then proposed to be issued for(1) additional payments into the Interest and Sinking Fund sufficient to provide for the payment of the increased principal of and interest on the Bonds resulting from the issuance of such Additional Bonds, and(2)additional payments into the Reserve Fund sufficient to provide for the accumulation therein of the increased reserve requirement resulting from the issuance of such Additional Bonds,by not later than sixty(60)months from the date of issuance of such Additional Bonds. The provisions of this Section 6.1(a) notwithstanding, the City may issue Additional Bonds that bear interest at a variable rate. Such variable rate bonds may mature on dates other than September 1 and interest thereon may be payable on dates other than March 1 or September 1;provided that the issuance of Additional Bonds as variable rate bonds may not cause the total amount of Outstanding Bonds that are variable rate bonds to exceed 50% of the aggregate principal amount of all Outstanding Bonds and Subordinate Lien Obligations at the time of such issuance. For purposes of calculating the funding requirements for the Reserve Fund and for the purposes of calculating compliance with the conditions precedent to the issuance of Additional Bonds pursuant to the Ordinance and the rate covenant set forth in the Ordinance,any Bonds that are variable rate bonds shall be assumed to bear interest at a rate which shall be estimated and certified by the financial advisor to the City as the rate that would be borne by such variable rate bonds if they were at the date of such certification issued as Bonds bearing a fixed rate of interest to their scheduled maturity or maturities. -22- 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 Steve Saboe 2 Years 2008 Management Consultant Council Member Mayor Pro-Tem Woodrow Owens 6 Years(a) 2010 Vice President,TRC Council Member Solutions,Inc. Helen Beckman 1 Year 2009 Retired Council Member Felicia Kyle 1 Year 2009 Attorney Council Member Kevin Cole 6 Years(b) 2010 Insurance Broker Council Member (a) Elected May,2007,however Councilman Owens has served two previous terms(6 years)on the City Council. (b) Elected May 2004,however Councilman Cole has served a previous term(3 years)on the City Council. 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. -23- 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 Narciso Lira City Engineer <1 Year Damn Coker City Attorney 10 Years Trent Epperson Director of Projects 1 Year Christopher Doyle Police Chief 28 Years Jon Branson Director of Parks&Recreation 1 Year 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 a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Bonds and to the effect that the Bonds are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings,the approving legal opinion of Bond Counsel,to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal 'income tax purposes under existing law and the Bonds are not private activity bonds, subject to the matters described under "TAX EXEMPTION" herein, including alternative minimum tax consequences for corporations. 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 Bonds,or which would affect the provision made for their payment or security,or in any manner questioning the validity of said Bonds will also be furnished. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Notice of Sale and Bidding Instructions, the Official Bid Form and 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 Bonds in the Official Statement to verify that such description conforms to the provisions of the Ordinances. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent on the sale and delivery of the Bonds.The legal opinion will accompany the Bonds deposited with DTC or will be printed on the Bonds in the event of the discontinuance of the Book-Entry-Only System. No-Litigation Certificate The City will furnish to the Purchasers a certificate, dated as of the date of delivery of the Bonds, 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 Bonds;restraining or enjoining the issuance,execution or -24- delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Bonds; or affecting the validity of the Bonds. No Material Adverse Change The obligations of the Purchasers to take and pay for the Bonds,and of the City to deliver the Bonds, are subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, 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 Bonds 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 Bonds. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Bonds 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 Bonds(the"Ordinance")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 Bond proceeds and any facilities financed therewith, the source of repayment of the Bonds, the investment of Bond proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Bond 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 Bonds that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds, regardless of the date on which the event causing such taxability occurs. Interest on all tax-exempt obligations, such as the Bonds, 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. 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 Bonds. 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 Bonds is commenced, under current procedures the Service is likely to treat the City as the "taxpayer," and the owners of the Bonds 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 Bonds,the City may have different or conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit,regardless of its ultimate outcome. -25- Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest,such as interest on the Bonds,received or accrued during the year. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, 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 Bonds. If a tax-exempt obligation, such as the Bonds,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 Bonds. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Bonds. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM BONDS Discount Bonds The Bonds maturing in the years 2022 through 2024, inclusive and in 2034, inclusive are offered at initial offering prices which are less than the stated redemption prices at maturity of such Bonds. If the initial offering prices of the Bonds are lower than the stated redemption price payable at maturity, the Bonds of that maturity (the "Discount Bonds")will be considered to have"original issue discount"for federal income tax purposes. An initial owner who purchases a Discount Bond in the initial public offering of the Bonds at such an initial offering price will acquire such Discount Bond with original issue discount equal to the difference between (a) the stated redemption price payable at the maturity of such Discount Bond and(b)the initial offering price to the public of such Discount Bond. Under existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Bond 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 Bond continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Bonds under the caption"TAX EXEMPTION"generally applies to original issue discount deemed to be earned on a Discount Bond while held by an owner who has purchased such Bond at the initial offering price in the initial public offering of the Bonds and that discussion should be considered in connection with this portion of the Official Statement. In the event of a redemption, sale, or other taxable disposition of a Discount Bond prior to its stated maturity, however, any amount realized by such initial owner in excess of the basis of such Discount Bond in the hands of such owner (increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Bond 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 Bond will be treated for federal income tax purposes as interest on a Bond,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 Bonds 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 Bond may be required to take into account such original issue -26- discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a Bond. 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 Bond or of the City. The portion of the principal of a Discount Bond representing original issue discount is payable upon the maturity or earlier redemption of such Bond to the registered owner of the Discount Bond at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Bond 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 Bonds by an owner that did not purchase such Bonds 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 Bonds 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 Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership,redemption,sale or other disposition of such Discount Bonds. Premium Bonds The Bonds maturing in the years 2009 through 2021, inclusive and in 2026, 2028 and 2032 are offered at initial offering prices which exceed the stated redemption prices payable at the maturity of such Bonds. If any of the Bonds 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 Bonds of such maturities("Premium Bonds")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 Bond in the hands of an initial purchaser who purchases such Bond in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Bond by the amount of amortizable bond premium. 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 Bond 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 Bond which is amortizable each year(or shorter period in the event of a sale or disposition of a Premium Bond)is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Bond based on the initial purchaser's original basis in such Bond. The federal income tax consequences of the purchase,ownership,redemption, sale or other disposition by an owner of Bonds 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 Bonds of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Bonds 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 Bonds. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance,the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. 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. -27- 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 Certification, L.L.C. ("DAC"), under which the City has designated DAC as Disclosure Dissemination Agent. 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 "CITY REVENUE DEBT," "THE SYSTEM," and in APPENDIX "B". The City will update and provide this information within six months after the end of each fiscal year. 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,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 provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7)modifications to rights of holders of the Bonds;(8)calls;(9)defeasances;(10)release, substitution,or sale of property securing repayment of the Bonds; and (11)rating changes. Neither the Bonds nor the Ordinance makes any provision for 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 Bonds 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. The Municipal Advisory Council of Texas has been designated by the State'of Texas as a SID and has been approved as such by the SEC staff. The address of the Municipal Advisory Council is 600 West 8th Street, P.O. Box 2177,Austin,Texas 78768-2177,and its telephone number is 512/476-6947. The Municipal Advisory Council 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 -28- 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 Bonds. 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 Bonds 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 Bonds 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 Bonds 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 Bonds 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 Bonds. 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 Purchasers from purchasing the Bonds 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. Compliance With Prior Undertakings The City has complied in all material respects with its prior continuing disclosure agreements made in accordance with the Rule. FINANCIAL ADVISOR RBC Capital Markets is employed as Financial Advisor to the City in connection with the issuance of the Bonds. RBC Capital Markets is the name under which RBC Damn Rauscher Inc., a broker-dealer, conducts municipal investment banking business. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. GENERAL CONSIDERATIONS Financial Guaranty Industry Disclosure Fitch, Moody's and Standard and Poor's (collectively referred to herein as the "Rating Agencies") have each released statements on the health of the financial guaranty industry that cite financial guarantors' exposure to subprime mortgage risk as an area of stress for the financial guaranty industry. In various releases, the Ratings Agencies have each outlined the processes that they intend to follow in evaluating the effect of this risk on their respective ratings of financial guarantors. For some financial guarantors, the result of such evaluations could be a -29- • rating affirmation, a change in rating outlook, a review for downgrade, or a downgrade. For certain financial guarantors the result of such evaluations has been a ratings downgrade. Potential investors are directed to the Rating Agencies and the individual financial guarantors for additional information on their respective evaluations of the financial guaranty industry and individual financial guarantors. In a December 14, 2007 announcement, Moody's Investors Service affirmed Financial Security's Aaa insurance financial strength rating with a stable outlook. On January 17, 2008, Standard & Poor's announced that Financial Security's financial strength, financial enhancement and issuer credit rating was affirmed at AAA/Stable. On January 24,2008, Fitch Ratings announced that Financial Security's insurer financial strength rating was affirmed at AAA with a Stable Rating Outlook. There can be no assurance that the views expressed in those documents represent the current views of the rating agencies or that those views will not change in the future. 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. Forward-Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the City,that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative,judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Certification of the Official Statement At the time of payment for and delivery of the Bonds,the City will furnish a certificate, executed by proper officers, acting in their official capacity, 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 its Official Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of sale of said Bonds and the acceptance of the best bid therefor, and on the date of the 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, such 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 therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) insofar as the descriptions and statements, including financial data, of or pertaining to entities, other than the City, and their activities contained in such Official Statement are concerned, such statements and data have been obtained from sources which the City believes to be reliable and the City has no reason to believe that they are untrue in any material respect; and (d) there has been no material adverse change in the financial condition of the City since the date of the last audited financial statements of the City. -30- The Ordinances authorizing the issuance of the Bonds will also approve the form and content of this Official Statement,and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds by the Purchaser. 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 Bonds. 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 • -31- APPENDIX A ECONOMIC AND DEMOGRAPHIC CHARACTERISTICS OF THE CITY The following information has been derived from various sources, including the U.S. Census, Texas Municipal Reports,Texas Workforce Commission, "Sales Management Survey of Buying Power", and City 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. At present, 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 2007(b) 1,543 300,346,057 73 250,697,776 529 77,157,354 2,145 628,332,187 (a) Includes Apartments. (b) Values through November 15,2007. Source: City of Pearland A-1 Manufacturing and Commerce Employment in Brazoria County (the "County") is provided by the extensive petro-chemical industry. (Source: Texas Municipal Report. Also adding to the general economy of the County are fishing, tourism and recreation activities and agribusiness. The Gulf Intracoastal Waterway comes through the lowlands near Surfside Beach and is an important waterway in America with reported annual tonnage comparable to the Panama and Suez Canals. Major Employers Industrial activities within the District 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 District with employment numbers above 100. 100—999 Employees Davis Lynch Randall's Home Depot Shaw Cor Pipe Protection Kemlon Strickland Chevrolet Kroger Super Targer Lowe's Tele-Flow,Inc. Pauluhn Electric Manufacturing TurboCare Pearland,City of Wal-Mart Pro Fax Weatherford Manufacturing 1000+Employees Pearland ISD 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 +330.46 108,312 +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 2007 84,500 +7.60 Employment Statistics Source: Texas Workforce Commission A-2 City of Pea rland 2007(a) 2006 2005 2004 2003 2002 Labor Force 33,133 32,953 27,906 20,398 13,035 12,555 Employed 32,190 31,899 26,809 19,403 12,323 12,004 Unemployed 943 1,054 1,097 994 712 551 Rate 2.8 3.2 3.9 4.9 5.5 4.4 Brazoria County 2007(a) 2006 2005 2004 2003 2002 Labor Force 141,880 138,590 132,814 125,175 116,777 110,179 Employed 136,051 131,773 126,536 115,693 106,393 102,593 Unemployed 5,829 6,817 6,278 9,480 10,384 7,586 Rate 4.1 4.9 4.7 7.7 8.9 6.9 (a) As of November 2007. Marketing Survey of Buying Power* Houston-Galveston Brazoria 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 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 EIB($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. A-3 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY CITY OF PEARLAND, TEXAS r4 tt: haw AV ,,�A ����e.r-w+ �\mt'1� � �'yiiry d mo • ' t 3 a 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 B-1 CITY OF PEARLAND,TEXAS ANNUAL FINANCIAL REPORT TABLE OF CONTENTS Page FINANCIAL SECTION Independent Auditors' Report 1 Management's Discussion and Analysis 3 Basic Financial Statements Government-Wide Financial Statements: Statement of Net Assets 17 Statement of Activities 18 Fund Financial Statements: Balance Sheet—Governmental Funds 20 Reconciliation of the Governmental Fund Balance Sheet to the Statement of 21 Net Assets Statement of Revenues, Expenditures, and Changes in Fund Balances— 22 Governmental Funds Reconciliation of the Statement of Revenues, Expenditures, and Changes in 23 Fund Balance of Governmental Funds to the Statement of Activities Statement of Net Assets—Proprietary Fund . 24 Statement of Revenues, Expenses and Changes in Fund Net Assets— 25 Proprietary Fund Statement of Cash Flows—Proprietary Fund 26 Discretely Presented Component Units Combining Statement of Net Assets 28 Combining Statement of Activities 29 Notes to the Financial Statements 30 Required Supplementary Information: General Fund—Schedule of Revenues,Expenditures, and Changes in Fund 59 Balances—Budget and Actual Notes To Required Supplementary Budget Information 60 Required Pension System Supplementary Information 61 CITY OF PEARLAND,TEXAS ANNUAL FINANCIAL REPORT TABLE OF CONTENTS Page FINANCIAL SECTION(continued) Other Supplementary Information Combining and Individual Fund Statements and Schedules Combining Balance Sheet-Nonmajor Governmental Funds 66 Combining Statement of Revenues, Expenditures and Changes in Fund 70 Balances—Nonmajor Governmental Funds Schedules of Revenues, Expenditures, and Changes in Fund Balance— Budget and Actual: Debt Service Fund 74 Hotel Motel Tax Fund • 75 Court Security Fund 76 City Wide Donations Fund 77 Court Technology Fund 78 Regional Detention Fund 79 Park Donations Fund 80 State Police Seizure Fund 81 Federal Police Fund 82 Parks and Recreation Development Fund 83 Sidewalk Fund 84 Community Services Fund 85 Grant Fund 86 Street Assessments Fund 87 Component Unit Fund Information Balance Sheets—Governmental Funds 90 Schedules of Revenues, Expenditures and Changes in Fund Balance 91 Long-Term Debt Amortization Schedules Combining Schedule of Governmental Long-Term Debt 94 Combining Schedule of Enterprise Fund Long-Term Debt 98 Combining Schedule of Revenue Bonds Payable of Pearland Economic 100 Development Corporation Combining Schedule of Revenue Bonds Payable of Development Authority 101 of Pearland FINANCIAL SECTION IlL One Sugar Creek Ctr.Blvd., 11 Greenway Plaza,Suite 1515 Null A LIIISOfl 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 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. • • 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. .171.116,7414:5011 Re 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). • 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 statements 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 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 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 $ 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 $ 14,094 $ 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 eamini 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 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 $ 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. 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 this increase. Expenses and Program Revenues -Governmental Activities $25,000 - $20,000 0 Expenses E,. ®Program Revenues c $15,000 $10,000 4,4 $5 000 '�.,. DL a l"� F-=f a� $— ..}, x^.. tom. j�''i J'.T� I I I I I , ocN ��eC 0�5 •\005 �'`\o�. a°,oti o 0 :4'c" 'o�� r1c., `eGie ,oil Ge�� God �� 5�o Qa �o 8 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Governmental Activities Charges for services 16% Grants and Other �' contributions o 19% 4/0 k • Property taxes 25% Sales and use ��a taxes t, -. 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 - I 0 Expenses $25,000 - °° . :t Program Revenues $20,000 N � c $15,000 • it4t 444 o ZA- $5,000 Water and sewer 9 CITY OF PEARLAND,TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Revenues by Source-Business-type Activities Charges for services ya a 49% Other L,J ""\•• `mot ° a ,`° c sus Grants and ° g.` ° 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 City's 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 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 2006 2005 2006 2005 2006 2005 Land $ 3,715 $ 2,717 $ 414 $ 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 $ 143,139 $ 92,505 $ 100,943 $ 107,979 $ 244,082 $ 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 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 $ 90,305 $ 60,175 $ $ $ 90,305 $ 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 $ 55,588 $ 48,775 $ 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: Moody's Investors Standard and Service Poors General obligation bonds Al 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. l2 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 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 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 9,616,744 519,354,552) 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 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 liabilities and fund balances $ 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 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 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 41,865,000 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 $ 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: $ 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$45,438,872 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 $ 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 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- 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 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. 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 (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 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 principles.These 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 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 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 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 c CITY PEARLAND,TEXAS NOTES TO FINANCIAL STATEMENTS • rl 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 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 I -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. 4r 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 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. Restricted Assets =3 ` Certain proceeds of the Enterprise Fund and Economic Development Corporation revenue bonds and .J.. 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.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 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 and investments. 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 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 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 from 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 953,211 659,841 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: 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")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. 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) (356,966) (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 Balance Balance September 30, Reclassification/ September 30, 2005 Increases (Decreases) 2006 Business-type Activities: Capital assets not being depreciated: Land and intangibles $ 367,962 $ 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 $ 88,846,250 $ 12,097,623 $ $ 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 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: 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 $ 49,887,211 $ (11,542,741) $ 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(%) 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 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. 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 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 1,135,25,6 4,280,000 263,244 2028 8,960,000 763,538 2,635,000 99,825 • 2029 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 $ 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 Bonds,Series 2006 13,845,000 2031 3.74-4.82 13,845,000 Total Utility System Fund $ 55,170,000 48 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 $ 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 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 1,205,00Q 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 CITY PEARLAND,TEXAS NOTES TO FINANCIAL 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 2.30-4.42 $ 10,245,000 Sales Tax Revenue Bonds,Series 2006 10,235,000 2030 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: 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 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 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 $ 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 salary 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$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 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-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 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 TIRZ, 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 REQUIRED SUPPLEMENTARY INFORMATION 57 CITY OF PEARLAND,TEXAS GENERAL FUND SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES-BUDGET AND ACTUAL For the year ended September 30,2006 Variance with Final Budget- Budgeted Amounts Positive Original Final Actual (Negative) REVENUES Property taxes $ 11,154,650 $ 11,099,556 $ 11,413,806 $ 314,250 Sales and use taxes 8,056,000 9,829,660 9,712,118 (117,542) Franchise fees 3,130,500 3,291,065 3,426,352 135,287 Licenses and permits 3,673,570 3,848,491 4,066,914 218,423 Fees and forfeitures 1,935,625 1,725,228 1,934,882 209,654 Charges for services 7,702,721 8,505,393 8,734,090 228,697 Investment earnings 290,000- 420,000 516,775 96,775 Intergovernmental 123,000 490,829 448,502 (42,327) Other 369,500 475,726 252,704 (223,022) Total Revenues 36,435,566 39,685,948 40,506,143 820,195 EXPENDITURES Current: General government 6,761,935 6,519,885 6,284,996 234,889 Public safety 12,382,510 12,817,577 12,685,081 132,496 Public works 9,806,160 10,469,657 9,727,972 741,685 Community services 2,936,322 2,874,080 2,739,532 134,548 Parks and recreation 4,126,361 4,664,037 4,308,250 355,787 Total Expenditures 36,013,288 37,345,236 35,745,831 1,599,405 Excess(deficiency)of revenues over expenditures 422,278 2,340,712 4,760,312 2,419,600 OTHER FINANCING SOURCES(USES) Transfers in 1,575,323 1,634,681 1,655,653 20,972 Transfers out (1,997,601) (4,024,567) (4,021,367) 3,200 Total other financing sources and uses (422,278) (2,389,886) (2,365,714) 24,172 Net change in fund balances - (49,174) 2,394,598 2,443,772 Fund balances,beginningof year 8,202,771 7,702,771 8,202,771 500,000 Fund balances at year end $ 8,202,771 $ 7,653,597 $ 10,597,369 $ 2,943,772 59 CITY OF PEARLAND,TEXAS NOTES TO REQUIRED SUPPLEMENTARY BUDGET INFORMATION Year ended September 30,2006 BUDGETARY COMPLIANCE The City of Pearland has complied with all material budget requirements for the year ended September 30, 2006. Annual appropriated budgets are adopted for the General, Special Revenue and Debt Service Funds, using the same basis of accounting as for financial reporting. All annual appropriations lapse at fiscal year end. Project length budgets are adopted for the Capital Project Funds. The City, for management control, approves a financial plan for the Enterprise Fund. City Council approves the annual budget for the Pearland Economic Development Corporation, which is included in the City's financial reporting entity. Expenditures may not legally exceed budgeted appropriations at the fund level (i.e. General Fund, Debt Service Fund, etc.). Expenditure requests, which would require an increase in total budgeted appropriations, must be approved by City Council through a formal budget amendment. At any time in the fiscal year, the Council may make emergency appropriations to meet a pressing need for public expenditure in order to protect the public health, safety, or welfare.The Council has the power to transfer any unencumbered funds allocated by the budget from one activity, function, or department, to another activity, function, or department, to re-estimate revenues and expenditures, and to amend the budget. Because City Council adopts the budget at the fund level, management has the authority to transfer available funds allocated by the budget from one function/department or activity to another function or activity within the same department. In cooperation with the directors and department heads of the City, the Budget Manager, the Director of Finance and the City Manager prepare an annual budget for the General Fund, Special Revenue Funds and Debt Service Fund for the ensuing fiscal year, in.a form and style as deemed desirable by the City Manager. The City Manager shall submit to the Council, for its review, consideration, and revision, both a letter describing the proposed new budget, as well as a balanced budget for the forthcoming fiscal year, between 60 (sixty) and 90 (ninety) days prior to the beginning of the fiscal year. The budget, as adopted, must set forth the appropriations for services, functions, and activities of the various City departments and agencies, and shall meet all fund requirements provided by law and required by bond covenants.Capital projects are budgeted on a project-length basis. Amounts reported in the accompanying financial statements represent the amended budgeted amount plus all supplemental appropriations. 60 • TEXAS MUNICIPAL RETIREMENT SYSTEM(UNAUDITED) Schedule of Funding Progress Unfunded Actuarial Actuarial Actuarial Accrued Annual (UAAL)as a Valuation Date Actuarial Value Accrued Percentage Liability Covered Percentage of December 31, of Assets Liabilities Funded (UAAL) Payroll Covered Payroll 2006 $ 24,661,930 $ 29,638,024 83% 4,976,094 $ 15,233,614 33% 2005 21,971,144 26,517,882 83% 4,546,738 13,703,115 33% 2004 18,772,272 23,190,084 81% 4,417,812 12,731,012 35% Schedule of Annual Pension Costs Annual Fiscal Pension Percentage Year Cost Contributed 2006 $ 1,730,700 100% 2005 1,480,301 100% 2004 1,371,452 100% The City's annual covered payroll and annual pension cost are actuarially valued on a calendar year basis. Because the City makes all of the annually required contributions, no net pension obligation exists. The information presented below was determined as part of the actuarial valuations as of December 31, 2005. 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 61 (this page intentionally left blank) 62 • • COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES 63 NONMAJOR GOVERNMENTAL FUNDS SPECIAL REVENUE FUNDS To account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. Hotel/Motel Tax-A fund created to account for hotel/motel occupancy tax revenue. Court Security-A fund created to account for the receipt and expenditure of revenues from court fines for court security. City Wide Donation—A fund created to account for miscellaneous donations for all city departments except parks. Court TechnoloRv—This fund is used to account for the receipt and expenditure of revenues from court fines for court technology. Regional Detention Fund-A fund created to account for the regional detention development. Park Donation—A fund used to account for park special event donations and the development of parks.This fund also includes funds from the tree trust donations. State Police-Seizure Fund-A fund created to account for state seizure funds which are used solely for law enforcement purposes. Federal Police Fund—A fund created to account for federal seizure funds and can only be used to support activities that result in further seizures. Park and Recreation Development—A fund created to account for the development of parks. Sidewalk Fund—A fund created to account for resources designated for sidewalks. Community Services—To account for expenditures related to community services. Grants Fund—To account for revenues and expenditures associated with federal, state, and local grants. Street Assessments-A fund created to account for resources for street assessments. 65 CITY OF PEARLAND,TEXAS BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS September 30,2006 Hotel Motel City Wide Tax Court Security Donations Court Technology ASSETS Cash and cash equivalents $ 790,629 $ 108,697 $ 55,566 $ 196,818 Investments Receivables(net of allowance for uncollectibles) 73,051 2,864 3,521 Total assets $ 863,680 $ 111,561 $ 55,566 $ 200,339 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ $ $ 9,804 $ Deferred revenue 2,894 3,521 Total liabilities 2,894 9,804 3,521 Fund balances: Unreserved,reported in Special revenue funds 863,680 108,667 45,762 196,818 Capital projects funds _ Total fund balances 863,680 108,667 45,762 196,818 Total liabilities and fund balances $ 863,680 $ 111,561 $ 55,566 $ 200,339 66 Parks and Regional State Police- Recreation Detention Park Donations Seizure Fund Federal Police Development $ 107,400 $ 264,035 $ 120,058 $ 27,295 $ 1,129,687 $ 107,400 $ 264,035 $ 120,058 $ 27,295 $ 1,129,687 $ $ $ $ $ 107,400 264,035 120,058 27,295 1,129,687 107,400 264,035 120,058 27,295 1,129,687 $ 107,400 .$ 264,035 $ 120,058 $ 27,295 $ 1,129,687 67 CITY OF PEARLAND,TEXAS BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS September 30,2006 Community Sidewalk Services Grant Fund Street Assessments ASSETS Cash and cash equivalents $ 151,060 $ $ 113,796 $ 679,107 Investments 148,889 Receivables(net of allowance for uncollectibles) 88,787 820 Total assets $ 151,060 $ $ 202,583 $ 828,816 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ $ $ 1,813 $ Deferred revenue 22,790 Total liabilities 1,813 22,790 Fund balances: Unreserved,reported in Special revenue funds 151,060 200,770 Capital projects funds 806,026 Total fund balances 151,060 200,770 806,026 Total liabilities and fund balances $ 151,060 $ $ 202,583 $ 828,816 68 Totals $ 3,744,148 148,889 169,043 $ 4,062,080 $ 11,617 29,205 40,822 3,215,232 806,026 4,021,258 $ 4,062,080 69 CITY OF PEARLAND,TEXAS STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS GOVERNMENTAL FUNDS For the Year Ended September 30,2006 City Wide Court Hotel Motel Tax Court Security Donations Technology REVENUES Sales and use taxes $ 267,588 $ $ $ Fines and forfeitures 46,856 55,852 Investment earnings 22,403 2,969 1,170 5,194 Intergovernmental Other 54,502 Total revenues 289,991 49,825 55,672 61,046 EXPENDITURES Current: General government 96,248 Public safety Community services 1,716 16,185 3,814 Parks and recreation Total Expenditures 96,248 1,716 16,185 3,814 Excess(deficiency)of revenues over expenditures 193,743 48,109 39,487 57,232 OTHER FINANCING SOURCES (USES) Transfers in Transfers out (31,873) Net change in fund balances 193,743 16,236 39,487 57,232 Fund balances-beginning 669,937 92,431 6,275 139,586 Fund balances-ending $ 863,680 $ 108,667 $ 45,762 $ 196,818 70 Parks and Regional State Police- Recreation Detention Park Donations Seizure Fund Federal Police Development $ $ $ $ $ 2,923 7,197 3,204 747 25,370 6,000 2,348 20,674 38,273 178,632 5,271 27,871 41,477 747 210,002 10,500 7,409 59,139 7,409 10,500 59,139 5,271 20,462 30,977 747 150,863 235,731 5,271 20,462 30,977 747 386,594 102,129 243,573 89,081 26,548 743,093 $ 107,400 $ 264,035 $ 120,058 $ 27,295 $ 1,129,687 • 71 CITY OF PEARLAND,TEXAS STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS GOVERNMENTAL FUNDS For the Year Ended September 30,2006 Community Street Sidewalk Services Grant Fund Assessments REVENUES Sales and use taxes $ $ $ $ Fines and forfeitures Investment earnings 3,619 1,940 5,728 13,844 Intergovernmental 111,239 Other 35,226 3,941' Total revenues 38,845 5,881 116,967 13,844 EXPENDITURES Current: General government Public safety 48,846 125,170 Community services 9,541 Parks and recreation Total Expenditures 48,846 134,711 Excess(deficiency)of revenues over expenditures 38,845 (42,965) (17,744) 13,844 OTHER FINANCING SOURCES (USES) Transfers in 35,100 43,688 Transfers out (54,793) Net change in fund balances 38,845 (62,658) 25,944 13,844 Fund balances-beginning 112,215 62,658 174,826 792,182 Fund balances-ending $ 151,060 $ $ 200,770 $ 806,026 72 • Totals $ 267,588 102,708 96,308 117,239 333,596 917,439 96,248 184,516 31,256 66,548 378,568 538,871 314,519 (86,666) 766,724 3,254,534 $ 4,021,258 • 73 CITY OF PEARLAND,TEXAS DEBT SERVICE FUND SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Final Budget Actual (Negative) 2005 REVENUES Taxes: Property taxes $ 10,728,697 $ 10,736,081 $ 7,384 $ 10,095,935 Investment earnings 84,948 142,407 57,459 57,687 Intergovernmental 990,723 291,786 (698,937) Total Revenues 11,804,368 11,170,274 (634,094) 10,153,622 EXPENDITURES Debt Service: Principal 4,107,055 3,429,108 677,947 3,534,534 Interest 6,546,929 6,546,227 702 5,027,376 Intergovernmental 1,683,678 1,683,678 1,083,896 Total Expenditures 12,337,662 11,659,013 678,649 9,645,806 Revenues over(under)expenditures (533,294) (488,739) 44,555 507,816 OTHER FINANCING SOURCES/ (USES) Proceeds from long-term debt 8,004,141 8,004,141 Payments to refunding escrow agent (8,004,141) (8,004,139) 2 Transfers from other funds 1,291,909 1,291,909 339,561 Total other financing sources(uses) 1,291,909 1,291,911 2 339,561 Net change in fund balance 758,615 803,172 44,557 847,377 Fund balances,beginning of year 3,855,129 3,855,129 3,007,752 Fund balances at year end $ 4,613,744 $ 4,658,301 $ 44,557 $ 3,855,129 74 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-HOTEL/MOTEL TAX SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Hotels occupancy tax $ 251,500 $ 267,588 $ 16,088 $ 185,396 Investment Income 16,000 22,403 6,403 7,759 Total Revenues 267,500 289,991 22,491 193,155 EXPENDITURES Current: General government 157,500 96,248 61,252 80,313 Total Expenditures 157,500 96,248 61,252 80,313 Net change in fund balance 110,000 193,743 83,743 112,842 Fund balances,beginning of year 669,937 669,937 557,095 Fund balances at year end. $ 779,937 $ 863,680 $ 83,743 $ 669,937 • 75 • CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-COURT SECURITY SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Fines and forfeitures $ 42,700 $ 46,856 $ 4,156 $ 39,988 Investment earnings 2,500 2,969 469 1,137 Total Revenues 45,200 49,825 4,625 41,125 EXPENDITURES Current: Community services 545 1,716 (1,171) 3,266 Total Expenditures 545 1,716 (1,171) 3,266 Revenues over(under)expenditures 44,655 48,109 3,454 37,859 Other Financing Sources(Uses) Transfers(out) (31,873) (31,873) (10,363) Net change in fund balance 12,782 16,236 3,454 27,496 Fund balances,beginning of year 92,431 92,431 64,935 Fund balances at year end $ 105,213 $ 108,667 $ 3,454 $ 92,431 76 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-CITY WIDE DONATIONS SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 500 $ 1,170 $ 670 245 Other income 48,330 54,502 6,172 12,610 Total Revenues 48,830 55,672 6,842 12,855 EXPENDITURES Current: Community services 4,683 16,185 (11,502) 8,968 Total Expenditures 4,683 16,185 (11,502) 8,968 Net change in fund balance 44,147 39,487 (4,660) 3,887 Fund balances,beginning of year 6,275 6,275 2,388 Fund balances at year end $ 50,422 $ 45,762 $ (4,660) $ 6,275 77 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-COURT TECHNOLOGY SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Fines and forfeits $ 51,000 $ 55,852 $ 4,852 $ 51,586 Investment earnings 3,408 5,194 1,786 1,934 Total Revenues 54,408 61,046 6,638 53,520 EXPENDITURES Current: Community services 2,307 3,814 (1,507) 3,004 Total Expenditures 2,307 3,814 (1,507) 3,004 Net change in fund balance 52,101 57,232 5,131 50,516 Fund balances,beginning of year 139,586 139,586 89,070 Fund balances at year end $ 191,687 $ 196,818 $ 5,131 $ 139,586 78 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-REGIONAL DETENTION SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings • $ 1,600 $ 2,923 $ 1,323 1,211 Other income 2,348 2,348 49,258 Total Revenues 3,948 5,271 1,323 50,469 Net change in fund balance 3,948 5,271 1,323 50,469 Fund balances,beginning of year 102,129 102,129 51,660 Fund balances at year end $ 106,077 $ 107,400 $ 1,323 $ 102,129 79 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-PARK DONATIONS SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 3,850 $ 7,197 $ 3,347 $ 3,155 Other 22,322 20,674 (1,648) 15,018 Total Revenues 26,172 27,871 1,699 18,173 EXPENDITURES Current: Parks and recreation 8,000 7,409 591 16,971 Total Expenditures 8,000 7,409 591 16,971 Net change in fund balance 18,172 20,462 2,290 1,202 Fund balances,beginning of year 243,573 243,573 242,371 Fund balances at year end $ 261,745 $ 264,035 $ 2,290 $ 243,573 80 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-STATE POLICE-SEIZURE FUND SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 • 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 2,492 $ 3,204 $ 712 $ 1,307 Other 30,077 38,273 8,196 25,542 Total Revenues 32,569 41,477 8,908 26,849 EXPENDITURES Current: Public safety 10,500 10,500 17,661 Total Expenditures 10,500 10,500 17,661 Net change in fund balance 22,069 30,977 8,908 9,188 Fund balances,beginning of year 89,081 89,081 79,893 Fund balances at year end $ 111,150 $ 120,058 $ 8,908 $ 89,081 81 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-FEDERAL POLICE SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 400 $ 747 $ 347 $ 344 Total Revenues 400 747 347 344 Net change in fund balance 400 747 347 344 Fund balances,beginning of year 26,548 26,548 26,204 Fund balances at year end $ 26,948 $ 27,295 $ 347 $ 26,548 82 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-PARK AND RECREATION DEVELOPMENT SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 17,188 $ 25,370 $ 8,182 $ 8,346 Intergovernmental 6,000 6,000 Other ' 153,930 178,632 24,702 185,998 Total Revenues 177,118 210,002 32,884 194,344 EXPENDITURES Current: Parks and recreation 726,018 59,139 666,879 Total Expenditures 726,018 59,139 666,879 Revenues over(under)expenditures (548,900) 150,863 699,763 194,344 Other Financing Sources(Uses) Transfers from other funds 195,731 235,731 40,000 Total other financing sources(uses) 195,731 235,731 40,000 Net change in fund balance (353,169) 386,594 739,763 194,344 Fund balances,beginning of year 743,093 743,093 548,749 Fund balances at year end $ 389,924 $ 1,129,687 $ 739,763 $ 743,093 83 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-SIDEWALK SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 1,795 $ 3,619 $ 1,824 $ 1,924 Other 25,110 35,226 10,116 36,950 Total Revenues 26,905 38,845 11,940 38,874 Revenues over(under)expenditures 26,905 38,845 11,940 38,874 Other Financing Sources(Uses) Transfers(to)other funds (180,000) Total other financing sources(uses) (180,000) Net change in fund balance 26,905 38,845 11,940 (141,126) Fund balances,beginning of year 112,215 112,215 253,341 Fund balances at year end $ 139,120 $ 151,060 $ 11,940 $ 112,215 84 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-COMMUNITY SERVICES SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 2,281 $ 1,940 $ (341) $ 797 Other 3,904 3,941 37 3,806 Total Revenues 6,185 5,881 - (304) 4,603 EXPENDITURES Current: Public safety 44,585 48,846 (4,261) Total Expenditures 44,585 48,846 (4,261) 28,790 Revenues over(under)expenditures (38,400) (42,965) (4,565) (24,187) OTHER FINANCING SOURCES/ (USES) Transfers from other funds 35,100 35,100 32,000 Transfers(to)other funds (59,358) (54,793) 4,565 Total other financing sources(uses) (24,258) (19,693) 4,565 32,000 Net change in fund balance (62,658) (62,658) 7,813 Fund balances,beginning of year 62,658 62,658 54,845 Fund balances at year end $ $ $ $ 62,658 85 CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-GRANT FUND SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $' 3,385 $ 5,731 $ 2,346 $ 866 Intergovernmental 140,572 111,239 (29,333) 398,388 Total Revenues 143,957 116,970 (26,987) 399,254 EXPENDITURES Current: General government 1,260 Public safety 144,045 125,173 18,872 261,551 Community services 11,139 9,541 1,598 Capital outlay 91,694 Total Expenditures 155,184 134,714 20,470 354,505 Revenues over(under)expenditures (11,227) (17,744) (6,517) 44,749 OTHER FINANCING SOURCES/ (USES) Transfers from other funds 6,000 43,688 37,688 . 50,000 Total other financing sources(uses) 6,000 43,688 37,688 50,000 Net change in fund balance (5,227) 25,944 31,171 94,749 Fund balances,beginning of year 174,826 174,826 80,077 Fund balances at year end $ 169,599 $ 200,770 $ 31,171 $ 174,826 86 • CITY OF PEARLAND,TEXAS, SPECIAL REVENUE FUND-STREET ASSESSMENTS SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL For the Year Ended September 30,2006 with comparative actual totals for the year ended September 30,2005 2006 Variance Positive/ Budget Actual (Negative) 2005 REVENUES Investment earnings $ 7,468 $ 13,844 $ 6,376 $ 26,009 Other 198,928 Total Revenues 7,468 13,844 6,376 224,937 Net change in fund balance 7,468 13,844 6,376 224,937 Fund balances,beginning of year 792,270 792,182 567,245 Fund balances at year end $ 799,738 $ 806,026 $ 6,376 $ 792,182 87 (This page intentionally left blank.) 88 DISCRETELY PRESENTED COMPONENT UNITS FUND BASED FINANCIAL STATEMENTS 89 CITY OF PEARLAND,TEXAS,TEXAS DISCRETELY PRESENTED COMPONENT UNITS BALANCE SHEETS-GOVERNMENTAL FUNDS September 30,2006 Pearland Economic Tax Increment Development Development Reinvestment Authority of Total Component Corporation Zone#2 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 33,549 54,573 16,826 104,948 Total liabilities 33,549 54,573 16,826 104,948 FUND BALANCE Reserved for construction 10,840,127 10,840,127 Reserved for debt service 2,174,602 2,174,602 Unreserved 7,518,858 3,075,289 3,386 10,597,533 Total fund balance 18,358,985 3,075,289 2,177,988 23,612,262 Total Liabilities and Fund Balance $ 18,392,534 $ 3,129,862 $ 2,194,814 $ 23,717,210 Reconciliation from Fund balance to Net Assets Fund Balance $ 18,358,985 $ 3,075,289 $ 2,177,988 $ 23,612,262 Less revenue bonds payable (20,108,919) (20;562,611) (40,671,530) Less other long-term liabilities (38,198) (38,198) Less interest payable (82,484) (82,484) Net Assets $ (1,870,616) $ 3,075,289 $ (18,384,623) $ (17,179,950) 90 CITY OF PEARLAND,TEXAS DISCRETELY PRESENTED COMPONENT UNITS STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS For the Year Ended September 30,2006 Pearland Economic Development Total Development TIRZ Authority of Component Corporation Developments Pearland Units REVENUES Taxes: Property taxes $ $ 5,354,319 $ $ 5,354,319 Sales and use taxes 4,821,342 4,821,342 Intergovernmental Investment earnings 582,218 71,559 85,592 739,369 Total revenues 5,403,560 5,425,878 85,592 10,915,030 EXPENDITURES Current: General government 48,619 48,619 Economic development 1,148,585 1,421,796 8,100,000 10,670,381 Debt Service Principal 345,000 1,535,000 1,880,000 Interest 421,400 1,064,986 1,486,386 Bond issuance cost 102,808 781,040 883,848 Intergovernmental-City 7,211,662 352 7,212,014 Total Expenditures 9,229,455 1,421,796 _ 11,529,997 22,181,248 Revenues over(under)expenditures (3,825,895) 4,004,082 (11,444,405) (11,266,218) OTHER FINANCING SOURCES/ (USES) Transfers from other component units 2,151,892 2,151,892 Transfers(to)other component units (2,151,892) (2,151,892) Issuance of Revenue bonds 10,235,000 9,775,000 20,010,000 Total other financing sources(uses) 10,235,000 (2,151,892) 11,926,892 20,010,000 Changes in fund balance 6,409,105 1,852,190 482,487 8,743,782 Fund balances,beginning as restated 11,949,880 1,223,099 1,695,501 14,848,892 Fund balances, ending $ 18,358,985 $ 3,075,289 $ 2,177,988 $ 23,592,674 Reconciliation from changes in fund balance to changes in net assets Change in Fund Balance $ 6,409,105 $ 1,852,190 $ 482,487 $ 8,743,782 Add Principal payments 345,000 1,535,000 1,880,000 Bond Issuance costs 96,881 744,611 841,492 Add changes in interest payable (82,484) (82,484) Add changes in other long-term liabilities (10,275,075) (9,775,000) (20,050,075) Changes in Net Assets $ (3,506,573) $ 1,852,190 $ (7,012,902) $ (8,667,285) 91 LONG-TERM DEBT AMORTIZATION SCHEDULES 93 CITY OF PEARLAND,TEXAS COMBINING SCHEDULE OF GOVERNMENTAL ACTIVITY LONG-TERM DEBT BYMATURITYDATE September 30,2006 Permanent Improvement Refunding Bonds Series 2000 G.O.Series 2001(TIRZ Obligation) Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ 1,800,000 230,700 $ 2,030,700 $ 235,000 $ 31,298 $ 266,298 2008 1,885,000 142,260 2,027,260 250,000 21,840 271,840 2009 1,980,000 48,510 2,028,510 260,000 11,895 271,895 2010 175,000 3,413 178,413 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 $ 5,665,000 $ 421,470 $ 6,086,470 $ 920,000 $ 68,445 $ 988,445 Certificates of Oblieation,Series 2001 Certificates of Obligation,Series 2006 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ - $ 477,823 $ 477,823 $ - $ 534,360 $ 534,360 2008 - 477,823 477,823 25,000 457,257 482,257 2009 115,000 474,373 589,373 25,000 455,726 480,726 2010 560,000 456,923 ' 1,016,923 50,000 453,429 503,429 2011 575,000 431,423 1,006,423 125,000 448,069 573,069 2012 600,000 407,173 1,007,173 315,000 434,594 749,594 2013 630,000 380,641 1,010,641 335,000 414,688 749,688 2014 655,000 352,123 1,007,123 355,000 393,557 748,557 2015 700,000 321,198 1,021,198 370,000 371,354 741,354 2016 730,000 287,673 1,017,673 395,000 349,654 744,654 2017 790,000 251,375 1,041,375 405,000 330,932 735,932 2018 835,000 211,958 1,046,958 405,000 314,074 719,074 2019 880,000 169,500 1,049,500 505,000 294,838 799,838 2020 930,000 124,250 1,054,250 470,000 274,001 744,001 2021 980,000 76,500 1,056,500 500,000 253,146 753,146 2022 1,040,000 26,000 1,066,000 525,000 230,912 755,912 2023 555,000 207,218 762,218 2024 585,000 181,991 766,991 2025 605,000 155,363 760,363 2026 730,000 125,325 855,325 2027 765,000 91,688 856,688 2028 805,000 56,363 861,363 2029 850,000 19,125 869,125 $10,020,000 $ 4,926,752 $ 14,946,752 $ 9,700,000 $ 6,313,301 $ 16,013,301 94 • Page 1 Of Permanent Improvement&Refund Bonds,Series Permmanent Improvement Bonds,Series 2003 2005 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ - $ 664,504 $ 664,504 $ - 1,680,164 $ 1,680,164 2008 - 664,504 664,504 - 1,680,164 1,680,164 2009 140,000 660,304 800,304 425,000 1,673,258 2,098,258 2010 335,000 646,054 981,054 1,635,000 1,637,739 3,272,739 2011 350,000 625,504 975,504 1,705,000 1,578,223 3,283,223 2012 370,000 603,904 973,904 1,775,000 1,514,039 3,289,039 2013 390,000 581,104 971,104 1,845,000 1,445,011 3,290,011 2014 410,000 557,104 967,104 1,930,000 1,370,664 3,300,664 2015 435,000 535,016 970,016 2,010,000 1,281,814 3,291,814 2016 455,000 516,129 971,129 2,115,000 1,178,689 3,293,689 2017 725,000 492,529 1,217,529 865,000 1,108,514 1,973,514 2018 765,000 462,729 1,227,729 995,000 1,071,314 2,066,314 2019 805,000 430,826 1,235,826 380,000 1,043,624 1,423,624 2020 845,000 396,266 1,241,266 385,000 1,027,893 1,412,893 2021 885,000 359,283 1,244,283 395,000 1,011,658 1,406,658 2022 935,000 320,153 1,255,153 405,000 994,756 1,399,756 2023 980,000 278,613 1,258,613 875,000 967,338 1,842,338 2024 1,030,000 234,000 1,264,000 2,625,000 882,900 3,507,900 2025 1,085,000 186,413 1,271,413 2,760,000 748,275 3,508,275 2026 1,140,000 . 136,350 1,276,350 2,900,000 606,775 3,506,775 2027 1,200,000 83,700 1,283,700 3,045,000 465,763 3,510,763 2028 1,260,000 28,350 1,288,350 4,010,000 297,000 4,307,000 2029 3,935,000 98,375 4,033,375 $ 14,540,000 $ 9,463,335 $ 24,003,335 $ 37,015,000 $ •25,363,946 $ 62,378,946 Certificates of Obligation,Series 2003 Certificates of Obligation,Series 2004 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ 390,000 $ 744,520 $ 1,134,520 $ 100,000 $ 960,959 $ 1,060,959 2008 415,000 732,445 1,147,445 100,000 956,959 1,056,959 2009 435,000 719,695 1,154,695 290,000 949,159 1,239,159 2010 1,110,000 685,420 1,795,420 340,000 936,559 1,276,559 2011 1,175,000 631,233 1,806,233 365,000 922,459 1,287,459 2012 1,235,000 580,095 1,815,095 380,000 907,559 1,287,559 2013 1,295,000 531,114 1,826,114 385,000 892,259 1,277,259 2014 1,035,000 488,203 1,523,203 710,000 870,359 1,580,359 2015 1,090,000 449,408 1,539,408 710,000 841,959 1,551,959 2016 1,145,000 407,488 1,552,488 730,000 813,159 1,543,159 2017 1,210,000 361,533 1,571,533 1,030,000 777,959 1,807,959 2018 1,180,000 313,733 1,493,733 1,070,000 735,424 1,805,424 2019 1,240,000 265,333 1,505,333 1,160,000 689,129 1,849,129 2020 1,310,000 213,023 1,523,023 1,175,000 635,394 1,810,394 2021 1,380,000 156,188 1,536,188 1,195,000 574,650 1,769,650 2022 1,455,000 95,944 1,550,944 1,210,000 511,519 1,721,519 2023 1,530,000 32,513 1,562,513 1,510,000 440,119 1,950,119 2024 1,580,000 359,006 1,939,006 2025 1,625,000 280,969 1,905,969 2026 1,675,000 205,672 1,880,672 2027 1,730,000 126,931 1,856,931 2028 1,830,000 43,463 1,873,463 2029 $ 18,630,000 $ 7,407,883 $ 26,037,883 , $ 20,900,000 $ 14,431,621 $ 35,331,621 95 CITY OF PEARLAND,TEXAS COMBINING SCHEDULE OF GOVERNMENTAL ACTIVITY LONG-TERM DEBT Page 2 of 2 BY MATURITY DATE September 30,2006 Permanent Improvement&Refund Bonds,Series • 2006 Total All Series Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ 50,000 $ 1,917,992 $ 1,967,992 $ 2,575,000 $ 8,389,018 $ 10,964,018 2008 50,000 1,532,194 1,582,194 2,725,000 7,812,144 10,537,144 2009 50,000 1,530,194 1,580,194 4,415,000 7,648,962 12,063,962 2010 50,000 1,528,194• 1,578,194 4,985,000 7,427,179 12,412,179 2011 320,000 1,520,794 1,840,794 5,385,000 7,188,504 12,573,504 2012 385,000 1,506,694 1,891,694 5,870,000 6,933,407 12,803,407 2013 400,000 1,490,994 1,890,994 6,135,000 6,665,435 12,800,435 2014 410,000 1,474,794 1,884,794 6,405,000 6,392,552 12,797,552 2015 430,000 1,457,994 1,887,994 6,695,000 6,098,242 12,793,242 2016 445,000 1,440,216 1,885,216 7,015,000 5,783,756 12,798,756 2017 460,000 1,421,263 1,881,263 6,540,000 5,483,478 12,023,478 2018 480,000 1,401,288 1,881,288 6,845,000 5,195,643 12,040,643 2019 1,335,000 1,361,050 2,696,050 7,480,000 4,882,173 12,362,173 2020 1,485,000 1,293,888 2,778,888 7,835,000 4,532,339 12,367,339 2021 1,580,000 1,217,263 2,797,263 8,220,000 4,152,811 12,372,811 2022 1,675,000 1,135,888 2,810,888 8,620,000 3,752,296 12,372,296 2023 2,150,000 1,040,263 3,190,263 9,045,000 3,332,686 12,377,686 2024 2,150,000 932,763 3,082,763 9,495,000 2,883,035 12,378,035 2025 2,270,000 822,263 3,092,263 9,950,000 . 2,407,406 12,357,406 2026 2,395,000 705,638 3,100,638 10,535,000 1,911,384 12,446,384 2027 2,525,000 585,794 3,110,794 11,050,000 1,398,500 12,448,500 2028 3,690,000 438,188 4,128,188 11,595,000 .863,363 12,458,363 2029 7,380,000 175,275 7,555,275 12,165,000 292,775 12,457,775 $ 32,165,000 $ 27,930,877 $ 60,095,877 $ 171,580,000 $ 111,427,088 $ 283,007,088 Certificates of Obligation,Series 2002 Fiscal Year Ending Principal Interest Total 2007 $ - $ 1,146,700 $ 1,146,700 2008 - 1,146,700 1,146,700 2009 695,000 1,125,850 1,820,850 2010 730,000 1,079,450 1,809,450 2011 770,000 1,030,800 1,800,800 2012 810,000 979,350 1,789,350 2013 855,000 929,625 1,784,625 2014 900,000 885,750 1,785,750 2015 950,000 839,500 1,789,500 2016 1,000,000 790,750 1,790,750 2017 1,055,000 739,375 1,794,375 2018 1,115,000 685,125 1,800,125 2019 1,175,000 627,875 1,802,875 2020 1,235,000 567,625 1,802,625 2021 .1,305,000 504,125 1,809,125 2022 1,375,000 437,125 1,812,125 2023 1,445,000 366,625 1,811,625 2024 1,525,000 292,375 1,817,375 2025 1,605,000 214,125 1,819,125 , 2026 1,695,000 131,625 1,826,625 2027 1,785,000 44,625 1,829,625 2028 2029 $ 22,025,000 $ 14,565,100 $ 36,590,100 97 CITY OF PEARLAND,TEXAS COMBINING SCHEDULE OF ENTERPRISE FUND LONG-TERM DEBT BY MATURITY DATE September 30,2006 Water&Sewer System Revenue Bonds,Series Water&Sewer System Adjustable Rate Revenue 1996B Bonds,Series 1999 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ 495,000 $ 43,945 $ 538,945 $ 195,000 $ 263,495 $ 458,495 2008 515,000 22,660 537,660 205,000 261,218 466,218 2009 215,000 253,320 468,320 2010 220,000 238,688 458,688 2011 230,000 230,436 460,436 2012 240,000 221,811 461,811 2013 250,000 212,813 462,813 2014 260,000 203,438 463,438 2015 270,000 193,688 463,688 2016 290,000 183,375 473,375 2017 1,080,000 172,688 1,252,688 !' 2018 1,125,000 132,188 1,257,188 2019 1,175,000 90,000 1,265,000 2020 1,225,000 45,938 1,270,938 2021 $ 1,010,000 $ 66,605 $ 1,076,605 $ 6,980,000 $ 2,703,095 $ 9,683,095 • Water&Sewer System Revenue Bonds,Series 2001 Water&Sewer System Revenue Bonds,Series 2003 Fiscal Year Ending Principal Interest Total Principal Interest Total , 2007 190,000 $ 480,005 $ 670,005 $ 245,000 $ 383,513 $ 628,513 2008 200,000 468,130 668,130 260,000 373,717 633,717 2009 210,000 455,630 665,630 270,000 363,313 633,313 2010 230,000 442,505 672,505 285,000 352,513 637,513 2011 240,000 428,130 668,130 300,000 341,113 641,113 2012 255,000 413,130 668,130 315,000 323,113 638,113 2013 270,000 397,830 667,830 330,000 304,213 634,213 2014 290,000 386,018 676,018 340,000 285,238 625,238 , 2015 300,000 372,968 672,968 355,000 271,638 626,638 2016 320,000 359,093 679,093 365,000 257,438 622,438 2017 340,000 343,893 683,893 375,000 242,838 617,838 2018 365,000 327,573 692,573 385,000 227,838 612,838 2019 390,000 309,688 699,688 390,000 212,438 602,438 2020 420,000 290,188 710,188 395,000 196,350 591,350 2021 1,730,000 269,188 1,999,188 395,000 179,563 574,563 2022 1,825,000 182,688 2,007,688 410,000 162,775 572,775 2023 1,925,000 91,438 2,016,438 420,000 145,350 565,350 2024 1,500,000 127,500 1,627,500 2025 1,500,000 63,750 1,563,750 $ 9,500,000 $ 6,018,090 $ 15,518,090 $ 8,835,000 $ 4,814,204 $ 13,649,204 98 Water and Sewer System Revenue and Refunding Bonds,Series 2006 Certificates of Obligation.1998 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 $ - $ 657,656 $ 657,656 $ 915,000 $ 521,073 $ 1,436,073 2008 - 657,656 657,656 945,000 492,006 1,437,006 2009 550,000 657,656 1,207,656 980,000 461,198 1,441,198 2010 570,000 635,656 1,205,656 1,015,000 428,271 1,443,271 2011 600,000 611,431 1,211,431 1,050,000 393,158 1,443,158 2012 625,000 585,931 1,210,931 1,090,000 355,698 1,445,698 2013 650,000 559,369 1,209,369 1,125,000 316,100 1,441,100 2014 680,000 530,119 1,210,119 1,170,000 274,498 1,444,498 2015 710,000 499,519 1,209,519 1,210,000 230,760 1,440,760 2016 745,000 467,569 1,212,569 1,250,000 184,938 1,434,938 2017 100,000 434,044 534,044 2,090,000 121,790 2,211,790 2018 100,000 429,744 529,744 2,160,000 41,040 2,201,040 2019 100,000 425,369 525,369 2020 100,000 420,869 520,869 2021 100,000 416,244 516,244 2022 100,000 411,619 511,619 2023 100,000 406,994 506,994 2024 100,000 402,369 502,369 2025 100,000 397,744 497,744 2026 1,150,000 393,119 1,543,119 2027 1,205,000 338,494 1,543,494 2028 1,265,000 278,244 1,543,244 2029 1,330,000 214,994 1,544,994 ' 2030 1,395,000 146,831 1,541,831 2031 1,470,000 75,338 1,545,338 $ 13,845,000 $ 11,054,575 $ 24,899,575 $ 15,000,000 $ 3,820,528 $ 18,820,528 99 PEARLAND ECONCOMIC DEVELOPMENT CORPORATION COMBINING SCHEDULE OF REVENUE BONDS PAYABLE BY MATURITY DATE September 30,2006 Sales Tax Revenue Bonds,Series 2005 Sales Tax Revenue Bonds,Series 2006 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 350,000 412,275 $ 762,275 50,000 591,287 641,287 2008 360,000 402,650 762,650 165,000 485,719 650,719 2009 375,000 391,850 766,850 170,000 478,294 648,294 2010 385,000 380,600 765,600 180,000 471,069 651,069 2011 400,000 368,088 768,088 185,000 463,419 648,419 2012 410,000 355,088 765,088 200,000 454,169 654,169 2013 425,000 340,738 765,738 210,000 444,169 654,169 2014 445,000 323,738 768,738 215,000 433,669 648,669 2015 460,000 305,938 765,938 230,000 422,919 652,919 2016 480,000 287,538 767,538 240,000 411,419 651,419 2017 505,000 263,538 768,538 255,000 401,219 656,219 2018 530,000 238,288 768,288 265,000 390,381 655,381 2019 555,000 211,788 766,788 280,000 378,788 658,788 2020 575,000 189,588 764,588 ' 300,000 366,538 666,538 2021 600,000 166,588 766,588 310,000 353,038 663,038 2022 625,000 141,988 766,988 325,000 339,088 664,088 2023 650,000 116,363 766,363 345,000 322,838 667,838 2024 675,000 89,550 764,550 365,000 305,588 670,588 2025 705,000 61,200 766,200 385,000 287,338 672,338 2026 735,000 31,238 766,238 405,000 268,088 673,088 2027 1,190,000 247,838 1,437,838 2028 1,255,000 188,338 1,443,338 2029 1,320,000 128,725 1,448,725 2030 1,390,000 66,025 1,456,025 $ 10,245,000 $ 5,078,625 $ 15,323,625 $ 10,235,000 $ 8,699,956 $ 18,934,956 100 DEVELOPMENT AUTHORITY OF PEARLAND COMBINING SCHEDULE OF REVENUE BONDS PAYABLE BY MATURITY DATE September 30,2006 Tax Increment Revenue Bonds,Series 2006 Tax Increment Revenue Bonds,Series 2005 Fiscal Year Ending Principal Interest Total Principal Interest Total 2007 715,000 395,898 1,110,898 840,000 642,370 1,482,370 2008 275,000 370,873 645,873 360,000 614,020 974,020 2009 270,000 360,904 630,904 375,000 601,060 976,060 2010 280,000 350,779 630,779 390,000 586,435 976,435 2011 290,000 339,929 629,929 405,000 570,348 975,348 2012 300,000 328,329 628,329 425,000 552,933 977,933 2013 315,000 315,954 630,954 440,000 534,020 974,020 2014 330,000 302,566 632,566 460,000 513,780 973,780 2015 340,000 288,129 628,129 485,000 492,160 977,160 2016 360,000 272,829 632,829 505,000 469,365 974,365 2017 375,000 257,529 632,529 530,000 445,125 975,125 2018 390,000 241,216 631,216 555,000 418,625 973,625 2019 390,000 223,666 613,666 585,000 390,875 975,875 2020 410,000 206,116 616,116 615,000 361,625 976,625 2021 425,000 187,256 612,256 645,000 330,875 975,875 2022 450,000 168,131 618,131 675,000 298,625 973,625 2023 470,000 147,319 617,319 710,000 264,031 974,031 2024 485,000 125,581 610,581 750,000 227,644 977,644 2025 510,000 103,150 613,150 790,000 186,806 976,806 2026 530,000 79,563 609,563 835,000 143,788 978,788 2027 560,000 54,388 614,388 880,000 98,313 978,313 2028 585,000 27,788 612,788 925,000 50,388 975,388 $ 9,055,000 $ 5,147,893 $ 14,202,893 $ 13,180,000 $ 8,793,211 $ 21,973,211 101 (this page intentionally left blank) 102 APPENDIX C FORM OF BOND COUNSEL OPINION 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 18,2008 WE HAVE ACTED as Bond Counsel for the City of Pearland, Texas (the "City"), in connection with an issue of bonds(the"Bonds")described as follows: CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated February 1,2008, in the aggregate principal amount of $14,950,000 maturing on September 1 in each year from 2009 through and including 2024 and on September 1 in the years 2026, 2028, 2032 and 2034. The Bonds are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Bonds and in the ordinance (the"Bond 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 Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income,tax law; and a transcript of certain-certified proceedings pertaining to the issuance of the Bonds, as described in the Bond 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 Bonds. We have also examined executed Bond 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 Bonds. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) . The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently in effect; the Bonds constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Bonds have been authorized and delivered in accordance with law; and HOU:2770041.1 Austin Beijing Dallas Houston London Los Angeles New York The Woodlands Washington, DC C-1 March 18,2008 Page 2 (2) The Bonds are special obligations of the City of Pearland, Texas and are payable solely from a first lien on and pledge of the net revenues of the City's waterworks and sanitary sewer system. "Net Revenues" are the revenues to be derived from the operation of the City's waterworks and sewer system after the payment of all operation and maintenance expenses thereof. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that,subject to the restrictions hereinafter described, interest on the Bonds 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 Bonds 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 Bond Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes,to be retroactive to the date of issuance of the Bonds. 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 Bonds in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Bonds, 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 Bonds 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 Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, 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 Bonds. 7867/7868 HOU:2770041.1 APPENDIX D SPECIMEN OF MUNICIPAL BOND INSURANCE POLICY • ilillill1 FINANCIAL MUNICIPAL BO II SECURITY INSURANCE : 9 I 1 Y ASSURANCE® . ISSUER: / Pol' . o.: - BONDS: • ective Date: Pre ium: $ FINANCIAL SECURITY ASSURANCE INC. ("Fi :nci:l, Secu y' , or cc-isi do recei d, hereby UNCONDITIONALLY AND IRREVOCABLY ag -es to pay h: to stee (the ' u• ee' or paying.agent (the"Paying Agent") (as set forth ' e d• u -n ation r vi'ing fcr the issu of d securing:the Bonds) for the Bonds, for the en t o the Cwn•r , t t ie election •ina al Security, directly to,each Owner, subject my to the to s'o t s P,lic} (which in d:s a h endorsement.hereto), that portion of the,pri ipal of n• int:re:t o, t B Ii d: O.at sh ec• e for Payment but shall be unpaid by re•+•n o Nonpay e b the Is u . i . ' On the later of the day o , hich uc •prin ipal • i east I•e Due:for Payme 0 th : ' Business Day next following e Busine s ay • - hi, ina cial cu al have eeceiv oti o Nonpayment, Financial Security will di li se o • •r t e •-n fit ,f c Ovine r of a n he ace amount'of principal • '-nd hterest on h B• d I at is the' Cue .•r a ent but - hen r pai by reason of Nonpay.• -nt b the Issu- , •ut nl upon re : pt 'y Fin- ial '=runty, in a form aso bly _ satisfactory to' of(a)ev•e ice • the-0 ne • right to r•cei e pay -nt « —ie xi icipal or,in r:s hen Due for Paym= t and (b) •vden e, inclu ng :ny appro. iat: inetr ent ck a��si nment,th of the Owner' hts with resp:ct to •ayme t of •uch princi.al' r nt- =.t t : isiD e for P ent shall ther-loon es in Financi:I Se• ri . A No - of Non ay er t d be en1e recei on a given Bu ess D:y I'it'i cei' -c'pri• o 1:r 0 p.- (Ne Yor ti -) 3n • h':u Ines D - ,otherwise;it will be •eemed re4eived' n t e next Busi e 3s I ay.- - No ce of •np: ent ived by Financial S. urity is i complete it all be dee -• not o h.ve• ).--n r•cr iv-• ry ' n n al Security for purposes of he • ece.ing sent ce and Financi.I 'ec 'ty - all p urn. ly so :• is; t Trustee, Paying Agent or O n= , :s -.p*opr at , w o may su• it -:n •me de• otic• cg i• •- ment. Upon disbursement in r:sp:ct if . Bc nd, F" an• al Sec y sha• be • e.t - ,wn•r cf t - :ond, any appurtenant coupon to t e :on. or right o re•-ipc of paymen. of • • cip.I • o in e st on the Bond and shall be fully s br.•-ted to tie rights 'f tr e • ner, inc ding the #w -r's ig t to receive payments under the Bond, t' the e .-nt or any pa er t b Financia Security er:ur.er. Paymentby Financial Security to the ustee or. Pawing Ag= t fc r t - b.- it •f the 0 ne shall, to the, extent thereof, discharge the o'ligation o Fi ancial •ecurty u • -r thi3 Policy. Except o the -xtent e,oressly modifie. • .:n endorsement hereto, the following terms shall have th- meaning •pe• led for a I purposes of this Policy. "Business Day" means any day other than (a) a Sat • or . da or(b)a day on which banking institutions in the State of New York or the Insurer's Fiscal A•,ent= a horized or requir by law or executive order to•remain closed. "Due for Payment" mea s (.)w : r- erring to the cipal of a Bond, payable on the stated maturity date thereof or the d-•- on his he .ame she II ve been duly called for mandatory sinking fund redemption and does •t -fe to ,n -e- her date on which payment is due by reason of call for redemption (other.than by an.-t'ry •in ing and redemption), acceleration or other advancement of maturity unless Financial •ecu sh.II :ect in its sole discretion,to pay such principal due upon such acceleration together,with y accrue,, in -r- t to the date of acceleration and(b)when referring to interest on a Bond, payable on t e stated sat- or payment of interest. "Nonpayment" means, in respect of a Bond,the failure of the I •uer to 'ave provided sufficient funds to the Trustee or, if there is no Trustee,to the Paying Agent for p men n full of all principal and interest that is Due for Payment on such Bond. "Nonpayment"shall als• ude, in respect of a Bond,any payment of principal or interest that is Due for Payment • D-1 / . Page 2 of 2 • Policy No.-N made to an Owner by or on behalf of the Issuer which has been recover-• from such Ow •r ursu hto the United States Bankruptcy Code by a trustee in bankruptcy in actor•<nce wit) a fin- , no appea le order of a court having competent jurisdiction. "Notice" me--s. i-leph m c o eleco ed no ice, subsequently confirmed in a signed writing,or written notice by r- st-re• or certi led ail,fro an Ow �r, the Trustee or the Paying Agent to Financial Security which •tice -h- I spe;ify (a) the pers n or•e ity making the claim, (b) the Policy Number, (c) the claimed : ount a • 1)the date •uch - :i ed mo nt became Due for Payment. "Owner" means, in respect • a :ond, the p rson )r anti , o a th ime of Nonpayment, is entitled under the terms of such Bond b p•yrsent t er o• e)cept t at"0 `n r" all not include the Issuer or any person or entity who - direct or indirect ib g- for constitutes h un rlying security for the Bonds. t+ Financial Security may appoint a fiscal gent(t - "I isu -r'o F . •g;nt" for purpo--s o thi olicy by giving written notice to the Trustee •_ d t -Paying •gent peci n•,t e 'an e and • ice ad re f the Insurer's Fiscal Agent. From and • e tip date of r ceipt i f arc n• of•y he T tee and the P ing Agent, (a)copies of all notices r-: ired o •- delivere• tc Fi :ncial .ei ri pu'scant. o this Po icy h I be simultaneously delivered to tr Insure -. -scal •en i and t F na i-, S:,uri y and -hall not be ee ed• received until-received by-both'and (b) -II say- e ts eq iir- to be m- •e i y F inahci I-Se • it' u er his Policy may be made directly by Finan•al Se• rit ,r by th- Insure s i .:I Agent • •-half 2f F nan is Security. The Insur - iscal Agent i th• a•-nt :' Financi•I Fecc ty •n' and tie I urea f isa I Ag t shall in no event. liabl to any-0 er f it ai y-act of the In urer's iscal 'gent or any failwe )f F nancial - Security to de it or cau e o b: s eposit•d s fficient furls t' n eke.•ay - ts Ju a under thi; Fblj % , To •: full;st extent emiitt d by ap di -•le law, Fi an ial Se± rity • -es sot to ass ,::and hereby waiv:-, o y fc r the ben it of ::ch % er, :II rights (whet er by 'sun - laim, setoff otherwise) and def: ses(i clr,din itho t imi,; '•n,' h: de -nse of fra id), tasth; acq i -d by sub gation, assignment or :therwis , t)th en hat uch e s a d d: : ses m:y be a aila•I: to Fi cial Security-to avoid p-,ment of i s )blioati ns rder this P• i. in :cco •a wit th e eroc• es • ov si ns of this Policy. ' T Po cy set f rth n Full the u e aki g o Fi :ncial .e:uriy,en•- all not be modified, altered or , a e -• by .:n.ott er agr esient or' st me , i lu• nc an n od i.; '•n or amendment thereto. Except ti th e , t e(pre* y m died : an-e •ors• -nt ereto; a) anw premium paid in respect of this-Policy i- n• re undo a for any ea son whatsoe er, i ' udi • r ay ent/6r'provision being made for payment, of t e :-••s prick to matu ty and (b) this -•licy may of )e '=nceled or revoked. THIS POLICY IS NOT II OVER . BY THE PR PE-TTWCASU INSU- •NC ECURITY FUND SPECIFIED IN ARTICLE 76 F THE N:W FORK I URANCE In witne s At of, FINAN AL S U-'ITY ' •SURANCE INC. has caused this Policy to be executed o its behalf •y its Authorized Officer. - [Coun - sig :t ire] FINANCIAL SECURITY ASSURANCE INC. - • '1 By . • -. - - -Authorized Officer • subsidia of'Financial Security-Assurance Holdings Ltd. .. - (212)826-0100 3 .West % d Street, New'York, N.Y. 10019 %0NY(5/90) - - - - 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 WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated March 1, 2008, and aggregating $14,950,000 (the "Bonds"). That the Bonds 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 Bonds, 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 Bonds, 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 Bonds, or the collection or application of revenues pledged or to be pledged to pay the principal of and interest on the Bonds, or the pledge thereof, or in any way contesting or 1 F affecting the validity of the Bonds,the ordinance dated February 11, 2008, authorizing the issuance, sale and delivery of the Bonds (the "Ordinance"), or contesting the powers of the City or the authorization of the Bonds 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 Bonds 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 Bonds be submitted to a referendum or other election. We further certify that Bill Eisen is the City Manager of the City and that Claire Manthei is the Director of Finance of the City and the signatures set forth below are genuine. We further certify that the information and data contained iri the General Certificate dated February 11,2008 remain true and correct as of this date. l_ HOU:2773242.1 - WITNESS OUR HANDS AND THE SEAL OF THE CITY this s i 04,/,-/ /3 ,2008. SIGNA TITLE OF OFFICE -==:3C4',V Mayor, City of Pearland, Texas City Secretary, City of Pearland, Texas 4I I r �,� City Manager, City of Pearland, Texas Director of Finance, City of Pearland, Texas Vt (CITY SEAL) 121 f�c4('[�'' /1 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 Flip rV Gtr 2 o O . '34 0-v4eE. I 4a.,1 tor„,,,,,,„" „1"4417 Notary Public o.�,Ry p qo T ,a ed or Printed Name: / ? \�Gin !, _ ifj • 9▪ ,.• � +yy y Commission Expir/;� OF a TE ,,NSF-1'A!RES,.• '.. �S �O C w zoo J (Notary Seal) HOU:2773242.1 is 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 $14,950,000 CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated March 1, 2008 (the "Bonds"), now in the process of issuance, as follows: (1) The City is a home rule municipality operating under its own charter, which has not been amended, repealed, changed or altered since the approval by the Attorney General of the State of Texas of its City of Pearland, Texas Certificates of Obligation, Series 2008 and the City of Pearland, Texas Permanent Improvement Bonds, Series 2008, which were the last obligations issued by or on behalf of the City. (2) The Bonds are being issued for the purpose of (i) constructing certain repairs, improvements, additions and extensions to the System, and (ii) payment of expenses of issuance of the Bonds. (3) From February 11, 2008 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 Steve Saboe Mayor Pro-Tern Kevin Cole Councilmember Helen Beckman Councilmember Woodrow Owens Councilmember Felicia Kyle Councilmember (4) From February 11, 2008, to the date hereof, Young Lorfing has been the duly appointed and qualified City Secretary of the City. 1 (5) The Bonds were sold at a price of$14,950,000, representing the principal amount of - the Bonds, plus accrued interest to the date of delivery of the Bonds, by means of a competitive sale to Robert W. Baird&Co.,Inc. (6) Attached to this certificate as Exhibit A is a true, full and correct debt service schedule for the Bonds and for all presently outstanding obligations of the City which are payable from Net Revenues (as defined below) of the City's water and sewer system(the"System"). .i- (7) 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") for fiscal year ended September 30, 2006, was $3,875,582, and for the previous three fiscal years: 1—. HOU:2773266.1 Fiscal Year Ended September 30, 2003 2004 2005 $7,622,912 $7,700,176 $3,638,349 (8) Attached to this certificate as Exhibit B is a true, full and current ordinance establishing the utility rates of the System that are currently in effect. (9) 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 and the City's Certificates of Obligation, Series 2008, Certificates of Obligation, Series 2007,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. (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. (11) The City has appropriated from current funds on hand an amount of money sufficient, when added to the accrued interest received from the sale of the Bonds, to pay the debt service payments scheduled to come due on its debt in.2008. 2 HOU:2773266.1 SIGNED AND SEALED this February 11, 2008. CITY OF PEARLAND, TEXAS • , 1C-2r-c.." Sec/ary, City-' P-/and, Texas Mayor, City of Pearland, Texas i .0\ • • !J J ' v. Jr If I • • 1 i 3 HOU:2773266.1 JAI Exhibit A Debt Service Schedule for the Bonds and for all Bonds payable from Water and Sewer System Revenues J c� ', II R ' HOU:2773266.1 I 4 1 I L__ i 4 - City of Pearland,Texas-Revenue Debt Current Debt plus New Debt I- FINAL NUMBERS-February 12,2008 1 Dated Date 03/01/2008 Series 2008 Delivery Date 03118/2008 New Interest Interest Year Current Principal Various Various Total Total New Total Debt Ending Debt Due Due Due New Principal Service _ 09/30 Requirement 09/01 03/01 09/01 Interest B Interest Requirement '( 2008 4,897,598 342,676 342,676 342,676 5,240,274 2009 5,056,978 150,000 342,676 342,676 685,353 835,353 5,892,331 2010 5,612,645 190,000 340,239 340,239 680,478 870,478 6,483,122 2011 5,606,594 205,000 337,151 337,151 674,303 879,303 6,485,896 2012 5,599,972 225,000 333,820 333,820 667,640 892,640 6,492,612 2013 5,598,468 235,000 330,164 330,164 660,328 895,328 6,493,795 i 2014 5,589,518 255,000 326,345 326,345 652,690 907,690 6,497,208 2015 5,585,735 275,000 320,608 320,608 641,215 916,215 6,501,950 1 2016 5,581,061 290,000 314,420 314,420 628,840 918,840 6,499,901 2017 5,570,212 315,000 307,895 307,895 615,790 930,790 6,501,002 2018 5,561,928 340,000 300,808 300,808 601,615 941,615 6,503,543 2019 5,552,247 370,000 293,158 293,158 586,315 956,315 6,508,562 2020 5,542,878 395,000 284,833 284,833 569,665 964,665 6,507,543 2021 5,539,194 420,000 275,945 275,945 551,890 971,890 6,511,084 ,1 2022 5,538,531 440,000 266,495 266,495 532,990 972,990 6,511,521 2023 5,539,731 460,000 257,420 257,420 514,840 974,840 6,514,571 2024 5,537,069 490,000 247,760 247,760 495,520 985,520 6,522,589 - 2025 5,538,944 510,000 237,225 237,225 474,450 984,450 6,523,394 2026 5,536,569 540,000 224,475 224,475 448,950 988,950 6,525,519 2027 5,540,944 560,000 210,975 210,975 421,950 981,950 6,522,894 2028 5,536,694 595,000 196,975 196,975 393,950 988,950 6,525,644 ✓ 2029 5,558,644 600,000 182,100 182,100 364,200 964,200 6,522,844 2030 5,608,956 580,000 167,100 167,100 334,200 914,200 6,523,156 2031 5,664,638 560,000 152,600 152,600 305,200 865,200 6,529,838 2032 1,890,000 138,600 138,600 277,200 2,167,200 2,167,200 1 W 2033 1,980,000 91,350 91,350 182,700 2,162,700 2,162,700 2034 2,080,000 46,800 46,800 93,600 2,173,600 2,173,600 Totals $132,495,748 $14,950,000 $6,527,937 $6,870,613 $13,398,548 $28,348,548 $160,844,293 1 NEW08: Dated Date:03/01/2008 Principal Due Dates:09/01/2009-09/01/2034 Maturing Amount:14,950,000.00 L_ f 1 �i PEARLANDCITYOFWWS:NEW08 AGGPRIOR Prepared by:RBC Capital Markets-Houston,Texas(JHR) 02/11/2008 @ 16:44 v7.85 o b Page-1 I 1 1 -1 11 f Exhibit B Resolution Establishing Utility Rates of the System 1 ' I � 7 � 1 I � A ' HOU:2773266.1 • ORDINANCE NO. 870-5 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 SERVICE RATE • • SCHEDULES; PROVIDING A PENALTY FOR VIOLATION; CONTAINING A i I • AN EMERGENCY CLAUSE, A SAVINGS CLAUSE AND A SEVERABILITY CLAUSE; PROVIDING FOR CODIFICATION, PUBLICATION, AND AN EFFECTIVE DATE. WHEREAS, Chapter 30, Article I1, 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, ' l BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: { I Section 1. 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 or more persons living together as a single family. 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- ; 1 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. . • • _may ORDINANCE NO. 870-5 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 $2.93 per 1000 gallons Multi-Unit Residence or Business: ,__. Up to and including first 2000 gallons $10.89 minimum per unit All over 2000 gallons $2.93 per 1000 gallon usage • ' f The rate of$11.98 shall be the minimum monthly rate for all water users including the users for less than a monthly period. If the user's water meter becomes inoperative and fails to register, the user will be • r-, l charged at the average monthly consumption as shown by the meter when in order. All l i I 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.In•dustrial Users Having City Water Service:. The monthly sewer service charge for all Commercial and Industrial Users having City Water Service will be $12.53-minimum for 2000 gallons of water usage or less and $2.24 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: 2 i } I ORDINANCE NO. 870.5 (a) For customers with a metered well, $2.24 per 1000 gallons of comparable bill l t. 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 +J 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 System, then, upon the user's request,the City Council will establish the amount l 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 $2.24per 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 ametered.well, $ 2.24 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 • 3 • r--, i . 1T • • ORDINANCE NO. 870-5 L' determine the.amount of water consumption. $12.53 Monthly Minimum charge. I (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: ! k Each unit of a multi-unit, residence or business 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 $ 2.24 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 $2.24 per 1000 gallons of water usage over 2000 I gallons. (Multi-unit being defined as being a building, residence or business consisting of two or more units)." _i Section 2. 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 3, 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). • • a , Section 4: 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. L 4 •• • ORDINANCE NO. 870-5 • Section 5. 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 6. 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 7. 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. Section 8. Effective Date. This Ordinance shall become effective at the time of the Cycle 14 billing in October 2007. f_.t Section 9. Declaration of Emergency. The Council finds and determines that the need to establish water and sewer rates inures to the benefit of the public and, f i therefore, bears directly upon the health, safety and welfare of the citizenry; and that this - ordinance shall be adopted as an emergency measure, and that the rule requiring this i ' ! ordinance to be read on two (2) separate occasions be, and the same Is hereby waived. PASSED and APPROVED ON FIRST AND .ONLY READING this the 1r day of September, A. D., 2007. TOM REID MAYOR - ' 5 ORDINANCE NO. 870-5 VOTING RECORD FIRST AND ONLY READING SEPTEMBER 17,2007 Voting"Aye"-Councilmembers Owens,Beckman,Saboe ATTEST: and Cole. Voting"No"— None. Motion passed 4 to 0,with Councilmember Kyle absent. • UN t � i G, RMC L. PUBLICATION DATE: September 19,2007 • ITY CRETARY EFFECTIVE DATE: October.5,2007 1 PUBLISHED AS REQUIRED BY SECTION 3.10 OF APPROVED AS TO FORM: THE CHARTER OF THE CITY OF PEARLAND,TEXAS . DARR1N M. COKER CITY ATTORNEY • f � , � 1 . C 6 - c . . f CERTIFICATE FOR RESOLUTION L THE STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § I, 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 November 12, 1 1 2007, at the regular meeting place thereof, within the City, and the roll was called of the duly 1 constituted officers and members of the City Council,to wit: i . Tom Reid Mayor Steve Saboe Mayor Pro-Tem ,, Woodrow Owens Councilmember L, Helen Beckman Councilmember Felicia Kyle Councilmember Kevin Cole Councilmember 14 and all of such persons were present except Councilmember Cole, thus constituting a quorum. Whereupon,among other business,the following was transacted at said meeting: a written — RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION �_, IT ISSUE CERTIFICATES OF OBLIGATION IN A PRINCIPAL AMOUNT • NOT TO EXCEED $10,500,000 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 L MATTERS RELATING THERETO . (the "Resolution")was duly introduced for the consideration of the City Council and read in full. It was then duly moved and seconded that the Resolution be adopted; and, after due discussion, such motion, carrying with it the adoption of the Resolution, prevailed and carried by the following vote: • AYES: 4 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 • r HOU:2749120.2 • f 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 11,2008. • Mayor CITY OF PEARLAND,TEXAS `,,QA1ti�Nl�'��"AiC�li`i of fje:AB•z. h r f�bryttt t f t ltit��AON. • • f� I L. • . • • HOU:2749120.2 ) . FEDERAL TAX CERTIFICATE CITY OF PEARLAND,TEXAS WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008 I, the undersigned officer of the City of Pearland, Texas of Brazoria, Fort Bend 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 Water and Sewer System Revenue Bonds, Series 2008 (the "Bonds") in the aggregate principal amount of$14,950,000, 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 Bonds. 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 11 2008, authorizing the issuance of the Bonds (the "Ordinance"), and particularly the provisions thereof relating to the treatment of the Bonds 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. 2. Reasonable Expectations. As an officer of the City responsible for issuing the Bonds, 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 Bonds and other matters relevant to the treatment of interest on the Bonds for federal income tax purposes are accurately and completely stated herein, that all of such expectations 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 Robert W. Baird&Co., the initial purchaser of the Bonds from the City, (the "Initial Purchaser") in the Issue Price Certificate, attached hereto as Exhibit A, and certain representations of RBC Damn 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 Bonds pursuant to the Ordinance to provide funds, which will be used.to: { HOU:2779465.1 (a) finance certain repairs, improvements, additions and extensions to the City's water and sewer system (the "System"), as more fully described in the Ordinance (the"Project"); and (b) pay the costs issuing the Bonds. 4. Proceeds of the Bonds. The sales proceeds from the sale of the Bonds is $15,308,610.35, which represents the aggregate principal amount of the Bonds of $14,950,000.00,plus net original issue premium of$358,610.35. 5. Use of Proceeds of the Bonds. The sales proceeds from the sale of the Bonds will be expended and applied by the City as follows: (a) Proceeds of the Bonds in the amount of $14,800,000.00 will be used by the City to pay costs of the Project. (b) Proceeds of the Bonds in the amount of $100,610.35 represents the underwriters' compensation and will be retained bythe Underwriters from the sales p 1--_4 proceeds as a cost to the City of issuing the Bonds. (c) Proceeds of the Bonds in the amount of approximately $118,501.61 will be used by the City to pay costs of issuance of the Bonds. (d) Proceeds of the Bonds in the amount of$258,000.00 will be disbursed on the date hereof to pay the insurance premium for the Bonds. (e) Proceeds of the Bonds in the amount of $31,498.39 will be used by the LCity to purchase a surety bond policy to fund the Reserve Fund for the Bonds. 6. Pre-Issuance Accrued Interest. In addition to the sale proceeds described in paragraph 5, the City will receive, upon the issuance of the Bonds, the amount of $32,363.87 representing interest on the Bonds accruing during the period from March 1, 2008, to the date hereof. Such amount will be deposited in the City's Interest and Sinking Fund (the "Interest and Sinking Fund") and, along with all investment earnings therefrom, will be disbursed to pay interest on the Bonds on September 1, 2008, the first interest payment date on the Bonds. Because the amount of$32,363.87 represents accrued interest on the Bonds for a period of less than one year and will be used to pay interest on the Bonds within one year from the Issue Date, such amount constitutes pre-issuance accrued interest on the Bonds 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 Bonds to be approximately$100,000.00. Earnings on the investment of proceeds of the Bonds 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. The City will have no investment earnings on the amount described in paragraph 5(b) as such amount will be retained by the Underwriter as a cost to the City of issuing the Bonds. Earnings on the -2- HOU:2779465.1 -1 i investment of proceeds of the Bonds described in paragraph 5(c) through 5(e) will be used for the purpose described in paragraph 5(c)through 5(e). 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 Bonds { and amounts to be held in the Interest and Sinking Fund for the payment of debt service on the C - Bonds (as discussed in paragraphs 6 and 16) which have or will have at any time a sufficiently direct nexus to the Bonds or to any governmental purpose of the Bonds to conclude that such amounts would have been used for that governmental purpose if the proceeds of the Bonds were not used or to be used for that governmental purpose. More specifically-- (a) Sinking Funds and Pledged Funds. Other than the Interest and Sinking Fund and the amounts and investments on deposit therein from time to time,there are not now and will not be at any time while the Bonds 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 Bonds; and (ii) any fund, amount, or investment that is directly or indirectly pledged to pay principal or interest on the Bonds. 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 fmancial 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 proceeds allocable to the Bonds. Based on the reasonable expectations of the City as of the date hereof, the term of the Bonds is not longer than, and the City will not allow the Bonds to remain outstanding longer than, is reasonably necessary for the governmental purposes for which the Bonds are being issued. The weighted average maturity of the • Bonds does not exceed 120 percent of the reasonably expected economic life of the capital projects being financed and refinanced by the Bonds, determined in the same manner as provided under Section 147(b) of the Code. In addition, none of the proceeds of the Bonds will be used to finance working capital expenditures. 9. No Other Issue. There are no other tax-exempt obligations issued by the City or any related party of the City which (a) are sold at the same time as the Bonds (within 15 days), (b) are reasonably expected to be paid from the same source of funds as the Bonds and (c)have been or will be sold pursuant to the same plan of financing as the Bonds. 10. Temporary Period Requirements for the Bonds (a) Pre-Issuance Accrued Interest. The amount described in paragraph 6 Ij represents pre-issuance accrued interest on the Bonds for a period not in excess of one -3- I HOU:2779465.1 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 Bonds will have been expended prior to March 18, 2011 for costs of the Project. All net sale proceeds of the Bonds not expended prior to March 18, 2011 will be invested on and after such date until final expenditure at a yield (as defined in paragraph 14) which is not materially higher than the yield on the Bonds, except as set forth in paragraph 18 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 Bonds 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 Bonds 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 Bonds 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 Bonds 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 Bonds, except as provided in paragraph 19 below. The term "net sale proceeds" shall mean any amount actually or constructively received from the sale of the Bonds, 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 Bonds. 1 11. No Overissuance. Based on the expectations set forth in the preceding paragraphs, the amount of the proceeds from the issuance of the Bonds, plus all investment proceeds to be received with respect to the Bonds, does not exceed by any amount, the amount required for the governmental purposes for which the Bonds are being issued, as described in paragraph 3 above. 12. Flow of Funds. Under the Ordinance, the City is obligated to assess and collect certain revenues of the City's System in an amount sufficient to pay debt service on the Bonds. All revenues assessed and collected by the City for and on account of the Bonds will be deposited into the Interest and Sinking Fund. 13. Issue Price. The term "Issue Price," with respect to the entire issue of Bonds, means the aggregate of the initial offering prices for all of the Bonds, plus pre-issuance accrued interest as of date of issue on the entire issue of Bonds (unless as otherwise indicated herein). For substantially identical Bonds, the Issue Price is the first price at which a substantial amount j _' -4- HOU:2779465.1 (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 Issue Price Certificate, attached as Exhibit A and incorporated herein by reference, the Issue Price of the Bonds, without taking into account any costs of issuance or pre- issuance accrued interest, is $15,308,610.35. 14. Yield on the Bonds. For purposes of this Certificate, the term "yield" 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 Bonds, 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 of and interest on the Bondsproduces an amount equal to (i)the Issue Price of the principal q Bonds, plus (ii)pre-issuance accrued interest on the Bonds as of the Issue Date. Yield on the Bonds shall not take into account or reflect any underwriter's discount or cost of issuance of the Bonds. For purposes hereof, yield is and shall be calculated on the basis of a 360-day year with interest compounded semi-annually. The yield on the Bonds referred to on the cover page of the Official Statement as Term Bonds, and due 2026, 2028, 2032 and 2034 and subject to optional redemption(the"Yield- to-Call Bonds") is computed by treating each of these Bonds as retired at par plus accrued interest on September 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, and the treatment of these Bonds as retired on September 1, 2017, produces the lowest yield on the Yield-to-Call Bonds. Except for the Yield-To-Call Bonds, the yield with respect to the Bonds subject to optional redemption is computed by treating each Bond 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 Bonds which are subject to optional redemption, (ii) no Bond is subject to optional redemption at any time for a price less than the retirement price at final maturity plus accrued interest, (iii) no Bond is subject to optional redemption within five years of the Issue Date, (iv)no Bond subject to optional redemption is issued at an Issue Price that exceeds the stated redemption price at maturity of such Bond by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Bond and the number of complete years to the first optional redemption date for such Bond; and (v)no Bond subject to optional redemption bears interest at a rate that increases during the term of the Bond. The insurance premium in the amount of $258,000.00 and the surety bond policy premium in the amount of$31,498.39 (collectively, the "Insurance Premium") paid to insure the Bonds, constitutes a fee for a qualified guarantee; thus the Insurance Premium in the amount of $289,498.39 will be treated as additional interest on the Bonds for the purpose of calculating the yield on the Bonds. The Insurance Premium represents a fee for a qualified guarantee based on the representations set forth below: (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 { -5- HOU:2779465.1 discounted at a rate equal to the yield on the Bonds which results assuming recovery of the Insurance Premium. (b) Guarantee In Substance. The guarantee imposes secondary liability on Financial Security Assurance ("FSA") that unconditionally shifts substantially all of the credit risk for all or part of the payments on the Bonds. FSA is not a co-obligor and does not expect to make any payments other than payments for which it will be reimbursed immediately. FSA and related parties thereto will not use more than ten percent of the gross proceeds of the Bonds that are guaranteed by FSA. (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 FSA 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 Bonds or for the cost of casualty insurance for 1 property financed or refinanced by the Bonds. The Insurance Premium is not refundable upon redemption of the Bonds prior to maturity. The yield on the Bonds, calculated in this manner and as certified in the Certificate of Financial Advisor, Exhibit B hereto, is 4.546181 percent. 15. 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 Bonds is 18.947 years, which is the sum of the products of the Issue Price of each group of identical Bonds and the number of years to maturity (determined separately for each group of identical Bonds and taking into account mandatory redemptions), divided by the aggregate sale proceeds of the Bonds. 16. Interest and Sinking Fund. The City created pursuant to the Ordinance the Interest and Sinking Fund to be used primarily to achieve a proper matching of revenues and debt service on the Bonds 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 Interest { and Sinking Fund, will be sufficient to pay debt service each year on the Bonds. The City will 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 Bonds. The portion of the Interest and Sinking Fund which will be depleted by the payment of debt service on the Bonds 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 Interest and Sinking 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 Interest and Sinking Fund and will be treated as a separate fund (the "Bona Fide Portion") for purposes of this Certificate. Amounts, other than proceeds of the Bonds, remaining in the Interest and Sinking Fund, after the annual payment of all principal of and interest and premium, if any, on the Bonds, 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 Interest and Sinking Fund which (i) are allocable to such Reserve Portion and the Reserve Fund or(ii) are allocable to the Bona Fide Portion,but are not spent for the payment of debt service on -6- HOU:2779465.1 the Bonds within 13 months after the date of receipt of such amount, together with the amounts on deposit in the Reserve Fund, 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 Bonds, or (z) 125 percent of the average annual principal and interest requirement on the Bonds, at any time so long as the Bonds 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 Bonds, except as set forth in paragraph 19 below. 17. Reserve Fund. The City continued pursuant to the Ordinance the Reserve Fund will be used to secure payment of debt serve on the Bonds in the event the balance in the interest and sinking fund is insufficient. Amounts on deposit in the Reserve Fund allocable to the Bonds 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 requirement on the Bonds, or (Z) 125 percent of the average annual principal and interest requirements on the Bonds, 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 Bonds, except as set forth in paragraph 19 below. 18. No Other Sinking Funds. Other than the Interest and Sinking Fund and the Reserve 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 Bonds, or which are reserved or pledged as collateral for payment of debt service on the Bonds and (b) for which there is reasonable assurance that amounts therein will be available to pay debt service on the Bonds if the City encounters financial difficulties. Use of amounts in the Interest and Sinking Fund and the Reserve 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 Bonds. 19. Minor Portion. The City expects that the gross proceeds of the Bonds, including all proceeds received with respect to the Bonds 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 Bonds, other than amounts representing a portion of the Bona Fide Portion of the Interest and Sinking 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 19, 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 Bonds or $100,000 in the aggregate, at a yield not materially • higher than the yield on the Bonds. 20. Identification of Replacement Proceeds. Notwithstanding the expectations of the City as stated above in paragraph 8 the City will (at all times while the Bonds are outstanding) identify all replacement proceeds with respect to the Bonds, including any sinking fund created for repayment of the principal or interest on the Bonds or any other amounts held in any fund of the City reasonably expected by the City to be used to pay the principal of or interest • on the Bonds. If the City identifies any replacement proceeds and determines that a temporary period pursuant to Section 1.148-2(e) of the Regulations is not applicable to such replacement proceeds, the City will limit the yield on the investment of such replacement proceeds to the yield on the Bonds until such proceeds are treated as spent in accordance with the Regulations. -7- HOU:2779465.1 The City acknowledges that failure to properly identify replacement proceeds and account for the investment and expenditure thereof as required by the Regulations may result in interest on the Bonds being includable in the gross income of the holders of the Bonds. 21. Compliance with Rebate Requirements. The City has covenanted in the Ordinance that, unless the Bonds 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 Bonds, 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 Bonds (ii) maintain records regarding the investment of the gross proceeds of the Bonds as may be required to calculate the amount earned on the investment of the gross proceeds of the Bonds which are part of a reasonably required reserve or replacement fund separately from records of amounts in other funds or accounts maintained for the Bonds 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 Bond 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 Bond 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 Bonds 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 Bonds 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 Bonds 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 Bonds. 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 Bonds 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 Bonds pursuant to Section 148(f) of the Code in order to prevent the Bonds from constituting arbitrage bonds or being otherwise classified or treated such that interest on the Bonds 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. li The City hereby makes the following elections with respect to the Construction Proceeds of the Bonds: -8- HOU:2779465.1 { 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. ❑ ❑ 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 Bond 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 expenditures to be financed by the Bonds. 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 Bonds fail to satisfy any of the semiannual spending requirements for the two-year rebate exception. Section 1.148-7(k)(1) of the Regulations. 22. Not a Refunding. No portion of the proceeds of the Bonds are expected to be used to pay any principal of or interest on any issue of governmental obligations other than the Bonds. 23. Not a Reimbursement. Except for certain preliminary expenditures, if any (as defined in Section 1.150-2(f)(2) of the Regulations), not exceeding 20 percent of the Issue Price of the Bonds and those expenditures described in the two Resolutions Declaring The City's Intention To Reimburse Project Expenditures approved by the City respectively on July 23, 2007 and October 22, 2007 (attached hereto as Exhibit C) regarding certain expenditures already paid by the City with respect to the Project prior to the date hereof, none of the proceeds of the Bonds will be allocated to, or otherwise used, to reimburse any expenditure paid, either actually or constructively, by the City prior to the Issue Date. 24. No Change in Use. The City does not expect to dispose of any portion of any project related to the Bonds or to change the use of the proceeds of the Bonds while any of the Bonds are outstanding. 25. Not a Hedge Bond. The Bonds are not "hedge bonds" within the meaning of Section 1.149(g)-1 of the Regulations. -9- HOU:2779465.1 r- 26. No Abusive Arbitrage Device. The Bonds are not and will not be a part of 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 Bonds 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 fmancial advantage, and (ii)increasing the burden on the market for tax-exempt obligations. In this regard, the City issued the Bonds 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 Bonds in an amount higher than is reasonably necessary to accomplish the governmental purposes of the Bonds, the City has not issued the Bonds earlier than is reasonably necessary to accomplish the governmental purposes of the Bonds and the City is not allowing the Bonds to remain outstanding longer than is reasonably necessary to accomplish the governmental purposes of the Bonds. The City would have issued the Bonds regardless of any arbitrage benefit, which it may, realize in connection with the Bonds. In fact, the City reasonably expects that even if the Bonds 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 Bonds are in fact now being issued, the City would have issued the Bonds, notwithstanding the loss of any opportunity to borrow at lower tax-exempt rates and invest at higher taxable rates. (a) No Impermissible Sinking Fund. No portion of the Bonds has a maturity determined primarily for the purpose of creating a sinking fund with respect to the Bonds the yield on which will be blended with the yield on the investment of other proceeds of the Bonds 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 Bonds (and that is directly related to capital expenditures financed by the Bonds), the City will only expend proceeds of the Bonds 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 Bonds in an amount that does not cause the aggregate amount of interest paid on all of the Bonds to exceed that amount of interest on the Bonds 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 Bonds 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 gross proceeds of the Bonds has been or will be used to acquire, finance or refinance a conduit loan. 27. Allocations and Accounting. The proceeds of the Bonds 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 Bonds, if earlier. The allocation of proceeds will be made by employing the direct-tracing method of accounting, unless the City elects otherwise. 28. No Private Use,Payments or Loan Financing. -10- HOU:2779465.1 I j ' _ (a) General. The City reasonably expects, as of the date hereof, that no action or event during the entire stated term of the Bonds will cause either the "private business tests" or the "private loan financing test," as such terms are defined in the Regulations,to be met. (i) No portion of the proceeds of the Bonds, or the facilities refinanced by the Bonds, 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 Bonds is treated as the direct use of proceeds; (C) a nongovernmental person will be treated as a private business user of proceeds of the Bonds 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 Bonds. (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 Bonds, or the facilities refinanced by the Bonds, 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 Bonds remain outstanding (or until an opinion of nationally recognized bond counsel is received to the effect that such change in use will not JI adversely affect the excludability from gross income for federal income tax purposes of interest payable on the Bonds). 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 Bonds that is not subject to any material contingencies. (iii) No portion of the proceeds of the Bonds 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. —I Dispositions of personal property financed or refinanced with any portion of the proceeds of the Bonds will occur in the ordinary course of an established governmental program and will satisfy the following requirements: (i) The weighted average maturity of the portion of the Bonds 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; ii -11- HOU:2779465.1 I ' I � (iii) Such personal property will no longer be suitable for its governmental purposes on the date of disposition; and (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. 29. No Arbitrage. On the basis of the foregoing facts, estimates and circumstances, it is expected that the proceeds of the Bonds will not be used in a manner that would cause any of the Bonds to be an "arbitrage bond" within the meaning of Section 148 of the Code and the i 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. [SIGNATURE PAGE FOLLOWS] -12- HOU:2779465.1 1 I WITNESS MY HAND,this 18th day of March, 2008. CITY OF PEARLAND, TEXAS By: hV�n Th Claire Manthei Director of Finance EXHIBIT A—Issue Price Certificate EXHIBIT B—Certificate of Financial Advisor EXHIBIT C Resolution Declaring Intention to Reimburse Project Expenditures HOU:2779465.1 o EXHIBIT A ISSUE PRICE CERTIFICATE t ,. HOU:2779465.1 , CERTIFICATE REGARDING ISSUE PRICE The undersigned hereby certifies with respect to the sale of$14,950,000 City of Pearland, Texas (the "Issuer"), Water and Sewer System Revenue Bonds,Series 2008 dated March 1,2007(the"Bonds"): 1 I. 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 Bonds at competitive bid sale. In this capacity,the undersigned is familiar with the facts stated herein. 1 1 2. The term "Initial Offering Prices"means the respective initial offering prices for the Bonds 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 $ 150,000 September 1,2009 2,c % $ 440,000 September 1,2022 % 190,000 September 1,2010 2.,(7 % 460,000 September 1,2023 11,Z{ % 205,000 September 1,2011 7_142-% 490,000 September 1,2024 q(,3 4/ % 225,000 September 1,2012 •.iy % 510,000 September 1,2025 -- % 235,000 September 1,2013 Z.?) % 540,000 September 1,2026 LI 24 % 255,000 September 1,2014 Z g7 % 560,000 September 1,2027 275,000 September 1,2015 3,Io % 595,000 September 1,2028 c.,M% 290,000 September 1,2016 3.Z1) % 600,000 September 1,2029 - % 315,000 September 1,2017 - 13 % 580,000 September 1,2030 - % 340,000 September 1,2018 % 560,000 September 1,2031 -. % 370,000 September 1,20194„_% 1,890,000 September 1,2032 N.lir% 395,000 September 1,2020 3,1% % 1,980,000 September 1,2033 % 420,000 September 1,2021 d%% 2,080,000 September 1,2034 El 47 % _ 3. The term"Sale Date"means the first day on which there was a binding contract in writing for the sale of the Bonds by the Issuer to the Underwriter on specific terms that were not later modified or adjusted in any material respect. In the case of the Bonds,the Sale Date is February 11,2008. 4. The term "Issue Date" means the first day on which there is a physical delivery of the written evidence of the Bonds in exchange for the purchase price(but not earlier)than the day interest on the Bonds begins to accrue for federal income tax purposes). In the case of the Bonds,the Issue Date is March 18,2008. 5. The term"Public"shall not include bond houses,brokers,and similar persons or organizations acting in the capacity of wholesalers or underwriters. 6. Based on the actual facts and reasonable expectations in existence,the Initial Offering Price for each Bond: a. Represented the price (payable in cash, with no other consideration being included, and exclusive of accrued interest),at which the Underwriters reasonably expected,each such Bond would be sold to the Public;and b. Did not exceed what the Underwriters believed to be the respective fair market value of each such Bond. 7. The Underwriters have made a bona fide public offering to the public of all of the Bonds at the prices to the public set forth above in paragraph 2. The prices set forth above in paragraph 2 were determined on the date the Bonds were purchased by the Underwriters based on the reasonable expectations regarding the initial public offering prices. Based on our records and other information available to us, which we have no reason to believe is is 1 S i -', not correct, at least 10 percent of all of the Bonds,except any Retained Bonds(as defined below)were sold to the public at initial offering prices not greater than the respective prices shown in paragraph 2 above or, in the case of obligations sold on a yield basis, at yields no lower than the respective yields shown in paragraph 2 above. For the Bonds maturing in the years , , ,and ,of which at least 10 percent of each maturity was not sold to the public at the initial offering prices set forth in paragraph 2 above(the "Retained Bonds), the Underwriters reasonably expected, as of the date such Bonds were purchased by the Underwriters, to sell a substantial amount of each maturity of such Bonds to the public at prices not greater than the respective prices shown in paragraph 2 above or,in the case of obligations sold on a yield basis,at yields no lower than the respective yields shown in paragraph 2 above. And,as of the date of closing,no Retained Bond has been sold to the public at prices greater than the respective prices shown above in paragraph 2 or,in the case of Bonds sold on a yield basis,at yields no lower than the respective yields shown in paragraph 2 above. 8. The accrued interest on the Bonds as of the Issue Date is $ The aggregate of the respective Initial Offeri PricesQes of all of the Bonds, exclusive of accrued intere t and without adjustment for any costs of issuance,is$ ( 9. The Underwriter 6a has not] purchased bond insurance or another form of credit enhancement ("Guarantee")securing the payment of the principal of,or interest on,any of the Bonds. If any Guarantee has been purchased with respect to all or any portion of the Bonds— ' a. The provider of the Guarantee is (the"Guarantor"). b. The fee or premium paid to the Guarantor for the Guarantee is$Z,S7 OPP(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 Bonds. c. As a result of the Guarantee,the interest rates on the Bonds are less than those which would have been necessary in order to sell the Bonds at the respective Initial Offering Prices without the Guarantee. The present value of such interest savings expected to result from the Guarantee is • greater than the present value of the Premium. In both cases, such present values have been determined as of the Issue Date using the yield on the Bonds(computed for this purpose by treating the Premium as additional interest on the Bonds)as the discount rate. We understand that the City will rely on the above in making certain representations to Andrews Kurth LLP,Bond Counsel to the City,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 Bonds to be and remain excludable from 4-. gross income for federal income tax purposes. EXECUTED and DELIVERED this ,2008. 22 ber�k ID0J 7. (A) ( ( ))ame N of U nde iter or Manager) By: C�;,, e� .. Title: l�J)JV1 'Uf EXHIBIT B CERTIFICATE OF FINANCIAL ADVISOR The undersigned hereby certifies with respect to the sale of City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 (the"Bonds"), as follows: 1. The undersigned is a duly authorized representative of RBC Dain Rauscher, Inc., doing business under the name RBC Capital Markets, the fmancial advisor (the "Financial Advisor")to City of Pearland, Texas (the "City") in connection with the sale and delivery of the Bonds. In this capacity,the undersigned is familiar with the facts stated herein. 2. Based on the scheduled debt service on the Bonds, an amount of not less than the reserve requirement represented by the surety bond policy maintained in the Reserve Fund for the Bonds is consistent with accepted standards of prudent fiscal management for similar governmental entities in order to provide a reserve against periodic fluctuations in the amount and timing of revenue collections of the City and unanticipated financial problems of the City. 3. For purposes of this Certificate, the term "yield" 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 Bonds, 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 Bonds produces an amount equal to (i)the Issue Price of the Bonds, plus (ii)pre- issuance accrued interest on the Bonds as of the Issue Date. Yield on the Bonds shall not take into account or reflect any underwriter's discount or cost of issuance of the Bonds. For purposes hereof, yield is and shall be calculated on the basis of a 360-day year with interest compounded semi-annually. The yield on the Bonds referred to on the cover page of the Official Statement as Term Bonds, and due 2026, 2028, 2032 and 2034 subject to optional redemption (the "Yield-to- t_ Call Bonds") is computed by treating each of these Bonds as retired at par plus accrued interest on September 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, and the treatment of these Bonds as retired on September 1, 2017,produces the lowest yield on the Yield-to-Call Bonds. Except for the Yield-To-Call Bonds, the yield with respect to the Bonds subject to optional redemption is computed by treating each Bond 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 Bonds which are subject to optional redemption, (ii) no Bond is subject to optional redemption at any time for a price less than the retirement price at final maturity plus accrued interest, (iii)no Bond is subject to optional redemption within five years of the Issue Date, (iv)no Bond subject to optional redemption is issued at an Issue Price that exceeds the stated redemption price at maturity of such Bond by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of such Bond and the number of complete s B-1 HOU:2779465.1 years to the first optional redemption date for such Bond; and (v)no Bond subject to optional redemption bears interest at a rate that increases during the term of the Bond. Based on representations of the Initial Purchaser set forth in the Issue Price Certificate, attached as Exhibit A to the Federal Tax Certificate to which this Certificate is attached, the insurance premium in the amount of $258,000.00 and the surety bond policy premium in the amount of$31,498.39 (collectively, the "Insurance Premium") paid to insure the Bonds, will be treated as additional interest on the Bonds for the purpose of calculating the yield on the Bonds. The yield on the Bonds, calculated in this manner, is 4.546181 percent. 4. The weighted average maturity of the Bonds is 18.947 years. The weighted average maturity is the sum of the products of the Issue Price of each group of identical Bonds and the number of years to maturity (determined separately for each group of identical Bonds and taking into account mandatory redemptions), divided by the aggregate sale proceeds of the Bonds. 5. With respect to the issuance of the Bonds, the representations set forth in paragraph 26 of the Federal Tax Certificate are, to the best of our knowledge, true, correct and complete. [SIGNATURE PAGE FOLLOWS] j-, B-2 HOU:2779465.1 The Financial Advisor hereby authorizes the City to rely 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 Bonds.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 Bonds is excludable from gross income for federal income tax purposes. EXECUTED and DELIVERED as of and on the 18th day of March,2008. RBC CAPITAL M TS By: Ry O'Hara Director II B-3 HOU:2779465.1 EXHIBIT C { RESOLUTION DECLARING INTENTION TO REIMBURSE PROJECT EXPENDITURES B-4 HOU:2779465.1 RESOLUTION.NO. R2007-170 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PEARLAND DECLARING THE INTENTION TO REIMBURSE PROJECT EXPENDITURES. WHEREAS, the City Council of the City of Pearland, Texas (the "City") has previously approved, and the City is proceeding with its program to construct certain water and sewer lines located in the City, including the City of,Houston water line, the SH35 north sewer line and the Cullen water line (collectively, the "Projects"); WHEREAS, the City anticipates providing funds to permanently finance the capital costs of the Projects by issuing after the date hereof its Water and Sewer System Revenue Bonds, Series 2008, which are currently expected to have a maximum aggregate principal amount of approximately $17,630,000 (the "Bonds"), of which not more than $6,400,000 is expected to be used for the Projects; WHEREAS, no funds'of the.City are, or are reasonably expected to be, allocated, reserved, or otherwise set aside in the City's budget on a long-term basis to pay the cost of the Projects; WHEREAS, the Bonds will be;payable from revenues received from the operation of the City's water and wastewater system and collected by the City; WHEREAS, the City anticipates that, after the date hereof and prior to the issuance of the Bonds, it will be obligated to pay certain costs constituting expenditures properly chargeable to a capital account(under general federal income tax principles) in connection with the Projects in the aggregate amount of not more than $6,400,000 (herein, the "Expenditures"), for costs related to the Projects; HOU:27385323 RESOLUTION NO. R2007-170 WHEREAS, the funds to be used to pay the Expenditures set forth in this Resolution are in the City's General Fund,the general purpose of which.is to pay operation and maintenance expenditures of the City, and other lawfully available funds of the City., including funds for the payment of water, sewer and wastewater operation and maintenance and excluding proceeds of the City's outstanding tax-exempt bonds and amounts currently on hand dedicated to the payment of debt service on the City's outstanding tax-exempt bonds(collectively herein, the"Fund"), and such funds have been earmarked by the City for expenditures other than the Expenditures; WHEREAS, the City reasonably expects that it will be reimbursed for the Expenditures with proceeds of the Bonds; and WHEREAS, after the issuance of the Bonds, the City will: (i) evidence each allocation of proceeds of the Bonds to the reimbursement of the Expenditures with an entry in its books and records maintained with respect to the Bonds, and (ii) identify in 1 such entry the actual prior Expenditure being reimbursed or the fund from which the Expenditure was made. WHEREAS, on July 23, 2007,. the City previously approved a resolution to use proceeds of the. Bonds to reimburse prior expenditures for the expansion of the 'City's Southwest Environmental Center Wastewater Treatment Plant in the amount not . exceeding $11,000,000, which amount is in addition to the Expenditures described herein. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: 2 UOU:2738532.I • RESOLUTION NO..R2007-170 Section 1. That the City Council hereby adopts the findings set out in the preamble hereof and declares its intent within the meaning of Treasury Regulation §1.150- 2, as promulgated under the Internal Revenue Code of 1986, as amended, to issue the • Bonds to pay the costs of Projects, of which a maximum amount of $6,400,000 is expected to be used to reimburse the City for the Expenditures paid in connection with Projects prior to the issuance of the Bonds. Section 2. That the City will maintain this Resolution at the office of the City located at 3519 Liberty Drive, Pearland,Texas,where such records are generally kept and make it continuously available for inspection by the general public during normal business hours on business days beginning within thirty(30)days after the date of this Resolution. PASSED, APPROVED and ADOPTED this the 22nd day of October, A.D., 2007. TOM REID MAYOR AT' c ' • / UN 40f:1 tC _ ITY S CRETARY APPROVED AS TO FORM: DARRIN M. COKER CITY ATTORNEY 3 HOU:2738532.1 Page 1 of 1 RESOL ION NO.R2°07-113 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PEARLAND, DECLARING THE INTENTION TO REIMBURSE PROJECI EXPENDITURES. WHEREAS.thc City Council of the City of Pearland,Texas(the"'City") has previously approved,and the City is proceeding with its progam to l'z(rand the Southwest Enviroornernal Center'Wastewater Treatment Plant,located in the City(the"Projecr): WHEREAS,the City anticipates providing funds to permanently fi)ative the capital costs of the Projeet by issuing after the date hereof its Water and Sewer System Revenue Bonds, Series 200g, which are CUriently expected to have a maximum aggregate principal amount of approximately S17,000,(100(the''Bonds'),of which riot more than SI 1,(00,1)00 is expected to be _ used for the Project and cost of issuance; WHEREAS,no funds of the City are,or arc reasonably expanati to he,allocauxl,reserved, or otherwise set aside in the City's budget on a long.,terin basis to pay the cost ofthe Project:. WHEREAS,the Bonds will be PaYable from revenues received from the operation,rd the City's water and wastewater system and collected by the City; WHEREAS,the City anticipates that,enter the date hereof and prior to the issuance of the Bonds,it will be obligated to pay certain costs constituting expenditures proptill) chargeable to a capital OCC+JORt(under general feder d income tax principles)in connection with the Project in OW aggregate amount of not more than S I 1,000,(0(herein,the"Expenditures"),for costs related to the expansion ot'the Southwest Environmental Center WaAewater Treatment Plain; WHEREAS,the funds to be used to pay the Expenditures set forth in this Rtzulution are in the City's Qencral Fund, the g.,aterel purpose of which is to pay operation and maintenance expenditures of the City, and other lawfully available limit of the City, including limas for the payment of water,sewer and wastewater operation and maintenance and excluding procerxIs of the City's outstanding tax-exempt hoods and amounts currently on band dedierited to the payment of debt mice on the City's outstanding tax-exempt bonds(collectively herein,the-Fund"), anti such funds have been earmarked by the City for expenditures other than the Expenditures.; WHEREAS, the City reasonably expects that it will be reinthurecti for the Expenditures with proceeds of the Bonds',and WHEREAS,after the issuance of the Bonds.the City will: (i)evidence each allocation of proceeds of the Bonds to the reimbursement of the Expenditures with an entry in its books and records maintained with respect to the Bonds, and (ii) identify in such entry the actual prior Expenditure being reimbursed or the fund from which the Expenditure was made. NOW,THEREFORE,Br;IT RESOLVED BY THE crry COUNCIL OF THE CITY OF PEARLAND,TEXAS.THAT: http://65.112.242.10/weblink7/ImageDisplay.aspx?cache=yes&sessionkey=WL. ImageDisp... 3/17/2008 Page 1 of 1 J Section 1. The City Council hereby adopts the findings set out in the preamble hereof and declares its intent within the meaning of Thlasury Regulation§1.l5Q-2,as promulgated under the Internal Revenue Code of 1 r956,as amended,to issue the Boncts to pay the costs of Project,of which a Inutimam amount of$11,1 0t10 is expected to he used to reimburse the City for the Expenditures paid in connection-with Project prior to the issuance of the Bends, Swim 2. The City will maintain this Resolution at the office o1:the City located at 3519 Liberty Drive, Pe eland, 'Texas, where s+teh rwards are generally kept and make it continuously available for inspection by the general public during normal business hours on business days beginning within thirty(30)days atter the date of this Resolution. PASSED AND APPROVED this 23°J day of July,2007. 24-P �.. .. Mayor City of Pcarland.Texas Sear y of P .rland,"i cans (SEAL) 2 t 5.112.242.10/weblink7/Ima eDis 1a .as x?cache= es&sessionke =WLIma eDis ... 3/17/2008 hip//6 g P Y P Y Y g P 600 Travis,Suite 4200 AN V D i\ Y Y S Houston,Texas 77002 ATTORNEYS K t V 1 R I' LIP 713.220.4200 Phone f� 1 713.220.4285 Fax andrewskurth.com { Kathryn Garner 713 220.3948 Phone 713 238.7298 Fax kathygarner©andrewskurth.com April 7, 2008 • VIA CM/RRR 7160 39019849 6697 9420 Internal Revenue Service Ogden,Utah 84201 Re: City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 Ladies and Gentlemen: Enclosed for filing is an originally executed Form 8038G which I am forwarding on behalf of the City of Pearland, Texas for the above-referenced Bonds. Please date-stamp the enclosed copy of the Form 8038G to evidence your filing and return the copy of the Form to the undersigned in the enclosed envelope. Sincerely, Kathryn Garner Enclosures cc: Marcus Deitz (Finn) - HOU:2792563.1 Austin Dallas Houston London Los Angeles New York The Woodlands Washington, DC , . .. Form 8038-G Information Return for Tax-Exempt Governmental Obligations ► Under Internal Revenue Code section 149(e) OMB No.1545-0720 (Rev. November 2000) ► See.separate Instructions. Department of the Treasury Caution: If the issue price is under$100,000, use Form 8038-GC. Internal Revenue Service Part I Reporting Authority If Amended Return, check here ► ❑ 1 Issuer's name 2 Issuer's employer identification number City of Pearland,Texas 74 ; 6028909 3 Number and street(or P.O. box if mail is not delivered to street address) 'Room/suite 4 Report number 3519 Liberty Drive 3 2008-03 5 City,town, or post office, state, and ZIP code 6 Date of issue Pearland,Texas 77581 • • 03/18/2008 - 7 Name of issue 8 CUSIP number Water and Sewer System Revenue Bonds,Series 2008 704883 JF5 9 Name and title of officer or legal representative whom the IRS may call for more information 10 Telephone number of officer or legal representative Kathryn V.Garner, Bond Counsel ( 512 )320-9248 Part II Type of Issue (check applicable box(es) and enter the issue price) See instructions and attach schedule • I _ 11 ❑ Education 11 12 ❑ Health and hospital 12 13 ❑ Transportation 13 14 ' ❑ Public safety 14 15 ❑ Environment (including sewage bonds) 15 16 ❑ Housing 16 17 ❑✓ Utilities 17 15,308,610.35 18 ❑ Other. Describe ► 18 19 If obligations are TANS or RANs, check box 0- 0 If obligations are BANs, check box 0- 0 j�j��� 20 If obligations are in the form of a lease or installment sale, check box ► ❑ Part III Description of Obligations. Complete for the entire issue for which this form is being filed. (a)Final maturity date (b)Issue price (c)Stated redemption (d)Weighted (e)Yield price at maturity average maturity 21 09/01/2034 $ 15,308,610.35 $ 14,950,000.00 18.947 years 4.546181 Part IV Uses of Proceeds of Bond Issue (including underwriters' discount) 22 Proceeds used for accrued interest 22 32,363.87 23 Issue price of entire issue (enter amount from line 21, column (b)) 23 15,308,610.35 24 Proceeds used for bond issuance costs (including underwriters' discount) . 24 219,111.96 25 Proceeds used for credit enhancement 25 289,498.39 26 Proceeds allocated to reasonably required reserve or replacement fund 26 __ 00.0 27 Proceeds used to currently refund prior issues 27 0.00 28 Proceeds used to advance refund prior issues 28 0.00 j 29 Total (add lines 24 through 28) 29 508,610.35 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here). . 30 14,800,000.00 I Part V Description of Refunded Bonds (Complete this part only for refunding bonds.) 31 Enter the remaining weighted average maturity of the bonds to be currently refunded . . . ► years 32 Enter the remaining weighted average maturity of the bonds to be advance refunded . . ► years 33 Enter the last date on which the refunded bonds will be called ► 34 Enter the date(s) the refunded bonds were issued ► Part VI Miscellaneous 35 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) . . . 35 N/A 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract(see instructions) 36a b Enter the final maturity date of the guaranteed investment contract ► PA 37 Pooled financings: a Proceeds of this issue that are to be used to make loans to other governmental units 37a N/A b If this issue is a loan made from the proceeds of another tax-exempt issue, check box ► ❑ and enter the name of the issuer ► and the date of the issue ► 38 If the issuer has designated the issue under section 265(b)(3)(B)(i)(III) (small issuer exception), check box . . ► ❑ 39 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box ► ❑ 40 If the issuer has identified a hedge, check box ❑ Under penalties of perjury,I declare that I have examined this return and accompanying schedules and statements,and to the best of my knowledge and belief,they are true,correct,a complete. Sign nn^ _ Here ��IL.D 3 • )4. 0) Claire Manthei, Director of Finance Signature of issuer's authorized representative Date 'Type or print name and title For Paperwork Reduction Act Notice, see page 2 of the Instructions. Cat.No.63773S Form 8038-G (Rev. 11-2000) OFFICIAL STATEMENT CERTIFICATE THE STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § We, the undersigned, Mayor and City Manager of the City of Pearland, Texas (the "City"), acting solely in our respective official capacities, hereby certify with respect to the $14,950,000 City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 (the "Bonds"), as follows: We, the undersigned, Mayor and City Secretary, respectively, of the City of Pearland, Texas (the "City"), acting solely in our official capacity as such, hereby certify with respect to the City's Permanent Improvement Bonds, Series 2008 (the "Bonds"), as follows: That,to the best of our knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in its Official Statement, on the date thereof and on the date of sale of the Certificates and the acceptance of the best bid therefor, 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, • such 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 therein or necessary to make the statements therein, in the light of the circumstances under which they were made,not misleading. (c) insofar as the descriptions and statement, including financial data contained in such 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. (d) 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] • HOU:2773250.1 EXECUTED ON BEHALF OF THE CITY as of if,44443 /! , 2008. CITY OF PEARLAND, TEXAS "›.)-rypt2 7 Mayor City of Pearland re /pi City Manager City of Pearland [Signature Page to Official Statement Certificate] HOU:2773250.1 ADDITIONAL BONDS CERTIFICATE I, the undersigned, being the Director of Finance of the City of Pearland, Texas (the "City"), hereby certify as follows in connection with the issuance of"City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008" in the aggregate principal amount of $14,950,000 (the "Series 2008 Bonds"). This certificate is made for the Attorney General of the State of Texas and all other persons interested in the issuance of the Bonds. Capitalized terms not defined herein are those defined in the Ordinance authorizing the issuance of the Series 2008 Bonds. 1. This certificate evidences compliance with Section 6:1 of the Ordinances authorizing the issuance of the Outstanding Bonds. 2. The Series 2008 Bonds mature on September 1 and interest thereon is payable only on March 1 and September 1. 3. The Interest and Sinking Fund and the Reserve Fund each contain the amount of money currently required to be on deposit therein. 4. For the "Base Period" the Net Revenues were $8,525,522 which amount is equal to at least one hundred and forty percent (140%) of the Average Annual Principal and Interest Requirements on all Bonds (as set forth in the Ordinance authorizing the issuance of the Series 2008 Bonds), after giving effect to the issuance of the Series 2008 Bonds. The Base Period, as used in this Certificate, is the Fiscal Year ended September 30, 2007. _.I [Signature Page Follows] HOU:2773260.2 WITNESS MY HAND this �,.1A4,.,7 // , 2008. Director of Finance City of Pearland, Texas • 1 i 2 HOU:2773260.1 CERTIFICATE OF FINANCIAL ADVISOR The undersigned officer of RBC Dain Rauscher Inc., doing business under the name RBC Capital Markets, serving as financial advisor to the City of Pearland, Texas (the "City") in matters relating to the issuance of$14,950,000 City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 (the "Bonds"), hereby certifies to the City, pursuant to the final paragraph of Section 6.1 of the ordinance authorizing issuance of the Bonds, as follows: The estimated rate which the City's Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 would bear if they were issued as of this date as bonds bearing a fixed rate of interest to their scheduled maturity or maturities is 4.6%. IN WITNESS WHEREOF, I have hereunto set my hand this March!2-, 2008. RBC DAIN RAUSCHER INC. By: 7 , Printed Nan �t-7s o Title: /)let I ' HOU:2773265.1 . a CERTIFICATE REGARDING RESERVE FUND I, the undersigned, being the Director of Finance of the City of Pearland, Texas (the "City"), hereby certify as follows in connection with the issuance of "City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008" in the aggregate principal amount of $14,950,000 (the "Series 2008 Bonds"). Capitalized terms not defined herein are those defined in the Ordinance authorizing the issuance of the Series 2008 Bonds. 1. The amount of money and investments, including Surety Policy(ies), on deposit in the Debt Service Reserve Fund on the date hereof is $5,957,196 (which consists of Surety Policy(ies) insuring payment of$5,957,196 and money and investments in the amount of$0.00). 2. Pursuant to Section 5.6 of the Ordinance, the funds currently on deposit in the Debt Service Reserve Fund (in the amount set forth in the preceding paragraph) shall remain on deposit therein until such time as the Ordinance permits the City to withdraw such funds as provided therein. { [Signature Page Follows] HOU:2773251.1 WITNESS MY HAND this 0%,„ if , 2008. hajil .1marL, Director of Finance City of Pearland, Texas HOU:2773251.1 DISCLOSURE, NO DEFAULT AND TAX CERTIFICATE OF FINANCIAL SECURITY ASSURANCE INC. The undersigned hereby certifies on behalf of Financial Security Assurance Inc. ("Financial Security"), in connection with the issuance by Financial Security of its Policy No. 210084-N (the"Insurance Policy") and Policy No. 210084-R (the "Reserve Policy" and collectively with the Insurance Policy, the "Policy") in respect of the $14,950,000 in aggregate principal amount of the City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 (the"Bonds")that: (i) the information set forth under the caption "BOND INSURANCE — Financial Security Assurance Inc." in the official statement dated February 11,2008, relating to the Bonds is true and correct, (ii) Financial Security is not currently in default nor has Financial Security ever been in default under any policy or obligation guaranteeing the payment of principal of or interest on an obligation, (iii) the Policy is an unconditional and recourse obligation of Financial Security (enforceable by or on behalf of the holders of the Bonds)to pay the scheduled principal of and interest on the Bonds in the event of Nonpayment by the Issuer(as set forth in the Policy), (iv) each of the insurance premium for the Insurance Policy of $258,000.00 and for the Reserve Policy of $24,099.99 (the "Premium") is a charge for the transfer of credit risk and was determined in arm's length negotiations and is required to be paid to Financial Security as a condition to the issuance of the Policy, (v) no portion of such Premium represents an indirect payment of costs of issuance, including rating agency fees, other than fees paid by Financial Security to maintain its ratings, which, together with all other overhead expenses of Financial Security, are taken into account in the formulation of its rate structure, or for the provision of additional services by us, nor the direct or indirect payment for a cost, risk or other element that is not customarily borne by insurers of tax-exempt bonds (in transactions in which the guarantor has no involvement other than as a guarantor), r— (vi) Financial Security is not providing any services in connection with the Bonds other than providing the Policy, and except for the Premium, Financial Security will not use any portion of the Bond proceeds; provided, however, that Financial Security or its affiliates may independently provide a guaranteed investment contract for the investment of all or a portion of the proceeds of the Bonds, (vii) except for payments under the Policy in the case of Nonpayment by the Issuer,there is no obligation to pay any amount of principal or interest on the Bonds by Financial Security, (viii) Financial Security does not expect that a claim will be made on the Policy, (ix) the Issuer is not entitled to a refund of the premium for the Policy in the event a Bond is retired before the final maturity date, and (x) Financial Security would not have issued the Insurance Policy unless the authorizing or security agreement for the Bonds provided for a debt service reserve account or fund funded and maintained in an amount at least equal to, as of any particular date of computation,the reserve requirement as set forth in such agreement. Financial Security makes no representation as to the nature of the interest to be paid on the Bonds or the treatment of the Policy under Section 1.148-4(f)of the Income Tax Regulations. FINANCIAL SECURITY ASSURANCE INC. By: Authorized Officer Dated: March 18,2008 AN D R E VV S 600 Travis,Suite 4200 ATTORNEYS K U F�T H LLP Houston,Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com � I March 18, 2008 WE HAVE ACTED as Bond Counsel for the City of Pearland, Texas (the "City"), in connection with an issue of bonds (the"Bonds") described as follows: CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated February 1, 2008, in the aggregate principal amount of $14,950,000 maturing on September 1 in each year from 2009 through and including 2024 and on September 1 in the years 2026, 2028, 2032 and 2034. The Bonds are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Bonds and in the ordinance (the "Bond 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 Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Bonds, as described in the Bond 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 Bonds. We have also examined executed Bond 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 Bonds. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently in effect; the Bonds constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Bonds have been authorized and delivered in accordance with law; and HOU:2770041.1 Austin Beijing Dallas Houston London Los Angeles New York The Woodlands Washington, DC March 18, 2008 Page 2 (2) The Bonds are special obligations of the City of Pearland, Texas and are payable solely from a first lien on and pledge of the net revenues of the City's waterworks and sanitary sewer system. "Net Revenues" are the revenues to be derived from the operation of the City's waterworks and sewer system after the payment of all operation and maintenance expenses thereof. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Bonds 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 Bonds 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 Bond Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. 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 Bonds in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Bonds, 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 Bonds 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 Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, 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 Bonds. 7867/78681Ltt HOU:2770041.1 FsA March 18,2008 A Dexia Company Municipal Bond Insurance Policy No.210084-N and Municipal Bond Debt Service Reserve Insurance Policy No.210084-R with Respect to $14,950,000 in Aggregate Principal Amount of the City of Pearland,Texas Water and Sewer System Revenue Bonds,Series 2008 Ladies and Gentlemen: I am Associate General Counsel of Financial Security Assurance Inc., a New York stock insurance company ("Financial Security"). You have requested my opinion in such capacity as to the matters set forth below in connection with the issuance by Financial Security of its municipal bond insurance policy no. 210084-N (the "Insurance Policy") and its municipal bond debt service reserve insurance policy no. 210084-R (the "Reserve Policy" and, collectively with the Insurance Policy, the "Policy"). In that regard, and for purposes of this opinion, I have examined such corporate records, documents and proceedings as I have deemed necessary and appropriate. Based upon the foregoing, I am of the opinion that: 1. Financial Security is a stock insurance company duly organized and validly existing under the laws of the State of New York and authorized to transact financial guaranty insurance business therein. 2. The Policy has been duly authorized,executed and delivered by Financial Security. 3. The Policy constitutes the valid and binding obligation of Financial Security, enforceable in accordance with its terms, subject, as to the enforcement of remedies, to bankruptcy, insolvency, reorganization, rehabilitation, moratorium and other similar laws affecting the enforceability of creditors' rights generally applicable in the event of the bankruptcy or insolvency of Financial Security and to the application of general principles of equity. In addition, please be advised that I have reviewed the description of the Insurance Policy under the caption "BOND INSURANCE — Bond Insurance Policy" in the official statement relating to the above-referenced Bonds dated February 11,2008(the"Official Statement"). There has not come to my attention any information which would cause me to believe that the description of the Insurance Policy referred to above, as of the date of the Official Statement or as of the date of this opinion, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Please be advised that I express no opinion with respect to any information contained in, referred to or omitted from under the caption "BOND INSURANCE—Financial Security Assurance Inc." I am a member of the Bar of the State of New York, and do not express any opinion as to any law other than the laws of the State of New York. Very truly yours, //,`:,77/';'/,'' Associate General Counsel City of Pearland, 3519 Liberty Drive, f- Pearland,Texas 77581. - Robert W. Baird, 125 Half Mile Rd,Suite 200, Red Bank, New Jersey 07701. Financial Security Assurance 3 i West 52nd Street•New York,Now York 10019•`t'el:212.826.o1oo Fax:2.1e.688, io i. New York•Dallas•San Francisco•London•Madrid•Paris•Singapore•Sydney!Pokyo II gow ATTORNEY GENERAL OF TEXAS GREG ABBOTT • March 18,2008 THIS IS TO CERTIFY that the City of Pearland, Texas (the "Issuer") has submitted to me City of Pearland,Texas Water and Sewer System Revenue Bond, Series 2008(the"Bond")in the principal amount of$14,950,000,for approval. The Bond is dated March 1,2008, numbered T-1,and was authorized by Ordinance No. 1337 of the Issuer passed on February 11, 2008 (the"Ordinance"). In connection therewith, .the Issuer has additionally submitted to me for review an Insurance Agreement dated March 18,2008 (the"Agreement"). 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,Ihave 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 Bond. 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 Bond has been issued in accordance with law and is a valid and binding special obligation of the Issuer. (2) The Bond is equally and ratably payable from, and secured by a first lien on and pledge of, the Net Revenues. (3) The owner of the Bond shall never have the right to demand payment of the Bond from any funds raised or to be raised by taxation. Therefore,the Bond is approved and,pursuant to section 1502.064 of the Government Code, the Agreement is also approved. • • Attorney Ge ral of the State of`I'exas • No.47573 • Book No.2008-A MAR • Pos-r OFFLcF. Box 12548, AUSTiN, TExAS78711-2548 TEL:(512)463-2100 'WWW.OAC.S7ATE.TX.us An Equal E,nplopnrns Opporrovily Employer• Printed on Retyekd Paper • OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora, 111 Bond Clerk riq 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 18th day of March 2008, I signed the name of the Comptroller to the certificate of registration endorsed upon the: City of Pearland,Texas Water and Sewer System Revenue Bond. Series 2008, numbered T-1, dated March 1, 2008, and that in signing the certificate of registration I used the following signature: (Driettuz IN WITNES1 E OF I have executed this rti to this the 18th day of March 2008. 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 74033. GIVEN under my hand and seal of office at Austin,Texas,this the 18th day of March 2008, • Susan Combs Comptroller of Public Accounts of the State of Texas II it 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 Water and Sewer System Revenue Bond. Series 2008 numbered T-1, of the denomination of $ 14,950,000, dated March 1, 2008, 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 18th day of March 2008, under Registration Number 74033. Given under my hand and seal of office, at Austin, Texas, the 18th day of March 2008. 4‘,10:01/L. SUSAN COMBS Comptroller of Public Accounts of the State of Texas • 1 � A N D R E 1N S Andrews Kurth LLP Suite 4200 ATTORNEYS KURTH Houston,Texa 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com March 18, 2008 Financial Security Assurance 31 West 52nd Street New York,New York 10019 Re: $14,950,000 City of Pearland, Texas Water and Sewer Revenue Bonds; Series 2008 Ladies and Gentlemen: We have this day issued our opinion as Bond Counsel in connection with the referenced Bonds. Please be advised that you may rely upon such opinion as if it were addressed to you. In addition, we are of the opinion that the ordinance (the "Bond Ordinance") adopted by the City Council of the City authorizing the issuance of the referenced Bonds has been duly adopted and is in full force, and is enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency,reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases. Very truly yours, HOU:2786324.1 Austin Dallas Houston London Los Angeles New York The Woodlands Washington,DC $14,950,000 CITY OF PEARLAND,TEXAS, WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008 RECEIPT AND CROSS RECEIPT March 18,2008 representative of Wells Bank, N.A. hereby the undersigned, a dulyauthorized re rFargoY I, p � acknowledge receipt on behalf of the City of Pearland, Texas (the "City") of the full purchase price for the City's Water and Sewer System Revenue Bonds, Series 2008, in the total amount of $14,982,363.87 (representing the par amount of the Bonds of $14,950,000.00, plus accrued interest of$32,363.87) on the date hereof. WELLS FARGO BANK,N.A. Na JOS • Title:A I,the undersigned,a duly authorized representative of Rober W. Baird& Co., Inc. hereby acknowledge receipt from the City of the initial bonds of its $14,950,000.00 Waterworks and Sewer System Revenue Bonds, Series 2008,dated March 1,2008. ROBERT W. BAIRD & CO.,INC. By: Name: Title: HOU:2789111.1 $14,950,000 CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008 RECEIPT AND CROSS RECEIPT March 18,2008 I, the undersigned, a duly authorized representative of Wells Fargo Bank, N.A. hereby acknowledge receipt on behalf of the City of Pearland, Texas (the "City") of the full purchase price for the City's Water and Sewer System Revenue Bonds, Series 2008, in the total amount of $14,982,363.87 (representing the par amount of the Bonds of $14,950,000.00, plus accrued interest of$32,363.87) on the date hereof. WELLS FARGO BANK,N.A. • By: Name: Title: I,the undersigned, a duly authorized representative of Rober W. Baird& Co., Inc. hereby acknowledge receipt from the City of the initial bonds of its $14,950,000.00 Waterworks and Sewer System Revenue Bonds, Series 2008, dated March 1,2008. ROBERT W.BAIRD & CO.,INC. Cf2sx,ejK4,yj,__ By: Name: [.- .o.r1,1),S Title: A, '►i--) HOU:2789111.1 • • { I 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 WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008,in the total authorized aggregate amount of$14,950,000 certifies that it has duly registered the above-mentioned Bonds in accordance with the Ordinance, dated February 11,2008 and that such Bonds have been delivered to the purchaser thereof. EXECUTED AND DELIVERED this March 18,2008. WELLS FARGO BANK,N.A. By: Name: Title:ASSI STAM i VICE PT1CSIDENT • • HOU:2789121.1 $14,950,000 City of Pearland, Texas Water and Sewer System Revenue Bonds Series 2008 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 certificates of ownership, 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 Water and Sewer System Revenue Bonds, Series 2008 2. a) par amount of issue: $14,950,000 if any: 470 b) dollar amount of bond premium, $ ,937.65 c) dollar amount of bond original issue discount, if any: $112,327.30 3. Dated date: March 1, 2008 • 4. Closing date (expected delivery date, on or about): March 18, 2008 5. By year,maturity amounts, coupon rates, prices or yields: See Official Statement. (If no reoffering yield (NRO) indicated, please provide yield separately.) 6. Call provisions, including premiums, if any: See the Official Statement. 7. Mandatory redemption provisions: See the Official Statement. 8. Debt-service schedule, principal and interest, and annual totals, with fiscal year identified: See Official Statement. 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: Revenue 12. Type of credit enhancement (including PSF guarantee): FSA Policy and Debt Service Reserve Fund Surety Policy 13. Rating service(s) and rating(s) assigned to issue: Moody's "Aaa"; S&P "AAA" B. Additional Information 1. Type of sale: Competitive 2. Pricing: February 11, 2008 Bids opened at 3:00 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): 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 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: N/A 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 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). HOU:2785539.1 1 SERVICE FIRM ONE-TIME FEE ANNUAL FEE(a) (in dollars) Bond Rating Moody's $14,000 Standard&Poor's $15,000 Other General Costs of Issuance (b) - ' jit ltt $120,500 $500.00 Any Specialized Costs of Issuance (c) � $0.00 Bond Insurance $0.00 Total Underwriting Spread (d) ta ng4ta $100,610.35 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 Escrow Agent None Paying Agent Wells Fargo Bank,N.A. Underwriter Robert W. Baird & Co. Trustee None Underwriters' 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 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 600 Travis, Suite 4200 Houston, Texas 77002 HOU:2785539.1 2 i ! Liar-12-2008 11:06am From- T-051 P 002 . F-742 United States of America State of Texas NUMBER DENOMINATION T-1 S14,950,000.00 REGISTERED REGISTERED CITY OF PEARLAND,TEXAS WATER AND SEWER SYSTEM REVENUE BONDS SERIES 2008 DATED DATE: March 1,2008 REGISTERED OWNER: ROBERT W.BAIRD&CO. PRINCIPAL AMOUNT: FOURTEEN MILLION NINE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS . THE CITY OF PEARLAND, TEXAS (the "City"), a municipal corporation duly incorporated under the laws of the State of Texas, for value received hereby promises to pay, but solely front certain Net Revenues as hereinafter provided,to the Registered Owner identified above or registered assigns,on the Maturity Date specified below,upon presentation and surrender of this Series 2008 Bond at the designated payment office of Wells Fargo Bank, N.A. in Houston, Texas (tho "Paying Agent/Registrar"), the principal amount set forth in the following schedule: ::r .,., • : :rim ;. • Maturity ,,,Principal.= , \ , T/itere5r`'`.. ;:.;;•:, . a` j'09'�01) %Anyo+int A Rate' '� '+'-' w <" I .. k 2009 S 15O,,400 • • 3�50 ,0•„ :a z� �� tJ �,s� - 20I0 ti .$ l :19Oti 1 0 r -L' 50 ,� .;r,. i ,, "it 0.1< ..--s~205,,O00 3.250 i ; ' "21l2 225,000 3.250 2013 235,000 . 3.250 2014 255,000 4.500 2015 275,000 4.500 2016 290,000 4.500 2017 315,000 4.500 2018 340,000 4,500 2019 370,000 4.500 2020 395,000 4.500 . 2021 420,000 4.500 2022 440,000 4.125 2023 460,000 4.200 • 2024 490,000 4.300 *** *** *** 2026 1,050,000 5.000 ' 2028 1,155,000 5.000 *** *** *** 2032 3,630,000 5.000 2034 4,060.000 4.500 , 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 the United States of America, and to pay, solely from such Net Revenues, interest thereon at the rate described above,calculated on the 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 — i•HOU:2779120. I4ar-lZ-Z008 I1:ran From- Till P 003/015 F-742 has been paid or duly provided for. Interest on this Series 2008 Bond is payable by check sent by United States mail,first class,postage prepaid,payable on March I and September 1,beginning on September 1,2008,mailed to the Registered Owner as shown on the books of registration kept by the Paying Agent/Registrar as of the fifteenth calendar day of the month next preceding each interest payment date. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Series 2008 Bond at the principal corporate trust office of the Paying AgentiRegistrar. THIS SERIES 2008 BOND IS ONE OF A DULY AUTHORIZED SERIES OF BONDS(the"Series 2008 Bonds")aggregating S14,950,000, issued for the purpose of constructing certain repairs, improvements, additions and extensions to the City's waterworks and sanitary sewer system end payment of costs of issuance of the Series 2008 Bonds, all under and pursuant to Chapter 1502, Texas Government Code, as amended, and an ordinance adopted by the City on February 11, 2008 (the "Ordinance"), and other applicable law. Capitalized terms used herein without definition are defined in the Ordinance. THIS SERIES 2008 BOND AND THE SERIES OF WHICH 1T IS A PART are special obligations of the City that are payable from and are equally and ratably secured by a first lien on and pledge of the Net Revenues collected and received by the City from the operation and ownership of the City's water and sewer system as defined and provided in the Ordinance, which Net Revenues are required to be set aside and pledged to the payment of the Outstanding Bonds, as described in the Ordinance, the Series 2008 Bonds, and all Additional Bonds issued on a, parity therewith, in the Interest and Sinking Fund and the Reserve Fund maintained for the payment Of all such Bonds,all as more fully described and provided for in the Ordinance. THIS SERIES 2008 BOND AND THE SERIES OF WHICH IT'IS A PART ME,PAYAB E SOLELY FROM SUCH NET REVENUES AND NEITHER THE STATE,.NOR ANY POLITICAL$'iBI .,l 1SION OR AGENCY OF THE STATE, SHALL BE OBLIGATED,TO;PAY;THE S ►ME OXTHE NOVA THEREON AND NEITHER THE FAITH AND,CREJ IT NOR'THE TAXING POIIJEI OF T1 TA E, ,V�+ CITY, OR ANY OTHER PAL(TIC UQl?,�'ORATtON, S• DIVISIONiOR AGENCYrTH,E OF S L>,EDtID TO THE PAYMENT Walk R N Z P L OR P iT iftlrSTis.ON bal.-SEWS 20b8 BONDS, THE OWNER. HEREOF SH�` y VE1 r A/E T lettiT OID lAND"TAYMENT OF THIS SERIES 2008 BOND OUT OF ANY FIJ Ei ' R TO BE''ItA1S D BY AD VALOREM TAXATION. ru REFERENCE IS HEREBY MADE TO THE ORDINANCE,a copy of which is on file in the office of the Paying Agent/Registrar, and to all of the provisions of which the Registered Owner of this bond by the acceptance hereof hereby assents, for definitions of terms; the description of and the nature and extent of the security for the Series 2008 Bonds; the priority for the application and use of the income and revenues of the System; the Net Revenues pledged to the payment of the principal of and interest on the Series.2008 Bonds;the nature and extent _ and manner of enforcement of the lien and pledge securing the payment of the Series 2008 Bonds;•the terms and conditions for the issuance of additional revenue obligations,including Additional Bonds;the terms and conditions for amending the Ordinance;the terms and conditions relating to the transfer or exchange of this bond;the rights, duties, and obligations of the City and the Paying Agent/Registrar,,the terms and provisions upon which the liens, pledges,charges and covenants made therein may be discharged at or prior to the maturity of this bond,and deemed to be no longer Outstanding thereunder; and for the other terms and provisions thereof. Capitalized terms used herein,unless otherwise defined,have the same meanings assigned in the Ordinance. THE CITY RESERVES THE RIGHT, at its option, to redeem the Series 2008 Bonds manning on September I, 2019, and thereafter prior to their scheduled maturities, in whole.or in part, in integral multiples of 55,000 on September 1,2018,or any date thereafter at par plus accrued interest on the principal amounts called for redemption to the date fixed for redemption. THE SERIES 2008 BONDS MATURING on September 1 in the years 2026, 2028,2032 and 2034 (the "Tenn Bonds")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 Series 2008 Bonds or the portions thereof so called for redemption plus.accrued interest to the date fixed for • redemption: • Mandatory Rcc?cmntion Dates Principal Amounts • HOU:2779120.1 ' Mar-12-2008 11:07am From- T-051 P UU4/U15 h~rat I • Term Bonds Maturing September 1,2026 September 1,2025 S510,000 j September 1,2026(maturity) • 540,000 , I Term Bonds Maturing September 1,2028 September 1,2027 S560,000 September 1,2028(maturity) 595,000 -- Term Bonds Maturing September 1,2032 September 1,2029 $600,000 September 1,2030 580,000 September 1,2031 560,000 September 1,2032(maturity) . 1,890,000 Term Bonds Maturing September 1,2034 September 1,2033 S1,980�00 - September 1,2034(maturity) 00 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before July 15 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before July 15 of such year and which have not been made the basis for a previous reduction. . NOT LESS THAN THIRTY (30)DAYS prior to a redemption date,a notice of redemption will be seat by U.S.mail,first class postage prepaid,in the name of the City to each registered owner of a Series 2008 Bond to be redeemed in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the datepi gnat:I bg. When Series 2008 Bonds or portions thereof have been called for redemption and due provisiipch beektasie alredeem the same,the amounts so redeemed shall be payable solely from the funds provided Too`redemptn `a1; rerest which would • otherwise accrue on the Series 2008 Bonds or poniops tt d of 4.l10d fOe't,fatriptiottAhalf0minate on the date fixed for redemption. . 1 ' -.y . ,y_f.;. a A THIS SERIES 2008 7Nf)shaI(}itot be vand`:Qr o6lpato}y for any purpose or be entitled to any benefit under the Resolutio eif s rb Boat .is rr,�li,sten ,y r =Comptroller of Public Accounts of the State of Texas by registrai'P1fi� t ifi -fie attach ed','{[,�r;affixe he " .Ml j R.�. 4�'t`-q 1 a •.�1 2008 BiD IS TRANSFERABLE only upon presentation and surrender at the designated payment tit '•eying Agent/Registrar, duly endorsed for transfer or accompanied by an assignment duly I ' executed a Registered Owner or his authorized representative, subject to the terms and conditions of the . !_ . Ordinance. • THIS SERIES 2008 BOND IS EXCHANGEABLE at the corporate trust office of die Paying Agent/Registrar for bonds in the principal amount of S5,000 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 Series • 2008 Bond celled for redemption in whole or in part during the 45 day period immediately prior to the date fixed for redemption. • r THE REGISTERED OWNER of this Series 2008 Bond,by acceptance hereof,acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. THE CITY has covenanted in the Ordinance that it will at all times provide a legally qualified Paying Agent/Registrar for the Series 2008 Bonds and will cause notice of any change of Paying Agent/Registrar to be mailed to each Registered Owner. - THE CITY HAS RESERVED THE RIGHT TO ISSUE ADDITIONAL PARITY BONDS,subject to the i restrictions contained in the Ordinance, which may be equally and ratably payable from,and secured by a first lien HOU:2779120.1 j I #oar-12-2088 11:07am From- T-U I P UU5/Uta r-ruc on and pledge of,the Net Revenues in the same manner and to the same extent as the Outstanding Bonds, which includes this Series 2008 Bond and the series of which it is a part. IT IS HEREBY DECLARED AND REPRESENTED that this Series 2008 Bond has been duly and validly issued and delivered;that all acts,conditions,and things required or proper to be performed,to exist,and to be done precedent to or in the issuance and delivery of this Series 2008 Bond have been performed,haveh a,, nd��� ve been done in accordance with law; that the Series 2008 Bonds do not exceed any statutory provision has been made for the payment of the principal of and interest on this Series 2008 Bond and all of the Series 2008 Bonds by the creation of the aforesaid lien on and pledge of the Net Revenues. IN WITNESS WHEREOF,the City has caused its corporate seal to be impressed or placed in facsimile hereon and has caused this Series 2008 Bond to be executed by the Mayor and countersigned by the City Secretary • by manual,lithographed,or printed facsimile signatures. CITY OF I2EARLAND,TEXAS fat% .,.x (SEAL) _ r- pal o ;miry 4 "44. 1 +6a G• X �^1 } vs, " ; Seer ar'y HOU:2779120,1 • I ' Mar-12-2008 11:08am Frays- 1-unI r uuvulu r 1..4 • THE STATE OF TEXAS • REGISTER NO. OFFICE OF THE COMPTROLLER . OF PUBLIC ACCOUNTS I hereby certify that there is on file and of record in my office a certificate of the Attorney General of the State of Texas to the effect that this bond and the proceedings for the issuance hereof have been examined by him as required by law, that he finds that it has been issued in conformity with the Constitution and laws of the State of • Texas and that it is a valid and binding special obligation of the City of Peaxlend,Texas,payable from the revenues and other funds pledged to its payment by and in the proceedings authorizing the same, and I do further certify that this bond has this day been registered by me. AIR, 'S 2at e WITNESS MY SIGNATURE AND SEAL OF OFFICE this I • APid-}49. Comptroller o Public Accounts ry. 0 of the State or Texas x g:4 F', (SEAL) . ,- � V 1' S .y 1- �1y: s . • • HOU:2779120.1 I_ Mar-12-2008 11:08am Fram- v u, r YVIr VIr ASSIGNMENT For value received, the undersigned hereby sells, assigns, and transfers unto • (Social Security or Other Identifying Number) (Print or type.Hama,address,and zip code of transferee) the within bond and hereby irrevocably constitutes and appoints ,attorney to transfer said bond on the books kept for registration thereof,with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE: The signature must be guaranteed by a NOTICE: The signature on this th signment must c e commercial bank or a member firm of a national correspond with tlte�� g;s±,#' �rw�g. is d Owner as it securities exchange. Notarized or witnessed appears on the face. df'thei' ond in every c: • signatures are not acceptable. M irticitlar.. without alrejatfon or ektl4trgement or any e .. t henge whatever:; i ; e; � ~y. P+t i?t , kr �' 'cur ^ 1� � 'y .„ L�s • • I� I I I I - I30U:2779120.1 i__ IMar-12 2008 11:08am From- STATEMENT OF INSURANCE Financial Security Assurance Inc.("Financial Security"),New York,New York,has delivered its miuueipal bond insurance policy with respect to the scheduled payments due of principal of and interest on this Bond to Wells Fargo Bank,NA,Houston,Texas,or its successor,es paying agent for the Bonds(the"Paying Agent"). Said Policy is on file and available for inspection at the principal office of the Paying Agent and a copy thereof may be obtained from Financial Security or the Paying Agent. M1 Y' r _ I I HOU:2779120.1 si ` tSA MUNICIPAL BOND'DEBT SERVICE RESERVE .g� ii' INSURANCE COMMITMENT Issuer: City of Pearland,Texas Date of Commitment: February 13,2008 Related Bonds: Water and Sewer System Revenue Bonds, Series 2008, and all other Bonds issued and Outstanding as defined in the Ordinance Premium: 3.00%of Policy Limit Expiration Date: Friday,April 18,2008 Policy Limit: A dollar amount equal to the required deposit to the Reserve Fund, as specified under the Ordinance, up to a maximum of$1,085,000 FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), a stock insurance company, hereby commits to issue its Municipal Bond Debt Service Reserve Insurance Policy (the "Reserve Policy"), in the form transmitted herewith, relating to the Related Bonds, subject to the terms and conditions contained herein or added hereto. All terms used herein and not otherwise defined shall have the meanings ascribed to them in the document setting forth the security for and authorizing the issuance of the Bonds(the"Ordinance"). To keep this Commitment in effect after the Expiration Date set forth above, a request for renewal must be submitted to Financial Security prior to such expiration date. Financial Security reserves the right to refuse wholly or in part to grant a renewal. To keep the Commitment in effect to the Expiration Date set forth above, Financial Security must _ receive a duplicate of this Commitment executed by an authorized officer of the Issuer by the date which is ten days from the date of this Commitment. THE RESERVE POLICY SHALL BE ISSUED UPON SATISFACTION OF THE FOLLOWING CONDITIONS: 1. The Water and Sewer System Revenue Bonds, Series 2008, shall be issued and insured by Financial Security in accordance with Financial Security's commitment of even date herewith. 2. Financial Security shall be provided with: (a) An opinion of Bond Counsel, addressed to and in form and substance satisfactory to Financial Security, as to the Policy constituting a"Surety Policy"under the applicable provisions of the Ordinance. (b) Satisfactory evidence that the Issuer has obtained all consents required in connection with the deposit of the Reserve Policy to the Reserve Fund. (c) Evidence of wire transfer in federal funds in an amount equal to the Premium. 3. The Ordinance for the Insured Bonds, shall include the following terms and conditions and shall be in form and substance acceptable to Financial Security: (a) The Issuer shall repay any draws under the Reserve Policy and pay all related reasonable expenses incurred by Financial Security. Interest shall accrue and be payable on such draws and expenses from the date of payment by Financial Security at the Late Payment Rate. "Late Payment Rate"means the lesser of(a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ("Prime Rate") (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan L:\LEGAL\M U N I S\STATES\TX\10 618 6_D.d o c 1 • • Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as Financial Security shall specify. The Issuer's obligation to make payments in excess of the amount drawn under the Reserve Policy under this paragraph is applicable only to the extent permitted by law and is subject in all respects to annual appropriation therefor by the Issuer. Repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, "Policy Costs") shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Policy Costs related to such draw. Amounts in respect of Policy Costs paid to Financial Security shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to Financial Security on account of principal due, the coverage under the Reserve Policy will be increased by a like amount, subject to the terms of the Reserve Policy. All cash and investments in the Reserve Fund shall be transferred to the Interest and Sinking Fund for payment of debt service on Bonds before any drawing may be made on the Reserve Policy or any other credit facility credited to the Reserve Fund in lieu of cash (each, a "Surety Policy"). Payment of any Policy Costs shall be made prior to replenishment of any such cash amounts. Draws on all Surety Policies (including the Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Reserve Fund. Payment of Policy Costs and reimbursement of amounts with respect to other Surety Policies shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Fund. (b) If the Issuer shall fail to pay any Policy Costs in accordance with the requirements of Paragraph 3(a) hereof, Financial Security shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Ordinance other than (i) acceleration of the maturity of the Bonds or (ii) remedies which would adversely affect owners of the Bonds. (c) The Ordinance shall not be discharged until all Policy Costs owing to Financial Security shall have been paid in full. The Issuer's obligation to pay such amounts shall expressly survive payment in full of the Bonds. (d) Additional Bonds may only be issued pursuant to Section 6.1 of the Ordinance if the certificate delivered pursuant to Section 6.1(c) of the Ordinance demonstrates Net Revenues shall be sufficient to pay Policy Costs 11 in accordance with the provisions of paragraph(a)above. (e) The paying agent for the Bonds shall ascertain the necessity for a claim upon the Reserve Policy and to provide notice to Financial Security in accordance with the terms of the Reserve Policy at least five business days prior to each date upon which interest or principal is due on the Bonds. Where deposits are required to be made by the Issuer with the paying agent to the Interest and Sinking Fund for the Bonds more often than semi-annually, the Paying Agent shall be instructed to give notice to Financial Security of any failure of the Issuer to make timely payment in full of such deposits within two business days of the date due. 1 (f) In order to secure the Issuer's payment obligations with respect to the Policy Costs,there is hereby granted and perfected in favor of the Insurer a security interest(subordinate only to that of the owners of the Bonds) in all Net Revenues and other collateral pledged under this Ordinance as security for the Bonds. 4. The Reserve Policy shall expire on the earlier of the date the Water and Sewer System Revenue Bonds, Series 2008, are no longer outstanding and the final maturity date of the Water and Sewer System Revenue Bonds, Series 2008. 1 Page 2 of 3 5. Any official statement or similar disclosure document relating to the Water and Sewer System Revenue Bonds, Series 2008, shall contain only such references to the Reserve Policy and Financial Security as supplied or approved by Financial Security. FINANCIAL SECURITY ASSURANCE INC. .y;SM'....y Authorized Officer To keep this commitment in effect to the Expiration Date set forth on the first page, Financial Security must receive by the date which is ten days from the date of this Commitment a duplicate of this Commitment executed by an appropriate officer of the Issuer. The undersigned agrees that if the reserve fund requirement for the Bonds is met in whole or in part by credit instrument, such credit instrument shall be a Reserve Policy provided by Financial Security in accordance with the terms of this Commitment. r , CITY OF PEARLAND,TEXAS Authorized Officer 11 I Page 3 of 3 PROCEDURES FOR PREMIUM PAYMENT TO FINANCIAL SECURITY ASSURANCE INC. Financial Security's issuance of its municipal bond insurance policy at bond closing is contingent upon payment and receipt of the premium. NO POLICY MAY BE RELEASED UNTIL PAYMENT OF SUCH AMOUNT HAS BEEN CONFIRMED. Set forth below are the procedures to be followed for confirming the amount of the premium to be paid and for paying such amount: Confirmation of Upon determination of the final debt service Amount to be Paid: schedule, fax such schedule to Financial Security Attention: Michael Caldiero, Assistant Vice President Phone No. (212) 339-3468 Fax No. (212) 857-0313 Confirm with the individual in our underwriting department that you are in agreement with respect to par and premium on the transaction prior to the closing date. Payment Date: Date of Delivery of the insured bonds. Method of Payment: Wire transfer of Federal Funds. Wire Transfer Instructions: Bank: The Bank of New York ABA#: 021 000 018 Acct. Name: Financial Security Assurance Inc. Account No.: 8900297263 Transaction No. 106186 CONFIRMATION OF PREMIUM WIRE NUMBER AT CLOSING Financial Security will accept as confirmation of the premium payment a wire transfer number and the name of the sending bank, to be communicated on the closing date to Lillie Santana, Assistant Vice President Documentation and Closing Supervisor, (212) 339-3537. :RIFSA I Dexia Company February 13,2008 VIA E-MAIL Ms.Claire Manthei City of Pearland,Texas 3519 Liberty Drive Pearland,Texas 77581 Re: Not to Exceed$14,950,000 aggregate principal amount of City of Pearland,Texas Water and Sewer System Revenue Bonds,Series 2008 Dear Ms. Manthei: Please find attached our municipal bond insurance commitment letter in respect of the above-referenced issue. Please return one fully executed copy to Ms. Lillie Santana, of our office, prior to any reference to Financial Security as insurer of the issue being made in marketing efforts in respect of the issue. Please note that a blacklined copy of each draft of each financing document and opinion,each draft of the preliminary and final official statements and the bond proof should be delivered to us for review and comment. Attached as a link to this e-mail is Financial Security's website,where the logo, statement of insurance, disclosure language, specimen policy, procedures for premium payment, form of opinion and form of disclosure, no default and tax certificate may be accessed and downloaded as needed. Financial Security will require, prior to closing, six hard copies of the final official statement. We will deliver to Bond Counsel,at the preliminary closing,assuming the requirements of the commitment letter have been met, an opinion of counsel as to the enforceability of the policy,a disclosure, no default and tax certificate and the executed policy. Prior to the closing, Financial Security will obtain rating letters from the rating agencies indicated in the official statement. Note that any questions with regard to rating agency fees should be directed to the respective rating agency. Please ensure the following people are added to the Distribution List for this Financing: Michael Cooper,Associate General Counsel Telephone: (212)893-7389 I Telecopier: (212)857-0337 E-Mail: MCooper@FSA.com Michael Caldiero,Assistant Vice President Telephone: (212)339-3468 Telecopier: (212)857-0313 E-Mail: Mcaldiero@FSA.com Lillie Santana,Assistant Vice President Telephone: (212)339-3537 Documentation and Closing Supervisor Telecopier: (212)857-0514 E-Mail: LSantana@FSA.com Financial Security requires one original and two copies of the final closing transcript of proceedings and it may be in the form of either hard copies or three CD-ROMs. I look forward to working with you. Yours truly, Michael Cooper Associate General Counsel ec: Marcus Deitz, Esq.;Andrews Kurth LLP Mr.Charlie Galarza; Robert W. Baird `1 Mr. Ryan O'Hara; RBC Capital Markets f" Financial Security itsmtranee :fit West 5::nd Street•New litrk,New York xtcstt;•`li l:3tM.f3Wti.crtao•Fax: t 2.683.3 is It ' - New York•Dallas•;tan Francisco•London•lluririd•Paris•Singapore•Syriac),••Inkvo FsAMUNICIPAL BOND INSURANCE COMMITMENT FINANCIAL SECURITY ASSURANCE INC. ("Financial Security" or "FSA") hereby commits to issue its Municipal Bond Insurance Policy(the"Policy") relating to whole maturities of the debt obligations described in Exhibit A attached hereto (the "Bonds"), subject to the terms and conditions set forth in this Commitment, of which Commitment Exhibit A is an integrated I - part, or added hereto (the"Commitment"). To keep this Commitment in effect after the Expiration Date set forth in Exhibit A attached hereto, a request for renewal must be submitted to Financial Security prior to such Expiration Date. Financial Security reserves the right to refuse wholly or in part to grant a renewal. THE MUNICIPAL BOND INSURANCE POLICY SHALL BE ISSUED IF THE FOLLOWING CONDITIONS ARE SATISFIED: 1. The documents to be executed and delivered in connection with the issuance and sale of the Bonds shall not contain any untrue or misleading statement of a material fact and shall not fail to state a material fact necessary in order to make the information contained therein not misleading. 2. No event shall occur which would permit any underwriter or purchaser of the Bonds, otherwise required, not to be required to underwrite or purchase the Bonds on the date scheduled for the issuance and delivery thereof("Closing Date"). 3. There shall be no material change in or affecting the Bonds (including,without limitation, the security for the Bonds) or the financing documents or the Official Statement (or any similar disclosure documents) to be executed and delivered in connection with the issuance and sale of the Bonds from the descriptions or forms thereof approved by Financial Security. 4. The Bonds shall contain no reference to Financial Security,the Policy or the insurance evidenced thereby except as may be approved by Financial Security. BOND PROOFS SHALL HAVE BEEN APPROVED BY FINANCIAL SECURITY PRIOR TO PRINTING. The Bonds shall bear a Statement of Insurance in the form provided by Financial Security. 5. Financial Security shall be provided with: • (a) Executed copies of all financing documents, any disclosure document (the "Official Statement") and the various legal opinions delivered in connection with the issuance and sale of the Bonds (which shall be dated the Closing Date and which, except for the opinions of counsel relating to the adequacy of disclosure, shall be addressed to Financial Security or accompanied by a letter of such counsel permitting Financial Security to rely on such opinion as if such opinion were addressed to Financial Security), including,without limitation, the approving opinion of bond counsel. Each of the foregoing shall be in form and substance acceptable to Financial Security. Copies of all drafts of such documents prepared subsequent to the date of the Commitment (blacklined to reflect all revisions from previously reviewed drafts) shall be furnished to'Financial Security for review and approval. Final drafts of such documents shall be provided to Financial Security at least three (3) business days prior to the issuance of the Policy, unless Financial Security shall agree to some shorter period. (b) Evidence of wire transfer in federal funds of an amount equal to the insurance premium, unless alternative arrangements for the payment of such amount acceptable to Financial Security have been made prior to the delivery date of the Bonds. (c) Standard & Poor's Credit Market Services, Moody's Investors Service Inc. and Fitch IBCA, Inc. will separately present bills for their respective fees relating to the Bonds. Payment of such bills should be made directly to such rating agency. Payment of the rating fee is not a condition to release of the Policy by Financial Security. 6. Promptly after the closing of the Bonds, Financial Security shall receive three completed sets of executed documents (one original and either(i)two photocopies(each unbound)or(ii)three compact discs). 7. The Official Statement shall contain the language provided by Financial Security and only such other references to Financial Security or otherwise as Financial Security shall supply or approve. FINANCIAL SECURITY SHALL BE PROVIDED WITH SIX PRINTED COPIES OF THE OFFICIAL STATEMENT. EXHIBIT A AMENDED MUNICIPAL BOND INSURANCE COMMITMENT TERM SHEET Issuer: City of Pearland,Texas Name of Insured Bonds: Water and Sewer System Revenue Bonds,Series 2008 Principal Amount of Insured Bonds: Not to Exceed$14,950,000 Date of Commitment: February 13,2008 Expiration Date: Friday,April 18,2008* Premium: $258,000 Additional Conditions: 1. The amortization schedule for, and final maturity date of, the Bonds shall be acceptable to Financial Security. The Bonds shall be issued with fixed rates to maturity. 2. The Issuer shall have purchased from Financial Security a Municipal Bond Debt Service Reserve Insurance Policy in the amount of the required deposit to the Reserve Fund upon the issuance of the Insured Bonds pursuant to Financial Security's commitment of even date herewith. 3. The Ordinance shall contain terms and provisions substantially identical to those in Ordinance No. 1268 adopted May 15, 2006, relating to the Issuer's Water and Sewer System Revenue and Refunding Bonds,Series 2006. 4. See attached Exhibits B-C. Terms used in this Commitment and not otherwise defined shall have the meanings ascribed to them in the document authorizing the issuance of and setting forth the terms for the Bonds described above(the"Ordinance"). FINANCIAL SECURITY ASSURANCE INC. /' Authorized Officer *To keep the Commitment in effect to the Expiration Date set forth above, Financial Security must receive a duplicate of this Exhibit A executed by an authorized officer by the earlier of the date on which the Official Statement containing disclosure language about Financial Security is circulated and ten calendar days from the date of this Commitment. The undersigned agrees that if the Bonds are insured by a policy of municipal bond insurance, such insurance shall be provided by Financial Security in accordance with the terms of the Commitment. CITY OF PEARLAND,TEXAS Authorized Officer L:\LEGAL\M UNIS\STATES\TX\105806_G.doc � I EXHIBIT B Page 1 of 1 • OPINION REQUIREMENTS i 1 1. Each of the Ordinance, the Bonds and other transaction documents (the"Related Documents")is a legal, valid and binding obligation of the parties thereto, has been duly authorized, executed and delivered and is enforceable in accordance with its terms. 2. There does not exist any action, suit, proceeding or investigation pending, or to the best of counsel's knowledge, threatened which if adversely determined, could (i) materially adversely affect (a) the financial condition of the Issuer, (b)the ability of the Issuer to perform its obligations under the Related Documents, (c) the security for the Bonds, or (d) the transactions contemplated by the Related Documents or (ii) impair the ability of the Issuer to maintain and operate the System(as defined in the Ordinance). 3. Nothing has come to the attention of counsel which would cause it to believe that the final Official Statement (excluding information provided by Financial Security), as of its date and the date of issuance of the Policy, contained any untrue statement of a material fact or omitted to state a material fact required to be stated , therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. The Bonds are secured by a valid first lien on and security interest in the Net Revenues on a parity with all Outstanding Bonds and Additional Bonds issued pursuant to the Ordinance. • i _ L:\LEGAL\M U N I S\STATES\TX\105 B 06_G.d o c I I, EXHIBIT C Page 1 of 5 ORDINANCE REQUIREMENTS The Ordinance shall incorporate the following requirements either in one section or article entitled"Provisions Relating to Bond Insurance"(or the like),the provisions of which section or article shall be stated in the Ordinance to govern, notwithstanding anything to the contrary set forth in the Ordinance,or individually in the appropriate sections: (a) "Insurance Policy" shall be defined as follows: "the insurance policy issued by the Insurer guaranteeing the scheduled payment of principal of and interest on the Bonds when due". "Insurer" shall be defined as follows: "Financial Security Assurance Inc., a New York stock insurance company, or any successor thereto or assignee thereof". (b) The prior written consent of the Insurer shall be a condition precedent to the deposit of any credit instrument provided in lieu of a cash deposit into the Reserve Fund, if any. Notwithstanding anything to the contrary set forth in the Ordinance, amounts on deposit in the Reserve Fund shall be applied solely to the payment of debt service due on the Bonds. (c) The Insurer shall be deemed to be the sole holder of the Insured Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Insured Bonds are entitled to take pursuant to Section 7.10 of the Ordinance. (d) The maturity of Insured Bonds shall not be accelerated without the consent of the Insurer. In the event the maturity of the Bonds is accelerated, the Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued on such principal to the date of acceleration (to the extent unpaid by the Issuer) and the Paying Agent shall be required to accept such amounts.Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Insurer's obligations under the Insurance Policy with respect to such Bonds shall be fully discharged. (e) The Insurer shall be a third party beneficiary to the Ordinance. (f) Upon the occurrence of an extraordinary optional, special or extraordinary mandatory redemption in part, the selection of Bonds to be redeemed shall be subject to the approval of the Insurer. Bonds purchased in lieu of redemption shall be delivered promptly to the Bond Registrar for cancellation unless the Insurer otherwise consents. (g) Any amendment, supplement, modification to, or waiver of, the Ordinance that requires the consent of Bondowners or adversely affects the rights and interests of the Insurer shall be subject to the prior written consent of the Insurer. (h) Unless the Insurer otherwise directs, upon the occurrence and continuance of a default in payment or performance of the provisions of the Ordinance, amounts on deposit in the any construction fund or project fund representing proceeds of the Bonds shall not be disbursed, but shall instead be applied to the payment of debt service or redemption price of the Bonds. (i) The Issuer acknowledges that the rights granted to the Insurer under the Ordinance or any other or any other transaction document(each a"Related Document")to request, consent to or direct any action are rights granted to the Insurer in consideration of its issuance of the Insurance Policy. Any exercise by the Insurer of such rights is merely an exercise of the Insurer's contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the Bondholders and such action does not evidence any position of the Insurer, affirmative or negative, as to whether the consent of the Bondowners or any other person is required in addition to the consent of the Insurer. (j) Only (1) cash, (2) non-callable direct obligations of the United States of America ("Treasuries"), (3)evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or r- trust company as custodian, under which the owner of the investment is the real party in interest and has the L:\LEGAL\M U N I S\STATES\TX\105606_G.d o c EXHIBIT C Page 2 of 5 right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (4) subject to the prior written consent of the Insurer, pre-refunded municipal obligations rated "AAA" and "Aaa" by S&P and Moody's, respectively, or (5) subject to the prior written consent of the Insurer, securities eligible for"AAA" defeasance under then existing criteria of S&P or any combination thereof,shall be used to effect defeasance of the Bonds unless the Insurer otherwise approves. To accomplish defeasance,the,Issuer shall cause to be delivered(i)a report of an independent firm of nationally recognized certified public accountants or such other accountant as shall be acceptable to the Insurer ("Accountant") verifying the sufficiency of the escrow established to pay the Bonds in full on the Maturity or redemption date ("Verification"), (ii) an Escrow Deposit Agreement (which shall be acceptable in form and substance to the Insurer), (iii) an opinion of nationally recognized bond counsel to the effect that the Bonds are no longer"Outstanding" under the Ordinance and (iv) a certificate of discharge of the Paying Agent with respect to the Bonds; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the Issuer, Paying Agent and Insurer. The Insurer shall be provided with final drafts of the above-referenced documentation not less than five business days prior to the funding of the escrow. Bonds shall be deemed "Outstanding" under the Ordinance unless and until they are in fact paid and retired or the above criteria are met. (k) Amounts paid by the Insurer under the Insurance Policy shall not be deemed paid for purposes of the Ordinance and the Bonds relating to such payments shall remain Outstanding and continue to be due and owing until paid by the Issuer in accordance with the Ordinance. The Ordinance shall not be discharged unless all amounts due or to become due to the Insurer have been paid in full or duly provided for. (I) The Issuer covenants and agrees to take such action (including, as applicable, filing of UCC financing statements and continuations thereof) as is necessary from time to time to preserve the priority of the pledge of the Trust Estate under applicable law. (m) Claims Upon the Insurance Policy and Payments by and to the Insurer. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date ("Payment Date")there is not on deposit with the Paying Agent, after making all transfers and deposits required under the Ordinance, moneys sufficient to pay the principal of and interest on the Bonds due on such Payment Date, the Paying Agent shall give notice to the Bond Insurer and to its designated agent(if any) (the"Insurer's Fiscal Agent") by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Bonds due on such Payment Date, the Paying Agent shall make a claim under the Insurance Policy and give notice to the Insurer and the Insurer's Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Bonds and the amount required to pay principal of the Bonds, confirmed in writing to the Insurer and the Insurer's Fiscal Agent by 12:00 noon, New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Insurance Policy. The Paying Agent shall designate any portion of payment of principal on Bonds paid by the Insurer,whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Bonds registered to the then current Bondholder, whether DTC or its nominee or otherwise, and shall issue a replacement Bond to the Insurer, registered in the name of Financial Security Assurance Inc., in a principal amount equal to.the amount of principal so paid (without regard to authorized denominations); provided that the Paying Agent's failure to so designate any payment or issue any replacement Bond shall have no effect on the amount of principal or interest payable by the Issuer on any Bond or the subrogation rights of the Insurer. L:\LEGAL\MUNIS\STATES\TX\105806_G.doc + I EXHIBIT C Page 3 of 5 The Paying Agent shall keep a complete and accurate record of all funds deposited by the Insurer into the Policy Payments Account (defined below) and the allocation of such funds to payment of interest on and principal of any Bond. The Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Paying Agent. Upon payment of a claim under the Insurance Policy, the Paying Agent shall establish a separate special purpose trust account for the benefit of Bondholders referred to herein as the "Policy Payments Account" and over which the Paying Agent shall have exclusive control and sole right of withdrawal. The Paying Agent shall receive any amount paid under the Insurance Policy in trust on behalf of Bondholders and shall deposit any such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be•disbursed by the Paying Agent to Bondholders in the same manner as principal and interest payments are to be made with respect to the Bonds under the sections hereof regarding payment of Bonds. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything herein to the contrary and to the extent permitted by law, the Issuer agrees to pay to the Insurer (i) a sum equal to the total of all amounts paid by the Insurer under the Insurance Policy(the"Insurer Advances"); and (ii)interest on such Insurer Advances from the date paid by the Insurer until payment thereof in full, payable to the Insurer at the Late Payment Rate per annum (collectively, the "Insurer Reimbursement Amounts"). "Late Payment Rate" means the lesser of(a)the greater of(I)the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in The City of New York, as its prime or base lending rate(any change in such rate of interest to be effective on the date such change is announced by JPMorgan Chase Bank)plus 3%, and (II)the then applicable highest rate of interest on the Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. _ The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The Issuer hereby covenants and agrees that the Insurer Reimbursement Amounts are secured by a lien on and pledge of the Net Revenues and payable from such Net Revenues on a parity with debt service due on the Bonds. The Issuer's obligation to make payments in excess of Insurer Advances under this paragraph is subject in all respects to annual appropriation therefor by the Issuer. j ! Funds held in the Policy Payments Account shall not be invested by the Paying Agent and may not be applied to satisfy any costs, expenses or liabilities of the Paying Agent. Any funds remaining in the Policy Payments Account following a Bond payment date shall promptly be remitted to the Insurer. (n) The Insurer shall, to the extent it makes any payment of principal of or interest on the Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Insurance Policy. Each obligation of the Issuer to the Insurer under the Related Documents shall survive discharge or termination of such Related Documents. (o) The Issuer shall pay or reimburse the Insurer any and all charges, fees, costs and expenses that the Insurer - may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security in any Related Document; (ii)the pursuit of any remedies under the Ordinance or any other Related Document or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, the Ordinance or any other Related Document whether or not executed or completed, or (iv) any litigation or other dispute in connection with the Ordinance or any other Related Document or the transactions contemplated thereby, other than costs resulting from the failure of the Insurer to honor its obligations under the Insurance Policy.The Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Ordinance or any other Related Document. (p) After payment of reasonable expenses of the Paying Agent, the application of funds realized upon default shall be applied to the payment of expenses of the Issuer or rebate only after the payment of past due and current debt service on the Bonds and amounts required to restore the Reserve Fund to the amount required to be maintained on deposit therein. L:\LEGAL\MUNISISTATES\TX\105806_G.doc • EXHIBIT C Page 4 of 5 (q) The Insurer shall be entitled to pay principal or interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer(as such terms are defined in the Insurance Policy)and any amounts due on the Bonds as a result of acceleration of the maturity thereof in accordance with the Ordinance, whether or not the Insurer has received a Notice of Nonpayment (as such,terms are defined in the Insurance Policy)or a claim upon the Insurance Policy. (r) The notice address of the Insurer is: Financial Security Assurance Inc., 31 West 52nd Street, New York, New York 10019,Attention:Managing Director—Surveillance, Re: Policy No. , Telephone: (212) 826-0100; Telecopier: (212) 339-3556. In each case in which notice or other communication refers to an Event of Default, then a copy of such notice or other communication shall also be sent to the attention of the General Counsel and shall be marked to indicate"URGENT MATERIAL ENCLOSED." (s) The Insurer shall be provided with the following information by the Issuer or Paying Agent, as the case may be: (i) Annual audited financial statements within 150 days after the end of the Issuer's fiscal year(together with a certification of the Issuer that it is not aware of any default under the Ordinance), and the Issuer's annual budget within 30 days after the approval thereof together with such other information, data or reports as the Insurer shall reasonably request from time to time; (ii) Notice of any draw upon the Reserve Fund within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the amount required to be maintained on deposit therein and (ii) withdrawals in connection with a refunding of Bonds; (iii) Notice of any default known to the Paying Agent or Issuer within five Business Days after knowledge thereof; (iv) Prior notice of the advance refunding or redemption of any of the Bonds, including the principal amount,maturities and CUSIP numbers thereof; (v) Notice of the resignation or removal of the Paying Agent and Bond Registrar and the appointment of, and acceptance of duties by, any successor thereto; (vi) Notice of the commencement of any proceeding by or against the Issuer commenced under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership,rehabilitation or similar law(an"Insolvency Proceeding"); (vii) Notice of the making of any claim in connection with any Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on,the Bonds; (viii) A full original transcript of all proceedings relating to the execution of any amendment, supplement,or waiver to the Related Documents; and (ix) All reports, notices and correspondence to be delivered to Bondholders under the terms of the Related Documents. (t) Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Ordinance, no such issuance may occur(1) if a default under the Ordinance has occurred and then continues unless such default shall be cured upon such issuance and (2) unless the Reserve Fund is fully funded at the amount required to be maintained on deposit therein (giving effect to the proposed issue) upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Insurer. L:\LEGAL\M U N I S\STATES\TX\105806_G.d oc EXHIBIT C I Page 5 of 5 L (u) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the Ordinance would adversely affect the security for the Bonds or the rights of the Bondholders, the Issuer shall consider the effect of any such amendment, consent,waiver, action or inaction as if there were no Insurance Policy. (v) No contract shall be entered into or any action taken by which the rights of the Insurer or security for or sources of payment of the Bonds may be impaired or prejudiced in any material respect except upon obtaining the prior written consent of the Insurer. • L:\LEGAUMUNIS\STATES\TX\105806_G.doc • PROCEDURES FOR PREMIUM PAYMENT TO FINANCIAL SECURITY ASSURANCE INC. Financial Security's issuance of its municipal bond insurance policy at bond closing is contingent upon payment and receipt of the premium. NO POLICY MAY BE RELEASED UNTIL PAYMENT OF SUCH AMOUNT HAS BEEN CONFIRMED. Set forth below are the procedures to be followed for confirming the amount of the premium to be paid and for paying such amount: Confirmation of Upon determination of the final debt service Amount to be Paid: schedule,fax such schedule to Financial Security Attention: Michael Caldiero, Assistant Vice President Phone No.: (212) 339-3468 Fax No.: (212) 857-0313 Confirm with the individual in our underwriting department that you are in agreement with respect to par and premium on the transaction prior to the closing date. Payment Date: Date of Delivery of the insured bonds. Method of Payment: Wire transfer of Federal Funds. Wire Transfer Instructions: Bank: The Bank of New York ABA#: 021 000 018 Acct. Name: Financial Security Assurance Inc. Account No.: 8900297263 Transaction Nos. 105806 and 106186 Policy Nos.: (To Be Assigned) CONFIRMATION OF PREMIUM WIRE NUMBER AT CLOSING Financial Security will accept as confirmation of the premium payment a wire transfer number and the name of the sending bank,to be communicated on the closing date to Lillie Santana,Assistant Vice President Documentation and Closing Supervisor, (212)339-3537. L Moody's Corporation 7 World Trade Center at 250 Greenwich Street, New York, New York 10007 March 17, 2008 Financial Security Assurance, Inc 31 West 52nd Street New York, NY 10019 To Whom It May Concern: Moody's Investors Service has assigned the rating of Aaa to the $14,950,000.00, City of Pearland, Texas -Water and Sewer System Revenue Bonds, Series 2008, dated March 1, 2008 which sold on February 11, 2008, insured by Financial Security Assurance, Inc (Policy No. 210084-N). The rating is the highest of(i) the guarantor's financial strength rating, (ii) any published underlying rating on the security, or (iii) any published enhanced rating based on a state credit enhancement program. Should you have any questions regarding the above, please do not hesitate to contact Karen Malkowski at (201) 395-6370. Sincerely yours, r )43-cvnirb W efin ` t Joann Hempel Vice President/Senior Credit Officer JH /TM het cGrc w41111l campoores a° r * ,.<. s W . 55 Water Street,38th Floor STANDARD TDAI D New York,NY 10041.0003 te1212 438-2074 nOOR!S reference no.:882999 March 17,2008 Financial Security Assurance Inc Financial Guaranty Group 31 West 52nd Street New York,NY 10019 Attention:Mr. Richard Bauerfeld,Managing Director Re: $14,950,000 City of Pearland, Texas, Water and Sewer System Revenue Bonds,Series 2008, dated:March 1,2008, due:September 1,2009-2024, Term Bonds due:September 1, 2026,September 1,2028,September 1,2032,September 1,2034, (POLICY#2100841V) Dear Mr.Bauerfeld: Standard&Poor's has reviewed the rating on the above-referenced obligations. After such 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 policy your company is providing. Therefore,rating adjustments may result from changes in the financial 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 verification 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 fmal. If any subsequent changes were made in the final documents,you must notify us of such changes by sending us the revised fmal documents with the changes clearly marked. 1 , Mr.Richard Bauerfeld Page 2 March 17,2008 - Standard&Poor's is pleased to be of service to you. For more information please visit our website at www.standardandpoors.com. If we can be of help in any other way,please contact us. Thank you for choosing Standard&Poor's and we look forward to working with you again. Sincerely yours, Standard&Poor's Ratings Services a division of The McGraw-Hill Companies,Inc. ,A,ZezrcAYLIA;:tf/e' ,V ,OK' aw • -1 OFFICIAL BID FORM February 11,2008 Mayor and City Council City of Pearland 3519 Liberty Drive _ 1 Pearland,Texas 77581 - 1 LadiesLadies and Gentlemen: Subject to the terms of your Official Notice of Sale and Preliminary Official Statement, dated January 30, 2008, which are incorporated herein by reference, we hereby submit the following bid for the $14,950,000 CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated March 1, 2008. This offer is being made for all of said Bonds and for not less than all. For said legally issued Bonds,we will pay you the par value thereof,plus accrued interest from their date to the date of delivery to us,for the Bonds maturing and bearing interest per annum as follows: Maturity Principal Interest Maturity Principal Interest Date Amount Rate Date Amount Rate _ September 1,2009(a) $ 150,000 . S.250 % September 1,2022(a)(b) $ 440,000 Ll.125 % September 1,2010(a) 190,000 3.250 September 1,2023(a)(b) 460,000 4.ZOD j I September 1,2011(a) 205,000 3.250 September 1,2024(a)(b) 490,000 11,3 0 0 September 1,2012(a) 225,000 3.251) September 1,2025(a)(b) 510,000 September 1,2013(a) 235,000 3.25o September 1,2026(a)(b) 540,000 5 000 , September 1,2014(a) 255,000 4.500 September 1,2027(a)(b) 560,000 September 1,2015(a) 275,000 `'t• 0� September 1,2028(a)(b) 595,000 5.000 September 1,2016(a) 290,000 `t•Sit') September 1,2029(a)(b) 600,000 September 1,2017(a) 315,000 Lt.SO September 1,2030(a)(b) 580,000 September 1,2018(a)(b) 340,000 4.500 September 1,2031(a)(b) 560,000 September 1,2019(a)(b) 370,000 'A.SOD September 1,2032(a)(b) 1,890,000 5.00 0 September 1,2020(a)(b) 395,000 1{.500 September 1,2033(a)(b) 1,980,000 I September 1,2021(a)(b) 420,000 A•500 September 1,2034(a)(b) 2,080,000 y.SOO I (a) At the option of the Purchaser, any or all of such serial maturities may be designated as term bonds 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 (September 1) Redemption of Term Bonds Rate 7024, 2025 $ l,OCO,( ) 5.000% 202.$ 2421 1, 155,( .0 5.ou. % 2.032- 1029 3, V30,uov 5.vw% 2434-t 2.O33 4.O1•0,Wo `1.500% (b) Subjectto optional redemption and payment, at the option of the City, in whole or, from time to time, in P part, on September 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. • The calculation(which is not part of this bid)of the interest cost from the above, is: Total Interest Cost from March 1,2008 $ 13, 3113,514 L.2S NET INTEREST COST $ 13, 398, VP.,zo' NET EFFECTIVE INTEREST RATE y.Co$cO Z % 4 Co The Initial Bonds shall be registered in the name of 20 T IQ- gill[ZQ , which'will, upon payment for the Bonds, be cancelled by the Paying Agent/Registrar. The Bonds will then be registered in the name of Cede&Co. (DTC's partnership nominee),under the Book-Entry-Only System. We request1 0copies of the final Official Statement(not to exceed 200 copies). By submitting this bid,we agree to provide copies of the final Official Statement, and any amendments and supplements thereto, in accordance with the terms of the Official Notice of Sale and as required by Rule 15c2-12 of the Securities and Exchange Commission. Cashier's Check of the i�Cr Bank, AuStini ,Texas,in the amount of$299,000 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 "Preliminary Official Statement." We agree to accept delivery of the Bonds utilizing the Book-Entry-Only System through DTC and make payment for the Initial Bonds in immediately available funds in the Corporate Trust Office, Wells Fargo Bank, N.A., Houston, If Texas, not later than 10:00 AM, CST, on March 18, 2008, or thereafter on the date the Bonds 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 Bonds to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute and deliver to the City, by the date of delivery of the Bonds, a certificate relating to the "issue price" of the Bonds 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 C2J2/ � ' (�G�,-�- ) D)vt%10—' Authorized Representative ACCEPTED this 11`h day of February,2008,the City Council,City of Pearland,Texas. Mayor Q p�ftLq�v4, • ATTEST: _1•'• �/�1` i7:• / ` •c YiliC110( (For your information you will find attached a list of the group of purchasers associated with us in this proposal) NOTICE OF ISSUANCE OF ADDITIONAL BONDS NOTICE IS HEREBY GIVEN, pursuant to the requirements of City of Pearland, Texas - Ordinance 930 - City of Pearland, Texas Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 (the "1999 Ordinance"), that the City of Pearland, Texas (the "City") proposes and intends to issue Additional Bonds (as such term is defined in the 1999 Ordinance), to wit: CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE BONDS, SERIES 2008, dated March 1, 2008, in the aggregate principal amount of$14,950,000 (the"Series 2008 Bonds"). The City has complied with the requirements of Section 6.1 of the Ordinance as evidenced by the Additional Bonds Certificate attached hereto as Exhibit A and the Certificate of Financial Advisor attached hereto as Exhibit B. The City authorized the issuance of the Series 2008 Bonds at its City Council meeting on February 11, 2008, and currently anticipates issuance and delivery of such Series 2008 Bonds on or about March 18, 2008. Copies of the 1999 Ordinance are on file with the Paying Agent/Registrar for the Bonds, The Bank of New York Trust Company, N.A., as successor to IPMorgan Chase Bank, Dallas, Texas. Copies of the ordinance authorizing the issuance of the Series 2008 Bonds are on file with the Paying Agent/Registrar for the Series 2008 Bonds, Wells Fargo Bank, N.A., Houston, Texas. Dated: February 11,2008 z:i ok ; ngLo g, Citfe0/10., ctary Ltf :v-. `1 HOU:2778850.1 Exhibit A Additional Bonds Certificate HOU:2778850.1 ADDITIONAL BONDS CERTIFICATE I, the undersigned, being the Director of Finance of the City of Pearland, Texas (the "City"), hereby certify as follows in connection with the issuance of"City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008" in the aggregate principal amount of $14,950,000 (the "Series 2008 Bonds"). This certificate is made for the Attorney General of the State of Texas and all other persons interested in the issuance of the Bonds. Capitalized terms not defined herein are those defined in the Ordinance authorizing the issuance of the Series 2008 Bonds. 1. This certificate evidences compliance with Section 6.1 of the Ordinances authorizing the issuance of the Outstanding Bonds. 2. The Series 2008 Bonds mature on September 1 and interest thereon is payable only on March 1 and September 1. 3. The Interest and Sinking Fund and the Reserve Fund each contain the amount of money currently required to be on deposit therein. 4. For the "Base Period" the Net Revenues were $8,525,522 which amount is equal to at least one hundred and forty percent (140%) of the Average Annual Principal and Interest Requirements on all Bonds (as set forth in the Ordinance authorizing the issuance of the Series 2008 Bonds), after giving effect to the issuance of the Series 2008 Bonds. The Base Period, as used in this Certificate, is the Fiscal Year ended September 30, 2007. [Signature Page Follows] HOU:2773260.2 WITNESS MY HAND this Ft<<OfU art, k , 2008. r Director of Finance City of Pearland, Texas • • • 2 HOU:2773260.1 Exhibit B Certificate of Financial Advisor HOU:2778850.1 • CERTIFICATE OF FINANCIAL ADVISOR The undersigned officer of RBC Dain Rauscher Inc., doing business under the name RBC Capital Markets, serving as financial advisor to the City of Pearland, Texas (the "City") in matters relating to the issuance of$14,950,000 City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 2008 (the "Bonds"), hereby certifies to the City, pursuant to the final paragraph of Section 6.1 of the ordinance authorizing issuance of the Bonds, as follows: The estimated rate which the City's Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 would bear if they were issued as of this date as bonds bearing a fixed rate of interest to their scheduled maturity or maturities is 4.6%. IN WITNESS WHEREOF, I have hereunto set my hand this March!2-, 2008. RBC DAIN RAUSCHER INC. 77 /• By: Printed Nani, off- Title: /)/rt e- HOU:2773265.1