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HomeMy WebLinkAboutOrd. 1488 2013-08-12 ORDINANCE NO. 4_83 ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013; PRESCRIBING THE TERMS AND FORM THEREOF; PROVIDING FOR THE PAYMENT OF THE PRINCIPAL THEREOF AND INTEREST THEREON; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES, INCLUDING USE OF THE PROCEEDS THEREOF, AND MATTERS INCIDENT THERETO; AND DECLARING AN EMERGENCY BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: ARTICLE I FINDINGS AND DETERMINATIONS Section 1.1: Findings and Determinations. The City Council hereby officially finds and determines that: (a) The City of Pearland, Texas (the "City"), acting through its City Council, is authorized pursuant to and in accordance with the provisions of Texas Local Government Code, Chapter 271, Subchapter C, as amended (the "Act"), to issue certificates of obligation to provide all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights- of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit: (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) professional services rendered in connection with the above listed projects. (b) The City Council authorized the publication of a notice of intention to issue Certificates of Obligation, Series 2013 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 7:30 p.m. on August 12, 2013 at its regular meeting place to adopt an ordinance authorizing the issuance of the Certificates to be payable from (i) an ad valorem tax levied, within the limits prescribed by law, on the taxable property located within the City, and (ii) the revenues to be derived from the City's water and sewer system (the "System") after the payment of all operation and maintenance expenses thereof (the "Net Revenues") in an amount not to exceed $10,000, to the extent that ad valorem taxes are ever insufficient or unavailable for such purposes, provided that the pledge of Net Revenues is and shall be subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. (c) Such notice was published at the times and in the manner required by the Act. HOU:3339814.1 (d) No petition signed by at least five percent (5%) of the qualified voters of the City has been filed with or presented to any official of the City protesting the issuance of such Certificates on or before August 12, 2013, or the date of passage of this Ordinance. (e) The City has determined that it is in the best interests of the City and that it is otherwise desirable to issue the Certificates to provide all or part of the funds to pay contractual obligations to be incurred for the purposes authorized by the Act. ARTICLE II DEFINITIONS AND INTERPRETATIONS Section 2.1: Definitions. As used herein, the following terms shall have the meanings specified, unless the context clearly indicates otherwise: "Act" shall mean Texas Local Government Code, Chapter 271, Subchapter C, as amended. "Attorney General" shall mean the Attorney General of the State of Texas. "Certificate" or "Certificates" shall mean any or all of the City of Pearland, Texas Certificates of Obligation, Series 2013, authorized by this Ordinance. "City" shall mean the City of Pearland, Texas and, where appropriate, its City Council. "City Council" shall mean the governing body of the City. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Comptroller" shall mean the Comptroller of Public Accounts of the State of Texas. "Debt Service Fund" shall mean the Certificates of Obligation, Series 2013 Debt Service Fund established by the City and described in section 5.2 of this Ordinance. "Fiscal Year" shall mean the City's then designated fiscal year, which currently is the twelve-month period beginning on the first day of October of a calendar year and ending on the last day of September of the next succeeding calendar year and each such period may be designated with the number of the calendar year in which such period ends. "Interest Payment Date," when used in connection with any Certificate, shall mean March 1, 2014, and each September 1 and March 1 thereafter until maturity or earlier redemption of such Certificate. "MSRB" means the Municipal Securities Rulemaking Board. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements hereto. 2 HOU:3339814.1 "Outstanding", when used with reference to the Certificates, shall mean, as of a particular date, all Certificates theretofore and thereupon delivered pursuant to this Ordinance except: (a) any Certificates canceled by or on behalf of the City at or before such date; (b) any Certificates defeased pursuant to the defeasance provisions of this Ordinance or otherwise defeased as permitted by applicable law; and (c) any Certificates in lieu of or in substitution for which a replacement Certificate shall have been delivered pursuant to this Ordinance. "Paying Agent/Registrar" shall mean Wells Fargo Bank, National Association and its successors in that capacity. "Paying Agent/Registrar Agreement" shall mean the agreement between the City and the Paying Agent/Registrar as described more particularly in Section 6.1 hereof. "Purchaser" shall mean the entity or entities specified in Section 7.1 hereof "Record Date" shall mean the close of business on the 15th day of the calendar month immediately preceding the applicable Interest Payment Date. "Register" shall mean the registration books for the Certificates kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts registered to, each Registered Owner of Certificates. "Registered Owner" shall mean the person or entity in whose name any Certificate is registered in the Register. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. Section 2.2: Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Certificates and the validity of the levy of ad valorem taxes to pay the principal of and interest on the Certificates. ARTICLE III TERMS OF THE CERTIFICATES Section 3.1: Amount, Purpose and Authorization. The Certificates shall be issued in fully registered form, without coupons, under and pursuant to the authority of the Act in the total authorized aggregate principal amount of TWO MILLION SEVEN HUNDRED FORTY FIVE THOUSAND AND NO/100 DOLLARS ($2,745,000) for the purpose of providing all or part of the funds to pay contractual obligations to be incurred for the purposes described in paragraph 1.1(a) hereof 3 HOU:3339814.1 Section 3.2: Designation, Date and Interest Payment Dates. The Certificates shall be designated as the "City of Pearland, Texas Certificates of Obligation, Series 2013," and shall be dated August 1, 2013. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of the August 1, 2013 or the most recent Interest Payment Date to which interest has been paid or duly provided for, calculated on the basis of a 360- day year of twelve 30-day months, payable on March 1, 2014, and each September 1 and March 1 thereafter until maturity or earlier redemption. If interest on any Certificate is not paid on any Interest Payment Date and continues unpaid for thirty (30) days thereafter, the Paying Agent/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 affected Registered Owner as of the close of business on the day prior to mailing of such notice. Section 3.3: Numbers, Denomination, Interest Rates and Maturities. The Certificates shall be issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in the following schedule, and may be transferred and exchanged as set out in this Ordinance. The Certificates shall mature on March 1 in each of the years and in the amounts set out in such schedule. Certificates delivered in transfer of or in exchange for other Certificates shall be numbered in order of their authentication by the Paying Agent/Registrar, shall be in the denomination of$5,000 or integral multiples thereof and shall mature on the same date and bear interest at the same rate as the Certificate or Certificates in lieu of which they are delivered. Certificate Year of Principal Interest Number Maturity Amount Rate R-1 R-2 R-3 R-4 R-5 R-6 R-7 R-8 R-9 R-10 R-11 R-12 R-13 R-14 R-15 R-16 R-17 4 HOU:3339814.1 R-18 R-19 R-20 Section 3.4: Redemption Prior to Maturity. (a) Optional Redemption. The Certificates maturing on and after March 1, 2024 are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 1, 2023, or any date thereafter, at par plus accrued interest to the date fixed for redemption. (b) Certificates may be redeemed in part only in integral multiples of $5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of$5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of$5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. Upon presentation and surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of this Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. (c) Notice of any redemption, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the Register, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Certificates which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being Outstanding except for the purpose of being paid with the funds so provided for such payment. Section 3.5: Manner of Payment, Characteristics, Execution and Authentication. The Paying Agent/Registrar is hereby appointed the paying agent for the Certificates. The Certificates shall be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the manner indicated in the FORM OF CERTIFICATES set forth in Article IV of this Ordinance. If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of the Certificates or before the delivery of the Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the back of the Certificates over the certification of the City Secretary, which may be executed in facsimile but errors or omissions in the printing of the opinion shall have no effect on the validity of the Certificates. 5 HOU:3339814.1 The City may secure identification numbers through CUSIP Global Services, managed on behalf of the American Bankers Association by Standard & Poor's Financial Services LLC, and may authorize the printing of such numbers on the face of the Certificates. It is expressly provided, however, that the presence or absence of CUSIP numbers on the Certificates shall be of no significance or effect in regard to the legality thereof and neither the City nor the attorneys approving said Certificates as to legality are to be held responsible for CUSIP numbers incorrectly printed on the Certificates. Section 3.6: Authentication. Except for the Certificates to be initially issued,which need not be authenticated by the Registrar, only such Certificates as shall bear thereon a certificate of authentication, substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. Such duly executed certificate of authentication shall be conclusive evidence that the Certificate so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.7: Ownership. The City, the Paying Agent/Registrar and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such Certificate for the purpose of making and receiving payment of the principal thereof and interest thereon and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Certificate in accordance with this Section shall be valid and effective and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.8: Registration, Transfer and Exchange. The Paying Agent/Registrar is hereby appointed the registrar for the Certificates. So long as any Certificate remains Outstanding, the Paying Agent/Registrar shall keep the Register at its office in Houston, Texas in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of the Certificates in accordance with the terms of this Ordinance. Each Certificate shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Certificate for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Certificate or Certificates, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate as the Certificate or Certificates so presented and surrendered. All Certificates shall be exchangeable upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates, maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Certificate or Certificates presented for exchange. 6 HOU:3339814.1 The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver exchange Certificates in accordance with the provisions of this Section. Each Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such Certificate is delivered. All Certificates issued in transfer or exchange shall be delivered to the Registered Owners thereof at the principal corporate trust office of the Paying Agent/Registrar or sent by United States mail, first class, postage prepaid. The City or the Paying Agent/Registrar may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Certificate. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Certificate called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Certificate called for redemption in part. Section 3.9: Replacement Certificates. Upon the presentation and surrender to the Paying Agent/Registrar of a damaged or mutilated Certificate, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Certificate, of the same maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Registered Owner of such Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Paying Agent/Registrar and the City. If any Certificate is lost, apparently destroyed or wrongfully taken, the City, pursuant to the applicable laws of the State of Texas and ordinances of the City, and in the absence of notice or knowledge that such Certificate has been acquired by a bona fide purchaser, shall execute, and the Paying Agent/Registrar shall authenticate and deliver, a replacement Certificate of the same maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding, provided that the Registered Owner thereof shall have: (a) furnished to the City and the Paying Agent/Registrar satisfactory evidence of the ownership of and the circumstances of the loss, destruction or theft of such Certificate; (b) furnished such security or indemnity as may be required by the Paying Agent/Registrar and the City to save and hold them harmless; (c) paid all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar and any tax or other governmental charge that may be imposed; and 7 HOU:3339814.1 (d) met any other reasonable requirements of the City and the Paying Agent/Registrar. If, after the delivery of such replacement Certificate, a bona fide purchaser of the original Certificate in lieu of which such replacement Certificate was issued presents for payment such original Certificate, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Certificate from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the City or the Paying Agent/Registrar in connection therewith. If any such mutilated, lost, apparently destroyed or wrongfully taken Certificate has become or is about to become due and payable, the City in its discretion may, instead of issuing a replacement Certificate, authorize the Paying Agent/Registrar to pay such Certificate. Each replacement Certificate delivered in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such replacement Certificate is delivered. Section 3.10: Cancellation. All Certificates paid or redeemed in accordance with this Ordinance, and all Certificates in lieu of which exchange Certificates or replacement Certificates are authenticated and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment or redemption. The Paying Agent/Registrar shall periodically furnish the City with certificates of destruction of such Certificates. ARTICLE IV FORM OF CERTIFICATES The Certificates, including the Form of Comptroller's Registration Certificate, Form of Paying Agent/Registrar Authentication Certificate, and Form of Assignment, shall be in substantially the form set forth in Exhibit A hereto, with such omissions, insertions and variations as may be necessary or desirable, and not prohibited by this Ordinance. ARTICLE V SECURITY FOR THE CERTIFICATES Section 5.1: Pledge and Levy of Taxes and Revenues. (a) To provide for the payment of principal of and interest on the Certificates, there is hereby levied, within the limits prescribed by law, for the current year and each succeeding year thereafter, while the Certificates or any part of the principal thereof and the interest thereon remain outstanding and unpaid, an ad valorem tax upon all taxable property within the City sufficient to pay the interest on the Certificates and to create and provide a sinking fund of not less than 2% of the principal amount of the Certificates or not less than the principal payable out of such tax, whichever is greater, with full allowance being made for tax delinquencies and the costs of 8 HOU:3339814.I tax collection, and such taxes, when collected, shall be applied to the payment of principal of and interest on the Certificates by deposit to the Debt Service Fund and to no other purpose. (b) The City hereby declares its purpose and intent to provide and levy a tax legally sufficient to pay the principal of and interest on the Certificates, it having been determined that the existing and available taxing authority of the City for such purpose is adequate to permit a legally sufficient tax. As long as any Certificates remain outstanding, all moneys on deposit in, or credited to, the Debt Service Fund shall be secured by a pledge of security, as provided by law for cities in the State of Texas. (c) In addition, pursuant to the authority of Chapter 1502, Texas Government Code, as amended, the City also hereby pledges the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. (d) The City hereby appropriates from current funds on hand and legally available therefor, funds sufficient, when added to the accrued interest received from the sale of the Certificates, to pay the interest on the Certificates payable on March 1, 2014. Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2013 Debt Service Fund (the "Debt Service Fund") is hereby created as a special fund solely for the benefit of the Certificates. The City shall establish and maintain such fund at an official City depository and shall keep such fund separate and apart from all other funds and accounts of the City. Any amount on deposit in the Debt Service Fund shall be maintained by the City in trust for the Registered Owners of the Certificates. Such amount, plus any other amounts deposited by the City into such fund and any and all investment earnings on amounts on deposit in such fund, shall be used only to pay the principal of, premium, if any, and interest on the Certificates. Section 5.3: Further Proceedings. After the Certificates to be initially issued have been executed, it shall be the duty of the Mayor to deliver the Certificates to be initially issued and all pertinent records and proceedings to the Attorney General for examination and approval. After the Certificates to be initially issued shall have been approved by the Attorney General, they shall be delivered to the Comptroller for registration. Upon registration of the Certificates to be initially issued, the Comptroller (or a deputy lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's registration certificate prescribed herein to be affixed or attached to the Certificates to be initially issued, and the seal of said Comptroller shall be impressed, or placed in facsimile, thereon. 9 HOU:3339814.1 ARTICLE VI CONCERNING THE PAYING AGENT/REGISTRAR Section 6.1: Acceptance. Wells Fargo Bank, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates pursuant to the terms and provisions of the Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar. The Paying Agent/Registrar Agreement shall be substantially in the form attached hereto as Exhibit B, the terms and provisions of which are hereby approved, and the Mayor is hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest thereto and affix the City's seal. Such initial Paying Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of any fees pursuant to the terms of any contract between the Paying Agent/Registrar and the City and/or the deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. Section 6.2: Trust Funds. All money transferred to the Paying Agent/Registrar in its capacity as Paying Agent/Registrar for the Certificates under this Ordinance (except any sums representing Paying Agent/Registrar's fees) shall be held in trust for the benefit of the City, shall be the property of the City and shall be disbursed in accordance with this Ordinance. Section 6.3: Certificates Presented. Subject to the provisions of Section 6.4, all matured Certificates presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Certificates shall be canceled as provided herein. Section 6.4: Unclaimed Funds Held by the Paying Agent/Registrar. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Certificates remaining unclaimed by the Registered Owner thereof after the expiration of three years 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 Agent/Registrar to the City upon receipt by the Paying Agent/Registrar of a written request therefor from the City. The Paying Agent/Registrar shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with this Section. Section 6.5: Paying Agent/Registrar May Own Certificates. The Paying Agent/Registrar in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent/Registrar. 10 HOU:3339814.1 Section 6.6: Successor Paying Agents/Registrars. The City covenants that at all times while any Certificates are Outstanding it will provide a legally qualified bank, trust company, financial institution or other agency to act as Paying Agent/Registrar for the Certificates. The City reserves the right to change the Paying Agent/Registrar for the Certificates on not less than sixty (60) days' written notice to the Paying Agent/Registrar, as long as any such notice is effective not less than 60 days prior to the next succeeding principal or interest payment date on the Certificates. Promptly upon the appointment of any successor Paying Agent/Registrar, the previous Paying Agent/Registrar shall deliver the Register or a copy thereof to the new Paying Agent/Registrar, and the new Paying Agent/Registrar shall notify each Registered Owner, by United States mail, first class, postage prepaid, of such change and of the address of the new Paying Agent/Registrar. Each Paying Agent/Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Ordinance. ARTICLE VII PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF CERTIFICATES Section 7.1: Sale of Certificates. The Certificates are hereby sold and shall be delivered to the Purchaser at a price of par, in accordance with the terms of the Bid Form of even date herewith, presented to and hereby approved by the City Council, which price and terms are hereby found and determined to be the most advantageous reasonably obtainable by the City. The Mayor and other appropriate officials of the City are hereby authorized to do any and all things necessary or desirable to satisfy the conditions set out therein and to provide for the issuance and delivery of the Certificates. Section 7.2: Approval, Registration and Delivery. The Mayor is hereby authorized to have control and custody of the Certificates and all necessary records and proceedings pertaining thereto pending their delivery, and the Mayor and other officers and employees of the City are hereby authorized and directed to make such certifications and to execute such instruments as may be necessary to accomplish the delivery of the Certificates and to assure the investigation, examination and approval thereof by the Attorney General and the registration of the initial Certificates by the Comptroller. Upon registration of the Certificates, the Comptroller (or the Comptroller's certificates clerk or an assistant certificates clerk lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's Registration Certificates prescribed herein to be attached or affixed to each Certificates initially delivered and the seal of the Comptroller shall be impressed or printed or lithographed thereon. Section 7.3: Application of Proceeds of Certificates. Proceeds from the sale of the Certificates shall, promptly upon receipt by the City, be applied as follows: (1) Accrued interest, if any, shall be deposited into the Debt Service Fund created in Section 5.2 of this Ordinance; 11 HOU:3339814.1 (2) A portion of the proceeds shall be applied to pay expenses arising in connection with the issuance of the Certificates; (3) The remaining proceeds shall be applied, together with other funds of the City, to provide funds to pay contractual obligations to be incurred for the purposes set forth in Section 3.1 of this Ordinance. Section 7.4: Tax Exemption. The City intends that the interest on the Certificates on the Certificates shall be excludable from gross income of the owners thereof for federal income tax purposes pursuant to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended, (the "Code") and all applicable temporary, proposed and final regulations (the "Regulations") and procedures promulgated thereunder and applicable to the Certificates. For this purpose, the City covenants that it will monitor and control the receipt, investment, expenditure and use of all gross proceeds of the Certificates (including all property, the acquisition, construction or improvement of which is to be financed directly or indirectly with the proceeds of the Certificates) and take or omit to take such other and further actions as may be required by Sections 103 and 141 through 150 of the Code and the Regulations to cause the interest on the Certificates to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Certificates for federal income tax purposes. Without limiting the generality of the foregoing, the City shall comply with each of the following covenants: (a) The City will use all of the proceeds of the Certificates to (i)provide funds for the purposes described in Section 3.1 of this Ordinance, which will be owned and operated by the City and (ii) to pay the costs of issuing the Certificates. The City will not use any portion of the proceeds of the Certificates to pay the principal of or interest or redemption premium on, any other obligation of the City or a related person. (b) The City will not directly or indirectly take any action, or omit to take any action, which action or omission would cause the Certificates to constitute "private activity bonds" within the meaning of Section 141(a) of the Code. (c) Principal of and interest on the Certificates will be paid solely from ad valorem taxes collected by the City, investment earnings on such collections, and as available, proceeds of the Certificates. (d) Based upon all facts and estimates now known or reasonably expected to be in existence on the date the Certificates are delivered, the City reasonably expects that the proceeds of the Certificates will not be used in a manner that would cause the Certificates or any portion thereof to be an "arbitrage bond" within the meaning of Section 148 of the Code. (e) At all times while the Certificates are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Certificates in accordance with the Regulations. The City will monitor the yield on the 12 HOU:3339814.1 investments of the proceeds of the Certificates and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Certificates. To the extent necessary to prevent the Certificates from constituting "arbitrage bonds," the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose investments allocable to the Certificates to be less than the yield that is materially higher than the yield on the Certificates. (f) The City will not take any action or knowingly omit to take any action that, if taken or omitted, would cause the Certificates to be treated as "federally guaranteed" obligations for purposes of Section 149(b) of the Code. (g) The City represents that not more than fifty percent (50%) of the proceeds of the Certificates will be invested in nonpurpose investments (as defined in Section 148(f)(6)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 149(g)(3)(A)(ii) of the Code, and the City reasonably expects that at least eighty-five percent (85%) of the spendable proceeds of the Certificates will be used to carry out the governmental purpose of the Certificates within the three-year period beginning on the date of issue of the Certificates. (h) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Certificates, if any, be rebated to the federal government. Specifically, the City will (i) maintain records regarding the receipt, investment, and expenditure of the gross proceeds of the Certificates as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after the day on which the last outstanding Certificate is discharged, (ii) account for all gross proceeds under a reasonable, consistently applied method of accounting, not employed as an artifice or device to avoid in whole or in part, the requirements of Section 148 of the Code, including any specified method of accounting required by applicable Regulations to be used for all or a portion of any gross proceeds, (iii) calculate, at such times as are required by applicable Regulations, the amount of excess arbitrage profits, if any, earned from the investment of the gross proceeds of the Certificates and (iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it, interest thereon and any penalty. (i) The City will not directly or indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other 13 HOU:3339814.1 than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if such arrangement had been at arm's length and had the yield on the Certificates not been relevant to either party. (j) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of the Code with respect to the Certificates on such form and in such place as the Secretary may prescribe. (k) The City will not issue or use the Certificates as part of an "abusive arbitrage device" (as defined in Section 1.148-10(a) of the Regulations). Without limiting the foregoing, the Certificates are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations, by (i) enabling the City to exploit the difference 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. (1) Proper officers of the City charged with the responsibility for issuing the Certificates 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 Certificates and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the date of issuance of the Certificates, the City will take such actions as are necessary and appropriate to assure the continuous accuracy of the representations contained in such certificates. (m) The covenants and representations made or required by this Section are for the benefit of the Certificate holders and any subsequent Certificate holder, and may be relied upon by the Certificate holders and any subsequent Certificate holder and bond counsel to the City. In complying with 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 Certificates to be includable in gross income for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance, the City's representations and obligations under the covenants and provisions of this Section 6.5 shall survive the defeasance and discharge of the Certificates for as long as such matters are relevant to the exclusion of interest on the Certificates from the gross income of the owners for federal income tax purposes. Section 7.5: Reserved. 14 HOU:3339814.1 Section 7.6: Related Matters. In order that the City shall satisfy in a timely manner all of its obligations under this Ordinance, the Mayor, the Mayor, City Secretary and all other appropriate officers, agents, representatives and employees of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance and delivery of the Certificates, including, without limitation, executing and delivering on behalf of the City all certificates, consents, receipts, requests, notices, and other documents as may be reasonably necessary to satisfy the City's obligations under this Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of this Ordinance. ARTICLE VIII MISCELLANEOUS Section 8.1: Defeasance. The Certificates may be discharged, defeased, redeemed or refunded in any manner now or hereafter permitted by law. Section 8.2: Application of Chapter 1208, Government Code. Chapter 1208, Government Code, applies to the issuance of the Certificates and the pledge of the taxes granted by the City under Section 5.1 of this Ordinance, and such pledge is therefore valid, effective and perfected. If Texas law is amended at any time while the Certificates are outstanding and unpaid such that the pledge of the taxes granted by the City under Section 5.1 of this Ordinance is to be subject to the filing requirements of Chapter 9, Business & Commerce Code, then in order to preserve to the Registered Owners of the Certificates the perfection of the security interest in said pledge, the City agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Business & Commerce Code and enable a filing to perfect the security interest in said pledge to occur. Section 8.3: Ordinance a Contract - Amendments. This Ordinance shall constitute a contract with the Registered Owners from time to time, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Registered Owners, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Registered Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the consent of Registered Owners who own in the aggregate 51% of the principal amount of the Certificates then Outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Registered Owners of Outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Registered Owners for consent to any such amendment, addition, or rescission. 15 HOU:3339814.I Section 8.4: Legal Holidays. In any case where the date interest accrues and becomes payable on the Certificates or principal of the Certificates matures or the date fixed for redemption of any Certificates or a Record Date shall be in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date shall not occur on such date, but payment may be made or the Record Date shall occur on the next succeeding day which is not in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if (i) made on the date of maturity or the date fixed for redemption and no interest shall accrue for the period from the date of maturity or redemption to the date of actual payment or (ii) the Record Date had occurred on the fifteenth day of that calendar month. Section 8.5: No Recourse Against City Officials. No recourse shall be had for the payment of principal of or interest on any Certificates or for any claim based thereon or on this Ordinance against any official of the City or any person executing any Certificates. Section 8.6: Further Proceedings. The Mayor, Mayor Pro-Tem, City Secretary and other appropriate officials of the City are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Ordinance. Section 8.7: 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. Section 8.8: Power to Revise Form of Documents. Notwithstanding any other provision of this Ordinance, the Mayor is hereby authorized to make or approve such revisions, additions, deletions, and variations to this Ordinance and in the form of the documents attached hereto as exhibits as, in the judgment of the Mayor, and in the opinion of Certificate Counsel to the City, may be necessary or convenient to carry out or assist in carrying out the purposes of this Ordinance, or as may be required for approval of the Certificates by the Attorney General of Texas; provided, however, that any changes to such documents resulting in substantive amendments to the terms and conditions of the Certificates or such documents shall be subject to the prior approval of the City Council Section 8.9: Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date, hour, place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all times to the general public at City Hall for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 8.10: Official Statement. The City Council hereby approves the form and content of the Preliminary Official Statement prepared for the initial offering and sale of the 16 HOU:3339814.1 Bonds and hereby authorizes the preparation of a final Official Statement reflecting the terms of the Bond Purchase Agreement and other relevant matters. The use of such Official Statement in the reoffering of the Bonds by the Underwriter is hereby approved and authorized. Section 8.11: Repealer. All orders, resolutions and ordinances, or parts thereof, inconsistent herewith are hereby repealed to the extent of such inconsistency. Section 8.12: Continuing Disclosure Undertaking. (a) Annual Reports. The City will provide certain updated financial information and operating data to the MSRB annually in an electronic format as prescribed by the MSRB and available via the Electronic Municipal Market Access ("EMMA") system at www.emma.msrb.org. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in the final Official Statement authorized by Section 8.10 of this Ordinance under the headings "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY - Current Investments," "CITY TAX DEBT," "TAX DATA" (except under the subheading "Estimated Overlapping Taxes"), "SELECTED FINANCIAL DATA," and in APPENDIX `B." The City will update and provide this information within six months after the end of each fiscal year. If the City changes its fiscal year, it will submit a notice of such change to the MSRB, and 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 may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Web site or filed with the SEC, as permitted by the SEC 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 available by the required time, the City will provide unaudited financial statements by the required time and audited financial statements when and if such audited statements become available. Any such financial statements will be prepared in accordance with the accounting principals described in APPENDIX B or such other accounting principals as the City may require to employ from time to time pursuant to State law or regulation. (b) Material Event Notices. The City shall notify the MSRB in an electronic format prescribed by the MSRB, in a timely manner (not in excess of ten (10) days after the occurrence of the event), of any of the following events with respect to the Bonds: (i) Principal and interest payment delinquencies; (ii) Non-payment related defaults, if material; (iii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iv) Unscheduled draws on credit enhancements reflecting financial difficulties; 17 HOU:3339814.1 (v) Substitution of credit or liquidity providers or their failure to perform; (vi) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability,Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (vii) Modifications to rights of holders of the Bonds, if material; (viii) Bond calls, if material, and tender offers; (ix) Defeasances; (x) Release, substitution, or sale of property securing repayment of the Bonds, if material; (xi) Rating changes; (xii) Bankruptcy, insolvency, receivership or similar event of the City; (xiii) The consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (xiv) Appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. For the purposes, any event described in the immediate proceeding paragraph (12) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding Under States Bankruptcy Code or any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. The City shall notify the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance this Section by the time required by such Section. (c) Limitations, Disclaimers, and Amendments. The City shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the City remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the City in any event will give notice of any deposit made in accordance with Texas law that causes Bonds no longer to be outstanding. The provisions of this Section are for the sole benefit of the holders and the beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City 18 HOU:3339814.1 undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section 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 Section 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 Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY 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 SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE UNLIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the City in observing or performing its obligations under this Section shall comprise a breach of or default under this Order for purposes of any other provision of this Order. Nothing in this Section 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 Section 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, or status or type of principal payment of the City, if (1) the agreement, as so amended, would have permitted an underwriter to purchase or sell Bonds in the initial primary offering 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 provisions of this continuing disclosure agreement 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, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. If any such amendment is made, the City will include in its next annual update an explanation in narrative form of the reasons for the change and its impact on the type of operating data or financial information being provided. Section 8.13: Emergency. It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and the public peace, and that such emergency exists, the specific emergency being that the proceeds 19 HOU:3339814.1 from the sale of the Certificates are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its introduction. Section 8.14: Effective Date. This Ordinance shall be in force and effect from and after its passage on the date shown below. [signature page follows] 20 HOU:3339814.1 PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this August 12, 2013. CITY OF PEARLAND, TEXAS afry c14 Mayor ATTEST /40/#4+ Cit :ecreta (SEAL) tit( 1)< ie;) Exhibit A—Form of Certificate Exhibit B —Paying Agent/Registrar Agreement Exhibit C - Bid Form S-1 HOU:3339814.1 John Robuck Vice President 1401 McKinney Street, Suite 1000 Houston, Texas 77010 Phone: (713) 289-5897 Email: jrobuck@boscinc.com August 26, 2013 Regina Velasquez Wells Fargo Bank, National Association N9311-115 625 Marquette Avenue — 11th Floor East Minneapolis, MN 55479 RE: City of Pearland, Texas $2,745,000 Certificates of Obligation, Series 2013 (the "Certificates") Dear Ms. Velasquez: The delivery of the above referenced certificates is scheduled for Thursday, August 29, 2013 at 10:00 a.m. at your bank at the above captioned address. Tanya Fischer of Andrews Kurth LLP, Houston, Texas, Bond Counsel, will be handling legal matters relating to the closing. At or prior to closing, Wells Fargo Bank, N.A. ("Wells Fargo") will receive $2,795,207.92 from Robert W. Baird & Co., Inc. in immediately available funds calculated as follows: Principal Amount of the Certificates $2,745,000.00 Plus: Net Premium on the Certificates 99,133.45 Less: Underwriter's Discount 57,958.45 Plus: Accrued Interest 9.032.92 $2,795,207.92 Robert W. Baird & Co., Inc. will wire the aforementioned sum to Wells Fargo Bank, N.A. as indicated below: Wells Fargo Bank ABA # 121 000 248 Account # 0001038377 For Further Credit to 99990909 Ref: City of Pearland, Texas Attn: Regina Velasquez (612) 667-0647 Broker/Dealer Services and Securities offered by BOSC, Inc., an SEC registered investment adviser, a registered broker/dealer, member FINRA/SIPC. SEC registration does not imply a certain level of skill or training. Insurance offered by BOSC Agency, Inc., an affiliated agency. Investments and insurance are not insured by FDIC, are not deposits or other obligations of, and are not guaranteed by, any bank or bank affiliate. Investments are subject to risks, including possible loss of principal amount invested. City of Pearland, Texas Certificates of Obligation, Series 2013 Page 2 Wells Fargo Bank, N.A. will disburse the total amount of $2,795,207.92 as follows: 1. $2,794,457.92 ($2,745,000.00 representing deposit to the construction fund, $40,425.00 representing costs of issuance and $9,032.92 representing accrued interest) shall be wired to the City's Depository Account, as follows: Wells Fargo ABA #121-000-248 Account # 2010419505 Ref: Certificates of Obligation, Series 2013 2. $750.00 shall be withdrawn by Wells Fargo Bank from the proceeds of the Certificates and credit such sum to its account as the Paying Agent Annual Administration fee and Escrow Agent Fee for the Certificates. Please contract me should you have any questions regarding this matter, or if I may be of any further assistance. Respectfully submitted, John Robuck Vice President BOSC, Inc. Cc: Bill Eisen, City of Pearland, Texas Claire Bogard, City of Pearland, Texas Rick Witte, Andrews Kurth LLP Tanya Fischer, Andrews Kurth LLP Charles Galarza, Robert W. Baird & Co., Inc. Ryan O'Hara, BOSC, Inc. Broker/Dealer Services and Securities offered by BOSC, Inc., an SEC registered investment adviser, a registered broker/dealer, member FINRA/SIPC. SEC registration does not imply a certain level of skill or training. Insurance offered by BOSC Agency, Inc., an affiliated agency. Investments and insurance are not insured by FDIC, are not deposits or other obligations of, and are not guaranteed by, any bank or bank affiliate. Investments are subject to risks, including possible loss of principal amount invested. City of Pearland, Texas- General Obligation Debt Current Debt plus New Debt FINAL NUMBERS - Certificates of Obligation, Series 2013 Dated Date 08/01/2013 Series 2013 Certificates of Obligation Delivery Date 08/29/2013 New Interest Interest Year Current Principal Various Various Total Total New Total Debt Ending Debt Due Due Due New Principal Service 09/30 Requirement 03/01 03/01 09/01 Interest & Interest Requirement 2013 25,343,548 25,343,548 2014 24,591,850 75,000 67,747 56,944 124,691 199,691 24,791,541 2015 24,481,995 85,000 56,944 55,669 112,613 197,613 24,679,607 2016 24,468,751 85,000 55,669 54,394 110,063 195,063 24,663,813 2017 24,467,801 85,000 54,394 53,119 107,513 192,513 24,660,314 2018 24,453,638 85,000 53,119 51,844 104,963 189,963 24,643,600 2019 24,448,944 90,000 51,844 50,494 102,338 192,338 24,641,281 2020 24,434,853 100,000 50,494 48,494 98,988 198,988 24,633,840 2021 24,425,101 100,000 48,494 45,994 94,488 194,488 24,619,589 2022 24,385,794 100,000 45,994 43,494 89,488 189,488 24,575,282 2023 24,375,833 100,000 43,494 40,994 84,488 184,488 24,560,320 2024 25,317,060 100,000 40,994 38,494 79,488 179,488 25,496,548 2025 25,307,098 110,000 38,494 35,744 74,238 184,238 25,491,336 2026 23,679,609 110,000 35,744 33,544 69,288 179,288 23,858,897 2027 23,662,443 110,000 33,544 31,344 64,888 174,888 23,837,330 2028 23,648,846 110,000 31,344 29,144 60,488 170,488 23,819,334 2029 23,638,309 120,000 29,144 26,594 55,738 175,738 23,814,046 2030 14,838,578 120,000 26,594 23,969 50,563 170,563 15,009,140 2031 14,829,346 120,000 23,969 21,344 45,313 165,313 14,994,658 2032 14,846,068 120,000 21,344 18,719 40,063 160,063 15,006,131 2033 3,540,169 130,000 18,719 15,794 34,513 164,513 3,704,681 2034 3,530,006 130,000 15,794 12,869 28,663 158,663 3,688,669 2035 1,632,044 130,000 12,869 9,944 22,813 152,813 1,784,856 2036 857,122 140,000 9,944 6,706 16,650 156,650 1,013,772 2037 513,763 140,000 6,706 3,469 10,175 150,175 663,938 2038 501,331 150,000 3,469 3,469 153,469 654,800 Totals $470,219,900 $2,745,000 $876,865 $809,118 $1,685,983 $4,430,983 $474,650,871 NEW13CO: Dated Date: 08/01/2013 Principal Due Dates: 03/01/2014 - 03/01/2038 Maturing Amount: 2,745,000.00 PEARLAND_GO_2013: NEW13CO AGGPOSTPIB Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 08/12/2013 @ 13:47 v9.69 Page-1 City of Pearland, Texas- General Obligation Debt Sources & Uses Report FINAL NUMBERS - Certificates of Obligation, Series 2013 Sources of Funds: Principal Amount of Current Interest Bonds (CIBs) 2,745,000.00 CIB Premium 107,652.15 CIB Discount -8,518.70 Accrued Interest 9,032.92 Total SOURCES of Funds $2,853,166.37 Uses of Funds: Deposit to Construction Fund 2,745,000.00 Accrued Interest Deposit to D/S Fund 9,032.92 Issuance Expenses: ( $99,133.45) Underwriter's Discount 57,958.45 Rating Agency 3,000.00 Bond Counsel 17,500.00 Printing 2,000.00 Trustee 500.00 Attorney General Fee 2,745.00 Financial Advisor 12,500.00 Miscellaneous 2,930.00 Rounding Amount Total USES of Funds $2,853,166.37 Miscellaneous Bond Issuance Information: Delivery Date: Principal Amount of the New Money Bonds Proceeds of "The (new) Bonds" "All Costs Included" TIC on the New Issue is Federal Arbitrage Yield on the New Issue is 08/29/2013 2,745,000.00 2.844.133.45 4.31567938% 4.03638158% PEARLAND_GO_2013: RUNI3CO NEWI3CO NEW13GO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 08/1212013 @ 13:47 v9.69 Page-2 Page-3 Term Bond Bond Coupon Interest Total Fiscal Year Debt Service Dates Maturities Redemptions Proceeds Rate Yield Price Amount Debt Service Debt Service to Call 09/01/2037 - - - - - - 3,468.75 3,468.75 150,175.00 - 03/01/2038 - 150,000.00 * 148,372.50 4.625 4.700000 98.915000 3,468.75 153,468.75 153,468.75 - Total 220,000.00 2,745,000.00 2,844,133.45 1,685,971.88 4,430,971.88 4,430,971.88 3,733,634.38 Acc Int - - - -9,032.92 -9,032.92 - Grand Ttls 220 000.00 2,745,000.00 2 844 133.45 1,676,938.96 4421 938.96 4,430,971.88 3 733 634.38 * - Bonds callable ... 03/01/2023@100.000 TIC (Incl. all expenses) .... 4.41594243% Average Coupon ....... 4.43428840% TIC (Arbitrage TIC) ......... 4.04468880% Average Life (yrs) ... 13.85 IRS Form 8038-G NIC = 4.099806% (with Adjstmnt of $0.00). Bond Years .................. 38,021.25 WAM (yrs) ............. 13.531322 NIC = 4.173557% (with Adjstmnt of $0.00). Term bonds and their respective sinking payments are marked by "(n)" where each "n" identifies each respective term bond. PEARLAND_GO_2013: NEWI3CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 08/12/2013 @ 13:47 v9.69 Page-4 City of Pearland, Texas- General Obligation Debt Proof of Federal Arbitrage Yield FINAL NUMBERS - Certificates of Obligation, Series 2013 Dated Date 08/01/2013 Series 2013 Certificates of Obligation Delivery Date 08/29/2013 Proceeds to: Interest to: Recoverable, Disc Term BAB Total (1) PV of Adj DIS Face Bondholder(+) Bondholder(+) Recurring Total Bond Adjstmt "Direct Pymt" Adjusted to 08/29/2013 Dates Amounts Issuer(-) Issuer(-) Fees Debt Service for Yld Calc Adjustment Cash Flow 4.04468880% 08/29/2013 0.00 -2,844,133.45 -9,032.92 0.00 0.00 0.00 0.00 -2,853,166.37 -2,853,166.37 03/01/2014 75,000.00 75,945.00 67,746.88 0.00 142,746.88 0.00 0.00 142,746.88 139,886.15 09/01/2014 0.00 0.00 56,943.75 0.00 56,943.75 0.00 0.00 56,943.75 54,696.41 03/01/2015 85,000.00 87,922.30 56,943.75 0.00 141,943.75 0.00 0.00 141,943.75 133,639.17 09/01/2015 0.00 0.00 55,668.75 0.00 55,668.75 0.00 0.00 55,668.75 51,372.85 03/01/2016 85,000.00 88,979.70 55,668.75 0.00 140,668.75 0.00 0.00 140,668.75 127,240.25 09/01/2016 0.00 0.00 54,393.75 0.00 54,393.75 0.00 0.00 54,393.75 48,225.93 03/01/2017 85,000.00 89,935.95 54,393.75 0.00 139,393.75 0.00 0.00 139,393.75 121,137.78 09/01/2017 0.00 0.00 53,118.75 0.00 53,118.75 0.00 0.00 53,118.75 45,246.90 03/01/2018 85,000.00 90,152.70 53,118.75 0.00 138,118.75 0.00 0.00 138,118.75 115,318.33 09/01/2018 0.00 0.00 51,843.75 0.00 51,843.75 0.00 0.00 51,843.75 42,427.44 03/01/2019 90,000.00 95,151.60 51,843.75 0.00 141,843.75 0.00 0.00 141,843.75 113,779.84 09/01/2019 0.00 0.00 50,493.75 0.00 50,493.75 0.00 0.00 50,493.75 39,700.63 03/01/2020 100,000.00 110,217.00 50,493.75 0.00 150,493.75 0.00 0.00 150,493.75 115,979.96 09/01/2020 0.00 0.00 48,493.75 0.00 48,493.75 0.00 0.00 48,493.75 36,631.52 03/01/2021 100,000.00 116,268.00 48,493.75 0.00 148,493.75 0.00 0.00 148,493.75 109,946.67 09/01/2021 0.00 0.00 45,993.75 0.00 45,993.75 0.00 0.00 45,993.75 33,379.32 03/01/2022 100,000.00 115,728.00 45,993.75 0.00 145,993.75 0.00 0.00 145,993.75 103,852.65 09/01/2022 0.00 0.00 43,493.75 0.00 43,493.75 0.00 0.00 43,493.75 30,325.98 03/01/2023 100,000.00 115,985.00 43,493.75 0.00 143,493.75 0.00 0.00 353,493.75 241,587.49 09/01/2023 0.00 0.00 40,993.75 0.00 40,993.75 0.00 0.00 35,743.75 23,944.04 03/01/2024 100,000.00 112,903.00 40,993.75 0.00 140,993.75 0.00 0.00 35,743.75 23,469.41 09/01/2024 0.00 0.00 38,493.75 0.00 38,493.75 0.00 0.00 35,743.75 23,004.19 03/01/2025 110,000.00 122,303.50 38,493.75 0.00 148,493.75 0.00 0.00 35,743.75 22,548.19 09/01/2025 0.00 0.00 35,743.75 0.00 35,743.75 0.00 0.00 35,743.75 22,101.22 03/01/2026 110,000.00 110,000.00 35,743.75 0.00 145,743.75 0.00 0.00 145,743.75 88,330.53 09/01/2026 0.00 0.00 33,543.75 0.00 33,543.75 0.00 0.00 33,543.75 19,926.78 03/01/2027 110,000.00 110,000.00 33,543.75 0.00 143,543.75 0.00 0.00 143,543.75 83,582.35 09/01/2027 0.00 0.00 31,343.75 0.00 31,343.75 0.00 0.00 31,343.75 17,889.00 03/01/2028 110,000.00 108,805.40 31,343.75 0.00 141,343.75 0.00 0.00 141,343.75 79,070.83 09/01/2028 0.00 0.00 29,143.75 0.00 29,143.75 0.00 0.00 29,143.75 15,980.48 03/01/2029 120,000.00 120,465.60 29,143.75 0.00 149,143.75 0.00 0.00 149,143.75 80,159.35 09/01/2029 0.00 0.00 26,593.75 0.00 26,593.75 0.00 0.00 26,593.75 14,009.85 03/01/2030 120,000.00 120,694.80 26,593.75 0.00 146,593.75 0.00 0.00 146,593.75 75,696.18 09/01/2030 0.00 0.00 23,968.75 0.00 23,968.75 0.00 0.00 23,968.75 12,131.34 03/01/2031 120,000.00 119,635.20 23,968.75 0.00 143,968.75 0.00 0.00 143,968.75 71,422.68 09/01/2031 0.00 0.00 21,343.75 0.00 21,343.75 0.00 0.00 21,343.75 10,378.71 03/01/2032 120,000.00 118,872.00 21,343.75 0.00 141,343.75 0.00 0.00 141,343.75 67,368.04 09/01/2032 0.00 0.00 18,718.75 0.00 18,718.75 0.00 0.00 18,718.75 8,744.98 03/01/2033 130,000.00 130,000.00 18,718.75 0.00 148,718.75 0.00 0.00 148,718.75 68,100.84 09/01/2033 0.00 0.00 15,793.75 0.00 15,793.75 0.00 0.00 15,793.75 7,088.86 03/01/2034 130,000.00 129,138.10 15,793.75 0.00 145,793.75 0.00 0.00 145,793.75 64,140.90 09/01/2034 0.00 0.00 12,868.75 0.00 12,868.75 0.00 0.00 12,868.75 5,549.29 03/01/2035 130,000.00 128,235.90 12,868.75 0.00 142,868.75 0.00 0.00 142,868.75 60,386.90 09/01/2035 0.00 0.00 9,943.75 0.00 9,943.75 0.00 0.00 9,943.75 4,119.65 03/01/2036 140,000.00 139,514.20 9,943.75 0.00 149,943.75 0.00 0.00 149,943.75 60,889.62 09/01/2036 0.00 0.00 6,706.25 0.00 6,706.25 0.00 0.00 6,706.25 2,669.31 Page-5 Page-6 City of Pearland, Texas- General Obligation Debt Partial Form 8038-G Report (Rev. 11-2000) FINAL NUMBERS - Certificates of Obligation, Series 2013 Dated Date = 08/01/2013 Series 2013 Certificates of Obligation Delivery Date = 08/29/2013 Part Ill Description of Obligations. (Complete for the entire issue for which this form is being filed.) (a) Final maturity date (b) Issue price () p (c) Stated redemption () P (d) Weighted (e) Yield price at maturity average maturity 21 03/01/2038 I $2,844,133.45 $2,745,000.00 13.531 years 4.036382% Part IV Uses of Proceeds of Bond Issue (including underwriters discount) 22 Proceeds used for accrued interest 22 9,032.92 23 Issue price of entire issue (enter amount from line 21, column (b)) 23 2,844,133.45 24 Proceeds used for bond issuance costs (including underwriters' discount) 24 99,133.45 ## 25 Proceeds used for credit enhancement 25 0.00 ## 26 Proceeds allocated to reasonably required reserve or replacement fund 26 0.00 ## 27 Proceeds used to currently refund prior issues 27 0.00 ## 28 Proceeds used to advance refund prior issues 28 0.00 ## 29 Total (add lines 24 through 28) 29 99,133.45 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) 30 2,745,000.00 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 => 0.0000 years 32 Enter the remaining weighted average maturity of the bonds to be advance refunded => 0.0000 years 33 Enter the last date on which the refunded bonds will be called => 34 Enter the date(s) the refunded bonds were issued See each Issue's O/S PEARLAND_GO_2013: RUNI3CO NEW13CO NEWI3GO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 08/1212013 @ 13:47 v9.69 Page-7 City of Pearland, Texas- General Obligation Debt Issuance Expenses for NEW13CO FINAL NUMBERS - Certificates of Obligation, Series 2013 Expenses for NEWI3CO Expense Raises Exp has no Expense Title Type Units Arb Yield Affect on Arb Yield Total Underwriter's Discount F 57,958.45 0.00 57,958.45 57,958.45 Rating Agency F 3,000.00 0.00 3,000.00 3,000.00 Bond Counsel F 17,500.00 0.00 17,500.00 17,500.00 Accountant/CPA F 0.00 0.00 0.00 0.00 Printing F 2,000.00 0.00 2,000.00 2,000.00 Trustee F 500.00 0.00 500.00 500.00 Bond Insurance D 0.000000 0.00 0.00 0.00 Attorney General Fee V 1.000000 0.00 2,745.00 2,745.00 Financial Advisor F 12,500.00 0.00 12,500.00 12,500.00 Miscellaneous F 2,930.00 0.00 2,930.00 2,930.00 Totals $0.00 $99,133.45 $99,133.45 Type: F - Fixed Expense V - Variable Expense Based on Issue Size D - Variable Expense Based on Total Debt Service E - Variable Expense Based on Total Debt Service Less Accrued Interest R - Variable Expense Based on Reserve Fund Requirement PEARLAND_GO_2013: EXPI3CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 08/12/2013 @ 13:47 v9.69 Page-8 CERTIFICATE FOR RESOLUTION THE STATE OF TEXAS COUNTIES OF BRAZORIA, FORT BEND 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 June 24, 2013, 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 Tony Carbone Councilmember Scott Sherman Councilmember Susan Sherrouse Councilmember Keith Ordeneaux Councilmember Greg Hill Mayor Pro Tern and all of such persons were present except Tom Reid, thus constituting a quorum. Whereupon, among other business, the following was transacted at said meeting: a written RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CERTIFICATES OF OBLIGATION, IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $3,000,000, FOR THE ACQUISITION, CONSTRUCTION AND IMPROVEMENT OF CERTAIN PUBLIC WORKS, AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH SERIES OF CERTIFICATES AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO, AND DECLARING AN EMERGENCY (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: 5 NAYS: 0 ABSTENTIONS: 0 2. That a true, full and correct copy of the Resolution adopted at the meeting described in the above and foregoing paragraph is attached to and follows this certificate; that the Resolution has been duly recorded in the City Council's minutes of such meeting; that the above and foregoing paragraph is a true, full and correct excerpt from the City Council's minutes of such meeting pertaining to the adoption of the Resolution; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of the City Council as indicated therein; that each of the officers and members of the City Council was duly and sufficiently notified officially and personally, in advance, of the date, hour, place and 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. HOU:3328004.2 SIGNED AND SEALED this June 24, 2013. Mayor CITY OF PEARLAND, TEXAS HOU:3328004.1 RESOLUTION NO. R2013-101 RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CERTIFICATES OF OBLIGATION, IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $3,000,000, FOR THE ACQUISITION, CONSTRUCTION AND IMPROVEMENT OF CERTAIN PUBLIC WORKS, AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH SERIES OF CERTIFICATES AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO, AND DECLARING AN EMERGENCY STATE OF TEXAS § COUNTIES OF BRAZORIA, FORT BEND AND HARRIS § CITY OF PEARLAND § WHEREAS, the City Council (the "City Council") of the City of Pearland, Texas (the "City"), is authorized to issue certificates of obligation to pay contractual obligations to be incurred for the construction of public works, for the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes, and for the payment of contractual obligations for professional services pursuant to Subchapter C of Chapter 271, Texas Local Government Code, as amended; WHEREAS, the City Council has determined that it is in the best interests of the City and otherwise desirable to issue the City of Pearland, Texas Certificates of Obligation, Series 2013 in an aggregate principal amount not to exceed $3,000,000 (the "Certificates") for the design, engineering, acquisition and construction of certain public works and the purchase of certain equipment for authorized needs and purposes; WHEREAS, in connection with the Certificates, the City Council intends to publish notices of intent to issue the Certificates (the "Notice") in a newspaper of general circulation in the City; and WHEREAS, the City Council has been presented with and has examined the proposed forms of Notice and finds that the forms and substance thereof are satisfactory, and that the recitals and findings contained therein are true, correct and complete. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: Section 1. Preamble. The facts and recitations contained in the preamble of this Resolution are hereby found and declared to be true and correct. Section 2. Authorization of Notice. The City Secretary is hereby authorized and directed to execute and deliver the Notice set forth in Exhibit A hereto and to publish such Notice on behalf of the City once a week for two (2) consecutive weeks in a newspaper which is HOU:3324962.2 of general circulation in the City, the date of the first publication of the Notice to be at least thirty-one (31) days before the date tentatively set in the Notice for the passage of the ordinances authorizing the issuance of the each series of the Certificates. Section 3. Engagement of Professionals. This City Council hereby approves the engagement of Andrews Kurth LLP, as bond counsel ("Bond Counsel") in connection with the issuance of the Certificates. Section 4. Authorization of Other Matters Relating Thereto. The Mayor, City Secretary and other officers and agents of the City are hereby authorized and directed to do any and all things necessary or desirable to carry out the provisions of this Resolution. Section 5. Effective Date. This Resolution shall take effect immediately upon passage. Section 6. Public Meeting. It is officially found, determined and declared that the meeting at which this Resolution is adopted was open to the public and public notice of the time, place and subject matter of the public business to be considered at such meeting, including this Resolution, was given all as required by the Texas Government Code, Chapter 551, as amended. Section 7. Declaration of Emergency. It is hereby officially found and determined that a case of emergency and urgent public necessity exists that requires that this Resolution be passed finally and take effect immediately on the date of its introduction, such emergency and urgent public necessity being that the proceeds from the sale of the Certificates are required as soon as possible and without delay for the purposes set forth herein. [signature page follows] HOU:3324962.2 2 PASSED AND APPROVED this _-f day 5)Lc 2013. Mayor City of Pearland, Texas ATTEST: gSecr&ry of Pearland, Texas (SEAL _oy A HOU:3324962.2 EXHIBIT A NOTICE OF INTENTION TO ISSUE CERTIFICATES NOTICE IS HEREBY GIVEN that the City Council of the City of Pearland, Texas (the "City") will meet at its regular meeting place at City Hall, Pearland, Texas at 7:30 p.m. on the 12th day of August, 2013, which is the time and place tentatively set for the passage of an ordinance and such other action as may be deemed necessary to authorize the issuance of the City's certificates of obligation, payable from ad valorem taxation and a limited (in an amount not to exceed $10,000) subordinate pledge of certain revenues of the water and sewer system of the City, in the maximum aggregate principal amount of $3,000,000, bearing interest at any rate or rates, not to exceed the maximum interest rate now or hereafter authorized by law, as shall be determined within the discretion of the City Council at the time of issuance and maturing over a period of years not to exceed forty (40) years from the date thereof, for the purpose of evidencing the indebtedness of the City to pay all or any part of the contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) professional services rendered in connection with the above listed projects. WITNESS MY HAND AND THE OFFICIAL SEAL OF THE CITY, this 24th day of June, 2013. City Secretary City of Pearland, Texas HOU:3324962.2 AFFIDAVIT OF PUBLICATION STATE OF TEXAS § COUNTIES OF BRAZOS, FORT BEND AND HARRIS § BEFORE ME, the- undersigned authority, on this day personally appeared ~/y~y/5 of d' r4~ /t ~~,7r ~. , a newspaper published in the Counties of Brazos, Fort Bend and Harris, ' exas, who, being by me duly sworn, upon oath deposes and says: That said newspaper is of general circulation in the City of Pealand, Texas, and that the attached "NOTICE OF INTENTION TO ISSUE CERTIFICATES", hereto attached, was published in said newspaper in its issues of 7 ,2013; ,2013; and that said newspaper complies with the provisions of Section 2051.044, Texas Government Code, in that: (1) it devotes not less than twenty-five percent (25%) of its total column lineage to items of general interest, (2) it is published not less frequently than once each week, (3) it is entered as a second-class postal matter in the county in which it is published, and (4) it has been published regularly and continuously for not less than twelve (12) months prior to the date on which the City published the attached notice in said newspaper. By: _>L) Title: SUBSCRIBED AND SWORN TO before me day of 2013. LAURA ANN EMMONS NOTARY PUBLIC * * STATE OF T S Zp14 hhy Cammmion Expka3 Notary Public, State of Texas My commission expires: 7 J HOU:3332840. I CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS COUNTIES OF BRAZORIA, FORT BEND 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 August 12, 2013, 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 Tony Carbone Councilmember Scott Sherman Councilmember Susan Sherrouse Councilmember Keith Ordeneaux Councilmember Greg Hill Mayor Pro Tern and all of such persons were present thus constituting a quorum. Whereupon, among other business, the following was transacted at said meeting: a written ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013; PRESCRIBING THE TERMS AND FORM THEREOF; PROVIDING FOR THE PAYMENT OF THE PRINCIPAL THEREOF AND INTEREST THEREON; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES, INCLUDING USE OF THE PROCEEDS THEREOF, AND MATTERS INCIDENT THERETO; AND DECLARING AN EMERGENCY (the "Ordinance") was duly introduced for the consideration of the City Council and read in full. It was then duly moved and seconded that the Ordinance be adopted; and, after due discussion, such motion, carrying with it the adoption of the Ordinance, prevailed and carried by the following vote: AYES: 5 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 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 HOU:3342372.1 (SEAL) HOU:3342372.1 ORDINANCE NO. 1488 ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013; PRESCRIBING THE TERMS AND FORM THEREOF; PROVIDING FOR THE PAYMENT OF THE PRINCIPAL THEREOF AND INTEREST THEREON; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES, INCLUDING USE OF THE PROCEEDS THEREOF, AND MATTERS INCIDENT THERETO; AND DECLARING AN EMERGENCY BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: ARTICLE I FINDINGS AND DETERMINATIONS Section 1.1: Findings and Determinations. The City Council hereby officially finds and determines that: (a) The City of Pearland, Texas (the "City"), acting through its City Council, is authorized pursuant to and in accordance with the provisions of Texas Local Government Code, Chapter 271, Subchapter C, as amended (the "Act"), to issue certificates of obligation to provide all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights- of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit: (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) professional services rendered in connection with the above listed projects. (b) The City Council authorized the publication of a notice of intention to issue Certificates of Obligation, Series 2013 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 7:30 p.m. on August 12, 2013 at its regular meeting place to adopt an ordinance authorizing the issuance of the Certificates to be payable from (i) an ad valorem tax levied, within the limits prescribed by law, on the taxable property located within the City, and (ii) the revenues to be derived from the City's water and sewer system (the "System") after the payment of all operation and maintenance expenses thereof (the "Net Revenues") in an amount not to exceed $10,000, to the extent that ad valorem taxes are ever insufficient or unavailable for such purposes, provided that the pledge of Net Revenues is and shall be subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. (c) Such notice was published at the times and in the manner required by the Act. HOU:3339814.7 (d) No petition signed by at least five percent (5%) of the qualified voters of the City has been filed with or presented to any official of the City protesting the issuance of such Certificates on or before August 12, 2013, or the date of passage of this Ordinance. (e) The City has determined that it is in the best interests of the City and that it is otherwise desirable to issue the Certificates to provide all or part of the funds to pay contractual obligations to be incurred for the purposes authorized by the Act. ARTTrT.T TT DEFINITIONS AND INTERPRETATIONS Section 2.1: Definitions. As used herein, the following terms shall have the meanings specified, unless the context clearly indicates otherwise: "Act" shall mean Texas Local Government Code, Chapter 271, Subchapter C, as amended. "Attorney General" shall mean the Attorney General of the State of Texas. "Blanket Issuer Letter of Representations" means the Blanket Issuer Letter of Representations between the City, the Registrar and DTC. "Certificate" or "Certificates" shall mean any or all of the City of Pearland, Texas Certificates of Obligation, Series 2013, authorized by this Ordinance. "City" shall mean the City of Pearland, Texas and, where appropriate, its City Council. "City Council" shall mean the governing body of the City. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Comptroller" shall mean the Comptroller of Public Accounts of the State of Texas. "Debt Service Fund" shall mean the Certificates of Obligation, Series 2013 Debt Service Fund established by the City and described in section 5.2 of this Ordinance. "DTC" means The Depository Trust Company of New York, New York, or any successor securities depository. "DTC Participant" means 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 then designated fiscal year, which currently is the twelve-month period beginning on the first day of October of a calendar year and ending on the last day of September of the next succeeding calendar year and each such period may be designated with the number of the calendar year in which such period ends. 2 HOU:3339814.7 "Interest Payment Date," when used in connection with any Certificate, shall mean March 1, 2014, and each September 1 and March 1 thereafter until maturity or earlier redemption of such Certificate. "MSRB" means the Municipal Securities Rulemaking Board. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements hereto. "Outstanding", when used with reference to the Certificates, shall mean, as of a particular date, all Certificates theretofore and thereupon delivered pursuant to this Ordinance except: (a) any Certificates canceled by or on behalf of the City at or before such date; (b) any Certificates defeased pursuant to the defeasance provisions of this Ordinance or otherwise defeased as permitted by applicable law; and (c) any Certificates in lieu of or in substitution for which a replacement Certificate shall have been delivered pursuant to this Ordinance. "Paying Agent/Registrar" shall mean Wells Fargo Bank, National Association and its successors in that capacity. "Paying Agent/Registrar Agreement" shall mean the agreement between the City and the Paying Agent/Registrar as described more particularly in Section 6.1 hereof. "Purchaser" shall mean the entity or entities specified in Section 7.1 hereof. "Record Date" shall mean the close of business on the 15 th day of the calendar month immediately preceding the applicable Interest Payment Date. "Register" shall mean the registration books for the Certificates kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts registered to, each Registered Owner of Certificates. "Registered Owner" shall mean the person or entity in whose name any Certificate is registered in the Register. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. Section 2.2: Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Certificates and the validity of the levy of ad valorem taxes to pay the principal of and interest on the Certificates. 3 HOU:3339814.7 AT? TTCT.P TTT TERMS OF THE CERTIFICATES Section 3.1: Amount, Purpose and Authorization. The Certificates shall be issued in fully registered form, without coupons, under and pursuant to the authority of the Act in the total authorized aggregate principal amount of TWO MILLION SEVEN HUNDRED FORTY FIVE THOUSAND AND NO/100 DOLLARS ($2,745,000) for the purpose of providing all or part of the funds to pay contractual obligations to be incurred for the purposes described in paragraph 1.1(a) hereof. Section 3.2: Designation, Date and Interest Payment Dates. The Certificates shall be designated as the "City of Pearland, Texas Certificates of Obligation, Series 2013," and shall be dated August 1, 2013. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of the August 1, 2013 or the most recent Interest Payment Date to which interest has been paid or duly provided for, calculated on the basis of a 360- day year of twelve 30-day months, payable on March 1, 2014, and each September 1 and March 1 thereafter until maturity or earlier redemption. If interest on any Certificate is not paid on any Interest Payment Date and continues unpaid for thirty (30) days thereafter, the Paying Agent/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 affected Registered Owner as of the close of business on the day prior to mailing of such notice. Section 3.3: Numbers, Initial Certificates Denomination, Interest Rates and Maturities. The Certificates shall be issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in the following schedule, and may be transferred and exchanged as set out in this Ordinance. The Certificates shall mature on March 1 in each of the years and in the amounts set out in such schedule. The Initial Certificate shall be numbered I-1 and all other Certificates shall be numbered in sequence beginning with R-1. Certificates delivered in transfer of or in exchange for other Certificates shall be numbered in order of their authentication by the Paying Agent/Registrar, shall be in the denomination of $5,000 or integral multiples thereof and shall mature on the same date and bear interest at the same rate as the Certificate or Certificates in lieu of which they are delivered. Certificate Year of Principal Interest Number Maturity Amount Rate R-1 3/1/2014 $75,000 3.000% R-2 3/1/2015 $85,000 3.000% R-3 3/1/2016 $85,000 3.000% R-4 3/1/2017 $85,000 3.000% R-5 3/1/2018 $85,000 3.000% 4 HOU:3339814.7 R-6 3/1/2019 $90,000 3.000% R-7 3/1/2020 $100,000 4.000% R-8 3/1/2021 $100,000 5.000% R-9 3/1/2022 $100,000 5.000% R-10 3/1/2023 $100,000 5.000% R-11 3/1/2024 $100,000 5.000% R-12 3/1/2025 $110,000 5.000% **** *** R-13 3/1/2027 $220,000 4.000% R-14 3/1/2028 $110,000 4.000% R-15 3/1/2029 $120,000 4.250% R-16 3/1/2030 $120,000 4.375% R-17 3/1/2031 $120,000 4.375% R-18 3/1/2032 $120,000 4.375% R-19 3/1/2033 $130,000 4.500% R-20 3/1/2034 $130,000 4.500% R-21 3/1/2035 $130,000 4.500% R-22 3/1/2036 $140,000 4.625% R-23 3/1/2037 $140,000 4.625% R-24 3/1/2038 $150,000 4.625% Section 3.4: Execution of Certificates: Seal. (a) The Certificates shall be signed on behalf of the City by the Mayor and countersigned by the City Secretary, by their manual, lithographed, or facsimile signatures, and the official seal of the City shall be impressed or placed in facsimile thereon. Such facsimile signatures on the Certificates shall have the same effect as if each of the Certificates had been signed manually and in person by each of said officers, and such facsimile seal on the Certificates shall have the same effect as if the official seal of the City had been manually impressed upon each of the Certificates. (b) If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of such Certificates or before the delivery of such Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. (c) Except as provided below, no Certificate shall be valid or obligatory for any purpose or be entitled to any security or benefit of this Ordinance unless and until there appears thereon the Registrar's Authentication Certificate substantially in the form provided herein, duly authenticated by manual execution by an officer or duly authorized signatory of the Registrar. In lieu of the executed Registrar's Authentication Certificate described above, the Initial Certificate delivered at the Closing Date shall have attached hereto the Comptroller's Registration Certificate substantially in the form provided herein, manually executed by the Comptroller, or by his duly authorized agent, which certificate shall be evidence that the Initial Certificate has been duly approved by the Attorney General of the State of Texas and 5 I-IOU:3339814.7 that it is a valid and binding obligation of the City, and has been registered by the Comptroller. Section 3.5: Redemption Prior to Maturity. (a) Optional Redemption. The Certificates maturing on and after March 1, 2024 are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 1, 2023, or any date thereafter, at par plus accrued interest to the date fixed for redemption. (b) Mandatory Redemption. The Certificates maturing on March 1 in the year 2026, (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 1, 2027 March 1, 2026 $110,000 March 1, 2027 (stated maturity) 110,000 The particular Term Certificates to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 15 of each year in which Term Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Certificates that have been optionally redeemed and which have not been made the basis for a previous reduction. (c) Certificates may be redeemed in part only in integral multiples of $5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of $5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of $5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. Upon presentation and surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of this Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. (d) Notice of any redemption, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the Register, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Certificates which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being Outstanding except for the purpose of being paid with the funds so provided for such payment. 6 HOU:3339814.7 Section 3.6: Manner of Payment, Characteristics, Execution and Authentication. The Paying Agent/Registrar is hereby appointed the agent for the Certificates. The Certificates shall be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the manner indicated in the FORM OF CERTIFICATES set forth in Article IV of this Ordinance. If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of the Certificates or before the delivery of the Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Certificate Counsel, may be printed on the back of the Certificates over the certification of the City Secretary, which may be executed in facsimile but errors or omissions in the printing of the opinion shall have no effect on the validity of the Certificates. The City may secure identification numbers through CUSIP Global Services, managed on behalf of the American Bankers Association by Standard & Poor's Financial Services LLC, and may authorize the printing of such numbers on the face of the Certificates. It is expressly provided, however, that the presence or absence of CUSIP numbers on the Certificates shall be of no significance or effect in regard to the legality thereof and neither the City nor the attorneys approving said Certificates as to legality are to be held responsible for CUSIP numbers incorrectly printed on the Certificates. Section 3.7: Authentication. Except for the Certificates to be initially issued, which need not be authenticated by the Registrar, only such Certificates as shall bear thereon a certificate of authentication, substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. Such duly executed certificate of authentication shall be conclusive evidence that the Certificate so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.8: Ownership. The City, the Paying Agent/Registrar and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such Certificate for the purpose of making and receiving payment of the principal thereof and interest thereon and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Certificate in accordance with this Section shall be valid and effective and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.9: Registration, Transfer and Exchange. The Paying Agent/Registrar is hereby appointed the registrar for the Certificates. So long as any Certificate remains Outstanding, the Paying Agent/Registrar shall keep the Register at its office in Houston, Texas in which, subject to such reasonable regulations as it may prescribe, the Paying 7 HOU:3339814.7 Agent/Registrar shall provide for the registration and transfer of the Certificates in accordance with the terms of this Ordinance. Each Certificate shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Certificate for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Certificate or Certificates, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate as the Certificate or Certificates so presented and surrendered. All Certificates shall be exchangeable upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates, maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Certificate or Certificates presented for exchange. The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver exchange Certificates in accordance with the provisions of this Section. Each Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such Certificate is delivered. All Certificates issued in transfer or exchange shall be delivered to the Registered Owners thereof at the principal corporate trust office of the Paying Agent/Registrar or sent by United States mail, first class, postage prepaid. The City or the Paying Agent/Registrar may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Certificate. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Certificate called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Certificate called for redemption in part. Section 3.10: Replacement Certificates . Upon the presentation and surrender to the Paying Agent/Registrar of a damaged or mutilated Certificate, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Certificate, of the same maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Registered Owner of such Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Paying Agent/Registrar and the City. 8 HOU:3339814.7 If any Certificate is lost, apparently destroyed or wrongfully taken, the City, pursuant to the applicable laws of the State of Texas and ordinances of the City, and in the absence of notice or knowledge that such Certificate has been acquired by a bona fide purchaser, shall execute, and the Paying Agent/Registrar shall authenticate and deliver, a replacement Certificate of the same maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding, provided that the Registered Owner thereof shall have: (a) furnished to the City and the Paying Agent/Registrar satisfactory evidence of the ownership of and the circumstances of the loss, destruction or theft of such Certificate; (b) furnished such security or indemnity as may be required by the Paying Agent/Registrar and the City to save and hold them harmless; (c) paid all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar and any tax or other governmental charge that may be imposed; and (d) met any other reasonable requirements of the City and the Paying Agent/Registrar. If, after the delivery of such replacement Certificate, a bona fide purchaser of the original Certificate in lieu of which such replacement Certificate was issued presents for payment such original Certificate, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Certificate from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the City or the Paying Agent/Registrar in connection therewith. If any such mutilated, lost, apparently destroyed or wrongfully taken Certificate has become or is about to become due and payable, the City in its discretion may, instead of issuing a replacement Certificate, authorize the Paying Agent/Registrar to pay such Certificate. Each replacement Certificate delivered in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such replacement Certificate is delivered. Section 3.11: Cancellation. All Certificates paid or redeemed in accordance with this Ordinance, and all Certificates in lieu of which exchange Certificates or replacement Certificates are authenticated and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment or redemption. The Paying Agent/Registrar shall periodically furnish the City with certificates of destruction of such Certificates. Section 3.12: Book-Entry System. (a) The Initial Certificate shall be registered in the name of the Purchaser. Except as provided in Section 3.12 hereof, all other Certificates shall be registered in the name of Cede & Co., as nominee of DTC. 9 HOU:3339814.7 (b) With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, the City and the Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such DTC Participant holds an interest in the Certificates, except as provided in this Ordinance. Without limiting the immediately preceding sentence, the City and the Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (ii) the delivery to any DTC Participant or any other person, other than an Owner, as shown on the Register, of any notice with respect to the Certificates, including any notice of redemption, or (iii) the payment to any DTC Participant or any other person, other than an Owner, as shown on the Register, of any amount with respect to principal of, premium, if any, or interest on the Certificates. Notwithstanding any other provision of this Ordinance to the contrary, the City and the Registrar shall be entitled to treat and consider the person in whose name each Certificate is registered in the Register as the absolute Owner of such Certificate for the purpose of payment of principal of and interest on the Certificates, for the purpose of giving notices of redemption and other matters with respect to such Certificate, for the purpose of registering transfer with respect to such Certificate, and for all other purposes whatsoever. The Registrar shall pay all principal of, premium, if any, and interest on the Certificates only to or upon the order of the respective Owners, as shown in the Register as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payments of principal, premium, if any, and interest on the Certificates to the extent of the sum or sums so paid. No person other than an Owner, as shown in the Register, shall receive a Certificate evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. Upon delivery by DTC to the 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 of this Ordinance with respect to interest checks being mailed to the Owner of record as of the Record Date, the phrase "Cede & Co." in this Ordinance shall refer to such new nominee of DTC. Section 3.13: Successor Securities Depository; Transfer Outside Book-Entry Only System. In the event that the City in its sole discretion, determines that the beneficial owners of the Certificates be able to obtain certificated Certificates, or in the event DTC discontinues the services described herein, the City shall (i) 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 and DTC Participants, as identified by DTC, of the appointment of such successor securities depository and transfer one or more separate Certificates to such successor securities depository or (ii) notify DTC and DTC Participants, as identified by DTC, of the availability through DTC of Certificates and transfer one or more separate Certificates to DTC Participants having Certificates credited to their DTC accounts, as identified by DTC. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Owners transferring or exchanging Certificates shall designate, in accordance with the provisions of this Ordinance. 10 HOU:3339814.7 Section 3.14: Payments to Cede & Co. Notwithstanding any other provision of this Ordinance to the contrary, so long as any Certificates 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 such Certificates, and all notices with respect to such Certificates, shall be made and given, respectively, in the manner provided in the Blanket Letter of Representations. ARTICLE IV FORM OF CERTIFICATES The Certificates, including the Form of Comptroller's Registration Certificate, Form of Paying Agent/Registrar Authentication Certificate, and Form of Assignment, shall be in substantially the form set forth in Exhibit A hereto, with such omissions, insertions and variations as may be necessary or desirable, and not prohibited by this Ordinance. ARTICLE V SECURITY FOR THE CERTIFICATES Section 5.1: Pledge and Levy of Taxes and Revenues. (a) To provide for the payment of principal of and interest on the Certificates, there is hereby levied, within the limits prescribed by law, for the current year and each succeeding year thereafter, while the Certificates or any part of the principal thereof and the interest thereon remain outstanding and unpaid, an ad valorem tax upon all taxable property within the City sufficient to pay the interest on the Certificates and to create and provide a sinking fund of not less than 2% of the principal amount of the Certificates or not less than the principal payable out of such tax, whichever is greater, with full allowance being made for tax delinquencies and the costs of tax collection, and such taxes, when collected, shall be applied to the payment of principal of and interest on the Certificates by deposit to the Debt Service Fund and to no other purpose. (b) The City hereby declares its purpose and intent to provide and levy a tax legally sufficient to pay the principal of and interest on the Certificates, it having been determined that the existing and available taxing authority of the City for such purpose is adequate to permit a legally sufficient tax. As long as any Certificates remain outstanding, all moneys on deposit in, or credited to, the Debt Service Fund shall be secured by a pledge of security, as provided by law for cities in the State of Texas. (c) In addition, pursuant to the authority of Chapter 1502, Texas Government Code, as amended, the City also hereby pledges the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to 11 HOU:3339814.7 issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. (d) The City hereby appropriates from current funds on hand and legally available therefor, funds sufficient, when added to the accrued interest received from the sale of the Certificates, to pay the interest on the Certificates payable on March 1, 2014. Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2013 Debt Service Fund (the "Debt Service Fund") is hereby created as a special fund solely for the benefit of the Certificates. The City shall establish and maintain such fund at an official City depository and shall keep such fund separate and apart from all other funds and accounts of the City. Any amount on deposit in the Debt Service Fund shall be maintained by the City in trust for the Registered Owners of the Certificates. Such amount, plus any other amounts deposited by the City into such fund and any and all investment earnings on amounts on deposit in such fund, shall be used only to pay the principal of, premium, if any, and interest on the Certificates. Section 5.3: Further Proceedings. After the Certificates to be initially issued have been executed, it shall be the duty of the Mayor to deliver the Certificates to be initially issued and all pertinent records and proceedings to the Attorney General for examination and approval. After the Certificates to be initially issued shall have been approved by the Attorney General, they shall be delivered to the Comptroller for registration. Upon registration of the Certificates to be initially issued, the Comptroller (or a deputy lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's registration certificate prescribed herein to be affixed or attached to the Certificates to be initially issued, and the seal of said Comptroller shall be impressed, or placed in facsimile, thereon. ARTICLE VI CONCERNING THE PAYING AGENT/REGISTRAR Section 6.1: Acceptance. Wells Fargo Bank, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates pursuant to the terms and provisions of the Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar. The Paying Agent/Registrar Agreement shall be substantially in the form attached hereto as Exhibit B, the terms and provisions of which are hereby approved, and the Mayor is hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest thereto and affix the City's seal. Such initial Paying Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of any fees pursuant to the terms of any contract between the Paying Agent/Registrar and the City and/or the deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. 12 I-IOU:3339814.7 Section 6.2: Trust Funds. All money transferred to the Paying Agent/Registrar in its capacity as Paying Agent/Registrar for the Certificates under this Ordinance (except any sums representing Paying Agent/Registrar's fees) shall be held in trust for the benefit of the City, shall be the property of the City and shall be disbursed in accordance with this Ordinance. Section 6.3: Certificates Presented. Subject to the provisions of Section 6.4, all matured Certificates presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Certificates shall be canceled as provided herein. Section 6.4: Unclaimed Funds Held by the Paying Agent/Registrar. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Certificates remaining unclaimed by the Registered Owner thereof after the expiration of three years 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 Agent/Registrar to the City upon receipt by the Paying Agent/Registrar of a written request therefor from the City. The Paying Agent/Registrar shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with this Section. Section 6.5: Paying Agent/Registrar May Own Certificates. The Paying Agent/Registrar in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent/Registrar. Section 6.6: Successor Paying Agents/Registrars. The City covenants that at all times while any Certificates are Outstanding it will provide a legally qualified bank, trust company, financial institution or other agency to act as Paying Agent/Registrar for the Certificates. The City reserves the right to change the Paying Agent/Registrar for the Certificates on not less than sixty (60) days' written notice to the Paying Agent/Registrar, as long as any such notice is effective not less than 60 days prior to the next succeeding principal or interest payment date on the Certificates. Promptly upon the appointment of any successor Paying Agent/Registrar, the previous Paying Agent/Registrar shall deliver the Register or a copy thereof to the new Paying Agent/Registrar, and the new Paying Agent/Registrar shall notify each Registered Owner, by United States mail, first class, postage prepaid, of such change and of the address of the new Paying Agent/Registrar. Each Paying Agent/Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Ordinance. 13 HOU:3339814.7 ARTTPT.P VTT PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF CERTIFICATES Section 7.1: Sale of Certificates. The Certificates are hereby sold and shall be delivered to the Purchaser, Robert W. Baird & Co., Inc. at a price of $2,786,175.00 (which is the par amount of the Certificates plus net premium on the Certificates of $99,133.45, minus underwriter's discount of $57,958.45) plus accrued interest, in accordance with the terms of the Bid Form of even date herewith, presented to and hereby approved by the City Council, which price and terms are hereby found and determined to be the most advantageous reasonably obtainable by the City. The Mayor and other appropriate officials of the City are hereby authorized to do any and all things necessary or desirable to satisfy the conditions set out therein and to provide for the issuance and delivery of the Certificates. Section 7.2: Approval, Registration and Delivery. The Mayor is hereby authorized to have control and custody of the Certificates and all necessary records and proceedings pertaining thereto pending their delivery, and the Mayor and other officers and employees of the City are hereby authorized and directed to make such certifications and to execute such instruments as may be necessary to accomplish the delivery of the Certificates and to assure the investigation, examination and approval thereof by the Attorney General and the registration of the initial Certificates by the Comptroller. Upon registration of the Certificates, the Comptroller (or the Comptroller's certificates clerk or an assistant certificates clerk lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's Registration Certificates prescribed herein to be attached or affixed to each Certificates initially delivered and the seal of the Comptroller shall be impressed or printed or lithographed thereon. Section 7.3: Application of Proceeds of Certificates. Proceeds from the sale of the Certificates shall, promptly upon receipt by the City, be applied as follows: (1) Accrued interest, if any, shall be deposited into the Debt Service Fund created in Section 5.2 of this Ordinance; (2) A portion of the proceeds shall be applied to pay expenses arising in connection with the issuance of the Certificates; (3) The remaining proceeds shall be applied, together with other funds of the City, to provide funds to pay contractual obligations to be incurred for the purposes set forth in Section 3.1 of this Ordinance. Section 7.4: Tax Exemption. The City intends that the interest on the Certificates shall be excludable from gross income of the owners thereof for federal income tax purposes pursuant to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended, (the "Code") and all applicable temporary, proposed and final regulations (the "Regulations") and procedures promulgated thereunder and applicable to the Certificates. For this purpose, the City covenants 14 HOU:3339814.7 that it will monitor and control the receipt, investment, expenditure and use of all gross proceeds of the Certificates (including all property, the acquisition, construction or improvement of which is to be financed directly or indirectly with the proceeds of the Certificates) and take or omit to take such other and further actions as may be required by Sections 103 and 141 through 150 of the Code and the Regulations to cause the interest on the Certificates to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Certificates for federal income tax purposes. Without limiting the generality of the foregoing, the City shall comply with each of the following covenants: (a) The City shall not use, permit the use of or omit to use Gross Proceeds or any other amounts (or any property the acquisition, construction or improvement of which is to be financed directly or indirectly with Gross Proceeds) in a manner which, if made or omitted, respectively, would cause the interest on any Certificate to become includable in the gross income, as defined in Section 61 of the Code, of the owner thereof for federal income tax purposes. Without limiting the generality of the foregoing, unless and until the City shall have received a written opinion of counsel nationally recognized in the field of municipal bond law to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income tax of the interest on any Certificate, the City shall comply with each of the specific covenants in this Section. (b) Except as permitted by Section 141 of the Code and the regulations and rulings thereunder, the City shall, at all times prior to the last stated maturity of the Certificates, (1) exclusively own, operate, and possess all property the acquisition, construction, or improvement of which is to be financed directly or indirectly with Gross Proceeds of such series of the Certificates and not use or permit the use of such Gross Proceeds or any property acquired, constructed, or improved with such Gross Proceeds in any activity carried on by any person or entity other than a state or local government, unless such use is solely as a member of the general public, or (2) not directly or indirectly impose or accept any charge or other payment for use of Gross Proceeds of such series of the Certificates or any property the acquisition, construction or improvement of which is to be financed directly or indirectly with such Gross Proceeds. (c) Except to the extent permitted by Section 141 of the Code and the regulations and rulings thereunder, the City shall not use Gross Proceeds of the Certificates to make or finance loans to any person or entity other than a state or local government. For purposes of the foregoing covenant, Gross Proceeds are considered to be "loaned" to a person or entity if (1) property acquired, constructed or improved with Gross Proceeds is sold or leased to such person or entity in a transaction which creates a debt for federal income tax purposes, (2) capacity in or service from such property is committed to such person or entity under a take-or-pay, output, or similar contract or arrangement, or (3) indirect benefits, or burdens and benefits of ownership, of such Gross Proceeds or such property are otherwise transferred in a transaction which is the economic equivalent of a loan. (d) Except to the extent permitted by Section 148 of the Code and the regulations and rulings thereunder, the City shall not, at any time prior to the earlier of the final stated maturity 15 HOU:3339814.7 or final payment of the Refunded Obligations, directly or indirectly invest Gross Proceeds of such Certificates in any Investment (or use such Gross Proceeds to replace money so invested), if as a result of such investment the Yield of all Investments allocated to such Gross Proceeds whether then held or previously disposed of, exceeds the Yield on the Refunded Obligations. (e) Based on all of the facts and estimates now known or reasonably expected to be in existence on the date the Certificates are delivered, the City reasonably expects that the proceeds of the Certificates (to the extent any of such proceeds remain unexpended) will not be used in a manner that would cause the Certificates or any portion thereof to be "arbitrage bonds" within the meaning of Section 148 of the Code. (f) At all times while the Certificates are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Certificates in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Certificates and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Certificates. To the extent necessary to prevent the Certificates from constituting "arbitrage bonds," the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose investments allocable to the Certificates to be less than the yield that is materially higher than the yield on the Certificates. (g) The City will not take any action or knowingly omit to take any action, if taken or omitted, would cause the Certificates to be treated as "federally guaranteed" obligations for purposes of Section 149(b) of the Code. (h) The City represents that not more than fifty percent (50%) of the proceeds of any new money portion of the Certificates was invested in nonpurpose investments (as defined in Section 148(f)(b)(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 expected at the time each issue of the Refunded Certificates was issued that at least eighty-five percent (85%) of the spendable proceeds of the Certificates or the Refunded Certificates would be used to carry out the governmental purpose of such Certificates within the corresponding three-year period beginning on the respective dates of the Certificates or the Refunded Certificates. (i) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Certificates, if any, be rebated to the federal government. Specifically, the City will (i) maintain records regarding the receipt, investment and expenditure of the gross proceeds of the Certificates as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after the day on which the last outstanding Certificate is discharged, (ii) account for all gross proceeds under a reasonable, consistently applied method of accounting, not employed as an artifice or device to avoid, in whole or in part, the requirements of Section 148 of the Code, including any specified method of accounting required by applicable Regulations to be used for all or a portion of the 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 16 HOU:3339814.7 gross proceeds of the Certificates and (iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it, including interest thereon and penalty. (j) 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 Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in 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 issue not been relevant to either party. (k) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of the Code with respect to the Certificates on such form and in such place as the Secretary may prescribe. (1) The City will not issue or use the Certificates as part of an "abusive arbitrage device" (as defined in Section 1.148 10(a) of the Regulations). Without limiting the foregoing, the Certificates are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations, by (i) enabling the City to exploit the difference 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. (m) Proper officers of the City charged with the responsibility for issuing the Certificates are hereby directed to make, execute and deliver certifications as to facts, estimates or circumstances in existence as of the Issue Date and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the Issue Date, the City will take such actions as are necessary and appropriate to assure the continuous accuracy of the representations contained in such certificates. (n) The covenants and representations made or required by this Section are for the benefit of the Certificate holders and any subsequent Certificate holder, and may be relied upon by the Certificate holder and any subsequent Certificate 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 Certificates to be includable in gross income for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance, the City's representations and obligations under the covenants and provisions of this Section 7.4 shall survive the defeasance 17 HOU:3339814.7 and discharge of the Certificates for as long as such matters are relevant to the exclusion of interest on the Certificates from the gross income of the owners for federal income tax purposes. Section 7.5: Reserved. Section 7.6: Related Matters. In order that the City shall satisfy in a timely manner all of its obligations under this Ordinance, the Mayor, the Mayor, City Secretary and all other appropriate officers, agents, representatives and employees of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance and delivery of the Certificates, including, without limitation, executing and delivering on behalf of the City all certificates, consents, receipts, requests, notices, and other documents as may be reasonably necessary to satisfy the City's obligations under this Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of this Ordinance. ARTICLE VIII MISCELLANEOUS Section 8.1: Defeasance. The Certificates may be discharged, defeased, redeemed or refunded in any manner now or hereafter permitted by law. Section 8.2: Application of Chapter 1208, Government Code. Chapter 1208, Government Code, applies to the issuance of the Certificates and the pledge of the taxes granted by the City under Section 5.1 of this Ordinance, and such pledge is therefore valid, effective and perfected. If Texas law is amended at any time while the Certificates are outstanding and unpaid such that the pledge of the taxes granted by the City under Section 5.1 of this Ordinance is to be subject to the filing requirements of Chapter 9, Business & Commerce Code, then in order to preserve to the Registered Owners of the Certificates the perfection of the security interest in said pledge, the City agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Business & Commerce Code and enable a filing to perfect the security interest in said pledge to occur. Section 8.3: Ordinance a Contract - Amendments. This Ordinance shall constitute a contract with the Registered Owners from time to time, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Registered Owners, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Registered Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the consent of Registered Owners who own in the aggregate 51% of the principal amount of the Certificates then Outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Registered Owners of Outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way 18 HOU:3339814.7 modify the terms of payment of the principal of or interest on the Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Registered Owners for consent to any such amendment, addition, or rescission. Section 8.4: Legal Holidays. In any case where the date interest accrues and becomes payable on the Certificates or principal of the Certificates matures or the date fixed for redemption of any Certificates or a Record Date shall be in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date shall not occur on such date, but payment may be made or the Record Date shall occur on the next succeeding day which is not in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if (i) made on the date of maturity or the date fixed for redemption and no interest shall accrue for the period from the date of maturity or redemption to the date of actual payment or (ii) the Record Date had occurred on the fifteenth day of that calendar month. Section 8.5: No Recourse Against City Officials. No recourse shall be had for the payment of principal of or interest on any Certificates or for any claim based thereon or on this Ordinance against any official of the City or any person executing any Certificates. Section 8.6: Further Proceedings. The Mayor, Mayor Pro-Tem, City Secretary and other appropriate officials of the City are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Ordinance. Section 8.7: 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. Section 8.8: Power to Revise Form of Documents. Notwithstanding any other provision of this Ordinance, the Mayor is hereby authorized to make or approve such revisions, additions, deletions, and variations to this Ordinance and in the form of the documents attached hereto as exhibits as, in the judgment of the Mayor, and in the opinion of Certificate Counsel to the City, may be necessary or convenient to carry out or assist in carrying out the purposes of this Ordinance, or as may be required for approval of the Certificates by the Attorney General of Texas; provided, however, that any changes to such documents resulting in substantive amendments to the terms and conditions of the Certificates or such documents shall be subject to the prior approval of the City Council Section 8.9: Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date, hour, place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all times to the general public at City Hall for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, 19 HOU:3339814.7 considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 8.10: Official Statement. The City Council hereby approves the form and content of the Preliminary Official Statement and the Notice of Sale prepared for the initial offering and sale of the Certificates and hereby authorizes the preparation of a final Official Statement reflecting the terms of the Bid Form and other relevant matters. The use of such Official Statement in the reoffering of the Certificates by the Purchaser is hereby approved and authorized. Section 8.11: Repealer. All orders, resolutions and ordinances, or parts thereof, inconsistent herewith are hereby repealed to the extent of such inconsistency. Section 8.12: Continuing Disclosure Undertaking. (a) Annual Reports. The City will provide certain updated financial information and operating data to the MSRB annually in an electronic format as prescribed by the MSRB and available via the Electronic Municipal Market Access ("EMMA") system at www.emma.msrb.org . The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in the final Official Statement authorized by Section 8.10 of this Ordinance under the headings "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY - Current Investments," "CITY TAX DEBT," "TAX DATA" (except under the subheading "Estimated Overlapping Taxes"), "SELECTED FINANCIAL DATA," and in APPENDIX "B." The City will update and provide this information within six months after the end of each fiscal year. If the City changes its fiscal year, it will submit a notice of such change to the MSRB, and 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 may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Web site or filed with the SEC, as permitted by the SEC 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 available by the required time, the City will provide unaudited financial statements by the required time and audited financial statements when and if such audited statements become available. Any such financial statements will be prepared in accordance with the accounting principals described in APPENDIX B or such other accounting principals as the City may require to employ from time to time pursuant to State law or regulation. (b) Material Event Notices. The City shall notify the MSRB in an electronic format prescribed by the MSRB, in a timely manner (not in excess of ten (10) days after the occurrence of the event), of any of the following events with respect to the Certificates: (i) Principal and interest payment delinquencies; (ii) Non-payment related defaults, if material; 20 HOU:3339814.7 (iii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iv) Unscheduled draws on credit enhancements reflecting financial difficulties; (v) Substitution of credit or liquidity providers or their failure to perform; (vi) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Certificates, or other material events affecting the tax status of the Certificates; (vii) Modifications to rights of holders of the Certificates, if material; (viii) Certificate calls, if material, and tender offers; (ix) Defeasances; (x) Release, substitution, or sale of property securing repayment of the Certificates, if material; (xi) Rating changes; (xii) Bankruptcy, insolvency, receivership or similar event of the City; (xiii) The consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (xiv) Appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. For the purposes, any event described in the immediate proceeding paragraph (12) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding Under States Bankruptcy Code or any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. The City shall notify the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance this Section by the time required by such Section. (c) Limitations, Disclaimers, and Amendments. The City shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the City remains an "obligated person" with respect to the Certificates within the meaning of the Rule, except that the City in any event will give notice of any deposit made in accordance with Texas law that causes Certificates no longer to be outstanding. 21 HOU:3339814.7 The provisions of this Section are for the sole benefit of the holders and the beneficial owners of the Certificates, and nothing in this Section, 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 Section 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 Section or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Certificates at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE UNLIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the City in observing or performing its obligations under this Section shall comprise a breach of or default under this Order for purposes of any other provision of this Order. Nothing in this Section 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 Section 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, or status or type of principal payment of the City, if (1) the agreement, as so amended, would have permitted an underwriter to purchase or sell Certificates in the initial primary offering in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate amount of the outstanding Certificates consent to such amendment or (b) a person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the provisions of this continuing disclosure agreement 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, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Certificates in the primary offering of the Certificates. If any such amendment is made, the City will include in its next annual update an explanation in narrative form of the reasons for the change and its impact on the type of operating data or financial information being provided. 22 HOU:3339814.7 Section 8.13: Emergency . It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and the public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Certificates are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its introduction. Section 8.14: No Personal Liability. No recourse shall be had for payment of the principal of or interest on any Certificates or for any claim based thereon, or on this Ordinance, against any official or employee of the City or any person executing any Certificates. Section 8.15: Effective Date . This Ordinance shall be in force and effect from and after its passage on the date shown below. [signature page follows] 23 HOU:3339814.7 PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this August 12, 2013. CITY OF PEARLAND, TEXAS Mayor ATTEST Ci ecret (SEAL) (1*' Exhibit A — Form of Certificate Exhibit B — Paying Agent/Registrar Agreement S-1 HOU:3339814.1 EXHIBIT A FORM OF CERTIFICATE UNITED STATES OF AMERICA STATE OF TEXAS CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATION, SERIES 2013 NUMBER 1 R- REGISTERED 2 INTEREST RATE: DENOMINATION REGISTERED 2 MATURITY DATE: DATED DATE: August 1, 2013 March 1, REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS 3THE CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on the Maturity Date specified above, upon presentation and surrender of this Certificate at the principal corporate trust office of Wells Fargo Bank, National Association, or its successor (the "Paying Agent/Registrar"), the principal amounts identified above (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360-day year composed of twelve 30-day months, from the later of the Dated Date identified above or the ' Initial Certificate shall be numbered I-l. 2 Omitted from initial Certificate. 3 The first sentence of the initial Bond shall read as follows: THE CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on March I of the year of maturity specified below (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption), upon presentation and surrender of this Certificate at the office of Wells Fargo Bank, N.A., or its successor (the "Paying Agent/Registrar"), the principal amount identified set forth in the following schedule: [Insert information regarding years of maturity, principal amounts and interest rates from the Section 3.3 of the Certified Ordinance] payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360-day year composed of twelve 30-day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. A-1 HOU:3339814.7 most recent interest payment date to which interest has been paid or duly provided for. Interest on this Certificate is payable by check on March 1 and September 1, beginning on March 1, 2014, mailed to the registered owner of record as of the close of business on the last business day of the month next preceding each interest payment date. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the "Certificates") in the aggregate principal amount of $2,745,000 issued pursuant to an ordinance adopted by the City Council of the City on August 12, 2013 (the "Ordinance") for the purpose of providing all or part of the funds to pay contractual obligations to be incurred for the construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit: (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) professional services rendered in connection with the above listed projects. 3 THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate is authenticated by the Paying Agent/Registrar by due execution of the authentication certificate endorsed hereon. THE CITY RESERVES THE RIGHT, at its option, to redeem, prior to their maturity, Certificates maturing on and after March 1, 2024, in whole or in part, on March 1, 2023, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES maturing on March 1 in the year 2026, (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 1, 2027 March 1, 2026 $110,000 March 1, 2027 (stated maturity) 110,000 The particular Term Certificates to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 15 of each year in which Term Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term 3 In the initial Certificate, this paragraph shall read as follows: THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate is registered by the Comptroller of Public Accounts of the State of Texas by due execution of the registration certificate endorsed hereon. A-2 HOU:3339814.7 Certificates that have been optionally redeemed and which have not been made the basis for a previous reduction. CERTIFICATES MAY BE REDEEMED IN PART only in integral multiples of $5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of $5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of $5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Ordinance, shall authenticate and deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. NOTICE OF ANY SUCH REDEMPTION, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the books of registration kept by the Paying Agent/Registrar, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Certificates which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the purpose of being paid with the funds so provided for such payment. THIS CERTIFICATE IS TRANSFERABLE only upon presentation and surrender at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of $5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. A-3 HOU:3339814.7 THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. IT IS HEREBY DECLARED AND REPRESENTED that this Certificate has been duly and validly issued and delivered; that all acts, conditions and things required or proper to be performed, exist and to be done precedent to or in the issuance and delivery of this Certificate have been performed, exist and have been done in accordance with law; that the Certificates do not exceed any constitutional or statutory limitation; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and such principal matures, have been levied and ordered to be levied, within the limits prescribed by law, against all taxable property in the City and have been irrevocably pledged for such payment. IT IS FURTHER DECLARED AND REPRESENTED that the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is filed with the Paying Agent/Registrar, for the full provisions thereof, to all of which the Registered Owners of the Certificates assent by acceptance of the Certificates. IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and this Certificate to be signed by the Mayor, countersigned by the City Secretary by their manual, lithographed or printed facsimile signatures. CITY OF PEARLAND, TEXAS Mayor (SEAL) COUNTERSIGNED: City Secretary A-4 HOU:3339814.7 FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE The following form of Comptroller's Registration Certificate shall be attached or affixed to each of the Certificates initially delivered: OFFICE OF THE COMPTROLLER § OF PUBLIC ACCOUNTS § REGISTER NO. THE STATE OF TEXAS § I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this certificate has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this Comptroller of Public Accounts of the State of Texas [SEAL] *** FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE The following form of authentication certificate shall be printed on the face of each of the Certificates other than those initially delivered: AUTHENTICATION CERTIFICATE This Certificate is one of the Certificates described in and delivered pursuant to the within mentioned Ordinance; and, except for the Certificates initially delivered, this Certificate has been issued in exchange for or replacement of a Certificate, Certificates, or a portion of a Certificate or Certificates 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, NATIONAL ASSOCIATION, as Paying Agent/Registrar I' Authorized Signature Date of Authentication: *** A-5 HOU:3339814.7 FORM OF ASSIGNMENT The following form of assignment shall be printed on the back of each of the Certificates: ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto (Please print or type name, address, and zip code of Transferee) (Please insert Social Security or Taxpayer Identification Number of Transferee) the within bond and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer such bond on the books kept for registration thereof, with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in NOTICE: Signature must be guaranteed by a every particular, without any alteration, member firm of the New York Stock Exchange enlargement or change whatsoever. or a commercial bank or trust company. A-6 HOU:3339814.7 PAYING AGENT/REGISTRAR AGREEMENT B-1 HOU:3339814.7 EXHIBIT C Bid Form HOU:3339814.7 CITY OF PEARLAND, TEXAS (Brazoria, Fort Bend and Harris Counties, Texas) PRELIMINARY OFFICIAL STATEMENT DATED: JULY 31, 2013 $2,745,000* CERTIFICATES OF OBLIGATION SERIES 2013 BIDS DUE: 1:00 P.M., HOUSTON TIME MONDAY, AUGUST 12, 2013 BIDS TO BE AWARDED: 6:00 P.M., HOUSTON TIME MONDAY, AUGUST 12, 2013 BOSE,, Inc. A subsidiary of 8OK Financial Corp. Financial Advisor Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts." PRELIMINARY OFFICIAL STATEMENT DATED JULY 31, 20.13 2 In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX EXEMPTION" herein. Interest on the Certificates is not includable in the alternative minimum taxable income of e 1 B individuals. See "TAX EXEMPTION" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations. NEW ISSUE: BOOK-ENTRY-ONLY RATINGS: Standard & Poor's Ratings Services...................... See "SALE AND DISTRIBUTION OF THE CERTIFICATES — Municipal Bond Ratings" =' o ' $2,745,000* CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) s = CERTIFICATES OF OBLIGATION, SERIES 2013 Dated: August 1, 2013 Due: September 1, as shown below >• Principal of and interest on the $2,745,000* City of Pearland, Texas, Certificates of Obligation, Series 2013 (the "Certificates") are payable by Wells F ^ Fargo Bank, N.A., Dallas, Texas, the paying agent/registrar (the "Paying Agent/Registrar"). Interest on the Certificates is payable on September 1 and March 1 of each year, commencing March 1, 2014 and thereafter until maturity or prior redemption. The definitive Certificates 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 Certificates will be issued in denominations of $5,000 of principal amount or any integral multiple thereof. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial o ° o owners thereof. Principal of the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts 2 ' so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "THE CERTIFICATES — Book- .. Entry-Only System" herein. The Certificates maturing on March 1, 2024 and thereafter are subject to redemption prior to their scheduled maturities on March 1, 2023 or any date thereafter, at the option of the City. Upon redemption the Certificates will be payable at a price equal to the principal amount thereof plus accrued interest to the date of redemption. See "THE CERTIFICATES - Description" and "THE CERTIFICATES - Redemption Provisions." o = The Certificates, when issued, will constitute valid and binding Certificates of the City of Pearland, Texas (the "City") and will be payable from the ° 5' proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable ,' from a limited subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System") in an r amount not to exceed $10,000. See "THE CERTIFICATES - Source of Payment." The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Govermnent Code, as amended, and an ordinance (the "Ordinance") to be approved by City Council on August 12, 2013. See "THE CERTIFICATES — Authorization of the Certificates." Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic S communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the 9 Certificates. See "THE CERTIFICATES — Use of Proceeds." PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES (Due March 1) Initial CUSIP Initial CUSIP Maturity Principal Interest Reoffering Nos. Maturity Principal Interest Reoffering Nos. (March 1) Amount* Rate Yield (a) (b) (March 1) Amount* Rate Yield (a) (b) 2014 $ 75,000 % % 2027(c) $110,000 % % 9 2015 85,000 2028(c) 110,000 2016 85,000 2029(c) 120,000 2017 85,000 2030(c) 120,000 2018 85,000 2031(c) 120,000 • 2019 90,000 2032(c) 120,000 = 2020 100,000 2033(c) 130,000 2021 100,000 2034(c) 130,000 c 2022 100,000 2035(c) 130,000 t 9 2023(c) 100,000 2036(c) 140,000 5 2 2024(c) 100,000 2037(c) 140,000 9 2025(c) 110,000 2038(c) 150,000 2026(c) 110,000 y y ° * Preliminary, •~ ~ ~ subject to change. (a) The initial yields will be established by and are the sole responsibility of the Initial Purchaser (hereinafter defined), and may subsequently be c changed. "' •2 (b) CUSIP numbers have been assigned to the Certificates by CUSIP Global Service, managed by Standard & Poor's Financial Services LLC on behalf of the American Banker Association, and are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor, nor the Initial Purchaser are responsible for the selection or correctness of the CUSIP numbers set forth herein. V ~ ~ (c) The Certificates maturing on March 1, 2024 and thereafter, are subject to redemption on March 1, 2023 or any date thereafter, at the option of the B City, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption. See "THE CERTIFICATES Redemption Provisions." The Certificates are offered when, as and if issued, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel for the City, as to the validity of the issuance of the Certificates under the Constitution and laws of the State of Texas. See "LEGAL MATTERS." Delivery of the Certificates through DTC is expected to be on or about August 29, 2013. SELLING: MONDAY, AUGUST 12, 2013 ' AT 1:00 P.M., HOUSTON TIME * Preliminary, subject to change. For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission, as amended, and in effect on the date of this Official Statement, this document constitutes an Official Statement of the City with respect to the Certificates that has been "deemed f nal" by the City as of its date except for the omission of no more than the information permitted by Rule 15c2-12. This document, when further supplemented by adding information specking the interest rates and certain other information relating to the Certicates, shall constitute a 'final official statement" of the City with respect to the Certicates, as such term is defined in rule 15c2-12. 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 ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING DTC OR ITS BOOK-ENTRY-ONLY SYSTEM. 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 OFFICIAL STATEMENT, INCLUDING THE ATTACHED APPENDICES, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. TABLE OF CONTENTS INTRODUCTORY STATEMENT ............................. 4 SALE AND DISTRIBUTION OF THE CERTIFICATES .................................................. 4 Sale of the Certificates ........................................... 4 Prices and Marketability ......................................... 4 Securities Laws ....................................................... 4 Municipal Bond Ratings ........................................ 5 OFFICIAL STATEMENT SUMMARY .................... 6 INTRODUCTION ......................................................... 9 THE CERTIFICATES ................................................. 9 Description.............................................................. 9 Redemption Provisions .......................................... 9 Notice of Redemption .......................................... 10 Book-Entry-Only System ..................................... 10 Successor Paying Agent/Registrar ....................... 12 Source of Payment ................................................ 12 Use of Proceeds .................................................... 12 Authorization of the Certificates .......................... 12 Sources and Uses of Funds .................................. 12 FutureDebt ........................................................... 13 Legal Investments and Eligibility to Secure Public Fund in Texas ....................... 13 Remedies in the Event of Default ........................ 13 INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY ....................................................................14 Legal Investments ................................................. 14 Investment Policies ............................................... 15 Current Investments ............................................. 15 Additional Provisions ........................................... 16 CITY TAX DEBT .......................................................17 Tax Supported Debt Statement ............................ 17 Bonded Indebtedness Payable from Ad Valorem Taxes ............................................ 17 Pro-Forma Tax Supported Debt Service Schedule ....................................................... 18 Estimated Overlapping Debt ................................ 19 DebtRatios ........................................................... 19 TAXDATA .................................................................. 20 General .................................................................. 20 Property Tax Code and County-Wide Appraisal District ......................................... 20 Tax Rate Limitations ............................................ 20 Property Subject to Taxation by the City ............. 20 Tax Increment Reinvestment Zone ...................... 21 Notice and Hearing Procedures ............................ 22 Levy and Collection of Taxes .............................. 22 Collection of Delinquent Taxes ........................... 23 Historical Analysis of Tax Collection .................. 23 Analysis of Tax Base ............................................ 25 SalesTax ............................................................... 26 SELECTED FINANCIAL DATA ............................. 27 Historical Operations of the City's General Fund ............................................... 27 General Fund and Debt Service Fund Balance for the Past Five Fiscal Years ............................................................ 27 Pension Fund ........................................................ 27 Financial Statements ............................................. 27 ADMINISTRATION OF THE CITY ....................... 28 Mayor and City Council ....................................... 28 Administration ...................................................... 28 Consultants ........................................................... 29 LEGAL MATTERS .................................................... 29 Legal Opinions ..................................................... 29 No-Litigation Certificate ...................................... 30 No Material Adverse Change ............................... 30 TAX EXEMPTION ..................................................... 30 Proposed Tax Legislation and "Fiscal Cliff ' ............................................................ 31 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES ................................................ 31 Discount Certificates ............................................ 31 Premium Certificates ............................................ 32 CONTINUING DISCLOSURE OF INFORMATION ................................................ 32 Annual Reports ..................................................... 32 Material Event Notices ......................................... 33 Availability of Information .................................. 33 Limitations and Amendments .............................. 34 Compliance With Prior Undertakings .................. 34 FINANCIAL ADVISOR ............................................ 34 GENERAL CONSIDERATIONS ............................. 34 Sources and Compilation of Information ............. 34 Certification as to Official Statement ................... 34 Forward Looking Statements ............................... 35 Updating of Official Statement ............................ 35 APPENDIX A — Economic and Demographic Characteristics APPENDIX B — Audited Financial Statements of the City APPENDIX C — Form of Bond Counsel Opinion $2,745,000* CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) CERTIFICATES OF OBLIGATION, SERIES 2013 INTRODUCTORY STATEMENT Information contained in this Official Statement, including APPENDICES A and B, has been obtained from the City of Pearland, Texas (the "City") in connection with the offering by the City of its $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates") identified on the cover page hereof. All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. SALE AND DISTRIBUTION OF THE CERTIFICATES Sale of the Certificates After requesting competitive bids for the Certificates, the City has accepted the bid resulting in the lowest true interest cost, which bid was tendered by ("Initial Purchaser") to purchase the Certificates 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 true interest rate on the Certificates was % as calculated pursuant to Chapter 1204, Texas Government Code. Prices and Marketability The delivery of the Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Initial Purchaser on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is a bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. The City has no control over trading of the Certificates after a bona fide offering of the Certificates is made by the Initial Purchaser at the yields specified on the cover page. Information concerning reoffering yields or prices is the responsibility of the Initial Purchaser. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Initial Purchaser after the Certificates are released for sale, and the Certificates may be offered and sold at prices other than the initial offering price, including sales to dealers who may sell the Certificates into investment accounts. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE INITIAL PURCHASERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Securities Laws No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such jurisdictions. * Preliminary, subject to change. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE CERTIFICATES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Municipal Bond Ratings In connection with the sale of the Certificates, the City has made application to Standard & Poor's Ratings Services ("S&P") for a rating and the rating of "_", has been assigned to the Certificates. An explanation of the significance of such rating may be obtained from S&P. The rating reflects only the views of S&P, and the City makes no representation as to the appropriateness of such rating. There is no assurance that such rating will continue for any period of time or that such rating will not be revised downward or withdrawn entirely by S&P, if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Certificates. 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. For additional information regarding the City, see "ADMINISTRATION OF THE CITY" and "APPENDIX A — Economic and Demographic Characteristics" herein. The Certificates .............................. $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates"), are dated August 1, 2013 and mature on March 1, 2014 through March 1, 2038 inclusive, unless the Initial Purchaser designate one or more maturities as a term bond. Interest on the Certificates accrues from August 1, 2013, and is payable initially on March 1, 2014, and on each September 1 and March 1 thereafter until the earlier of maturity or prior redemption. See "THE CERTIFICATES - Description." Other Characteristics ...................... The Certificates are issued in fully registered form in integral multiples of $5,000. The Certificates maturing on and after March 1, 2024 are subject to redemption, at the option of the City, at a price of the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption, on March 1, 2023 or any date thereafter. See "THE CERTIFICATES - Redemption Provisions." Authority ......................................... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance (the "Ordinance") to be approved by City Council on August 12, 2013. See "THE CERTIFICATES — Authorization of the Certificates." Paying Agent/Registrar ................... The initial paying agent/registrar is Wells Fargo Bank, N.A., Dallas, Texas (the "Paying Agent/Registrar"). The City intends to use the book-entry-only system of The Depository Trust Company ("DTC"), but reserves the right on its behalf or on behalf of the DTC to discontinue such system. (See "THE CERTIFICATES - Book-Entry-Only System.") Source of Payment .......................... Principal of and interest on the Certificates are payable from the proceeds of an annual ad valorem tax levied upon all taxable property within the City, within the limits prescribed by law, and are further payable from a limited subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System"), but only to the extent of and in an amount not in excess of $10,000 of the Net Revenues of such System. See "THE CERTIFICATES - Source of Payment." Use of Proceeds .............................. Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES — Use of Proceeds." Ratings ............................................ Standard & Poor's Ratings Services............................................................" Payment Record .............................. The City has never defaulted on the timely payment of principal of and interest on its indebtedness. * Preliminary, subject to change. Tax Exemption ............................... In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX EXEMPTION" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX EXEMPTION" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations. [Remainder of Page Intentionally Left Blank] WA - Selected Financial Information - (Unaudited) 2012 Adjusted Net Taxable Assessed Valuation .............................................................. $ 6,455,691,712 (a) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2013) .............................................. $ 298,570,000 (b)* Plus: The Certificates ............................................................................................... 2,745,000 * Plus: The Bonds ........................................................................................................ 9,315,000 (c)* Total Tax Supported Debt .................................................................................. $ 310.630,000 * Estimated Overlapping Debt ............................................................................................. $ 590,893,490 Direct and Estimated Overlapping Debt ........................................................................... 901.523.490 Debt Service Fund Balance (as of June 30, 2013) ............................................................ $ 12,156 203 % of 2012 Per Assessed Capita Valuation (103,800) Debt Ratios: Direct Tax Supported Debt ................................... 4.81% $2,993 Direct Tax Supported and Estimated Overlapping Debt ............................................. 13.96% $8,685 2012 Tax Rate (per $100 of Assessed Valuation) Maintenance and Operation ....................................................................................... $ 0.2151 DebtService ............................................................................................................. 0.4900 Total ................................................................................................................... $ 0.7051 Estimated Annual Debt Service Requirements: (b)(c) Average (Fiscal Years 2013-2038) ............................................................................ $ 18,280,348* Maximum(2024) ....................................................................................................... $ 25,523,068* Tax Collections: Arithmetic Average, Tax Years (2007-2011)- Current Year Collections ................. 98.83% - Total Collections .............................. 99.97% * Preliminary, subject to change. (a) Provided by the Brazoria County Appraisal District, Fort Bend Central Appraisal District and Harris County Appraisal District (the "Appraisal Districts") and net of exemptions. Includes $1,453,517,411 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. Does not include value associated with the annexation of Brazoria County Municipal Utility District No. 4 in an amount of $214 million. (b) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (c) Concurrently with the Certificates, the City intends to issue an estimated $9,315,000* Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. INTRODUCTION This Official Statement and the Appendices hereto provide certain information with respect to the issuance by the City of Pearland, Texas (the "City") in connection with the offering by the City of its $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates"). The Certificates are issued pursuant to the Texas Constitution, the general laws of the State of Texas, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance authorizing issuance of the Certificates (the "Ordinance") to be adopted by the City Council of the City (the "Council"). There follows in this Official Statement descriptions of the Certificates, the plan of financing, and certain information about the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City upon request. Certain capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance, except as otherwise indicated herein. THE CERTIFICATES Description The Certificates are dated August 1, 2013, bear interest from such date at the stated interest rates indicated on the cover page of this Official Statement, which interest is payable March 1, 2014, and each September 1 and March 1 thereafter until the earlier of maturity or prior redemption. The Certificates are issued in fully registered form in denominations of $5,000 each or any multiple thereof. Principal of the Certificates is payable at the principal payment office of Wells Fargo Bank, N.A., Dallas, Texas (the "Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede & Co., the nominee of The Depository Trust Company pursuant to the Book- Entry-Only System described below. In the event the Book-Entry-Only-System is discontinued, the Certificates may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer, but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date (the "Record Date") for the interest payable on any interest payment date means the 15th day of the month next preceding such interest payment date. It will be required that all transfers be made within three business days after request and presentation. The City has agreed to replace mutilated, destroyed, lost or stolen Certificates upon surrender of the mutilated Certificates, or receipt of satisfactory evidence of such destruction, loss or theft, and receipt by the City and the Paying Agent/Registrar of security or indemnity to keep them harmless. The City may require payment of taxes, governmental charges and other expenses in connection with any such replacement. Redemption Provisions The Certificates maturing on March 1, 2024 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on March 1, 2023, or any date thereafter, at the option of the City at a price equal to the principal amount thereof plus accrued interest to the date of redemption. If less than all of the Certificates are to be redeemed, the City may select the maturities of Certificates to be redeemed. If less than all the Certificates of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Certificates are in Book-Entry-Only form) shall determine by lot the Certificates, or portions thereof, within such maturity to be redeemed. If a 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. * Preliminary, subject to change. Notice of Redemption Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. Book-Entry-Only System This section describes how ownership of the Certificates is to be transferred and how the principal of premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC '), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City, the Financial Advisor and the Initial Purchaser believe the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City, the Financial Advisor and the Initial Purchaser cannot and do not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Certificates, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the world's largest securities 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 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. 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 rating of "AA+." 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 . Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each 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. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect 10 Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. 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. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within 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. (nor any other DTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or 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 Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Tender Agent, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant's interest in the Certificates, on DTC's records, to the Tender Agent. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Certificates to the Tender Agent's DTC account. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor 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). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes not responsibility for the accuracy thereof. 11 Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and, (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Successor Paying Agent/Registrar Provision is made in the Ordinance for replacing the Paying Agent/Registrar. If the City replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar's records to the successor paying agent/registrar (the "Successor Paying Agent/Registrar"), and the Successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any Successor Paying Agent/Registrar selected by the City shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Certificates. Source of Payment The Certificates are payable as to principal and interest from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding, it will levy, assess and undertake to collect such tax. The Certificates will be further payable from a limited subordinate pledge of Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System") in an amount not to exceed $10,000. See "TAX DATA - Tax Rate Limitations" and "THE CERTIFICATES - Remedies in the Event of Default." Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the Certificates. Authorization of the Certificates The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and the Ordinance. Further reference to the Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates, as a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. Sources and Uses of Funds The proceeds from the sale of the Certificates will be applied as follows: SOURCES OF FUNDS: Principal Amount of Certificates Net Premium on the Certificates Accrued Interest on Certificates Total Sources of Funds USES OF FUNDS Deposit to Construction Fund $ Deposit Accrued Interest to Interest and Sinking Fund Expenses: Initial Purchaser's Discount Other Issuance Expenses Total Uses of Funds $ 12 Future Debt In addition to the Certificates, the City anticipates issuing an estimated $9,315,000* Permanent Improvement Bonds, Series 2013, which are expected to be delivered concurrently with the Certificates on August 29, 2013. After the sale of the estimated $9,315,000* Permanent Improvement Bonds, Series 2013, the City will have $95,155,000* of authorized but unissued bonds. The City plans to issue such authorized bonds over the next five to seven years. The City may also issue unvoted certificates of obligation payable from ad valorem taxes for City projects. Depending on the rate of development within the City, changes in assessed valuation, and the amounts, interest rates, maturities and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds, the Certificates, and future certificates of obligation or bonds. Legal Investments and Eligibility to Secure Public Fund in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201, Texas Government Code, as amended, the Certificates, whether rated or unrated, are (a) legal investments for insurance companies, fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, and such political subdivisions may impose a requirement consistent with such act that the Certificates have a rating of not less than "A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than "A" or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws, rules, regulations or investment criteria that might affect the suitability of the Certificates for any of the above purposes or limit the authority of any of the above entities or persons to purchase or invest in the Certificates. Remedies in the Event of Default The Ordinance does not establish specific events of default with respect to the Certificates or 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. If the City defaults in any payment due on the Certificates or if the City defaults in the observance or performance of any of the covenants, conditions, or obligations set forth in the Ordinance, any registered owner is entitled to seek a writ of mandamus or mandatory injunction from a court of proper jurisdiction to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as they become due or to perform other material covenants, conditions or obligations contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract; and, Texas law provides that, following their approval by the Attorney General and issuance, the Certificates are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. Such rights are in addition to any other rights the registered owners of the Certificates may be provided by the laws of the State of Texas with respect to the Certificates. Under Texas law there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could file suit against the City if a default occurred in the payment of principal of or interest on any such Certificates; however, a suit for monetary damages could be vulnerable to the defense of sovereign immunity and any judgment could not be satisfied by execution against any property of the City. The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity, which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, * Preliminary, subject to change. 13 the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and, the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors. 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 Available City funds are invested as authorized by Texas law and 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. Under Texas 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 of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state 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 that are issued by or through an institution that either has its main office or a branch in Texas, 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 of Texas, (9) 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 (11) through (13) below, 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 of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) 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, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) 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 (13) 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 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, bond 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 bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. 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) 14 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. 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. Current Investments The City's Investment Policy authorizes the City to invest in direct obligations of the U.S. Treasury with maturity dates of three years or less, obligations of agencies of the U.S. Government with maturity dates of three years or less, certificates of deposit, and certain investment pools. The City's investment balances on June 30, 2013 were as follows: Face Principal Market Book Amount Invested Value Value Cash* $74,702,983 $74,702,983 $73,672,670 $74,702,983 Government Securities 11,500,000 11,579,432 11,543,746 11,541,600 Total Portfolio $86,202,983 $86,282,415 $85,216,416 $86,244,583 * Includes Certificates of Deposit. iE' 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. [Remainder of Page Intentionally Left Blank] 16 CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. Bonded Indebtedness Payable from Ad Valorem Taxes 2012 Adjusted Net Taxable Assessed Valuation .............................................................. $ 6,455,691,712 (a) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2013) .............................................. $ 298,570,000 (b)* Plus: The Certificates ............................................................................................... 2,745,000 * Plus: The Bonds ........................................................................................................ 9,315.000 (c)* Total Tax Supported Debt .................................................................................. $ 310.630.000 Debt Service Fund Balance (as of June 30, 2013 ............................................................. $ 12.156.203 * Preliminary, subject to change. (a) Provided by the Brazoria County Appraisal District, Fort Bend Central Appraisal District and Harris County Appraisal District (the "Appraisal Districts") and net of exemptions. Includes $1,453,517,411 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. Does not include value associated with the annexation of Brazoria County Municipal Utility District No. 4 in an amount of $214 million. (b) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (c) Concurrently with the Certificates, the City intends to issue an estimated $9,315,000* Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. [Remainder of Page Intentionally Left Blank] 17 Pro-Forma Tax Supported Debt Service Schedule The following sets forth the principal and interest on the City's Outstanding Tax Supported Debt, plus the principal and estimated interest on the Certificates. FY Current Total Ending Total Debt Plus: The Certificates * Plus: The Bonds (c)* Debt Service 9/30 Service (a) Principal * Interest (b) Principal * Interest (b) Requirements* 2013 $ 25,345,173 $ 25,345,173 2014 23,907,014 $ 75,000 $ 137,131 $ 275,000 $ 457,919 24,852,064 2015 23,817,677 85,000 123,238 295,000 410,163 24,731,077 2016 23,813,446 85,000 119,413 295,000 396,888 24,709,746 2017 23,813,021 85,000 115,588 305,000 383,388 24,701,996 2018 23,811,220 85,000 111,763 305,000 369,663 24,682,645 2019 23,804,351 90,000 107,825 320,000 355,600 24,677,776 2020 23,803,060 100,000 103,550 320,000 341,200 24,667,810 2021 23,796,634 100,000 99,050 330,000 326,575 24,652,259 2022 23,770,527 100,000 94,550 330,000 311,725 24,606,802 2023 23,764,046 100,000 90,050 340,000 296,650 24,590,746 2024 24,709,074 100,000 85,550 350,000 281,125 25,525,749 2025 24,703,556 110,000 80,825 360,000 265,150 25,519,531 2026 23,080,667 110,000 75,875 370,000 248,725 23,885,267 2027 23,078,430 110,000 70,925 370,000 232,075 23,861,430 2028 23,069,834 110,000 65,975 380,000 215,200 23,841,009 2029 23,065,005 120,000 60,800 390,000 197,875 23,833,680 2030 14,271,818 120,000 55,400 400,000 180,100 15,027,318 2031 14,270,184 120,000 50,000 410,000 161,875 15,012,059 2032 14,296,116 120,000 44,600 420,000 143,200 15,023,916 2033 2,994,881 130,000 38,975 430,000 124,075 3,717,931 2034 2,994,294 130,000 33,125 440,000 104,500 3,701,919 2035 1,106,356 130,000 27,275 450,000 84,475 1,798,106 2036 341,909 140,000 21,200 460,000 64,000 1,027,109 2037 140,000 14,900 480,000 42,850 677,750 2038 150,000 8,375 490,000 21,025 669,400 Totals $455,428,293 $2,745,000 $1,835,956 $9,315,000 $6,016,019 $475,340,268 * Preliminary, subject to change. (a) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (a) Interest estimated at market rates for illustrative purposes only. (b) The Permanent Improvement Bonds, Series 2013 are being issued concurrently with the Certificates. Estimated Average Annual Requirements (2013-2038) .............................................. $18,280,348* Estimated Maximum Annual Requirement (2024) ...................................................... $25,523,068* Preliminary, subject to change. 18 Estimated Overlapping Debt The following table indicates the indebtedness, defined as outstanding obligations payable from ad valorem taxes, of governmental entities overlapping the City and the estimated percentages and amounts of such indebtedness attributable to property within the City. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports. Such figures do not indicate the tax burden levied by the applicable taxing jurisdictions for operation and maintenance or for other purposes. The City has not independently verified the accuracy or completeness of the information shown below except for amounts related to the City. Debt as of Overlapping Taxing Jurisdiction July 1, 2013 Percent Amount Alvin Community College District $ 15,305,000 27.17% $ 4,158,369 Alvin ISD 307,545,000 30.89 95,000,651 Brazoria County 86,515,000 24.19 20,927,979 Brazoria County MUD No. 17 29,215,000 100.00 29,215,000 Brazoria County MUD No. 18 30,595,000 97.35 29,784,233 Brazoria County MUD No. 19 37,480,000 100.00 37,480,000 Brazoria County MUD No. 23 17,510,000 100.00 17,510,000 Brazoria County MUD No. 26 41,560,000 100.00 41,560,000 Brazoria County MUD No. 28 16,905,000 100.00 16,905,000 Brazoria County MUD No. 34 24,800,000 100.00 24,800,000 Brazoria County MUD No. 35 9,410,000 100.00 9,410,000 Brazoria-Fort Bend County MUD No. 1 57,550,000 73.76 42,448,880 Fort Bend County 468,360,000 0.23 1,077,228 Harris County (a) 2,345,417,190 0.13 3,049,042 Harris County Dept. of Education 7,605,000 0.13 9,887 Harris County Flood Control District 96,470,000 0.13 125,411 Pasadena ISD 621,810,000 0.14 870,534 Pearland ISD 300,627,047 71.72 215,609,718 Port of Houston Authority 731,969,397 0.13 951,560 TOTAL ESTIMATED OVERLAPPING 100.00% $590,893,490 City Total Direct Tax Supported Debt (b) 310,630,000 Total Direct and Estimated Overlapping Debt $901.523.490 (a) Harris County Toll Road Certificates are considered self-supporting and are not included in the amount shown for Harris County. (b) Includes the Certificates and the City's estimated $9,315,000* Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. Also includes the debt associated with the annexation of Brazoria County Municipal Utility District No. 4. Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2012 Assessed Valuation ($6,455,691,712) (a) 4.81% 13.96% Per Capita (103,800) $2,993 $8,685 (a) Includes $1,453,517,411 in assessed valuation attributable to the TIRZ. Tax revenue generated from assessed valuation attributable to the TIRZ are not available to make debt service payments on the Certificates. 19 TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments is the receipts from ad valorem taxation. See "SELECTED FINANCIAL DATA." The following is a recapitulation of (a) the Texas Property Tax Code, including methodology, limitations, remedies and procedures; (b) historical analysis of collection and trends of tax receipts and provisions for delinquencies; (c) an analysis of the tax base, including relative property composition, principal taxpayers and adequacy of the tax base to service debt requirements; and (d) taxation that may add to the City's taxpayers' tax costs. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") establishes for each county in Texas a single appraisal district with responsibility for recording and appraising property for all taxing units within the county, and a single appraisal review board, with responsibility for reviewing and equalizing the values established by the appraisal district. The Property Tax Code requires the appraisal district, by May 15 of each year, or as soon thereafter as practicable, to prepare appraisal records of property as of January 1 of each year based upon market value. The chief appraiser must give written notice before May 15, or as soon thereafter as practicable, to each property owner whose property value is appraised higher than the prior tax year or the value rendered by the property owner or whose property was not on the appraisal roll the preceding year or whose property was reappraised in the current tax year. Notice must also be given if ownership of the property changed during the preceding year. The appraisal review board has the ultimate responsibility for determining the value of all taxable property within the City; however, any property owner who has timely filed notice with the appraisal review board may appeal a final determination by the appraisal review board by filing suit in a Texas district court. Prior to such appeal or any tax delinquency date, however, the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event, the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units such as the City are entitled to challenge certain matters before the appraisal review board, including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption. A taxing unit may not, however, challenge the valuation of individual properties. Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies of the county and all cities, towns, school districts and, if entitled to vote, the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years. It is not known what frequency of reappraisals will be utilized by the Brazoria County, Fort Bend Central and Harris County Appraisal Districts or whether reappraisals will be conducted on a zone or county-wide basis. Tax Rate Limitations Article XI, Section 5 of the Texas Constitution, provides for an overall limitation for Home Rule Cities of $2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy, with respect to Home Rule Cities which have such a $2.50 limitation, of approving ad valorem tax bonds only to the extent that all of such city's ad valorem tax debt can be serviced by a debt service tax rate of $1.50 at 90% collection. Property Subject to Taxation by the City Except for certain exemptions provided by Texas law, all real and tangible personal property and certain categories of intangible personal property with a tax situs in the City are subject to taxation by the City; however, no effort is expected to be made by the Brazoria County, Fort Bend Central and Harris County Appraisal Districts to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions; property used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind-powered energy devices; most individually-owned automobiles; and property of disabled 20 veterans, only to the extent of $12,000; a complete exemption for the value of a residential homestead of disabled veterans judged to be 100% disabled by the U.S. Department of Veterans Affairs is granted by State law. In addition, taxpayers who are disabled or over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of $40,000. These disabled or over 65 exemptions and disabled veterans exemptions amounted to $186,790,895 from the 2012 tax roll. The state constitution permits local governments the option of granting homestead exemptions of up to 20% of market value. The City granted an additional homestead exemption for the 2012 tax year in the amount of 2.5% of the market value of the homestead with a minimum of $5,000. The City has authority to enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. Such abatement agreement may last for a period of up to 10 years. The City has $9,697,991 of such property that was subject to abatement January 1, 2012. The constitution of the State of Texas authorizes a property tax exemption for certain business personal property. The City Council had the option to take official action to override the exemption and to continue taxing the property exempted by the amendment. On December 18, 1989, the City's City Council took such official action not to tax the property in 1990 and to allow the exemption for 1991 and all future years. This Freeport Goods exemption amounted to $46,735,041 on the 2012 tax roll. Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of "goods-in-transit." "Goods-in-transit" is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The City has taken official action and determined not to grant a "goods-in-transit" exemption. Tax Increment Reinvestment Zone Article VIII, Section 1-g of the Texas Constitution and the Tax Increment Financing Act, Chapter 311, V.T.C.A. Tax Code (the "TIF Act") authorize municipalities in the State to establish one or more tax increment financing reinvestment zones for development or redevelopment of the territory within the zones. The TIF Act provides that the municipality may appoint a board of directors for a reinvestment zone to develop a project plan and financing plan for the zone and may delegate to the board certain management duties relating to the zone. Project costs, including financing costs, within the zone may be paid from tax increments collected by each of the taxing units in the zone. The amount of a taxing unit's tax increment for a year is the amount of property taxes levied by the unit for that year on the captured appraised value of real property taxable by the unit (the "Captured Appraised Value") and located in the zone. The Captured Appraised Value is the total appraised value of the property for a year, less the tax increment base of the unit. The tax increment base of a taxing unit is the total appraised value of all real property taxable by the unit and located in the zone in the year in which the City created the zone. Participation by a taxing unit in a reinvestment is discretionary with such taxing unit, and it may decide to deposit all or none, or a portion, of its tax increments into the fund and retain for its own purposes the remainder. A taxing unit cannot reduce the amount of its participation once the financing plan has been implemented. The City designated and created Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ") in 1998. The TIRZ initially encompassed approximately 3,467 acres of land (the "Original Area"). The City approved the annexation of an additional 457 acres of land (the "Annexation Area") into the boundaries of the TIRZ on June 26, 2006. The TIRZ encompasses all of the master planned community of Shadow Creek Ranch, which includes approximately 3,300 acres of land. Pursuant to the ordinance that created the TIRZ, the TIRZ shall terminate December 31, 2028. 21 The purpose of the TIRZ is to design, construct and finance or cause to be designed, constructed and financed certain public works and improvements to promote and facilitate the development of the vacant, undeveloped property in the TIRZ. Specifically, the TIRZ is constructing public works and infrastructure improvements to assist in the development of the master planned community, Shadow Creek Ranch ("Shadow Creek Ranch"). The City, Alvin Independent School District ("AISD"), Brazoria County, Texas ("Brazoria County") and Fort Bend County, Texas ("Fort Bend County") have agreed to deposit to a tax increment fund established for the TIRZ (the "Tax Increment Fund") annually a certain percentage of tax collections arising from their taxation of the increase, if any, since January 1, 1998, in the total appraised value of all real property located in the Original Area of the TIRZ and taxable by the City, AISD, Brazoria County and Fort Bend County. The City, Brazoria County and Fort Bend County have further agreed to deposit to the Tax Increment Fund tax collections arising from its taxation of the increase, if any, since January 1, 2006, in the total appraised value of real property located in the Annexation Area of the TIRZ and taxable by the City. The TIRZ Board has nine members, four of whom are appointed by the City. One of the TIRZ Board Members is nominated by AISD, and Brazoria County and Fort Bend County each appoint one member of the TIRZ Board. Finally, the Texas State Senator and Texas State Representative, or their designees, in whose district the TIRZ is located serve as the final two members of the TIRZ Board. The City has agreed to pay 100% of its collected Tax Increments (the "City Tax Increment") to the Tax Increment Fund. However, pursuant to a development plan and a development agreement (the "Development Agreement") by and between the City and Shadow Creek Ranch Development Company, L.P., the master developer of property within the TIRZ (the "Developer"), the City, the Developer and the TIRZ have agreed that a certain portion of the City Tax Increment shall be paid by the TIRZ to the City as an "Administrative Fee" (the "Administrative Fee") to compensate the City for some of its cost of providing City services to the developed property within the TIRZ. Pursuant to the Development Agreement, the Administrative Fee for years 2007-2028 is 64% of the City Tax Increment, provided that the amount of City Tax Increment deposited and retained annually in the Tax Increment Fund for the applicable year shall in no event be less than $0.255 per $100.00 of valuation. For tax year 2012, the assessed value attributable to the TIRZ is $1,453,517,411. As described above, tax revenues generated from assessed value attributable to the TIRZ are deposited into the Tax Increment Fund and are not available to make debt service payments on the Certificates. While a portion of such revenues are to be retained by the City as Administrative Fees, such Administrative Fees may not be available to make debt service payments on the Certificates. Notice and Hearing Procedures The Property Tax Code establishes procedures for providing notice and the opportunity for a hearing for taxpayers in the event of certain proposed tax increases and provides for taxpayer referenda which could result in the repeal of certain tax increases. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values over $1,000, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. Levy and Collection of Taxes The City is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. The City has elected to have Brazoria County bill and collect taxes on behalf of the City. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City, the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations (the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the City held upon petition of 10% of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. 22 The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the "effective tax rate" until it has held a public hearing on the proposed tax rate and has otherwise complied with the Property Tax Code. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. Taxes are due on receipt of the tax bill, and become delinquent after January 31 of the following year, or on the first day of the calendar month next following the expiration of twenty-one (21) days after mailing of the tax bills, whichever occurs later. A delinquent tax account incurs an initial penalty of six percent (6%) of the amount of the tax and accrues an additional penalty of one percent (1%) per month up to July 1, at which time the total penalty becomes twelve percent (12%). In addition, delinquent taxes accrue interest at one percent (1%) per month. If the tax is not paid by July 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the City. The Property Tax Code also makes provision for the split payment of taxes, discounts for early payments, partial payments of taxes and the postponement of the delinquency date of taxes under certain circumstances. Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property owner on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the City, having the power to tax the property. The City's tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. In the event a taxpayer fails to make timely payment of taxes due the City, the City may file suit to foreclose its lien securing payment of the tax, to enforce personal liability for the tax, or both. Whether a lien of the United States is on a parity with or takes priority over a tax lien of the City is determined by applicable federal law. In the absence of such federal law, the City's tax lien takes priority over a tax lien of the United States. The ability of the City to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, the foreclosure sale price attributable to market conditions, the taxpayer's right to redeem the property within two years of foreclosure, or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. Historical Analysis of Tax Collection - Collection Ratios — Tax Rate % of Collections Fiscal Net Per $100 of Current Year Tax Assessed Assessed Adjusted Year Current and Ending Year Valuation (a) Valuation Tax Levy (a) Collection Prior Years 9-30 2003 $2,355,280,316 $0.696000 $18,030,473 98.03% 100.02% 2004 2004 3,019,449,422 0.694800 21,073,788 98.08 99.68 2005 2005 3,576,439,129 0.674400 24,284,597 97.08 99.70 2006 2006 4,412,821,949 0.652659 28,819,229 98.14 100.14 2007 2007 5,389,790,165 0.652600 35,035,569 98.40 99.74 2008 2008 5,904,826,560 0.652600 38,368,354 98.57 100.70 2009 2009 6,269,047,937 0.652600 41,081,407 98.81 98.81 2010 2010 6,331,723,029 0.665100 41,968,046 99.11 100.28 2011 2011 6,369,626,981 0.685100 43,441,792 99.24 99.63 2012 2012 6,539,521,484(b)(d) 0.705100 45,861,482 98.69(c) 98.69(c) 2013 (a) Includes assessed value attributable to the TIRZ and tax levy adjusted for Senior Tax Freeze effective in tax year 2007. (b) Includes $1,453,517,411 in assessed valuation attributable to the TIRZ. Tax revenues generated from assessed valuation attributable to the TIRZ are not available to make debt service payments on the Bonds. (c) Collections as of June 30, 2013. (d) Adjusted tax roll. 23 - Tax Rate Distribution - 2012 2011 2010 2009 2008 Maintenance $0.2151 $0.2151 $0.2151 $0.2201 $0.22010 Debt Service 0.4900 0.4700 0.4500 0.4325 0.43250 Total $0.7051 $0.6851 $0.6651 0.6526 $0.65260 - Analysis of Delinquent Taxes - The following is an analysis, by tax year, of taxes delinquent as of September 30, 2012. Uncollected Adjusted Percentage Tax Year As of September 30, 2012 Tax Levy (a) Of Tax Levy 2011 $ 331,419 $43,441,792 0.76% 2010 218,459 41,968,046 0.52 2009 167,946 41,081,407 0.41 2008 84,048 38,368,354 0.22 2007 45,270 35,035,569 0.13 2006 37,315 28,819,229 0.13 2005 36,224 24,284,597 0.15 2004 23,928 21,073,788 0.11 2003 34,739 18,030,473 0.19 2002 25,194 14,880,007 0.17 (a) The total tax levy has been adjusted to reflect additions and deletions from the tax roll for prior years. Includes levy attributable to the TIRZ. - Delinquent Tax Collection Procedures - In addition to the legal procedures and penalties described under "Levy and Collection of Taxes", the City has retained a delinquent tax attorney on a contract basis to file suit to collect delinquent taxes due the City. The fees due such attorney for acting as delinquent tax attorney are payable from an additional penalty imposed upon the delinquent taxpayer, not to exceed 20% of the tax due. [Remainder of Page Intentionally Left Blank] 24 Analysis of Tax Base - Tax Base Distribution - 2012 Tax Roll 2011 Tax Roll 2010 Tax Roll Type of Property Amount % Amount % Amount % Residential $5,645,372,636 75.78% $5,538,320,529 75.64% $5,411,758,431 74.25% Acreage 93,765,783 1.26 92,047,258 1.26 115,462,851 1.58 Vacant Lots/Tracts 126,876,793 1.70 121,404,806 1.66 136,375,903 1.87 Farm & Ranch 9,235,628 0.12 8,483,859 0.12 8,350,359 0.11 Commercial/Industrial 1,169,417,293 15.70 1,206,544,884 16.48 1,140,785,576 15.65 Utilities 59,004,028 0.79 59,686,620 0.82 61,679,057 0.85 Real Inventory 60,989,786 0.82 73,253,979 1.00 91,173,634 1.25 Other 285,409,427 3.83 222,335,566 3.04 322,574,557 4.43 Gross Assessed Value $7,450,071,374 100.00% $7,322,077,501 100.00% $7,288,160,368 100.00% Less: Exemption (994,379,662) (956,765,192) (953,121,879) Net Assessed Value $6,455,691,712(a)(b) $6,365,312,309(a)(c) 6,335,038,489(a)(d) (a) Value may differ from those shown elsewhere in this Official Statement due to subsequent adjustments to the tax roll. (b) Includes $1,453,517,411 in assessed value attributable to the TIRZ. Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. (c) Includes $1,372,334,319 in assessed value attributed to the TIRZ. (d) Includes $1,385,656,309 in assessed value attributed to the TIRZ. - Principal Taxpayers — 2012 2011 2010 Taxable Taxable Taxable Assessed Assessed Assessed Principal Taxpayer Type of Property Valuation Valuation Valuation Pearland Town CenterLP Retail Development $ 68,763,470 $ 66,933,820 $ 67,661,190 Amreit SPF Shadow Creek LP Retail Development 43,671,670 41,006,650 50,744,245 Weatherford U.S. Inc. Oil Field Equipment 37,689,240 31,613,080 45,210,463 CenterPoint Energy, Inc. Utility 28,444,700 26,536,120 25,946,710 12400 Shadow Creek Parkway LLC Land Development 28,229,200 (a) (a) Discovery Shadow Creek Retail Development 26,391,910 (a) (a) Shadow Kirby LTD PTRN Land Development 25,000,000 23,114,059 23,114,059 Pearland Lifestyle Center LP Land Development 23,731,897 (a) 24,153,065 Wal-Mart Real Estate Shopping Center 23,179,360 23,678,280 23,412,910 Pearland Investments Ltd. Prt. Land Development 21,154,900 31,696,920 35,554,380 HCA Healthcare Corp. Health Care 19,012,840 19,074,620 20,030,180 Villas Shadow Creek Ranch LP Land Development (a) 29,000,460 (a) MRP Shadow Creek LP Land Development (a) 21,000,000 (a) Inland American Waterford Ltd. Land Development (a) (a) 17,125,100 Total Ten Principal Taxpayers $345,269,187 $313,654,009 $332,952,302 Percentage Ten Principal Taxpayers Comprise of Tax Roll 5.35% 4.93% 5.26% (a) Not included as top ten taxpayer for respective tax year. W, - Tax Adequacy - Estimated Average Annual Debt Service Requirements (2013-2038) .................................. $18,280,348 Tax Rate of $0.299 per $100 assessed valuation against the 2012 Certified Assessed Valuation at 95% collection produces ............................................... $18,337,392 Estimated Maximum Annual Tax Debt Service Requirements (in the year 2024) ............... $25,523,068 Tax Rate of $0.417 per $100 assessed valuation against the 2012 Certified Assessed Valuation at 95% collection produces ............................................... $25,574,223 Sales Tax - Authority - The City has adopted the provisions of Article 1066c, Vernon's Texas Civil Statutes, as amended, which grants the City the power to impose and levy a 1% sales tax. The City has also voted an additional 1/2% sales and use tax for economic development under Article 5190.6, Vernon's Texas Civil Statutes, as amended. The City may not and has not pledged the proceeds from the sales and use tax as security for the Certificates. - Collection History - The State Comptroller, after deduction of a 2% service fee, currently remits the City's portion of sales tax collections monthly. By statute the Comptroller is required to remit at least twice annually. The following is an analysis of the collection history of the City's sales and use tax: Fiscal Year Sales and Use Equivalent Tax Rate % of Actual Ended 9-30 Tax Receipts Tax Year Equivalent Tax Levy 2003 $ 5,859,053 (2002) $0.270 39.40% 2004 6,739,484 (2003) 0.260 37.47 2005 7,785,161 (2004) 0.258 35.15 2006 9,712,118 (2005) 0.253 36.28 2007 10,744,199 (2006) 0.231 37.34 2008 12,234,799 (2007) 0.227 34.89 2009 13,760,714 (2008) 0.255 35.86 2010 13,082,134 (2009) 0.209 31.84 2011 13,331,189 (2010) 0.211 31.77 2012 14,814,936 (2011) 0.233 34.10 [Remainder of Page Intentionally Left Blank] 26 SELECTED FINANCIAL DATA Historical Operations of the City's General Fund The following is a condensed statement of revenues and expenses of the City's General Fund for the past five fiscal years. The inclusion of the following table is not intended to imply that any revenues of the City, other than receipts from ad valorem taxes as provided in the Ordinance, are pledged to pay principal and interest on the Certificates. Fiscal Year Ended September 30, 2012 2011 2010 2009 2008 REVENUES General PropertyTaxes(a) $1.0,861,341 $10,867,570 $11,115,823 $10,688,512 $11,259,460 Sales and Use Taxes 14,814,936 13,331,189 13,082,134 13,760,714 12,234,799 Franchise Fees 5,669,958 5,605,394 5,426,110 5,074,602 4,426,856 Licenses & Permits 2,320,103 1,720,856 1,806,692 2,079,099 2,991,549 Fines & Forfeitures 3,164,068 2,714,217 2,310,041 2,213,101 7,511,637 Charges for Services 11,890,808 10,882,021 9,245,791 8,884,529 1,986,530 Intergovernmental --- 350,441 477,929 4,909,362 2,624,517 Other Revenues 678,438 602,817 446,353 487,663 986,404 Total Revenues $49,399,652 $46,074,505 $43,910,873 $48,097,582 $44,021,752 EXPENDITURES General Government $ 8,241,509 $ 8,045,261 $ 8,064,367 $ 8,020,370 $ 7,223,807 Public Safety 25,168,443 23,716,470 23,141,409 22,025,695 19,305,021 Public Works 5,506,477 6,505,139 7,108,143 11,913,119 7,535,792 Community Services 3,861,520 3,027,088 3,648,920 3,204,702 3,402,437 Parks and Recreation 6,775,316 7,171,812 6,069,658 5,753,141 --- Capital Outlay --- --- --- --- 6,557,427 Total Expenditures $49,553,265 $48,465,770 $48,059,497 $50,917,027 $44,024,484 (a) Includes penalties and interest. Source: City's audited financial statements. General Fund and Debt Service Fund Balance for the Past Five Fiscal Years Fiscal Year Ended September 30, 2012 2011 2010 2009 2008 General Fund $17,571,961 $14,523,546 $12,861,796 $12,219,109 $13,526,231 Debt Service Fund 4,992,479 5,159,541 6,705,688 7,246,548 6,835,188 Source: City's audited financial statements. Pension Fund The City participates in the Texas Municipal Retirement System (TMRS), an agency operated by the State of Texas. Employees of the City who participate in TMRS contribute a fixed percentage, currently 7%, of their gross pay and the City matching percent is currently 2 to 1. As employees leave municipal employment other than through retirement, they may withdraw from TMRS those funds they contributed, but forfeit their employer's contributions. Each municipal employer's requirements for current contributions are offset by the amounts of such forfeitures. In 2012, the City employed 536 full-time employees and 137 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's contribution for fiscal year 2012, amounted to approximately $3.5 million which includes amortization of prior service cost over 30 years. The City had no unfunded pension benefit obligation as of September 30, 2012. The liability for prior service benefits will be amortized over a period of thirty years or less by contributions from the City which are a level percentage of payroll. Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2012, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. 27 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 second 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 31 Years 2014 Retired Mayor Tony Carbone 3 Months 2016 Certified Public Accountant Council Member Scott Sherman 4 Years 2015 Attorney Council Member Susan Sherrouse 2 Years 2014 Project Manager Council Member Keith Ordeneaux 2 Years 2014 Energy and Risk Manager Council Member Greg Hill 1 Year 2016 Attorney Mayor Pro Tem 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. 28 Members of the administrative staff are described below: Name Position Period Served (a) Bill Eisen City Manager 12 Years Jon Branson Assistant City Manager 7 Years Mike Hodge Assistant City Manager 8 Years Claire Bogard Director of Finance 7 Years Eric Wilson Director of Public Works 1 Month Young Lorfing City Secretary 16 Years Lata Krishnarao Director of Community Development 10 Years Darrin Coker City Attorney 16 Years Trent Epperson Director of Projects & Engineering 7 Years Christopher Doyle Police Chief 35 Years Michelle Smith Director of Parks & Recreation 13 Years Vance Riley Fire Chief 2 Years Bonita Hall Director of Human Resources 3 Years Daniel Baum EMS Chief 2 Years (a) Reflects the total number of years worked for the City. 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: BondCounsel ............................................................................................................................... Andrews Kurth LLP Houston, Texas Certified Public Accountants ........................................................................................................ Grant Thornton LLP Houston, Texas FinancialAdvisor ........................................................................................................................................BOSC, Inc. Houston, Texas LEGAL MATTERS Legal Opinions The delivery of the Certificates is subject to the approving opinion of the Attorney General of Texas to the effect that the Certificates are valid and legally binding obligations of the City payable from the proceeds of an annual ad valorem maintenance tax levied, within the limits prescribed by law, upon all taxable property in the City, and the approving legal opinion of Andrews Kurth LLP, Bond Counsel to the City ("Bond Counsel"), in substantially the form attached as Appendix C. The various legal opinions to be delivered concurrently with the delivery of the Certificates express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee outcome of any legal dispute that may arise out of the transaction. The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Bond and to the effect that the Certificates 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. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates, or which would affect the provision made for their payment or security, or in any manner questioning the validity of the Certificates 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 Certificates in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent on the sale and delivery of the Certificates. The legal opinion will accompany the Certificates deposited with DTC or will be printed on the Certificates in the event of the discontinuance of the Book-Entry-Only System. 29 No-Litigation Certificate The City will furnish to the Initial Purchaser a certificate, dated as of the date of delivery of the Certificates, executed by appropriate City officials, to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Certificates; restraining or enjoining the issuance, execution or delivery of the Certificates; affecting the provisions made for the payment of or security for the Certificates; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Certificates; or affecting the validity of the Certificates. No Material Adverse Change The obligations of the Initial Purchaser to take and pay for the Certificates, and of the City to deliver the Certificates, are subject to the condition that, up to the time of delivery of and receipt of payment for the Certificates, there shall have been no material adverse change in the condition (financial or otherwise) of the City subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. TAX EXEMPTION In the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, interest on the Certificates is (1) excludable from gross income of the owners thereof for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), and (2) is not includable in the alternative minimum taxable income of individuals or, except as described below, corporations. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the ordinance authorizing the issuance of the Certificates (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 Certificates, 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. Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. Interest on the Certificates owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt or accrual of interest on or acquisition or disposition of the Certificates. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Service with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the City as the "taxpayer," and the owners of the Certificates may have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Certificates, the City may have different or conflicting interests from the owners of the Certificates. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit, regardless of its ultimate outcome. 30 Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. Proposed Tax Legislation and "Fiscal Cliff" Tax legislation, administrative actions taken by tax authorities, and court decisions may cause interest on the Certificates to be subject, directly or indirectly, to federal income taxation or state income taxation, or otherwise prevent the beneficial owners of the Certificates from realizing the full current benefit of the tax status of such interest. For example, future legislation to resolve certain federal budgetary issues may significantly reduce the benefit of, or otherwise affect, the exclusion from gross income for federal income tax purposes of interest on all state and local obligations, including the Certificates. In addition, such legislation or actions (whether currently proposed, proposed in the future or enacted) could affect the market price or marketability of the Certificates. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and its impact on their individual situations, as to which Bond Counsel express no opinion. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates may be offered at an initial offering price which is less than the stated redemption price payable at maturity of such Certificates. If a substantial amount of any maturity of the Certificates is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, an initial owner who purchases the Certificates of that maturity (the "Discount Certificates") will be considered to have "original issue discount" for federal income tax purposes 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 Certificates 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 Certificates 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 Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Bond may be required to take into account such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a 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. 31 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 Certificates by an owner that did not purchase such Certificates in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Certificates should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Certificates and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Discount Certificates. Premium Certificates Some of the Certificates may be offered at an initial offering price which exceeds the stated redemption price payable at the maturity of such Certificates. If a substantial amount of any maturity of the Certificates is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Certificates of such maturity ("Premium Certificates") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium 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 Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Certificates of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Certificates. CONTINUING DISCLOSURE OF INFORMATION In order to provide certain continuing disclosure with respect to the Certificates 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 (the "Rule"), the City has entered into a Disclosure Dissemination Agent Agreement ("Disclosure Dissemination Agreement") for the benefit of the holders of the Certificates with Digital Assurance Corporation, L.L.C. ("DAC"), under which the City has designated DAC as Disclosure Dissemination Agent. The form of Disclosure Dissemination Agreement can be obtained on www.dacbond.com . In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rule Making Board ("MSRB"). Information will be available free of charge via the Electronic Municipal Market Access ("EMMA") system at www.emma.msrb.org . Annual Reports The City will provide certain updated financial information and operating data to the MSRB annually via EMMA. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "INVESTMENT AUTHORITY 32 AND INVESTMENT OBJECTIVES OF THE CITY — Current Investments," "CITY TAX DEBT," "TAX DATA" (except under the subheading "Estimated Overlapping Taxes"), "SELECTED FINANCIAL DATA," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by Rule 15c2-12. 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 the MSRB of the change. Material Event Notices The City will also provide timely notices of certain events to the MSRB. The City will provide notice in a timely manner not in excess of ten business days after the occurrence of the event of any of the following events with respect to the Certificates: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Certificates, or other material events affecting the tax status of the Certificates; (7) modifications to rights of holders of the Certificates, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. As used above, the phrase "bankruptcy, insolvency, receivership or similar event" means the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court of governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if jurisdiction has been assumed by leaving the Board and officials or officers of the City in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. (Neither the Certificates nor the Ordinance make any provision for debt service reserves, liquidity enhancement or credit enhancement, merger, consolidation, or acquisition). 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." For these purposes, any event described in (12) in the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. Availability of Information The City has agreed to provide the foregoing information only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org . 33 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 a breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Certificates may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement 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, if (i) the agreement, as amended, would have permitted an Initial Purchaser to purchase or sell Certificates in the offering described herein 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 (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Certificates consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an Initial Purchaser from lawfully purchasing or selling Certificates in the primary offering of the Certificates. If the City so amends the agreement, it has agreed to include with the next financial information and operating data 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 Due to an administrative oversight by a consultant of the City, the 2009 audit was filed approximately 4 hours late. The City is working with the consultant to ensure that such a filing error will not occur again in the future. Otherwise, during the last 5 years, the City has complied in all material respects with its prior continuing disclosure agreements made in accordance with Rule 15c2-12. 1:31►KI\ relMr1. 1ITAC191A BOSC, Inc. is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information in this Official Statement. GENERAL CONSIDERATIONS Sources and Compilation of Information The information contained in this Official Statement has been obtained primarily from the City and from other sources believed to be reliable. No representation is made as to the accuracy or completeness of the information derived from sources other than the City. The summaries of the statutes, orders, ordinances and other related documents are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. The information contained in this Official Statement in the section entitled "APPENDIX B - Audited Financial Statements of the City" has been provided by Whitley Penn, LLP, Houston, Texas and has been included herein in reliance upon their authority as an expert in the fields of auditing and accounting. Neither this Official statement nor any statement that may have been made orally or in writing is to be constructed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. Certification as to Official Statement At the time of payment for and delivery of the Certificates, the Initial Purchaser will be furnished a certificate, executed by a proper officer acting in his or her official capacity, to the effect that to the best of his or her knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in its Official 34 Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of sale of said Certificates 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 any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they 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. Forward Looking Statements 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. It is important to note that the City's actual results could differ materially from those in such forward-looking statements. The forward-looking statements 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 would prove to be accurate. Updating of Official Statement The City will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the City and, to the extent that information comes to its attention, in the other matters described in the Official Statement, until the delivery of the Certificates to the Initial Purchaser. 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/ Mayor City of Pearland, Texas ATTEST: /s/ City Secretary City of Pearland, Texas 35 APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF PEARLAND The following information has been derived from various sources, including the U.S. Census data, Texas Workforce Commission, "Sales Management Survey of Buying Power", Claritas, and City of Pearland, Texas officials. While such sources are believed to be reliable, no representation is made as to the accuracy thereof. RESIDENTIAL AND COMMERCIAL DEVELOPMENT Because of the City's proximity to downtown Houston, it has become an area of continuing growth in residential, commercial and some light industrial development. 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. 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. 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 2010 91,252 +0.61 313,166 +29.53 2011 95,600 +4.76 2012 97,200 +1.67 2013(a) 103,800 +6.79 (a) Estimated. Includes annexation of Brazoria County Municipal Utility District No. 4. City of Pearland 2013(a) 2012 2011 2010 2009 Labor Force 51,372 50,470 49,538 48,447 45,775 Employed 48,859 47,818 46,299 45,305 43,131 Unemployed 2,513 2,652 3,239 3,142 2,644 Unemployment Rate 4.9 5.3 6.5 6.5 5.8 Brazoria County 2013(a) 2012 2011 2010 2009 Labor Force 158,195 155,381 153,203 150,467 146,843 Employed 147,652 144,503 139,914 136,989 135,062 Unemployed 10,543 10,878 13,289 13,478 11,781 Unemployment Rate 6.7 7.0 8.7 9.0 8.0 (a) As of May, 2013. Employment Statistics Source: Texas Workforce Commission A-2 APPENDIX B /111_]-I ILD17l ler.1 [4 M ILI] W119IITi I JI►`s Mol 11111.1 ore M_y1 CITY OF PEARLAND, TEXAS Fiscal Year Ended September 30, 2012 Officials Issuing Report Bill Eisen Jon Branson Mickiel Hodge Claire Bogard Rick Overgaard City Manager Assistant City Assistant City Director of Finance Assistant Director Manager Manager of Finance Introductory Section (This page intentionally left blank.) March 11, 2013 To the Honorable Mayor, Members Of City Council, and Citizens of the City of Pearland, Texas The Comprehensive Annual Financial Report (CAFR) of the City of Pearland, Texas (the "City") for the fiscal year ended September 30, 2012, is hereby submitted as mandated by both local and state statutes. These ordinances and statutes require that the City issue an annual report on its financial position and activity, and that an independent firm of certified public accountants audit.this report. Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Whitley Penn, LLP, Certified Public Accountants, have issued an unqualified (or "clean") opinion on the City of Pearland's financial statements for the year ended September 30, 2012. The independent auditor's report is located at the front of the financial section of this report. Management's discussion and analysis (MD&A) immediately follows the independent auditor's report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complements this letter of transmittal and should be read in conjunction with it. PROFILE OF THE GOVERNMENT The City of Pearland, incorporated in 1959, is located across the northern end of Brazoria County and shares a common border with Houston, Texas to the north. The City also extends into Fort Bend and Harris Counties. The City of Pearland, encompassing approximately 48 square miles, is the fastest growing city in Brazoria County, increasing from approximately 18,000 residents in 1990 to 99,800 residents estimated as of September 2012. The City of Pearland is a home-rule City operating under a Council-Manager form of government. Policy-making and legislative authority are vested in a governing council (Council) consisting of the mayor and five other members. The Mayor and all Council 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 To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas of three years and until his/her successor is elected and qualified. Council members are limited to two full consecutive terms of office and there is no limitation on the office of 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 full range of municipal services is provided by the City of Pearland including public safety (police, fire, and emergency medical services); solid waste; water and wastewater utilities; public improvements; repair and maintenance of infrastructure; recreational and community activities; and general administrative services. In addition, the City provides planning for future land use, traffic control, building codes, and health inspections, and plans for new infrastructure and rehabilitation of infrastructure to meet the needs of the citizens today, as well as tomorrow. The City is authorized to issue debt, subject to certain limitations, for the purpose of financing its capital projects and the City is empowered to levy a property tax on real property within its boundaries. Activities of the general, debt service, water and sewer, solid waste, capital project funds, and special revenue funds such as hotel/motel tax are included in the City's annual appropriated budget. Capital project funds are budgeted for project length. The legal level of control for each budget is at the fund level, which is to say that total expenditures for each fund should not exceed total budgeted expenditures for that fund. The City Manager is authorized to transfer budgeted amounts within and among departments. The City Council must approve any budget amendment that increases appropriations by fund. The City amends the budget at the end of each fiscal year to reflect current year projections for revenues and expenditures/expenses. As an independent political subdivision of the State of Texas, the City is considered a primary government. Pursuant to standards established by the Governmental Accounting Standards Board (GASB), the City also reports for all funds for which the City, as the primary government, is financially accountable. As such, this report includes financial activities of three component units as follows: The Pearland Economic Development Corporation was created by the voters of the City in 1995 under the Texas Development Corporation Act of 1979 for the purpose of promoting, assisting, and enhancing economic and related development activities on behalf of the City. The Tax Increment Reinvestment Zone (TIRZ #2) was created in 1998 for the purposes of development and redevelopment in the Zone Area, better known as Shadow Creek Ranch. The City participates in the Zone by contributing a portion of tax increments produced in the Zone to the Tax Increment Fund. The Development Authority of Pearland was created in 2004 to provide financing for the development of TIRZ #2. ECONOMIC CONDITIONS Local Economy Located minutes away from downtown Houston, Texas, the nation's second largest seaport, the world- renowned Texas Medical Center, and NASA-Johnson Space Center, Pearland is the premier location for residential and commercial growth. With abundant land, business facilities, a sound infrastructure, and a diverse workforce supported by educational programs, Pearland's growth has been consistent and will continue to be sustained over time with continued residential and commercial development. To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The total of all new construction permitted during calendar year 2012 totaled over $254.0 million, a 14.3% increase in value from 2011. New single-family housing permits totaled 951 with a construction value of $192 million. This is 260 permits and $58.0 million more than 2011; however Pearland's economy continues to grow at a respectable pace, faring better than the rest of the nation. Residential permitting activity is anticipated to increase for fiscal year 2013, budgeted at 1,142 permits. For calendar year 2012, the City had 77 commercial permits with a value of $62 million, compared to 42 permits with a value of $23 million in 2011. In addition, one multi-family development was permitted with a value of $19.6 million. The downward trend on the commercial real estate market has turned upward and strengthened. Sales of homes throughout the greater Houston area remained strong in 2012, driven by a combination of good local job numbers and historically low interest rates. The Houston Association of Realtors reported 62,229 single family home sales for 2012, up 16.1% from the 53,606 sales in 2011. Indications are that the Houston area will continue to have a healthy market with a balanced supply of housing inventory and strong pricing — conditions that put Houston in an enviable position compared to other markets around the Country. For fiscal year 2012, Pearland had 696 foreclosure filings, down from the 800 in fiscal year 2011, but still higher than the 588 we saw in fiscal year 2009. These filings also include areas in the ETJ with a Pearland address, but the number of filings only represents less than 3% of total households in Pearland. The decrease in foreclosures is another sign that the economy has turned around. Houston is the world's energy capital, and much of the recovery is from the oil and gas industry. During the recession the exploration sector lost 1,200 jobs, but added 8,100 in the recovery. Oil field services lost 9,700 jobs and have since recouped 9,500. Much of this growth is from hydraulic fracturing and much of it from the South Texas Eagle Ford Shale oil and gas reserves. The Eagle Ford produced 844 barrels of crude per day in 2009; in August of 2012 it produced 297,079 per day. With the high price of oil, and the South Texas Eagle Ford Shale oil and gas reserves, it is forecasted that this trend will continue keeping the Houston oil industry busy for the next 20 years. Pearland's unemployment rate was 5.2% in September 2012, down from 6.7% in September 2011. This is compared to the national unemployment rate of 8.0% and the State of Texas unemployment rate of 7.5% as of September 2012. Pearland's unemployment is less than the national and state rates with the economy turning around. Texas has been recognized by business publications as having the best business climate in the country. Houston's economy will continue to grow next year, adding more jobs in 2013 than in 2012. The Greater Houston Partnership forecasts the region to add 76,000 jobs in 2013. The Houston area is built on businesses, on jobs, and on economic opportunities. Pearland is poised to take advantage of those opportunities. Pearland has two prime areas for commercial, mixed use, livable developments along the Highway 288 corridor. A strategic and target market study completed in 2009 shows that life sciences, port-related activities, production/industrial, campus based back-office, and the education/public sectors are prime areas of interest for the Pearland area. Combined with a mix of reinforcing land uses, urban planning, key entertainment and cultural attractions, public spaces, and walkability and connectivity, all will provide for livable sustainable developments. iii To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas Kelsey-Seybold, a major healthcare organization of 370 physicians, is building a new 170,000 square foot, four story corporate headquarters on an 18 acre site in Shadow Creek Ranch, which will be home to approximately 750 employees. The facility will be next to the Shadow Creek Business Center, an 80,000 square foot office building built in 2009, and Hospital Corporation of America's (HCA) 78,000 square foot medical office building. Merit Medical Systems, a global medical device company, is building on a 12 acre site, a 120,000 square foot facility for research and development and manufacturing. Merit Medical is expected to employ 220 employees at the Pearland facility. Ref Chem, an oil and gas service company is constructing a 39,000 square foot regional headquarters on Beltway 8 that will employ 100 people. Sales tax for fiscal year 2012 totaled $22.0 million, an increase of $2.2 million or 11.3% over fiscal year 2011. Pearland is a regional shopping destination; however with lower consumer confidence, potential for job loss, debt, credit tightening, etc., homeowners tightened their budgets and spending in 2010 and 2011. The economy, however, has turned around, which should translate to higher consumer confidence. As such, the City projected a 5.4% growth in sales tax in the fiscal year 2013 operating budget. Long-Term Financial Planning The City adopts a one-year operating budget, including a five-year capital improvement program (CIP). Even though a one-year budget is adopted, the budget implements strategies, both financial and operational, to meet existing challenges and to plan for the future. The City's Five-Year CIP for fiscal year 2013 through fiscal year 2017 totals $346 million and continues to implement the $162 million bond program approved by the voters in May 2007, though at a slower pace, which is financially feasible given the slower economy in 2008-2011. Projects include Drainage ($24M), Streets ($149M), Facilities ($24M), Parks ($35M), Water and Wastewater ($114M). Projects in the CIP have identified funding sources or potential funding sources. Funding for these projects comes from the issuance of debt through Certificates of Obligation, General Obligation Bonds, and Revenue Bonds, as well as impact fees, cash, and contributions from the State, County, and other sources. Those projects that are unfunded will be identifying projects for a new bond referendum. The Debt Service Fund forecast projects a need to increase the Debt Service component of the tax rate to $0.5250 by fiscal year 2015 to implement the Five-Year CIP. The debt service component of the tax rate for FY 2013 increased $0.02 to $0.4900, which is consistent with the financial modeling that the City undertook when analyzing the Debt Service tax implications of implementing the $162 million bond referendum. The City completes a Water/Sewer Cost of Service Rate Study annually for the forecast. The study is built around the Five-Year CIP, operating budget, and future needs. Due to funds on hand for pay-as-you go capital improvements, no rate increase was necessary for fiscal year 2011 or 2012, however, the model anticipates rate increases for 2015 and 2016. The City's utility system continues to be self-supporting and financially sound. iv To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas Relevant Financial Policies/Guidelines Financial Policies guide the development and implementation of the budget and are a framework for fiscal decision making and that ensure financial resources are available to meet the current and future needs of the City. City Council adopted a set of Financial Management Policy Statements in August 2009, last amended in September 2011. The policy statements address areas of reporting and auditing, budgeting, revenues, capital improvements, debt, and grants to name a few. Some of the most relevant policies are: • Recurring revenues fund recurring expenditures/expenses. • Non-recurring funds fund non-recurring expenditures/expenses. • General Fund Operating Reserves should be a minimum of two months of operations. • Water and Wastewater Operating Reserves shall strive to be maintained at 25% of operations. • Budget revenues on a conservative basis. • Fund existing services at current service levels. • Enterprise Funds must be self-supporting. • Leverage City dollars by seeking outside funding sources. • Maintain stable property tax rates. Major Initiatives The City Council, staff, and community share a vision that combines progress and innovation with prudent controls to shape Pearland's future, even as it becomes one of the largest suburbs in the Houston area. Some of the major initiatives are as follows: Public Safety Among numerous other reasons, families move to Pearland for a high degree of personal safety and a low crime rate. Pearland was recently rated as one of the safest Cities in the United States ranking number 48 in the nation. Pearland was one of two Cities in the Houston area in the top 50. The City Council continues to emphasize public safety and the City delivers programs in the areas of law enforcement, emergency management, emergency medical services, and fire protection. For more than a decade, the City of Pearland public safety departments have been subscribers to an 800 MHZ trunked radio system provided by Harris County. This system was originally designed for mobile radios in vehicles and at a time when the western half of Pearland was sparsely populated. COP public safety departments have experienced significant radio reception difficulties creating safety issues for the City. Harris County is not able to improve radio coverage in west Pearland, and to switch to the digital version of the Harris County system is costly and would not guarantee improved radio coverage. The City of Houston has recently established a $130 million dollar 700 MHz trunked radio system designed for in-building coverage using portable radios. After radio testing and research, the City of Pearland would be switching to the City of Houston's radio system with tremendous improvements in coverage improving public safety for employees and citizens of Pearland, and at a lesser cost than creating a new radio system or staying as a subscriber to the current radio system. v To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The City of Pearland Police Department communications division currently provides dispatch services for the city's Police, Fire, and EMS departments. Due to the rapid population growth and increased demands for service in the City, it has become apparent that the Police communications division workload is unsustainable. As an alternative to hiring more dispatchers, the City has contracted with Harris County Emergency Corps for the provision of Fire Department and EMS dispatch services. In addition to the cost savings of not having to hire additional employees, the contracted dispatch center brings added capabilities to the Fire and EMS departments. By utilizing personnel specifically trained and certified for the Fire and EMS dispatch role, as well as employing a Computer Aided Dispatch system specifically configured for Fire and EMS dispatching, this arrangement will contribute to better deployment and utilization of resources. Brazoria County MUD's 21 and 22 in cooperation with Friendswood Development have constructed Fire Station 6 in the City's ETJ, which opened in 2012. This station is staffed and operated by Pearland Volunteer Firefighters with the MUD's bearing the cost of operations, pursuant to a Strategic Partnership Agreement. This will greatly enhance response times in the City's southwestern ETJ, where development continues. The City is also currently designing the reconstruction of Fire Station #3 on the eastern edge of the City to accommodate 24/7 fire and EMS crews, improving response times to that area of the City. Economic Development The Pearland Economic Development Corporation (PEDC) is a Type B non-profit corporation under the Texas Development Corporation Act that utilizes a half cent sales tax collected in the City to carry out economic development activities. The Corporation assists new and existing businesses that create new jobs and capital investment. The Corporation works with the City to utilize various tools such as tax abatement and the authority granted the City under Chapter 380 of the Local Government Code to encourage new jobs and investment in the community. PEDC celebrated the successful recruitment of Ref-Chem, L.P. to our community and kicked off their construction with a groundbreaking ceremony in June for the engineering, construction and maintenance firm's new office building. Ref-Chem L.P. is an Odessa, Texas based heavy industrial construction, engineering, EPC and maintenance organization with an annual sales volume of over $100 million. Ref- Chem's new office building will be located on an 11-acre site at Beltway 8 and Tom Bass Parkway. The three-story facility will be 39,000 square feet with space for a staff of approximately 100 employees, including management personnel, engineers, designers and administrative staff. PEDC assisted Hatch Mott MacDonald, a leading North American engineering and environmental consulting firm, in expanding and relocating its Pearland office to a new location in late 2012. HMM was previously located at 2950 Cullen Parkway and moved to its new location on the fourth floor of the Shadow Creek Business Center at 11233 Shadow Creek Parkway in mid-November. The new 20,000 square-foot Pearland office, which serves as headquarters to HMM's Pipeline Division and Houston Subdivision, houses HMM's current 70 local employees, with room for up to 30 additional employees. These two projects are in addition to KS Management Services and Merit Medical previously mentioned. vi To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas In 2012, the PEDC, along with local partners in government, education, healthcare and business, embarked upon a long-term strategic community and economic development planning process in order to create a shared vision for the community's future growth and an action plan to achieve it. The strategic plan process is being headed by a steering committee comprised of 23 community leaders in government, education, healthcare and local business. At the end of the process, Pearland will have a consensus-based, achievable roadmap to guide the community's path to short and long-term economic growth. The final plan will be released in April of 2013. The Pearland Economic Development Corporation continues to promote Pearland and is working with a myriad of companies on future relocations and site visits as well as working with existing businesses on future expansions. Land Use Plan/Annexation Land use planning seeks to order and regulate the use of land in an efficient way, thus preventing land use conflicts. Land use planning is the systematic assessment of land, alternatives for land use, and social and economic conditions in order to select and adopt the best land use options. Its purpose is to select and put into practice those land uses that will best meet the needs of the people while safeguarding resources and ensuring sustainability. PEDC and the City of Pearland, in partnership with Gateway Planning, finalized a market-based master plan and implementation strategy for the area formerly known as the Spectrum District that leverages the area's unique location (the southwest corner of Beltway 8 and SH 288) and creates a de facto "master development" context. The area is planned to be a regional employment center with destination mixed use urban living, and concentrated retail/entertainment areas. The key issues addressed by the plan include drainage, transportation access, linkages, and transit; revision of the existing zoning and development standards; incorporating new development with existing uses; involving the existing municipal management districts; and incorporating public parks and open spaces. The master plan and associated regulatory recommendation of a form-based code envisions a market- based approach and identifies different "character zones" of development, each implementing a unique neighborhood within the Lower Kirby Urban Center. This form-based code is combined with the overall infrastructure strategy that identifies the major regional drainage and roadway improvements needed to bring the plan together. This master plan and implementation strategy for Lower Kirby ensure that the vision for the mixed use regional destination is feasible, but flexible to address changing market conditions. In order to implement this vibrant vision for the Lower Kirby Urban Center, PEDC is working with the City of Pearland and the two area Municipal Management District Boards to create a coordinated action plan that identifies the responsibilities and roles of each of the entities. The City's annexation of Brazoria County MUD #4 occurred December 31, 2012, pursuant to a Strategic Partnership Agreement between the City and MUD. Brazoria County MUD #4 encompasses approximately 600 acres and has an estimated population of 3,100. Upon annexation all assets and obligations of the MUD transferred to the City. To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas In January 2013, City Council voted to incorporate the Grand Avenue Master Plan into the City's Comprehensive Plan. The plan is designed to facilitate future development of Grand Avenue as a focal point for the Oldtown Site while also responding to existing growth patterns in the city. A primary initiative for this plan is to reinvent the Oldtown Site as a modern village with a compatible mix of residential and non-residential uses. The Plan recommends adopting form based codes that would be used to ensure buildings and streets are coordinated in a manner that is attractive to pedestrians and encourages outdoor activities. Using form based codes allows for more flexibility and a mix of uses as compared to traditional zoning used throughout the city. Capital Improvement Projects and Planning With continued residential and commercial growth, and to plan for the future, the need to build new infrastructure and maintain existing infrastructure is a priority and will be implemented through an aggressive capital improvement program. The City's Five-Year CIP 2013 — 2017 totals $346 million. Projects include Drainage ($24M), Streets ($151M), Facilities ($23M), Parks ($36M), Water and Wastewater ($112M). Major thoroughfare projects include the widening of Bailey Road between FM1 128 and Veterans, widening three miles of Mykawa Road to a four lane facility, reconstruction of one mile of Old Alvin Road from Plum Street to McHard Road, the extension of Pearland Parkway to Dixie Farm Road, McHard Road extension from Mykawa to Cullen, Longwood Street Reconstruction, extension of Business Center Drive between Broadway and CR59, the widening of Max Road between Broadway and Hughes Ranch Road, and the extension of Fite between McLean and Veterans. Major drainage projects include expansion of the D.L. Smith detention pond by approximately 150 acre-feet, an additional 200 acre-feet of storm water storage in the Hickory Slough watershed, and future storm water regional detention. Major park projects include a soccer complex, improvements to Independence and Centennial Parks, Phase I development of the Shadow Creek Ranch Park, and a 7,000 square foot Nature Center. Facility projects include an 11,500 square feet expansion and renovation to the Tom Reid Library, reconstruction of Fire Station #3 to accommodate a 24/7 manned station, Fire/EMS administrative building, traffic signal operational improvements with the takeover of TXDOT signals in 2011, Westside Library, and renovation of Old Police Department building. Water projects include the preliminary design of a 20 million gallon per day surface water plant along with various waterline extensions. Wastewater projects include the replacement of Southdown wastewater treatment plant, extension of trunk sewer on McHard, and various lift station projects. Transportation Improvements and Strategic Planning Charged with planning, establishing, and maintaining an effective transportation system, the City of Pearland is involved in numerous activities to face this challenge. The $84 million transportation bond program (passed in 2007) will construct major projects mentioned previously. The City is also involved in regional efforts for long-range transportation planning. The Mayor is a member of H-GAC's Transportation Policy Council (TPC), and an Assistant City Manager is a member of the Technical Advisory Committee (TAC), a sub-committee of the TPC and the Transportation Improvement Program (TIP) Subcommittee. The City submitted several proposed roadway projects from its Capital Improvement Program for possible funding in the region's Transportation Improvement Program for 2011-2014. In 2011, The TPC and TAC selected four City of Pearland projects for funding. viii To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The projects are the Traffic Signal System Improvements (2012), Pearland Parkway Extension (2013), Max Road (2014), and Fite Road (2014). These projects will receive 80% funding from state or federal sources totaling $20,180,901 with the city providing 20% matching funds. The City continues to work with the Brazoria County Toll Road Authority (BCTRA) to develop viable low cost alternatives for the Hwy 288 toll facility that can be constructed on a near-term schedule (3-5 years) to provide immediate relief to congestion along the corridor. H-GAC has planned a "Call for Projects" in 2012 for the 2013- 2016 TIP. The City will submit several proposed roadway projects from its Capital Improvement Program in this new "Call for Projects" in an effort to continue to secure state and federal funding for projects in order to reduce the funding burden on the city taxpayers. The City of Pearland, METRO, TxDOT, Brazoria County and Connect Transit have been working together since 2009 to establish a Park & Ride in the Pearland Area. On November 30, 2011, METRO closed on a 15.1 acre parcel of property along Smith Ranch Road and Country Road 403. METRO solicited proposals for Engineering services to do the design and the plans and specifications for the project in November of 2012. It is anticipated that the METRO Board will authorize a contract for Engineering services in early spring of 2013. Once the design contract is let it is anticipated it will take six (6) to eight (8) months to design the project and another twelve to fifteen months to construct the project. The initial phase of the project will include approximately 1,000 parking spaces. The anticipated service area for the Pearland area Park & Ride includes Northern Brazoria County and Southern Harris County. The service will run between the Pearland area and the Texas Medical Center/Transit Center located at Fannin and Galen. The Texas Medical Center, the largest medical center in the world, houses 13 hospitals, 46 institutions (colleges, universities, research facilities, etc.), employs approximately 90,000 people, and services approximately 5.1 million patients annually. The fare for service each way is estimated to be $3.25. The Park & Ride will operate Monday through Friday (weekday service only). The service will be offered weekday mornings from 5:15 AM to 8:15 AM and 3:15 PM to 7:00 PM weekday evenings. It is anticipated that headway times for the busses will be twelve to fifteen minutes. METRO will provide a guaranteed ride home program during the day for those individuals that require a ride home during the times the regular bus service is not in operation. Fiscal Responsibility and Sustainability Fiscal sustainability can be defined as "the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes." City Council takes a pro-active stance in ensuring the fiscal health and sustainability of the City. Council adopted a set of Financial Management Policy Statements and receives quarterly Finance "Snapshot" presentations, which includes economic indicators. The City also prepares a Five-Year Forecast for the City's major funds to see how the spending decisions made today affect the future as well as to identify any issues/concerns that are forthcoming and to put strategies in place today to address those issues/concerns for the future. Fiscal Sustainability is more important given the most recent state of the economy and steady yet slow development. Based on the long-range forecast and impacts to the debt service and operating funds, the City delayed several major capital improvement projects and slotted them in the capital improvement plan, when the City could more afford to do them. In order to minimize the increase to the FY 2013 tax ix To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas rate and fund City infrastructure, the City continues to identify programs and line-items that could be reduced with little or no impact to the citizens and has looked at fees to ensure recoupment of costs resulting in budget reductions totaling $330,227 and revenue enhancements of $522,087, in the City's General Fund budget, for the 2013 fiscal year. Over the past three years base budget reductions to the General Fund totaled $4.9 million. While only a few months into the 2013 fiscal year, the City is already beginning to prepare for the 2014 budget process and up-coming forecast with the same goal of being fiscally responsible to our citizens. AWARDS AND ACKNOWLEDGEMENTS The City of Pearland was awarded a Gold rating from the Scenic City Texas Organization. The rating is based on the quality of our development codes, and the implementation and enforcement of these codes. The result of such work leads to a city full of both scenic roadways and scenic public and private developments. The Scenic City Certification Program is a project of Scenic Texas. Scenic Texas has identified a direct correlation between the success of a city's economic development efforts and the visual appearance of its public spaces. In recognition of this link, Scenic Texas has developed the Scenic City Certification Program to support and recognize municipalities that implement high-quality scenic standards for public roadways and public spaces. The program recognizes Texas cities which already have strong scenic standards and provides an incentive to others to adopt and implement the kind of stringent criteria that has been proven to enhance economic development, improve quality of life and foster a sense of place. The Scenic City application contained 270 possible criteria that earn points, including a high percentage of park and open space, implementation of multi-use trails and recreation areas, strong litter enforcement laws, street lighting standards, parking lot landscaping, utility line management, a budget that supports these programs and their ongoing maintenance, and more. The City of Pearland Planning Department was recently awarded the 2012 Certificate of Achievement for Planning Excellence by the Texas Chapter of the American Planning Association. This award recognizes the professional planning standards demonstrated by the Planning staff and the support exhibited by the City Council and the Planning and Zoning Commission. Pearland received this award for increasing the awareness of professional planning, enhancing neighborhood and citizen recognition of planning efforts, encouraging the funding of professional training for Commissioners and Staff and aiding in economic development and community image. This marks the sixth time the Planning Department has won this award. The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for the Excellence in Financial Reporting to the City of Pearland, Texas, for its Comprehensive Annual Financial Report for the year ended September 30, 2011. This was the 35th consecutive year that the City has received this prestigious award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted principles and applicable legal requirements. x To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements, and we are submitting it to GFOA to determine its eligibility for another certificate. The City has also received the GFOA's Distinguished Budget Presentation Award for its annual budget document. In order to qualify for the Distinguished Budget Presentation Award, the government's budget document had to be judged proficient as a policy document, a financial plan, an operations guide, and a communications device. The preparation of this report was accomplished with the dedicated service of the Accounting staff of the Finance Department. We express our sincere appreciation to these individuals who have continually demonstrated the core beliefs of the City and who assisted and contributed to the preparation of this report. We also thank the Mayor and members of the City Council for their support in planning and conducting the financial operations of the City in a responsible manner. Respectfully su muted t Bill Eisen, City Manager Claire Bogard, Director of Finance Rick ver ard, Assistant Director of Finance M CITY OF PEARLAND, TEXAS PRINCIPAL OFFICIALS Elected Officials Tom Reid Woody Owens Scott Sherman Susan Sherrouse Keith Ordeneaux Greg Hill Appointed Officials Bill Eisen Darrin Coker Letitia Farnie City Management Mickiel Hodge Jon Branson Claire Bogard Matt Buchanan Daniel Baum Young Lorfing Danny Cameron Bonita Hall Chris Doyle Michelle Smith Vance Riley Andrew Fearn Lata Krishnarao Trent Epperson Position Mayor Council Member at Large - Position One Council Member at Large - Position Two Council Member at Large - Position Three, Mayor Pro Tern Council Member at Large - Position Four Council Member at Large - Position Five Position City Manager City Attorney Municipal Court Judge Position Assistant City Manager Assistant City Manager Director of Finance President, PEDC Emergency Medical Services Chief City Secretary Director of Public Works Director of Human Resources Police Chief Director of Parks and Recreation Fire Chief Head Librarian Director of Community Development Director of Engineering and Capital Projects Term Expires May 2014 2013 2014 2014 2014 2013 '►.mil CITY OF PEARLAND I TX ORGANIZATIONAL CHART C TIZE CF MAYCR AND CITY CCUNCIL CC1i3 I; CTY MANAGEP. I ECCNOMC DEVELOFMEM I AiSITANT j TAT CITY IWJiER. '.EF EJG EE \3 S, 0'C4L1.I HUMAN CAITA. CELC: ME1T PLANNING . ENG EEG & -1 EC91EAT3N PE-1IT. ___________________ INEPECIC H__ANMAL CCNTFOL F dE T PtNAGEMEPT PUBI I & HEALTh _ _________ -I________________ FOUCE EMER,GENCY -PJ CITYSECRaT.ARY I. -J ACCOUNTING FIFE PUCHAING I- -1 E VAR0-AL I EMEENCY SILL & I I -'- PAL WAN&SEMENT CLECThC lil D CCLR.T xlii Certificate of Achievement for Excellence in Financial Reporting Presented to City of Pearland Texas For its Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2011 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. itL Executive Director XlV Financial Section (This page intentionally left blank.) Houston Office 3411 Richmond Avenue Suite 500 Houston, Texas 77046 71362 1.1515 Main Ywhh €tleypenn.com Independent Auditors' Report 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, 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, 2012, 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 the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of September 30, 2012, 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 March 11, 2013, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 5 through 15, and budgetary comparison, required pension system, and other post-employment benefits on pages 68 through 70 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Dates Fort Worth Houston INTERNATIONAL To the Honorable Mayor and Members of the City Council We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's financial statements as a whole. The introductory section, combining and individual non-major fund financial statements and schedules, and statistical section, are presented for purposes of additional analysis and are not a required part of the financial statements. The combining and individual non-major fund financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. wk-h- 457 March 11, 2013 ALP Management's Discussion and Analysis (This page intentionally left blank.) CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSIONAND 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, 2012. FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2012, by $629.2 million (net assets). Of this amount, $34.2 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 remaining amount is for investments in capital assets, net of related debt and amounts restricted for capital projects, debt service, and community development projects. • The City's total primary government net assets increased by $8.6 million due to lower accounts payable and long-term debt. • At the close of the current fiscal year, the City of Pearland's governmental funds reported combined ending fund balances of $40.8 million, a decrease of $6.3 million in comparison with the prior year, approximately all of which is related to capital projects. Approximately $13.8 million of the September 30, 2012, fund balance can be attributed to unspent bond proceeds for capital projects. • As of September 30, 2012, the unassigned fund balance for the General Fund was $17.2 million or 35% of total General Fund expenditures. The total fund balance for the General Fund is $17.6 million or 35% of General Fund expenditures. • The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities totaled $289.6 million, a net decrease of $8.7 million over the previous year. The decrease is attributable to principal payments for 2012 with no new money being issued. The City's debt for business activities totaled $124.4 million, a net decrease of approximately $1.4 million from the previous year principal outstanding. 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 or 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 (continued) 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, sewer, and solid waste. The government-wide financial statements can be found on pages 19 through 21 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 22 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. CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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 and Solid Waste 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 26 of this report, provide separate information for the Water and Sewer and Solid Waste Enterprise Funds since it is considered to be a major fund of the City. The basic proprietary fund financial statements can be found on pages 26 through 29 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 32 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 68 of this report. CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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 $629.2 million at the close of the most recent fiscal year. By far the largest portion of the City's net assets (90% ) 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. COMPARATIVE SCHEDULE OF NET ASSETS September 30, 2012 and 2011 Amounts in (000's) Governmental Activities Business-type Activities Totals 2012 2011 2012 2011 2012 2011 $ 67,257 $ 72,544 $ 48,163 $ 41,119 $ 115,420 $ 113,663 695,702 695,754 266,288 268,051 961,990 963,805 762,959 768,298 314,451 309,170 1,077,410 1,077,468 9,078 12,205 6,996 8,169 16,074 20,374 305,621 311,649 126,479 124,859 432,100 436,508 314,699 323,854 133,475 133,028 448,174 456,882 410,078 413,439 158,716 156,629 568,794 570,068 16,430 16,462 9,821 5,603 26,251 22,065 21,752 14,543 12,439 13,910 34,191 28,453 $ 448,260 $ 444,444 $ 180,976 $ 176,142 $ 629,236 $ 620,586 Assets Current and other assets Capital assets Total Assets Liabilities Other liabilities Long-term liabilities outstanding Total Liabilities Net assets Invested in capital assets, net of related debt Restricted Unrestricted Total Net Assets An additional portion of the City's net assets (4%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets (5%) may be used to meet the government's ongoing obligations to citizens and creditors. The increase in Total Net Assets from the prior year is $8.7 million, which is attributed to a decrease in liabilities. 8 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) COMPARATIVE SCHEDULE OF CHANGES IN NET ASSETS For the Years Ended September 30, 2012 and 2011 Amounts in (000's) Governmental Activities Business-type Activities Totals 2012 2011 2012 2011 2012 2011 Revenues Program revenues: Charges for services $ 12,183 $ 10,356 $ 35,189 $ 35,923 $ 47,372 $ 46,279 Operating grants and contributions 7,662 7,399 205 61 7,867 7,460 Capital grants and contributions 18,843 10,330 8,118 4,215 26,961 14,545 Property taxes 34,305 33,451 34,305 33,451 Sales and use taxes 15,632 13,983 15,632 13,983 Franchise taxes 5,670 5,605 5,670 5,605 Investment earnings 92 157 68 116 160 273 Other 1,510 1,909 443 9 1,953 1,918 Total Revenues 95,897 83,190 44,023 40,324 139,920 123,514 Expenses General Government 13,334 15,637 13,334 15,637 Public Safety 27,403 23,057 27,403 23,057 Public Works 28,510 31,348 28,510 31,348 Community Services 4,267 3,350 4,267 3,350 Parks and Recreation 9,264 8,043 9,264 8,043 Interest on long-term debt 11,572 13,087 11,572 13,087 Water and Sewer 29,392 29,194 29,392 29,194 Solid Waste 7,528 7,285 7,528 7,285 Total Expenses 94,350 94,522 36,920 36,479 131,270 131,001 Increase (decrease) in net assets before transfers 1,547 (11,332) 7,103 3,845 8,650 (7,487) Transfers 2,269 1,475 (2,269) (1,475) Increase in net assets 3,816 (9,857) 4,834 2,370 8,650 (7,487) Net assets - beginning 444,444 454,301 176,142 173,772 620,586 628,073 Net assets - ending $ 448,260 $ 444,444 $ 180,976 $ 176,142 $ 629,236 $ 620,586 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. Net assets increased by $8.7 million with the most significant change occurring in contributions for infrastructure by developers. 0 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Governmental activities - Governmental activities increased the City's net assets by $3.8 million, thereby accounting for 44% percent of the total increase in the net assets of the City. Key elements of this increase are as follows: • Property taxes, sales and use taxes, and franchise taxes totaled $34.3 million, $15.6 million, and $5.7 million respectively. These revenues increased by $2.6 million from prior year primarily as a result of an increase in the debt service tax rate and increased consumer spending. • Capital Contributions totaled $18.8 million as a result of infrastructure contributed by developers. • The revenues were offset by expenses for general government, public safety, and public works of $13.3 million, $27.4 million, and $28.5 million respectively. In total, these expenses were relatively consistent with the prior year. • The increase in net assets was also offset by interest expense on long-term debt of $11.6 million, an increase of $1.5 million from the prior year due to new issuances. Expenses and Program Revenues - Governmental Activities $30,000 $25,000 $20,000 $15,000 •° $10,000 $5,000 °~ do ~ mot ~~ b~ •ti~c1 ~ o-9 osyCs qa 40 44 5~4a 0 cP mot Revenues by Source - Governmental Activities Chargesfor services 13% Grants and Other contributions 2% 27% L....__ Property taxes Sales and use taxes 36% 16% Franchise taxes 6% 10 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Business-type activities - Business-type activities increased the City's net assets by $4.8 million. Key elements of this increase are as follows: • Charges for services of $35.2 million decreased approximately $0.7 million over the prior year primarily due to an decrease in water and sewer consumption due to rainfall. • Capital grants and contributions of $8.1 million increased $3.9 million from the prior year due to increased contributions from developers for impact fees. • The revenues listed above were offset by expenses of $29.4 million and $7.5 million respectively for Water and Sewer and Solid Waste. Expenses for Water and Sewer increased from prior year by $0.2 million mainly due to Kirby water well being down for repairs and the completion of Alice water plant. Expenses and Program Revenues - Business-type Activities $35,000 $30,000 $25,000 $20,000 ° $15,000 $10,000 $5,000 Water and Sewer Solid Waste Revenues by Source - Business-type Activities Other 1% Grants and contributions 19% rr Charges for /J . services 80% 11 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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, unassigned 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 $40.8 million. A portion of the combined fund balance, or $17.2 million, is unassigned and available for day-to-day operations of the City; $13.8 million is restricted for capital projects; and the remaining balance is restricted for debt service and other programs. There was a decrease in the combined fund balance of $6.3 million from the prior year. The decrease in fund balance includes a decrease in the capital projects fund balance of approximately $9.7 million due to draw down of bond proceed $9.2 million, a decrease of $0.2 million in the debt service fund balance, offset by a combined increase of approximately $468,000 in the special revenue funds. $3.0 million increase in the General Fund is seen mainly in Charges for Services for TIRZ Administration fees and Recreation Center/Natatorium fees, the General Fund's fund balance totaled $17.6 million at year end. In the Capital Projects Fund, the City spent $9.2 million on various improvement projects, leaving an ending fund balance of $13.8 million. Proprietary Funds - The City's business-type activities contain two activities (water and sewer, and solid waste). The City's proprietary funds provide the same type of information found in the government-wide financial statements. 12 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) GENERAL FUND BUDGETARY HIGHLIGHTS During the year, there was a $1.0 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 and to reflect projections during the 2011-2012 budget process. Budget estimates for revenues and other sources combined increased by approximately $1.9 million for the year; also to reflect carryovers and revised projections. Actual revenues of $49.4 million were $1.2 million over the final budget mainly in sales and use tax and charges for services. Actual expenditures of $48.5 million were under budget by $3.0 million, resulting in the year-end fund balance of $17.6 million over budget by $3.1 million. At year-end, equipment purchases and several projects were still in progress and part of the $3.1 million will be carried over and reappropriated in the 2012-2013 budget year. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of fiscal year 2012, the City's governmental activities and business-type activities had invested $695.7 million and $266.3 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net decrease of ($1.8)million, or -0.7 percent over the end of last fiscal year for the business-type activities capital assets and governmental activities capital assets stayed relatively flat. Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 Land $ 28,409 $ 28,409 $ 3,610 $ 3,610 $ 32,018 $ 32,018 Construction in progress 23,120 32,868 5,419 24,891 28,539 57,759 hifrastructure 573,752 564,903 199,511 179,648 773,263 744,551 Buildings and improvements 64,378 63,351 27,898 28,615 92,277 91,966 Machinery and equipment 6,043 6,224 1,243 1,299 7,286 7,523 Contractual water rights 28,607 29,988 28,607 29,988 Total Capital Assets $ 695,702 $ 695,754 $ 266,288 $ 268,051 $ 961,990 $ 963,805 Construction in progress at year-end represents numerous ongoing projects, the largest of which relate to street, drainage and water/sewer projects. Additional information on the City's capital assets can be found in Note 4 to the financial statements. 13 7,280 109,305 65,425 3,749 5,225 1,817 $ 432,102 4,145 113,270 91,150 4,453 5,227 1,428 $ 436,508 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Long-Term Debt - At the end of the current fiscal year, the City had total bonds, certificates of obligation, notes, capital leases, and post employment liabilities outstanding of $432.1 million. Of this amount, $239.3 million is composed of general obligation bonds, $65.4 million is composed of certificates of obligation and $109.3 million represents revenue bonds secured solely by specified revenue sources. General obligation bonds Deferred amount for issuance premium/(discount) Revenue bonds Certificates of obligation Capital leases payable Compensated absences Post employment benefit liability Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 $ 224,170 $ 207,105 $ 15,130 $ 9,730 $ 239,300 $ 216,835 6,398 3,489 882 656 109,305 113,270 65,425 91,150 3,407 4,032 342 421 4,686 4,669 539 558 1,535 1,204 282 224 $ 305,621 $ 311,649 $ 126,480 $ 124,859 The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities decreased to $289.6 million. The decrease is due to principal payments with no new monies issued. The City also refunded bonds of $43.6 million, of which $21.0 million was General Obligation bonds refunded, and $22.4 million in Certificates of Obligation. The City's debt for business activities increased to $126.5 million, a net increase of $1.6 million from the previous year, which was a result of the addition of $5.8 million in new Revenue Bonds offset by principal payments. Current ratings on debt issues are as follows: General obligation bonds Revenue bonds Standard and Poors Fitch AA- AA AA- AA- 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 Al from Moody's. The DAP bonds are rated A- by Standard and Poors. Additional information on the City's long- term debt can be found in Note 5 to the financial statements. 14 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES Two primary factors in the 2013 budget are the improving Houston area economy and the continued growth in population served by the City, which will include the annexation of Brazoria MUD No. 4 on December 31, 2012. The improving regional economy will result in substantially improved revenues in the coming fiscal year. Improved economic conditions will be most noticeable in two major revenue sources — sales tax and building permits. Sales tax revenue for FY 2012 was up 11% over FY 2011. The adopted budget for FY 2013 includes a total increase in sales tax of 5.4% over FY 2012 revenues. This increase assumes an overall increase in the dollar value of sales and also incorporates additional revenue from two major new sales tax producers, Sam's Club and Kelsey-Seybold. Building Permit revenue is also projected to maintain the strong levels that have developed during FY 2012. The FY 2012 Adopted Budget was based on an estimated 744 single-family permits. Due to the strengthening regional economy during the FY 2012, housing starts were 931. The FY 2013 Adopted Budget anticipates 1,142 single- family permits. Another economic factor that will impact revenues is an increase in property values of'$129 million or 2.6%, due to new construction. Values of existing residential properties have declined slightly over the past few years and indications are that residential property values will stay flat. The impact of new residential and commercial construction will more than offset home values for existing properties for 2013. The budget incorporates an increase of 2 cents in the property tax rate. The entire increase is related to debt service. Of the total adopted tax rate of 70.51 cents per hundred dollars valuation, the operating tax rate remains at 21.51 cents per hundred dollars and the debt service tax rate is 49 cents. With this increase, the overall tax rate will have increased by 5.25 cents since the 2007 bond election. Prior to the election, voters were informed that approval of the bond propositions could result in a tax increase of 13 cents per hundred dollars of value. Another significant factor that impacts the adopted budget is a 7.1% increase in population. This increase in population results in increased services to meet the needs of the new residents. This projected increase in population is a combination of two factors — newly constructed homes and multifamily dwellings and the annexation of Brazoria MUD No. 4 on December 31, 2012. Charges for various services and permits were also reviewed as part of the budget process to determine their recovery for cost of service. As a result, increases in several charges and fees are included in the General Fund FY 2013 budget as well as $330,227 in reductions. Over the past 3 years, a total of $4.4 million in General Fund budget reductions have been taken. The Pearland City Council approved a $58.6 million General Fund budget for FY 2013. This is a 13.7% increase from the FY 2012 adopted budget. The increase is mainly due to new positions added in FY 2013 and an average 3% pay increase for employees. The Water and Sewer fund is able to fund operations, debt service, and bond coverage requirements with no increase in rates. This is mainly attributable to efficient operations and transfers in from water and sewer impact fee funds used towards annual debt service payments. 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 Bogard, 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 . 15 (This page intentionally left blank.) 11 Basic Financial Statements 17 (This page intentionally left blank.) 18 CITY OF PEARLAND, TEXAS STATEMENT OF NET ASSETS September 30, 2012 Primary Government Discretely Presented Governmental Business-type Component Activities Activities Total Units $ 27,003,079 $ 4,422,922 $ 31,426,001 $ 15,705,835 14,024,006 6,051,442 20,075,448 2,002,459 16,600,651 3,492,378 20,093,029 1,674,864 768,652 768,652 134,720 134,720 218,438 63,121 281,559 28,435 32,305,395 32,305,395 665,254 8,507,030 1,827,653 10,334,683 607,575 51,528,815 9,028,352 60,557,167 3,220,907 644,173,218 257,260,089 901,433,307 6,413,293 695,702,033 266,288,441 961,990,474 9,634,200 762,958,609 314,451,352 1,077,409,961 30,318,622 5,261,144 3,676,575 8,937,719 434,463 91,350 91,350 1,004,536 435,835 1,440,371 227,370 2,616,994 2,616,994 195,698 2,791,112 2,986,810 38,333 10,705,778 4,895,325 15,601,103 3,600,000 294,915,760 121,584,984 416,500,744 69,250,043 314,699,910 133,475,181 448,175,091 73,550,209 410,077,968 158,715,983 568,793,951 (63,215,843) 8,689,520 8,689,520 11,223,863 1,131,525 12,355,388 437,884 4,502,287 4,502,287 19,546,372 702,955 702,955 21,751,626 12,439,143 34,190,769 $ 448,258,699 $ 180,976,171 $ 629,234,870 $ (43,231,587) Assets Cash and equivalents Investments Receivables, net of allowance for uncollectibles Due from other governmental agencies Inventories Prepaid items Restricted cash and investments Deferred charges Capital assets: Capital assets not subject to depreciation Capital assets, net of accumulated depreciation Total Capital Assets Total Assets Liabilities Accounts payable and accrued liabilities Due to other governmental agencies Accrued interest Unearned revenues Customer deposits Long-term liabilities Due within one year Due in more than one year Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted for: Capital improvements Debt service Community development programs Public safety Unrestricted Total Net Assets See Notes to Financial Statements. ITS' CITY OF PEARLAND, TEXAS STATEMENT OFACTIVITIES For the Year Ended September 30, 2012 Program Revenue Charges for Operating Grants Capital Grants and Functions/Programs Expenses Services and Contributions Contributions Primary Government Governmental Activities: General Government $ 13,333,899 $ $ 6,045,268 $ Public Safety 27,402,713 4,205,641 711,306 Public Works 28,509,730 42,991 52,538 18,742,786 Community Services 4,267,485 5,854,715 310,919 Parks and Recreation 9,265,497 2,079,614 541,896 100,000 Interest on long-term debt 11,571,519 Total Governmental Activities 94,350,843 12,182,961 7,661,927 18,842,786 Business-type activities: Water and Sewer 29,392,086 27,535,464 204,866 8,117,782 Solid Waste 7,527,713 7,653,933 Total Business-Type Activities 36,919,799 35,189,397 204,866 8,117,782 Total Primary Government $ 131,270,642 $ 47,372,358 $ 7,866,793 $ 26,960,568 Component Units: Pearland Economic Development Corporation $ 3,042,464 $ 414,000 $ $ Tax Increment Reinvestment Zone #2 5,894,105 Development Authority of Pearland 17,373,755 Total Component Units $ 26,310,324 $ 414,000 $ $ 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. ►717 Net (Expense) Revenue and Changes in Net Assets Primary Government Governmental Business-type Activities Activities Total Component Units $ (7,288,631) $ $ (7,288,631) (22,485,766) (22,485,766) (9,671,415) (9,671,415) 1,898,149 1,898,149 (6,543,987) (6,543,987) (11,571,519) (11,571,519) (55,663,169) (55,663,169) 6,466,026 6,466,026 126,220 126,220 6,592,246 6,592,246 (55,663,169) 6,592,246 (49,070,923) $ (2,628,464) (5,894,105) (17,373,755) (25,896,324) 34,304,615 34,304,615 17,924,775 15,631,576 15,631,576 7,337,389 5,669,958 5,669,958 92,365 68,427 160,792 41,644 1,510,310 442,794 1,953,104 44,353 2,268,910 (2,268,910) 59,477,734 (1,757,689) 57,720,045 25,348,161 3,814,565 4,834,557 8,649,122 (548,163) 444,444,134 176,141,614 620,585,748 (42,683,424) $ 448,258,699 $ 180,976,171 $ 629,234,870 $ (43,231,587) 21 CITY OF PEARLAND, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30, 2012 General Fund Debt Service Capital Projects Fund Other Total Governmental Governmental Funds Funds Assets Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Due from other governments Due from other funds Inventories Prepaid items Total Assets $ 6,617,774 $ 2,882,399 $ 13,282,463 $ 4,429,607 $ 27,212,243 9,031,025 2,000,595 2,000,386 13,032,006 5,725,094 10,377,470 4,642 482,213 16,589,419 608,705 159,947 768,652 168,548 168,548 134,720 134,720 48,222 166,894 3,322 218,438 $ 22,334,088 $ 15,427,358 $ 15,447,438 $ 4,915,142 $ 58,124,026 Liabilities and Fund Balances Liabilities Accounts payable $ 1,446,733 $ 166,894 $ 1,671,475 $ 237,844 $ 3,522,946 Accrued expenditures 1,433,509 1,433,509 Deposits 195,698 195,698 Due to other funds 168,548 168,548 Deferred revenue 1,686,187 10,267,985 6,463 11,960,635 Total Liabilities 4,762,127 10,434,879 1,671,475 412,855 17,281,336 Fund balances: Non -spendable: Inventories 134,720 134,720 Prepaid items 48,222 166,894 3,322 218,438 Restricted for: Debt service 4,825,585 4,825,585 Capital improvements 13,775,963 13,775,963 Community development programs 3,796,010 3,796,010 Public safety 702,955 702,955 Assigned for: Encumbrances 167,016 167,016 Unassigned General fund 17,222,003 17,222,003 Total fund balances 17,571,961 4,992,479 13,775,963 4,502,287 40,842,690 Total Liabilities and Fund Balances $ 22,334,088 $ 15,427,358 $ 15,447,438 $ 4,915,142 $ 58,124,026 See Notes to Financial Statements. 22 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STA TEMENT OF NET ASSETS September 30, 2012 Total fund balance, governmental funds $ 40,842,690 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. 695,702,033 Certain other long-term assets (property taxes receivable and adjudicated court fines receivable) 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. 9,343,641 Some liabilities 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 (299,400,028) Compensated absences (4,686,124) Accrued interest governmental activity debt (1,004,536) Estimated post employment benefit liability (1,535,386) Deferred bond issuance costs 8,507,030 The assets and liabilities of certain internal service funds are not included in the fund financial statement, but are included in the governmental activities of the Statement of Net Assets. 489,379 Net Assets of Governmental Activities in the Statement of Net Assets $ 448,258,699 See Notes to Financial Statements. 23 CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2012 Capital General Fund Debt Service Projects Fund Other Total Governmental Governmental Funds Funds Revenues Property taxes Sales and use taxes Franchise fees Licenses and permits Fines and forfeitures Charges for services Investment earnings Intergovernmental Other Total Revenues Expenditures Current: General government Public safety Public works Community services Parks and recreation Debt Service: Principal Interest and other charges Bond issuance costs Capital outlay Intergovernmental Total Expenditures Excess (deficiency) of revenues over expenditures $ 10,861,341 $ 23,500,454 $ $ $ 34,361,795 14,814,936 816,640 15,631,576 5,669,958 146,988 5,816,946 2,320,103 2,320,103 3,164,068 209,967 3,374,035 11,890,808 11,890,808 54,614 9,783 23,536 4,130 92,063 1,851,938 1,419,488 3,271,426 623,824 796,087 482,784 455,800 2,358,495 49,399,652 24,306,324 2,358,258 3,053,013 79,117,247 8,241,509 172,191 449,174 8,862,874 25,168,443 193,972 25,362,415 5,506,477 28,136 5,534,613 3,861,520 384,262 4,245,782 6,775,316 490,554 7,265,870 9,373,377 9,373,377 12,400,810 12,400,810 9,025,793 416,557 9,442,350 3,992,293 3,992,293 49,553,265 25,766,480 9,197,984 1,962,655 86,480,384 (153,613) (1,460,156) (6,839,726) 1,090,358 (7,363,137) Other Financing Sources (Uses) Issuance of debt Refunding bonds issued Payments to refunded bond escrow agent Bond premium Capital leases Transfers in Transfers out Total Other Financing Sources (Uses) Net change in fund balances Fund balances - beginning Fund balances - ending See Notes to Financial Statements. 3,599,482 2,157,471 152,030 5,908,983 (397,453) (2,997,317) (622,042) (4,016,812) 3,202,029 1,293,095 (2,845,287) (622,042) 1,027,795 3,048,416 (167,061) (9,685,013) 468,316 (6,335,342) 14,523,545 5,159,540 23,460,976 4,033,971 47,178,032 $ 17,571,961 $ 4,992,479 $ 13,775,963 $ 4,502,287 $ 40,842,690 49,805,000 49,805,000 (54,478,177) (54,478,177) 3,808,801 3,808,801 24 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STA TEMENT OFACTIVITIES For the Year Ended September 30, 2012 Net change in fund balances - total governmental funds: $ (6,335,342) 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 of $10,462,236 exceeded depreciation of $27,702,583 in the current period. (17,240,347) Governmental funds report only the proceeds from the disposal of capital assets and not the difference between the carrying value and the accumulated depreciation of the asset. This is the amount by which the carrying value exceeded the accumulated depreciation. (105,786) Capital assets net of related debt acquired as a result of in City development. 17,293,695 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. 18,071 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. 1,702,335 Governmental funds report bond issuance costs as expenditures. In contrast, the government wide financial statements amortized such a cost over the life of the bonds. 347,294 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 56,248 Amortization of bond issuance costs 8,657,350 Capital lease activity (426,496) Post employment benefit liability (348,491) Internal service funds are used by management to charge the costs of certain activities, such as property and liability insurance coverage and employee health benefits, to individual funds. The net revenue (expense) of certain internal service funds is reported with governmental activities. 196,034 Change in net assets of governmental activities $ 3,814,565 See Notes to Financial Statements. 25 CITY OF PEARLAND, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS September 30, 2012 Assets Current assets: Cash and cash equivalents Investments Accounts receivable, net of allowance for doubtful accounts Prepaid items Restricted cash and cash equivalents Restricted investments Total current assets Non -current assets: Deferred charges Capital assets: Land and improvements Construction in progress Contractual rights to water supply Infrastructure Buildings Machinery and equipment Less Accumulated depreciation Total non -current assets Total Assets Liabilities Current liabilities: Accounts payable and accrued expenses Accrued interest payable Due to other governments Customer deposits Compensated absences - current portion Bonds and certificates of obligation payable - current portion Capital lease - current portion Total current liabilities Non-current liabilities: Compensated absences Capital lease obligation Other post-employment benefits Bonds and certificates of obligation payable Total non -current liabilities Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted for debt service Restricted for capital projects Unrestricted Total Net Assets See Notes to Financial Statements. Business-type Activities - Enterprise Funds Water and Sewer Solid Waste Fund Fund Total $ 3,481,057 $ 941,865 $ 4,422,922 6,051,442 6,051,442 2,779,458 712,920 3,492,378 63,121 63,121 28,300,088 28,300,088 4,005,307 4,005,307 44,680,473 1,654,785 46,335,258 1,827,653 1,827,653 3,609,542 3,609,542 5,418,810 5,418,810 34,511,428 34,511,428 280,739,923 280,739,923 31,256,473 31,256,473 3,465,029 3,465,029 (92,712,764) (92,712,764) 268,116,094 268,116,094 312,796,567 1,654,785 314,451,352 2,364,693 1,311,882 3,676,575 435,835 435,835 91,350 91,350 2,791,112 2,791,112 88,945 88,945 4,725,000 4,725,000 81,380 81,380 10,578,315 1,311,882 11,890,197 449,933 449,933 260,984 260,984 282,467 282,467 120,591,600 120,591,600 121,584,984 121,584,984 132,163,299 1,311,882 133,475,181 158,715,983 158,715,983 1,131,525 1,131,525 8,689,520 8,689,520 12,096,240 342,903 12,439,143 $ 180,633,268 $ 342,903 $ 180,976,171 Governmental Activities - Internal Service Fund $ 782,836 11,232 794,068 794 068 304,689 304,689 304,689 489,379 $ 489,379 CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Governmental Business -type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Fund $ 27,535,464 $ 7,653,933 $ 35,189,397 $ 6,494,646 4,790,448 4,790,448 2,325,113 2,325,113 35,144 7,211,131 7,527,713 14,738,844 6,185,794 1,026,885 1,026,885 77,976 626,482 626,482 8,564,822 8,564,822 24,544,881 7,527,713 32,072,594 6,298,914 2,990,583 126,220 3,116,803 195,732 68,050 377 68,427 303 430,038 430,038 204,866 204,866 12,756 12,756 (5,223,944) (5,223,944) (4,508,234) 377 (4,507,857) 303 (1,517,651) 126,597 (1,391,054) 196,035 8,117,782 8,117,782 222,811 222,811 (2,114,982) (2,114,982) 4,707,960 126,597 4,834,557 196,035 175,925,308 216,306 176,141,614 293,344 $ 180,633,268 $ 342,903 $ 180,976,171 $ 489,379 Revenues Charges for services Operating Expenses Personnel services Supplies and materials Contractual services Repairs and maintenance Other expenses Depreciation and amortization Total Operating Expenses Operating income (loss) Non-Operating Revenues (Expenses) Earnings on investments Miscellaneous revenue (expense) Operating grants and contributions Gain (loss) on disposal of capital assets Interest expense Total Non-Operating Revenues (Expenses) Income (loss) before contributions and transfers Capital contributions Transfers in Transfers out Change in net assets Total net assets - beginning Total net assets - ending See Notes to Financial Statements. 27 CITY OF PEARLAND, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Cash Flows from Operating Activities Receipts from customers and users Disbursed for personnel services Disbursed for goods and services Net cash provided (used) by operating activities Page 101 2 Governmental Business-type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Fund $ 27,578,140 $ 7,625,682 $ 35,203,822 $ 6,487,121 (4,782,920) (4,782,920) (11,622,829) (8,581,492) (20,204,321) (6,247,156) 11,172,391 (955,810) 10,216,581 239,965 Cash Flows from Noncapital Financing Activities Transfers from funds Transfers to other funds Operating grants and contributions Net cash provided by (used by) noncapital financing activities Cash Flows from Capital and Related Financing Activities 222,811 (2,114,982) 204,866 (1,687,305) 222,811 (61,095) (2,114,982) 204,866 (1,687,305) (61,095) Proceeds from the sale of equipment 12,756 Capital grants and contributions 6,041,758 Proceeds from the issuance of debt 14,900,000 Principal payments on debt (13,465,000) Interest paid (5,223,944) Acquisition and construction of capital assets (7,644,628) 12,756 6,041,758 14,900,000 (13,465,000) (5,223,944) (7,644,628) Net cash used by capital and related financing activities (5,379,058) (5,379,058) Cash Flows from Investing Activities Purchase of investments 2,040,257 2,040,257 Interest received 68,050 377 68,427 303 Net cash provided by (used by) investing activities 2,108,307 377 2,108,684 303 Net increase (decrease) in cash and equivalents 6,214,335 (955,433) 5,258,902 179,173 Cash and equivalents, beginning 25,566,810 1,897,298 27,464,108 603,663 Cash and equivalents, end $ 31,781,145 $ 941,865 $ 32,723,010 $ 782,836 Unrestricted cash and equivalents $ 3,481,057 $ 941,865 $ 4,422,922 $ 782,836 Restricted cash and equivalents 28,300,088 28,300,088 $ 31,781,145 $ 941,865 $ 32,723,010 $ 782,836 See Notes to Financial Statements 28 CITY OF PEARLAND, TEXAS Page 2 of 2 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Governmental Business -type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Funds Reconciliation of operating income to net cash provided by operating activities Operating income (loss) $ 2,990,583 $ 126,220 $ 3,116,803 $ 195,732 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 8,564,822 8,564,822 (Increase) decrease in accounts receivable (222,682) (28,251) (250,933) (7,525) (Increase) decrease in prepaid expenses 49,740 49,740 Increase (decrease) in accounts payable (482,958) (1,053,779) (1,536,737) 51,758 Increase (decrease) in salaries payable 7,528 7,528 Increase (decrease) in customer deposits 265,358 265,358 Net Cash Provided by Operating Activities $ 11,172,391 $ (955,810) $ 10,216,581 $ 239,965 Summary of non -cash transactions Contributed capital assets $ 2,076,024 $ $ 2,076,024 $ See Notes to Financial Statements. wt CITY OF PEARLAND, TEXAS COMBINING STATEMENT OF NET ASSETS DISCRETELY PRESENTED COMPONENT UNITS- GOVERNMENTAL ACTIVITIES September 30, 2012 Assets Cash and cash equivalents Investments Receivables - less allowance for uncollectibles Due from primary government Prepaid items Restricted cash Deferred charges Capital assets not subject to depreciation Capital assets net of accumulated depreciation Total Assets Liabilities Accounts payable and accrued expenses Accrued interest Customer deposits Non-current liabilities: Due within one year Due in more than one year Total Liabilities 1,314,864 360,000 1,674,864 28,435 28,435 665,254 665,254 329,660 277,915 607,575 3,220,907 3,220,907 6,413,293 6,413,293 23,536,875 4,655,490 2,126,257 30,318,622 72,986 361,444 33 434,463 93,983 133,385 227,368 38,333 38,333 883,565 2,720,000 3,603,565 23,725,351 45,521,127 69,246,478 24,814,218 361,444 48,374,545 73,550,207 Pearland Economic Development Corporation $ 9,562,003 2,002,459 Tax Increment Development Total Reinvestment Authority of Component Zone #2 Pearland Units $ 4,655,490 $ 1,488,342 $ 15,705,835 2,002,459 Net Assets Invested in capital assets, net of related debt (14,974,716) (48,241,127) (63,215,843) Restricted - debt service 571,271 (133,385) 437,886 Restricted - economic development 13,126,102 4,294.046 2,126,224 19,546,372 Total Net Assets $ (1,277,343) $ 4,294,046 $ (46,248,288) $ (43,231,585) See Notes to Financial Statements. CITY OF PEARLAND, TEXAS COMBINING STATEMENT OFACTIVITIES DISCRETELYPRESENTED COMPONENT UNITS - GOVERNMENTAL ACTIVITIES For the Year Ended September 30, 2012 Program Revenues Net (Expense) and Changes in Net Assets Pearland Tax Increment Development Charges for Economic Reinvestment Authority of Functions/Programs Expenses Services Development Zone #2 Pearland Totals Component Units: Pearland Economic Development Corporation $ 3,042,464 $ 414,000 $ (2,628,464) $ $ $ (2,628,464) Tax Increment Reinvestment Zone #2 5,894,105 (5,894,105) (5,894,105) Development Authority of Pearland 17,373,755 (17,373,755) (17,373,755) $ 26,310,324 $ 414,000 (2,628,464) (5,894,105) (17,373,755) (25,896,324) $ $ 17,924,775 $ $ 17,924,775 7,337,389 7,337,389 34,161 5,844 1,641 41,646 44,353 44,353 (12,016,051) 12,016,051 7,415,903 5,914,568 12,017,692 25,348,163 4,787,439 20,463 (5,356,063) (548,1.61) (6,064,782) 4,273,583 (40,892,225) (42,683,424) $ (1,277,343) $ 4,294,046 $ (46,248,288) $ (43,231,585) General Revenues: Taxes: Property taxes Sales and use tax Unrestricted investment earnings Miscellaneous Transfers between component units Total General Revenues and Transfers Change in net assets Net assets, beginning Net assets, ending See Notes to Financial Statements. 31 CITY OF 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, fire 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 combination full-time/volunteer part- time/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 (DAP). 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. The component units do not issue separate financial statements. 32 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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 to help existing businesses to expand. The mechanism to fund the operations of the corporation is through a sales 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. A major land owner within the City of Pearland sits on the Board of Directors for the TIRZ #2. 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 Development Authority. 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. 33 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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-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. 34 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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 on a pay-as-you go basis 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 as well as solid waste collection 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. Additionally, the city maintains an Internal Service Fund used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City on a cost- reimbursement basis. Services provided by the Internal Service Funds include property and liability insurance coverage and employee health benefits. The Internal Service Fund is included in governmental activities for government-wide reporting purposes. 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. 35 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) C. Measurement Focus, Basis of Accounting and Financial Statement Presentation (continued) 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. 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. Fund Balance Working Capital Policies As of these financial statements, the City has adopted GASB Statement No. 54, which redefined how fund balances of the governmental funds are presented in the financial statements. Fund balances are classified as follows: Nonspendable — Amounts that cannot be spent either because they are not in a spendable form or because they are legally or contractually required to be maintained intact. Restricted — Amounts that can be spent only for specific purposes because of the City Charter, City Code, State or Federal laws, or externally imposed conditions by grantors or creditors. Committed — Amounts than can be used only for specific purposes determined by ordinances passed by City Council, the City's highest level of decision making authority. Commitments may be modified or rescinded only through ordinances approved by City Council. Assigned — Amounts that are intended to be used for a specific purposes, but do not meet the definition of restricted or committed fund balance. Under the City's policy, amounts can be assigned by the City's Director of Finance. Unassigned — All amounts not included in other spendable classifications. The City Council has authorized the Director of Finance as the official authorized to assign fund balance to a specific purpose. The City shall maintain the fund balance and working capital of the various operating funds at the following levels: General Fund Unassigned Fund Balance The City shall maintain the General Fund unassigned fund balance equivalent to 2 months of recurring operating expenditures, based on current year expenditures. If the fund balance exceeds this amount, funding non-recurring expenditures in the following fiscal year may be used to draw down the balance. 36 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies (continued) Water/Sewer Unreserved Working Capital The City shall maintain a working capital sufficient to provide for reserves for emergencies and revenue shortfalls. A cash equivalent operating reserve will be established and maintained at 25% of the current year's budget appropriation for recurring operating expenses. The cash operating reserve is derived by dividing the total cash equivalents balance by recurring operating expenses. Use of Fund Balance/Working Capital Fund balance/Working Capital shall only be used for emergencies, non-recurring expenditures/expenses or major capital purchases that cannot be accommodated through current year savings. Should such use reduce balances below the level established as the objective for that fund, restoration recommendations will accompany the request/decision to utilize said balances. Debt Service Fund Total Fund Balance The City shall maintain the debt service fund balance at 10% of annual debt service requirements OR a fund balance reserve as required by bond ordinances, whichever is greater. Property Insurance Fund Unrestricted Net Assets The Property Insurance Fund accounts for uninsured and deductible claims for the City's property and liability insurance. Claims cannot be reasonably predicted and budgeted for; therefore the fund will maintain a balance that approximates the prior average annual expense for the last three years, excluding extra-ordinary expenses in the fund. Employee Benefits Fund Unrestricted Net Assets The Employee Benefits Fund is funded through City and employee contributions. Estimated costs shall be determined during each budget year and the contributions adjusted accordingly. There is no minimum balance for this fund. Economic Development Corporation As sales tax revenue fluctuates due to changes in economic conditions, the PEDC shall maintain a fund balance of no less than 10% of budgeted sales tax revenues. Water/Sewer Revenue Debt Coverage Reserves Revenues shall be maintained at 1.15 times coverage in a fiscal year where the water/sewer fund is not issuing additional debt and 1.4 times coverage in a year where debt is anticipated to be issued. Bond Issuance Reserves Debt service reserves should be maintained for each bond issue as required by bond covenants. Contingency Fund Pursuant to the City Charter, a provision shall be made within the annual budget for a contingency fund in an amount not more than seven percent of the total budget (General Fund) to be used in case of unforeseen items of expenditure. 37 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) 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 (U.S.) 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 120 days comprise the trade accounts receivable allowance for uncollectibles. 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 Certain proceeds of the Water and Sewer Enterprise Fund revenue bonds and certain resources set aside for their repayment are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Certain resources are also set aside for repayment of Pearland Economic Development Corporation Bonds and are reported as restricted assets. 38 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) 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 $5,000 and an estimated useful life of three years or more. 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 add to the value of the asset or materially extend assets' lives are not capitalized. Property, plant, and equipment are depreciated using the straight-line method over the following useful lives: Asset Years Buildings and improvements 10-45 Machinery and equipment 3-15 Infrastructure 10-50 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 16 and over 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 required to work on a City-observed holiday 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 for non-exempt employees. Employees may be paid or receive compensatory time. The maximum accrual for overtime is 60 hours, except for employees involved in public safety, who can accrue up to 120 hours. All sick leave benefits are accumulated and paid to employees upon separation from the City not to exceed 720 hours for employees hired prior to July 24, 2006, and 360 hours for employees hired after. 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. Wt CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) 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. N. Comparative Data and Reclassifications Comparative data for the prior year have been presented in certain sections of the accompanying financial statements in order to provide an understanding of changes in the City's financial position and operations. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with current year's presentation. 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, bankers' 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. m CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) 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, consisting 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 No. 2 and Development Authority of Pearland are substantially the same as the City. The following schedule shows the City's recorded cash and investments at year-end: Total Fair Value Primary Component Government Units Cash deposits $ 55,706,673 $ 16,371,089 Temporary Investments FFCB discount note 5,004,430 1,000,555 FHLB discount note 6,055,222 1,001,904 FHLMC discount note 5,005,182 FNMA discount note 12,035,337 $ 83,806,844 $ 18,373,548 Quoted market prices are the basis of the fair value for U.S. 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 Unrealized gain (loss) on temporary investments Investment earnings Primary Component Government Units $ 136,749 $ 38,899 24,043 2,745 $ 160,792 $ 41,644 41 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) 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: Primary Government Component Units Weighted Weighted Average Average Total Fair Value Maturity (days) Total Fair Value Maturity, (days) Temporary Investments FFCB discount note $ 5,004,430 549 $ 1,000,555 509 FHLB discount note 6,055,222 135 1,001,904 600 FHLMC discount note 5,005,182 346 FNMA discount note 12,035,337 203 $ 28,100,171 $ 2,002,459 Portfolio weighted average maturity 275 555 The City's investment policy specifies a maximum weighted average maturity for the portfolio of 547.5 days or 18 months based on the stated maturity date of the investments. When including cash investments the weighted average maturity for the primary government is 107 days and for the component units is 124 days. 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. Concentration of Credit Risk With the exception of U.S. Treasury Securities and interest-bearing checking accounts that are fully collateralized, no more than 75 percent of the City's total investment portfolio will be invested in a single security type. As of September 30, 2012, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Primary Government Component Units Percentage of Percentage of— Total Total Investment Investment Investment Type Total Fair Value Portfolio Total Fair Value Portfolio FFCB discount note $ 5,004,430 18% $ 1,000,555 50% FHLB discount note 6,055,222 21% 1,001,904 50% FHLMC discount note 5,005,182 18% FNMA discount note 12,035,337 43% Total $ 28,100,171 100% $ 2,002,459 100% 42 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Credit Risk Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal National Mortgage Association Discount Notes were rated AA+ 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 Component Government Units Revenue bond debt service $ 1,567,360 $ 665,254 Customer deposits 2,813,050 Capital improvements 27,924,985 Total $ 32,305,395 $ 665,254 43 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables Receivables at September 30, 2012, consisted of the following: Primary Government: Governmental Funds: Other Debt Service Capital Non-Major General Fund Fund Projects Fund Funds Total Receivables Property taxes, including penalties and interest $ 563,152 $ 885,335 $ $ $ 1,448,487 Lease receivable 9,508,179 9,508,179 Sales and other taxes 3,792,071 31,558 3,823,629 Fines and forfeitures 849,821 849,821 Interest 26,369 1,342 4,642 387 32,740 Other 504,776 450,268 955,044 Allowance for uncollectibles (11,095) (17,386) (28,481) $ 5,725,094 $ 10,377,470 $ 4,642 $ 482,213 $ 16,589,419 Proprietary Funds: Water and Sewer Fund Solid Waste Fund Total Receivables Customer accounts $ 2,771,892 $ 777,439 $ 3,549,331 Interest 43,363 43,363 Other 65,937 65,937 Allowance for uncollectibles (101,734) (64,519) (166,253) $ 2,779,458 $ 712,920 $ 3,492,378 Component Units: Pearland Tax Increment Economic Reinvestment Development Development Zone Authority of Corporation Developments Pearland Total Receivables Sales and other taxes $ 1,305,787 $ $ $ 1,305,787 Interest 6,275 6,275 Other 2,802 360,000 362,802 Total $ 1,314,864 $ $ 360,000 $ 1,674,864 44 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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: Delinquent property taxes receivable - general fund Delinquent property taxes receivable - debt service fund Lease revenues-principal Municipal fines and forfeitures Lease interest revenues Grants and revenues prior to meeting all eligibility requirements Total Deferred Revenue for Governmental Funds Unavailable Unearned $ 498,094 $ 759,806 7,235,920 849,821 2,272,259 344,735 $ 9,343,641 $ 2,616,994 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, Harris County, and Fort Bend 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. 45 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets A summary of changes in the primary government's capital assets for the year ended September 30, 2012, follows: Primary Government Balance Balance September 30, September 30, 2011 Increases (Decreases) 2012 Governmental Activities Capital assets not being depreciated: Land $ 28,408,628 $ $ $ 28,408,628 Construction in progress 32,867,609 8,312,244 (18,059,666) 23,120,187 Total capital assets not being depreciated 61,276,237 8,312,244 (18,059,666) 51,528,815 Other capital assets: Infrastructure 771,888,616 32,315,680 804,204,296 Buildings and improvements 76,671,106 3,821,113 80,492,219 Machinery and equipment 15,396,213 1,339,442 (734,542) 16,001,113 Furniture and fixtures Total other capital assets 863,955,935 37,476,235 (734,542) 900,697,628 Less accumulated depreciation for: Infrastructure (206,986,038) (23,466,433) (230,452,471) Buildings and improvements (13,319,668) (2,794,104) (16,113,772) Machinery and equipment (9,171,994) (1,442,049) 655,876 (9,958,167) Furniture and fixtures Total accumulated depreciation (229,477,700) (27,702,586) 655,876 (256,524,410) Other capital assets, net 634,478,235 9,773,649 (78,666) 644,173,218 Totals $ 695,754,472 $ 18,085,893 $ (18,138,332) $ 695,702,033 Balance Balance September 30, September 30, 2011 Increases (Decreases) 2012 Business-type Activities Capital assets not being depreciated: Land and intangibles $ 3,609,542 $ $ $ 3,609,542 Construction in progress 24,891,393 4,432,206 (23,904,789) 5,418,810 Total capital assets not being depreciated 28,500,935 4,432,206 (23,904,789) 9,028,352 Other capital assets: Water and sewer system 254,701,621 26,038,302 280,739,923 Buildings and improvements 31,256,473 31,256,473 Machinery and equipment 3,334,000 236,959 (105,931) 3,465,028 Contractual water rights 34,511,428 34,511,428 Total other capital assets 323,803,522 26,275,261 (105,931) 349,972,852 Less accumulated depreciation for: Water and sewer system (75,053,176) (6,175,936) (81,229,112) Buildings and improvements (2,641,808) (716,274) (3,358,082) Machinery and equipment (2,035,386) (292,154) 105,931 (2,221,609) Contractual water rights (4,523,503) (1,380,457) (5,903,960) Total accumulated depreciation (84,253,873) (8,564,821) 105,931 (92,712,763) Other capital assets, net 239,549,649 17,710,440 257,260,089 Totals $ 268,050,584 $ 22,142,646 $ (23,904,789) $ 266,288,441 46 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) Depreciation was charged to programs as follows: General government Public safety Public works Community services Parks and recreation Total Governmental Activity Water and sewer Total Business-Type Activity $ 479,575 1,894,167 22,951,248 178,278 2,199,318 $ 27,702,586 $ 8,564,821 $ 8,564,821 The City had active construction projects as of September 30, 2012. The projects included 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: Project Description Total In Progress Drainage Improvement $ 15,268,041 Building Improvements 1,037,908 Street Improvement 5,930,085 Park Improvements 884,153 Water and Sewer Improvements 5,418,810 Totals $ 28,538,997 Commitment $ 5,328,936 2,868,262 7,608,379 86,584 19,467,693 $ 35,359,854 47 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012. In general, the City uses the General and Debt Service funds to liquidate governmental long-term liabilities. Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Year Governmental Activities Bonds payable: General obligation bonds $ 207,105,000 $ 43,575,000 $ (26,510,000) $ 224,170,000 $ 5,955,000 Certificates of obligation 91,150,000 (25,725,000) 65,425,000 3,480,000 Deferred amount for issuance premium/(discount) 3,489,368 3,548,801 (639,900) 6,398,269 Total bonds payable 301,744,368 47,123,801 (52,874,900) 295,993,269 9,435,000 Other liabilities: Obligations under capital leases 4,032,055 (625,296) 3,406,759 644,610 Compensated absences 4,668,853 2,486,200 (2,468,929) 4,686,124 626,168 Other post-employment benefits 1,204,166 331,220 1,535,386 Total Governmental Activities $ 311,649,442 $ 49,941,221 $ (55,969,125) $ 305,621,538 $ 10,705,778 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) transfers from 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. 48 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (continued) A summary of the terms of general obligation bonds and certificates of obligation, as of September 30, 2012, follows: Series Original Issue Matures Interest Rate (%) Debt Outstanding General Obligation Bonds Permanent Improvement, Series 2003 15,000,000 2028 4.00-6.00 $ 390,000 Permanent Improvement and Refunding Bonds, Series 2005 37,015,000 2029 3.25-5.00 22,570,000 Permanent Improvement and Refunding Bonds, Series 2006 32,165,000 2029 4.00-5.00 31,260,000 Permanent Improvement and Refunding Bonds, Series 2007 69,640,000 2032 4.00-5.00 68,565,000 Permanent Improvement, Series 2008 22,835,000 2032 4.50-5.50 21,930,000 Permanent Improvement and Refunding Bonds, Series 2009 16,735,000 2034 2.00-5.00 15,755,000 Permanent Improvement, Series 2010A 12,415,000 2035 3.00-4.00 11,700,000 Permanent Improvement Refunding, Series 201 OB 1,630,000 2018 2.00-4.00 1,215,000 Permanent Improvement, Series 2011 5,400,000 2036 2.125-4.125 5,340,000 Permanent Improvement and Refunding Bonds, Series 2012 43,575,000 2029 3.00-5.00 43,575,000 Annexed Municipal Utility District Bonds BC MUD I Series 2007 1,940,000 2030 3.75-4.35 1,870,000 Total General Obligation Bonds $ 224,170,000 Certificates of Obligation Certificates of Obligation, Series 2003 25,000,000 2023 3.00-4.50 $ 2,330,000 Certificates of Obligation, Series 2004 21,000,000 2028 4.00-5.25 1,805,000 Certificates of Obligation, Series 2006 9,700,000 2029 3.65-4.68 9,160,000 Certificates of Obligation, Series 2007 23,250,000 2032 3.25-5.25 22,700,000 Certificates of Obligation, Series 2008 9,000,000 2032 3.75-5.00 8,585,000 Certificates of Obligation, Series 2009 8,520,000 2034 2.25-5.00 8,095,000 Certificates of Obligation, Series 2009A 12,145,000 2029 2.00-4.50 10,865,000 Certificates of Obligation, Series 2011 2,095,000 2021 2.09 1,885,000 Total Certificates of Obligation $ 65,425,000 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, 2012, approximately $57.4 million of previously refunded bonds outstanding were considered defeased. Current Year Refunding On February 9, 2012, the City refunded approximately $43.405 million in general obligation bonds and $6.5 million in water and sewer bonds in order to take advantage of lower interest rates which produced $5.3 million in savings over sixteen years. Net Present Value of the refunding is 9.2%, which is well over the City's financial policy of a minimum of 3% for a refunding. The water and sewer revenue bonds will be folded into general obligation bonds, however will be paid from water and sewer revenues. CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (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, Debt Service and Water and Sewer Funds. The historical purchase price of the capital assets under lease is approximately $5.7 million. Following is a summary of future lease payments due on this equipment: Total Less: Interest Fiscal Year 2013 2014 2015 2016 2017 2018-2019 Obligations $ 843,723 843,723 843,723 696,006 516,550 363,422 4,107,146 (358,809) Obligations under capital leases $ 3,748,337 50 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30, 2012, were as follows: Governmental Activities Fiscal Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 General Obligation Principal Interest $ 5,955,000 $ 9,642,072 6,360,000 9,404,956 7,340,000 9,106,827 8,440,000 8,737,396 8,055,000 8,366,418 7,940,000 8,020,829 10,425,000 7,620,587 11,000,000 7,152,460 11,515,000 6,662,938 12,250,000 6,144,356 12,820,000 5,595,767 13,315,000 5,018,017 13,990,000 4,436,441 14,355,000 3,858,602 14,980,000 3,245,078 15,615,000 2,602,908 16,290,000 1,917,841 8,990,000 1,346,628 9,180,000 921,259 9,405,000 488,591 2,220,000 218,131 2,325,000 112,794 1,070,000 36,356 335,000 6,909 $ 224,170,000 $ 110,664,163 Certificates of Obligation Principal Interest $ 3,480,000 $ 2,726,815 3,635,000 2,597,558 2,660,000 2,480,111 2,035,000 2,390,475 2,105,000 2,308,503 2,680,000 2,207,678 2,920,000 2,090,441 2,950,000 1,966,524 3,065,000 1,838,971 2,960,000 1,706,746 3,080,000 1,569,654 3,210,000 1,425,293 3,320,000 1,273,513 3,580,000 1,111,516 3,730,000 953,652 3,885,000 803,336 4,055,000 644,684 3,290,000 493,950 3,685,000 338,925 4,065,000 159,025 505,000 51,750 530,000 26,500 $ 65,425,000 $ 31,165,623 51 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012. Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Year Business-type Activities Bonds payable: Permanent Improvement Bonds Water and sewer revenue bonds Deferred amount for issuance premium/(discount) Total bonds payable Other liabilities: Obligations under capital leases Compensated absences Other post-employment benefits Total Business-type Activities $ 9,730,000 $ 6,230,000 $ (830,000) $ 15,130,000 $ 1,110,000 113,270,000 8,670,000 (12,635,000) 109,305,000 3,615,000 655,633 347,949 (121,982) 881,600 123,655,633 15,247,949 (13,586,982) 125,316,600 4,725,000 421,093 (78,729) 342,364 81,380 558,216 288,223 (307,561) 538,878 88,945 224,017 58,450 282,467 $ 124,858,959 $ 15,594,622 $ (13,973,272) $ 126,480,309 $ 4,895,325 A summary of the terms of certificates of obligation and revenue bonds recorded in the Enterprise Funds as of September 30, 2012, is as follows: Series Original Issue Water and Wastewater Fund Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 $ 8,000,000 Water and Sewer System Revenue Bonds, Series 2003 9,500,000 Water and Sewer System Revenue and Refunding Bonds, Series 2006 13,845,000 Water and Sewer System Revenue and Refunding Bonds, Series 2007 40,135,000 Water and Sewer System Revenue Bonds, Series 2008 14,950,000 Water and Sewer System Revenue Bonds, Series 2009 13,130,000 Permanent bnprovement and Refunding Bonds, Series 2009 11,660,000 Water and Sewer System Revenue Bonds, Series 2010A 14,040,000 Water and Sewer System Refunding Bonds, Series 2010B 8,970,000 Permanent bnprovement and Refunding Bonds, Series 2012 6,230,000 Water and Sewer System Revenue Bonds, Series 2012 8,670,000 Total Utility System Fund Matures Interest Rate (%,) Debt Outstanding 2020 4.41-4.60 $ 2,835,000 2025 4.00-6.00 670,000 2031 3.74-4.82 11,500,000 2031 3.50-5.50 37,505,000 2034 4.125-5.00 14,180,000 2034 3.00-5.50 12,090,000 2018 2.00-5.00 8,900,000 2035 1.75-4.50 13,290,000 2023 1.75-4.00 8,565,000 2025 3.00-5.00 6,230,000 2037 2.00-3.625 8,670,000 $ 124,435,000 52 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) B. Enterprise Fund Debt (continued) The annual requirements to amortize governmental activity revenue bonds and permanent improvement bonds outstanding at September 30, 2012, were as follows: Revenue Bonds Permanent Improvement Bonds Principal $ 3,615,000 3,765,000 3,575,000 3,725,000 3,880,000 4,030,000 4,195,000 4,370,000 4,615,000 4,810,000 5,025,000 4,190,000 4,440,000 6,155,000 6,450,000 6,765,000 7,080,000 7,375,000 7,680,000 3,710,000 3,895,000 4,075,000 1,180,000 345,000 Interest $ 4,724,111 4,584,324 4,439,468 4,302,208 4,153,814 4,005,011 3,847,690 3,683,168 3,503,757 3,306,021 3,100,221 2,884,169 2,689,273 2,477,948 2,181,686 1,867,325 1,552,814 1,257,306 948,088 625,250 444,575 264,300 75,725 25,556 Principal $ 1,110,000 1,155,000 1,530,000 1,560,000 2,415,000 2,515,000 365,000 370,000 370,000 385,000 395,000 1,480,000 1,480,000 Interest $ 565,300 525,325 474,812 427,900 344,001 232,188 171,700 157,000 142,200 127,100 111,500 74,000 22,200 Fiscal Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 360,000 13,050 $ 109,305,000 $ 60,956,857 $ 15,130,000 $ 3,375,226 53 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012: Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Year Pearland Economic Development Corporation Sales tax revenue bonds $ 25,330,000 $ $ (840,000) $ 24,490,000 $ 880,000 Deferred amount for issuance premium/(discount) 91,161 (10,364) 80,797 Compensated absences 43,613 25,190 (30,684) 38,119 3,565 Development Authority of Pearland Tax Increment Revenue Bonds 49,230,000 56,915,000 (51,910,000) 54,235,000 2,720,000 Deferred Loss on Refunding (8,649,167) 2,655,294 (5,993,873) Deferred amount for issuance premium/(discount) (316,381) 316,381 74,378,393 $ 48,291,023 (49,819,373) 72,850,043 $ 3,603,565 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, 2012, is as follows: Original Issue Matures Interest Rate (%) Debt Outstanding $ 10,590,000 2026 2.30-4.42 $ 7,965,000 10,235,000 2030 3.66-4.75 9,285,000 7,685,000 2030 variable-resets every 6 7,240,000 months Series Pearland Economic Development Corporation Sales Tax Revenue Bonds, Series 2005 Sales Tax Revenue Bonds, Series 2006 Sales Tax Revenue Bonds, Series 2010 Development Authority of Pearland Tax Increment Revenue Bonds, Series 2012 56,915,000 2028 2.50-5.50 54,235,000 Total Component Unit Long-Term Debt $ 78,725,000 54 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) C. Component Unit Long-Term Debt (continued) The annual requirements to amortize component unit revenue bonds outstanding at September 30, 2012, were as follows: Revenue Bonds Pearland Economic Development Development Authority of Corporation Fiscal Year Principal Interest 2013 $ 880,000 $ 1,173,162 2014 920,000 1,132,524 2015 965,000 1,090,031 2016 1,010,000 1,045,383 2017 1,060,000 995,632 2018 1,115,000 943,456 2019 1,175,000 888,202 2020 1,230,000 835,519 2021 1,285,000 779,982 2022 1,350,000 721,322 2023 1,415,000 657,996 2024 1,480,000 591,411 2025 1,555,000 521,215 2026 1,635,000 447,066 2027 1,715,000 369,033 2028 1,805,000 281,379 2029 1,895,000 192,272 2030 2,000,000 98,737 $ 24,490,000 $ 12,764,322 D. Legal Compliance Pearland Principal Interest $ 2,720,000 1,665,014 2,800,000 1,581,511 2,885,000 1,495,550 2,970,000 1,406,981 3,070,000 1,315,802 3,160,000 1,221,553 3,255,000 1,124,541 3,120,000 1,024,613 3,215,000 928,828 3,030,000 830,128 3,130,000 737,107 3,225,000 641,016 3,320,000 542,008 3,425,000 440,085 3,530,000 334,937 3,635,000 226,566 3,745,000 114,972 $ 54,235,000 $ 15,631,212 Long-term debt assumed by the City upon dissolution of annexed municipal utility district in fiscal years 2006 and 2007 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. 55 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 6 - Interfund Transactions A summary of interfund transfers, the purpose of which is to cover operational expenses/expenditures, for the year ended September 30, 2012, is as follows: Transfers In Transfers Out Amounts Purpose General Fund Capital Projects Fund $ 1,944,269 Transfer of funds for capital projects costs Non-Major General Fund Governmental Fund 481,164 Transfer of funds for operating costs General Fund Water and Sewer Fund 1,174,049 Transfer of funds for administrative costs Debt Service Fund Water and Sewer Fund 434,865 Transfer of funds for debt service payments Debt Service Fund General Fund 163,490 Transfer of funds for debt service payments Debt Service Fund Capital Projects Fund 1,559,116 Transfer of funds for capital project costs Water and Sewer Fund General Fund 222,811 Transfer of funds for operating costs Non-Major Capital Projects Fund Governmental Fund 152,030 Transfer of funds for operating costs $ 6,131,794 A summary of interfund receivables and payables at September 30, 2012, follows: Receivable Fund Payable Fund Amount Purpose Non-Major General Fund Governmental Fund $ 168,548 Short-term loan to fund operations 168,548 Note 7 - Fund Balance / Net Assets The Pearland Economic Development Corporation and the Development Authority of Pearland, discretely presented component units of the City, had negative net asset balances at year-end of approximately $1.3 and $46.2 million respectively. These deficit balances are caused by these entities issuing bonds for economic development related construction projects and, in accordance with state law, transferring the capital assets to the primary government while retaining the related debt. As noted in Note 5, the debt is expected to be retired with future dedicated sales and property tax revenues. 56 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 7 - Fund Balance / Net Assets (continued) Encumbrances Encumbrance accounting is employed as an extension of formal budgetary integration for the General Fund, special revenue funds, and capital projects funds. September 30, 2012, certain amounts which were classified as restricted, committed, or assigned for specific purposes have been encumbered in the governmental funds. Significant encumbrances included in governmental fund balances are as follows: Encumbrances General Fund Assigned $ 167,016 Capital Projects Restricted 9,201,689 Aggregate non-major funds Restricted 140,352 Aggregate component units Restricted 90,585 $ 9,599,642 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 ICMA Retirement Corporation is the plan administrator. 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. 57 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System Plan Description and Provisions The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, defined benefit plan in the state-wide Texas Municipal Retirement System ("TMRS"), one of 842 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: Employee deposit rate Matching ratio (City to employee) Years required for vesting Service retirement eligibility (expressed as age/years of service) Updated Service Credit Annuity Increase (to retirees) Plan Year 2011 7.0% 2 to I 60/5, 0/20 100% Repeating, Transfers 70% of CPI Repeating Plan Year 2012 7.0% 2 to 1 60/5, 0/20 100% Repeating, Transfers 70% of CPI Repeating Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. 58 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) 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 30-year amortization period. The projected unit credit actuarial cost method is used for determining the City contribution rate using a 28-year closed period. 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. The City's total payroll in fiscal year 2012 was $29.9 million and the City's contributions were based on a payroll of $28.4 million. Contributions made by employees totaled $2.0 million, and the City made contributions of $3.5 million during the fiscal year ended September 30, 2012. Three-year trend information is presented below: 2012 2011 Annual Pension Cost (APC) $ 3,518,289 $ 3,302,952 Percentage of APC Contributed 100% 100% NPO at the End of Period $ - $ - 2010 $ 2,995,119 100% 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. All assumptions for the December 31, 2011, valuations are contained in the 2011 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 Amortization Method Remaining Amortization Period Asset Valuation Method Actuarial Assumptions: Investment Rate of Return Projected Salary Increases Includes Inflation At Cost-of-Living Adjustments Projected Unit Credit Level Percent of Payroll 27.2 Years - Closed Period Amortized cost 7.00% Varies by age and service 3.00% 2.1% W35 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) In order to provide a reasonable retirement benefit at a reasonable cost to employers and to provide better long-range rate forecasts, TMRS' actual funding method is the Projected Unit Credit method using a 25- 30 year "closed" period. For cities that have adopted annually repeating annuity increases (COLA's) this change in method results in increased contribution rates, which will provide advanced funding and positive improvement in the pension funding rates. The TMRS Board adopted an eight-year phase-in period for new rates to enable cities to slowly increase contributions. These new rates were first reflected in 2009. A schedule of funding status and progress for TMRS for the most recent valuation date follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Accrued Annual Percentage of Valuation Date Actuarial Accrued Percentage Liability Covered Covered December 31, Value of Assets Liabilities Funded (UAAL) Payroll Payroll 2011 $ 61,822,285 $ 78,404,115 79% 16,581,830 $ 27,756,555 60% 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. Note 10 - Other Post -Employment Benefits In addition to pension benefits, the City provides access to medical and dental coverage through its selected insurance carrier, to retirees and/or retiree dependents. The City's other post-employment benefit plan is a single-employer plan. To qualify for retiree's medical or dental insurance, the retiree must have a minimum of ten years of continuous service with the City and be at least sixty years of age, or with 20 years of continuous service at any age. The City provides the coverage on a pay-as-you-go basis similar to current employees, but the City does not pay any portion of the retiree premium. Therefore, there is an implicit subsidy due to the blended rate paid by the retirees, but there is no direct liability due from the City as it does not pay any portion of the retiree's costs. The costs of providing these benefits and number of retired employees are as follows: Emp/Dep Number Total City's Coverage of Retired Cost Cost Cost Employees $ 74,932 $ $ 74,932 9 Retirees who are entitled to receive retirement benefits under the City's retirement plan may purchase continued health benefits coverage for the retiree and the retiree's dependents, but shall pay 100% of the premium for coverage. The retiree, however, is able to receive a lower rate by participating in the City's plan as opposed to individually purchasing health insurance. The City's coverage is secondary to Medicare when the person becomes eligible for these benefits. "1 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 10 - Other Post -Employment Benefits (continued) The Governmental Accounting Standards Board published a guideline regarding accounting and financial reporting by employers for post-employment benefits other than pensions. This document gives guidance regarding the methods and timing for reporting. The effect of the Guideline is to cause the cost of retiree benefits to be accrued for during the working lifetime of the employees. This requires pre-funding or accruing of a liability. The City has elected to accrue the liability, and the unfunded liability will be funded over a period of 30 years. Calculations are based on OPEB benefits provided under the terms of the substantive plan in effect at the time of each valuation and on the pattern of sharing of costs between the City and plan members to that point. The results of the City's most recent actuarial valuation are as follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Accrued Percentage of Valuation Date Accrued Liability Annual Covered October 1, Liabilities (UAAL) Covered Payroll Payroll 2010 $ 6,994,465 $ 6,994,465 $ 26,871,670 26% Net OPEB obligations at year-end for the last three fiscal years are as follows: Normal cost Amortization of UAAL Annual required contribution (ARC) Interest on prior-year net OPEB obligation Estimated increase in Net OPEB obligation Net OPEB Obligation - beginning of year Net OPEB obligation - end of year 2010 2011 2012 $ 323,138 $ 206,293 $ 190,706 116,541 141,837 141,837 439,679 348,130 332,543 23,032 41,540 57,127 462,711 389,670 389,670 575,801 1,03 8,512 1,428,182 $ 1,038,512 $ 1,428,182 $ 1,817,852 The annual cost recorded to the general ledger for fiscal year 2012 is $389,670, which includes the estimated normal cost of $190,706 to provide for the benefits earned by active employees. The total liability, which is not recorded to the general ledger, is $6,994,465, and represents the actuarial present value of benefits. Actuarial valuations for OPEB plans involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as results are compared to past expectations and new estimates are made about the future. The methods and assumptions used as of the measurement date of October 1, 2010 include using the Projected Unit Credit actuarial costs method, a closed amortization period of 28 years, a discount rate of 4%, medical inflation and ultimate pre-Medicare rate of 10% and 5% respectively, with a straight years of service amortization method. Calculations are based on the OPEB benefits provided under the terms of the substantive plan in effect at the time of each valuation and on the pattern of sharing costs between employer and plan members to that point. Separate, audited GAAP-basis postemployment benefit plan reports are not applicable for the other post retirement benefit plan for the City as there are no separately issued plan financial statements. 61 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 11- Commitments and Contingencies Litigation and Other Contingencies The City was involved in various lawsuits and arbitration proceedings at September 30, 2012. 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. Reimbursements due to Developers Pursuant to the Local Government Code, the Economic Development Corporation offers incentives to attract and retain businesses to Pearland. The following are the current incentives. Current Incentives Amount Prior Years FY 2012 Balance Altus Harbor $ 87,500 $ 50,000 $ 15,000 $ 22,500 Braska/Neela, Inc 150,000 0 0 150,000 Cardiovascular Systems, Inc. 5,100,000 4,100,000 0 1,000,000 Hatch Mott 100,000 0 0 100,000 KS Management 2,600,000 0 0 2,600,000 KS Management Sales Tax Est. 600,000 0 0 600,000 Merit Medical Systems, Inc 888,000 0 0 888,000 Ref-Chem 340,000 0 0 340,000 SCR HH GP, LLC 300,000 180,000 0 120,000 Speed Shore 80,000 0 66,000 0 TurboCare 105,000 0 101,000 0 Zapp Precision Wire, Inc 29,500 0 0 29,500 Shadow Creek Town Center 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 determined by the Zone Board. WA CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 11- Commitments and Contingencies (continued) Shadow Creek Town Center (continued) On November 13, 2006, the City of Pearland, Pearland Economic Development Corporation (PEDC) and Shadow Creek Retail, LP entered into an agreement whereby the developer would build and construct a mixed use commercial development located at the northwest corner of State Highway 288 and Broadway, also known as FM 518. The Developer provided for the construction of segments of Broadway Street, Business Center Drive, Memorial Hermann Drive, as well as landscaping, underground utilities, pipeline relocation and other associated costs. The source of funds for reimbursement of the public infrastructure is both the TIRZ #2 and City and PEDC sales tax revenue generated from the project. The total funded from TIRZ #2 is $11,749,618 and the amount of TIRZ improvements to be funded from sales tax is $2,001,931. Once completion and tenant occupancy of at least 318,000 square feet is achieved for a period of three consecutive months, the City and PEDC, shall remit, monthly, thirty-three percent of sales tax received by the City and PEDC to the Developer until paid in full plus interest at eight percent per annum for the first two years following completion of the widening of Broadway and interest at five percent per annum for the subsequent two years. The Developer met the targets set forth in the agreement in fiscal year 2008. Through September 30, 2012, the City remitted sales tax to the developer pursuant to the agreement in the amount of $1,456,768, of which $502,699 was remitted in fiscal year 2012. To date, $1.0 million has been reimbursed towards principal and $448,585 for interest. Note 12 - Risk Management The City is exposed to various risks of loss related to torts: theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City's risk management program mainly encompasses obtaining property and liability insurance through Texas Municipal League's Intergovernmental Risk-Pool (TML-IRP), and 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 fiscal year-end September 30, 2012, the City believed the amounts paid on Workers' Compensation would not change significantly from the amounts recorded. 63 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 13 - Capital Lease The City has a 20-year agreement to lease a facility to the University of Houston Clear Lake (UHCL), which commenced in July 2010. Rent or lease payments are broken into two parts, debt service and operating. For accounting purposes the City has classified the lease as a direct financing lease. Because this lease is recorded in a governmental fund, the receivable is deferred and the distinction between a sales and direct financing lease is not relevant at the fund level. UHCL has an option to purchase the facility upon the commencement date of July 2010 until the 61S` day preceding the 20`" anniversary of the commencement date. The lease payments related to debt service to be received coincide with debt service payments the City is required to make on a bond that matures on March 1, 2029. At September 30, 2012, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2013 $ 673,447 2014 664,384 2015 654,255 2016 643,059 2017 627,598 2018-2029 6,300,155 Total $ 9,562,898 PEDC Operating Lease Note 14 - Operating Lease The City has a five-year agreement to lease a portion of the UHCL facility to the Pearland Economic Development Corporation which commenced in July 2010. For accounting purposes the City has classified the lease as an operating lease. The agreement calls for up to three additional five-year terms for a total of 20 years. The rent/lease payments are broken into two parts, debt service and operating. The debt service lease payments to be received coincide with debt service payments the City is required to make on a bond that matures on March 1, 2029. At September 30, 2012, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, 2013 2014 2015 2016 2017 2018-2029 Total Payment $ 113,384 111,858 110,153 108,268 105,665 1,060,718 $ 1,610,046 Note 15 - Subsequent Events 64 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Annexation of Brazoria County MUD No. 4 On December 31, 2012 the City annexed Brazoria County Municipal Utility District No. 4 and abolished the District. This annexation will add 600 acres and an additional 1,332 single family housing units as well as commerical property to the City. All assets and liabilities shall transfer to the City, with the City assuming approximately $2.5 million in debt outstanding and capital assets of $8.7 million, excluding streets and sidewalks. All City services shall be provided to the citizens in the district. Lease Purchase City Council approved a Notice of Intent to reimburse itself from future capital lease proceeds on October 11, 2011 not to exceed $1,300,000. On November 12, 2012 City Council awarded the bid to Chase Equipment Finance that provided the lowest overall interest rate of 1.29%. The amount financed via lease/purchase is $1,179,413.39 as follows: General Fund: Fire Truck $ 550,000 Vactor Truck Body 88,850 Vehicles 379,263 (2) Ambulances 161,300 Total $1,179,413 The first semi-annual payment is due January 2013 in the amount of $137,552.91 with the final semi- annual payment due July 2019 in the amount of $40,989.60. There is no penalty for pre-payment. APPENDIX C FORM OF BOND COUNSEL OPINION 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com DRAFT ANDREWS ATTORNEYS KU R T H LIP , 2013 WE HAVE ACTED as Bond Counsel for the CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City") in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013, dated , 2013, in the aggregate principal amount of $ maturing on September 1 in each year from . The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City (the "City Council") authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the Certificates constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, Austin Beijing Dallas Houston London New York The Woodlands Washington, DC HOU:3339491.1 , 2013 Page 2 moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law; (2) The Certificates are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, within the limits prescribed by law, upon taxable property located within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates; and (3) 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 (the "Net Revenues"), are pledged to the payment of the principal of and interest on the Certificates; provided, however, that such pledge is limited (not to exceed $10,000) and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is further our opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the Issuer comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer 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 Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. HOU:3339491.1 , 2013 Page 3 EXCEPT AS DESCRIBED HEREIN, we express no opinions as to any other matters except with respect to the excludability of the interest on the Certificates from gross income from the owners thereof for federal income tax purposes. IN PROVIDING THE FOREGOING OPINIONS, we have relied upon representations of the ISSUER with respect to matters solely within the knowledge of the Issuer, which we have not independently verified, and have assumed the accuracy and completeness thereof. IN ADDITION, EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, 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 credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. HOU:3339491.1 This Official Notice of Sale does not alone constitute an offer to sell but is merely notice of sale of the Certificates described herein. The offer to sell such Certificates is being made by means of this Official Notice of Sale, the Official Bid Form and the Preliminary Official Statement. OFFICIAL NOTICE OF SALE CITY OF PEARLAND, TEXAS (Brazoria, Fort Bend and Harris Counties, Texas) $2,745,000* CERTIFICATES OF OBLIGATION, SERIES 2013 Bids Due: Monday, August 12, 2013 at 1:00 P.M. Houston Time Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts." This Official Notice of Sale does not alone constitute an invitation for bids but is merely notice of sale of the Certificates described herein. The invitation for bids on such Certificates is being made by means of this Official Notice of Sale, the Official Bid Form and the Preliminary Official Statement. Prospective purchasers are urged to carefully examine all the documents to determine the investment quality of the Certificates. OFFICIAL NOTICE OF SALE $2,745,000* CITY OF PEARLAND, TEXAS (Brazoria, Fort Bend and Harris Counties, Texas) CERTIFICATES OF OBLIGATION, SERIES 2013 THE SALE CERTIFICATES OF OBLIGATION OFFERED FOR SALE AT COMPETITIVE BID: The City Council (the "Council") of The City of Pearland, Texas (the "City") is offering for sale at competitive bid its $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates"). PLACE AND TIME OF SALE: The Council will receive sealed bids at the City Hall, 3519 Liberty Drive, Pearland, Texas 77581 until 1:00 P.M., Houston time, Monday, August 12, 2013 (the "Sale Date"), and the bids will be opened and publicly read at 6:00 P.M., Houston time. Sealed bids, which must be submitted in duplicate on the Official Bid Form and plainly marked "Bid for Certificates," are to be addressed to "Mayor and City Council, City of Pearland, Texas." All bids must be delivered at the above address prior to the above-scheduled time. Any bid received after such scheduled time for bid opening will not be accepted and will be returned unopened. ELECTRONIC BIDDING PROCEDURE: Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Subscription to the i-Deal's BIDCOMP Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor be responsible for the failure of any prospective bidder to subscribe. Electronic bids must be received via PARITY in the manner described below, until 1:00 P.M., Houston time, on the Sale Date. Electronic bids must be submitted via PARITY in accordance with this Official Notice of Sale, until 1:00 P.M., Houston time, and no bid will be received after such time. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Certificates on the terms provided in this Official Notice of Sale, and shall be binding upon the bidder as if made by a signed, sealed bid delivered to the City. The City shall not be responsible for any malfunction or mistake made by, or as a result of the use of the facilities of, PARITY, the use of such facilities being the sole risk of the prospective bidder. To the extent any instructions or directions set forth in PARITY conflict with this Official Notice of Sale, the terms of this Official Notice of Sale shall control. For further information about PARITY, potential bidders may contact the Financial Advisor to the City or DALCOMP at i-Deal, 1359 Broadway, 2nd Floor, New York, NY 10018, telephone (212) 849-5021. BIDS BY TELEPHONE OR FACSIMILE: Bidders must submit, prior to Monday, August 12, 2013, SIGNED Official Bid Forms, in duplicate, to Ryan O'Hara, BOSC, Inc., 1401 McKinney Street, Suite 1000, Houston, Texas 77010 and submit their bid by telephone or facsimile (fax) on the date of sale by 1:00 P.M., Houston time. Ryan O'Hara of BOSC, Inc. will call telephone bidders who have submitted SIGNED Official Bid Forms prior to the date of the sale. Fax bids must be received by 1:00 P.M., Houston time, on the date of the sale. Contact Ryan O'Hara of BOSC, Inc. at 713-289-5898 on the day of the sale to obtain the fax phone numbers. BOSC, Inc. will not be responsible for the submission of any bids received after the above deadlines. BOSC, Inc. assumes no responsibility or liability with respect to any irregularities associated with the submission of any bids. AWARD OF THE CERTIFICATES: The Council will take action to award the Certificates (or reject all bids) at a special meeting of the City Council on the date of the bid opening, and will adopt an ordinance authorizing the Certificates and approving the Official Statement (the "Ordinance"). The City reserves the right to reject any or all bids and to waive any irregularities, except time of filing. * Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts." THE CERTIFICATES DESCRIPTION: The Certificates will be dated August 1, 2013 and interest will be calculated on the basis of a 360- day year of twelve 30-day months. Interest on the Certificates will be paid on March 1, 2014, and semiannually on September 1 and March 1 of each year thereafter until maturity or prior redemption. The Certificates will be issued in fully registered form in principal amounts of $5,000 or any integral multiple thereof. Principal and semiannual interest will be paid by Wells Fargo Bank, N.A., Dallas, Texas, the Paying Agent/Registrar. The Certificates will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. Beneficial owners of the Certificates will not receive physical certificates representing the Certificates, but will receive a credit balance on the books of the nominees of such beneficial owners. So long as Cede & Co. is the registered owner of the Certificates, the principal of and interest on the Certificates will be paid by the Paying Agent/Registrar directly to DTC, which will, in turn, remit such principal and interest to its participants for subsequent disbursement to the beneficial owners of the Certificates as described herein. See "THE CERTIFICATES — Book-Entry-Only System" in the Preliminary Official Statement. See the Preliminary Official Statement (made a part hereof) for a more complete description of the Certificates. The Certificates will mature March 1 in each year as follows: Maturity Principal Maturity Principal Date Amount* Date Amount* 2014 $ 75,000 2027 $110,000 2015 85,000 2028 110,000 2016 85,000 2029 120,000 2017 85,000 2030 120,000 2018 85,000 2031 120,000 2019 90,000 2032 120,000 2020 100,000 2033 130,000 2021 100,000 2034 130,000 2022 100,000 2035 130,000 2023 100,000 2036 140,000 2024 100,000 2037 140,000 2025 110,000 2038 150,000 2026 110,000 Bidders will have the opportunity to designate term certificates as part of their bid. The principal amounts of the Certificates will be payable in each year as reflected in the above maturity schedule (at maturity or pursuant to mandatory sinking fund redemption, as the case may be). ADJUSTMENT OF PRINCIPAL AMOUNTS: Prior to receiving bids on the Certificates the Council may, in its sole discretion, adjust the principal amounts set forth above (the "Maturity Schedule"). The City will give notice of any such adjustment no later than 11:00 A.M. Houston Time on the Sale Date. If, after final computation of the Bids, in awarding the sale to the best bidder, the City may determine that the funds necessary to carry out the purposes for which the Certificates are to be issued is either more or less than the proceeds of the proposed sale of all of the Certificates. The City reserves the right to adjust, by no more than ten percent (10.0%) the principal amount of the Certificates (including sinking fund installments in the case of Term Certificates, if any) shown on the Maturity Schedule. All calculations will be rounded to the nearest $5,000. The amount of Certificates maturing in each year may be increased or decreased by more than ten percent (10.0%) so long as the City adheres to the overall ten percent (10.0%) limitation on the amount of change to the total principal amount. If the City exercises its right to adjust the principal amount of the Certificates, the City agrees that any such adjustment(s) of the affected bid shall be contingent upon the preservation of the bidder's underwriting spread, as contemplated by the original bid. The winning bidder's acceptance of any adjustment(s) of the principal amount of the Certificates shall be verbally confirmed by (and subject to the verbal confirmation of) the City's financial advisor prior to the approval of the winning bid by the Council. * Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts." SERIAL CERTIFICATES AND/OR TERM CERTIFICATES: Bidders may provide that all the Certificates be issued as serial certificates or may provide that any two or more consecutive annual principal amounts be combined into one or more term certificates. REDEMPTION PROVISIONS: The Certificates maturing on March 1, 2024 are subject to redemption, at the option of the City, at the par value thereof plus accrued interest to the date of redemption on March 1, 2023, or any date thereafter. If fewer than all of the Certificates are redeemed at any time, the particular maturities of Certificates to be redeemed shall be selected by the City. If less than all the Certificates of any maturity are redeemed at any time, the particular Certificates within a maturity to be redeemed shall be selected by the Paying Agent/Registrar by lot or other customary method of selection (or by DTC in accordance with its procedures while the Certificates are in book-entry- only form). MANDATORY SINKING FUND REDEMPTION: If the successful bidder designates principal amounts to be combined into one or more term certificates, each such term certificate shall be subject to mandatory sinking fund redemption commencing on March 1 of the first year which has been combined to form such term certificate and continuing on March 1 in each year thereafter until the stated maturity date of that term certificate. The amount redeemed in any year shall be equal to the principal amount for such year set forth on the cover page hereof under the caption "Maturity Schedule." Certificates to be redeemed in any year by mandatory sinking fund redemption shall be redeemed at par by lot or other customary method. The principal amount of Term Certificates to be mandatorily redeemed is subject to proportionate reduction by the amount of any prior optional redemption. PAYING AGENT/REGISTRAR: The initial Paying Agent/Registrar is Wells Fargo Bank, N.A., Dallas, Texas. SOURCE OF PAYMENT: The Certificates are direct obligation of the City, and the principal thereof and interest thereon are payable solely from the proceeds of an annual ad valorem tax levied upon all taxable property within the City, within the limits prescribed by law, and are further payable from a limited junior and subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System"), but only to the extent of and in the amount not in excess of $10,000.00 of the Net Revenues of such System. BOOK-ENTRY-ONLY SYSTEM: The City intends to utilize the Book-Entry-Only System of The Depository Trust Company ("DTC"). Further details with regard to the security for the Certificates are set forth in the Preliminary Official Statement. CONDITIONS OF THE SALE TYPES OF BIDS AND INTEREST RATES: The Certificates will be sold in one block on an "All or None" basis, and at a price of $2,786,175 or 101.50% of par value plus accrued interest to the date of delivery of the Certificates provided, however, that any bid is subject to adjustment as described under the caption "THE CERTIFICATES — Adjustment of Principal Amounts." Bidders are invited to name the rate(s) of interest to be borne by the Certificates provided that each rate bid must be in a multiple of 1/8 of 1% or 1/20 of 1% and the net effective interest rate for the Certificates (calculated in the manner required by Chapter 1204, Texas Government Code, as amended) must not exceed 15%. The highest rate bid may not exceed the lowest rate bid by more than 2% in rate. No limitation is imposed upon bidders as to the number of rates or changes which may be used. All Certificates of one maturity must bear one and the same rate. No bids involving supplemental interest rates will be considered. BASIS OF AWARD: Subject to the City's right to reject any or all bids and to waive any irregularities except time of filing, the sale of the Certificates will be awarded to the bidder or syndicate account manager whose name first appears on the Official Bid Form (the "Purchaser") making a bid that conforms to the specifications herein and which produces the lowest True Interest Cost rate to the City. The True Interest Cost rate is that rate which, when used to compute the total present value as of the Delivery Date of all debt service payments on the Certificates on the basis of semi-annual compounding, produces an amount equal to the sum of the par value of the Certificates plus any premium bid, if any. In the event of a bidder's error in interest cost rate calculations, the interest rates, and premium, if any, set forth in the Official Bid Form will be considered as the intended bid. GOOD FAITH DEPOSIT: A Good Faith Deposit, payable to the "City of Pearland" in the amount of $54,900 is required. Such Good Faith Deposit shall be in the form of a Cashier's Check, which is to be retained uncashed by the City pending the Purchaser's compliance with the terms of its bid and the Notice of Sale and Bidding Instructions. The Good Faith Deposit may accompany the Official Bid Form or it may be submitted separately. If submitted separately, it shall be made available to the City prior to the opening of the bids, and shall be accompanied by instructions from the bank on which drawn which authorize its use as a Good Faith Deposit by the Purchaser who shall be named in such instructions. Unless otherwise agreed, the Good Faith Deposit will be returned to the purchaser of the Certificates on the date of delivery of the Certificates. No interest will be allowed on the Good Faith Deposit. In the event the fl Purchaser should fail or refuse to take up and pay for the Certificates in accordance with its bid, then said check shall be cashed and accepted by the City as full and complete liquidated damages. The checks accompanying bids other than the winning bid will be returned immediately after the bids are opened, and an award of the Certificates has been made. INITIAL OFFERING PRICE CERTIFICATE: To provide the City with information to enable it to comply with certain conditions of the Internal Revenue Code of 1986 relating to the exclusion of interest on the Certificates from gross income for federal income tax purposes, the successful bidder will be required to complete, execute, and deliver to the City, at the time that the Certificates are awarded, a certification regarding "issue price" substantially in the form attached hereto. If the successful bidder will not reoffer the Certificates for sale or has not sold a substantial amount of the Certificates of any maturity by the date of delivery, such certificate may be modified in a manner approved by the City and the City's Bond Counsel (as hereinafter defined). In no event will the City fail to deliver the Certificates as a result of the successful bidder's inability to certify actual sales of Certificates at a particular price prior to delivery. Each bidder, by submitting its bid, agrees to complete, execute, and deliver such a certificate by the date of the award of the Certificates, if its bid is accepted by the City. It will be the responsibility of the successful bidder to institute such syndicate reporting requirements, to make such investigation, or otherwise to ascertain the facts necessary to enable it to make such certifications with reasonable certainty. Any questions concerning such certification should be directed to Bond Counsel. DELIVERY OF THE CERTIFICATES AND ACCOMPANYING DOCUMENTS The delivery of the Certificates is subject to receipt of the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel for the City ("Bond Counsel"), as hereinafter described. CUSIP NUMBERS: It is anticipated that CUSIP identification numbers will appear on the Certificates, but neither the failure to print or type such number on any Certificates nor any error with respect thereto shall constitute cause for a failure or refusal by the Purchaser to accept delivery of and pay for the Certificates in accordance with the terms of this Notice of Sale and the terms of the Official Bid Form. All expenses in relation to the printing or typing of CUSIP numbers on the Certificates shall be paid by the City; provided, however, that the CUSIP Service Bureau fee for the assignment of the numbers shall be the responsibility of and shall be paid for by the Purchaser. INITIAL DELIVERY OF INITIAL CERTIFICATES: Initial delivery will be accomplished by the issuance of registered Certificates in the aggregate principal amount of $2,745,000*, payable to the Purchaser, signed by the manual or facsimile signature of the Mayor and City Secretary of the City, approved by the Attorney General, and registered by the Comptroller of Public Accounts. Upon delivery of the Initial Certificates, they shall be immediately cancelled, and one definitive Certificate for each maturity will be registered and delivered only to Cede & Co., and deposited with DTC in connection with DTC's Book-Entry-Only System. Initial delivery will be at the corporate trust office of the Paying Agent/Registrar. Payment for the Certificates must be made in immediately available funds for unconditional credit to the City, or as otherwise directed by the City. The Purchaser will be given five (5) business days' notice of the time fixed for delivery of the Certificates. It is anticipated that initial delivery of the Initial Certificates can be made on or about August 29, 2013, and it is understood and agreed that the Purchaser will accept delivery and make payment for Initial Certificates by 10:00 A.M., Houston, Texas Time on August 29, 2013, or thereafter on the date the Certificates are tendered for delivery, up to and including September 12, 2013. If for any reason the City is unable to make delivery on or before September 12, 2013, then the City shall immediately contact the Purchaser and offer to allow the Purchaser to extend its offer for an additional fifteen (15) days. If the Purchaser does not elect to extend its offer within six (6) days thereafter, then its Good Faith Deposit will be returned, and both the City and the Purchaser shall be relieved of any further obligation. In no event shall the City be liable for any damages, whether direct, consequential or otherwise, by reason of its failure to deliver the Certificates. CONDITIONS TO DELIVERY: The obligation of the Purchaser to take up and pay for the Certificates is subject to the Purchaser's receipt of (a) the legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel for the City, (b) a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates, and (c) the certification as to the Official Statement, all as further described in the Preliminary Official Statement. LEGAL OPINION: The City will furnish the Purchaser a transcript of certain certified proceedings held incident to the authorization and issuance of the Certificates, including a certified copy of the unqualified approving opinion of the Attorney General of Texas, as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding * Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts." iv obligations of the City under the Constitution and laws of the State of Texas. The City also will furnish the approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, to the effect that, based upon an examination of such transcript, the Certificates are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The opinion of Bond Counsel is expected to be reproduced on the Certificates. Errors and omissions in the printing of such legal opinion on the Certificates shall not affect the validity of the Certificates nor constitute cause for the failure or refusal by the Purchaser to accept delivery of and pay for the Certificates. REGISTRATION: The Certificates are transferable only on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal office of the Paying Agent/Registrar. No service charge will be made for any transfer or exchange, but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. NO-LITIGATION CERTIFICATE: The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates, or, which would affect the provisions made for their payment or security, or in any manner questioning the validity of said Certificates will also be furnished. NO MATERIAL ADVERSE CHANGE: The obligations of the Purchaser to take up and pay for the Certificates, and of the City to deliver the Certificates, are subject to the condition that, up to the time of delivery of and receipt of payment for the Certificates, there shall have been no material adverse change in the condition (financial or otherwise) of the City subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. CHANGE IN TAX EXEMPT STATUS: At any time before the Certificates are tendered for delivery, the Purchaser may withdraw its bid if the interest received by private owners of certificates of the same type and character as the Certificates shall be declared to be taxable income under present federal income tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required to be taken into account in computing any federal income taxes, by the terms of any federal income tax law enacted subsequent to the date of this Official Notice of Sale. CONTINUING DISCLOSURE AGREEMENT: The City will agree in the Ordinance authorizing the Certificates to provide certain periodic information and notices of material events in accordance with the Securities and Exchange Commission Rule 15c2-12, as described in the Preliminary Official Statement under "CONTINUING DISCLOSURE OF INFORMATION." The Purchaser's obligation to accept and pay for the Certificates is conditioned upon delivery to the Purchaser or its agent of a certified copy of the Ordinance containing the agreement described under such heading. GENERAL CONSIDERATIONS FINANCIAL ADVISOR: BOSC, Inc. is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. BOSC, Inc., in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documentation with respect to the federal income tax status of the Certificates. SECURITIES REGISTRATION AND QUALIFICATION: No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities laws or regulations of any other jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws or regulations of any other jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdictions. By submission of a bid, the Purchaser represents that the sale of the Certificates in states other than Texas will be made only pursuant to exemptions from registration or qualification or, where necessary, the Purchaser will register or qualify the Certificates in accordance with the securities laws or regulations of any jurisdiction which so requires. The City agrees to cooperate, at the Purchaser's written request and expense, in registering or qualifying Certificates, or in obtaining an exemption from registration or qualification, in any jurisdiction where such action is necessary, provided that the City shall not be required to file a consent to service of process in any jurisdiction. v ISSUANCE OF ADDITIONAL DEBT: Concurrently with the issuance of the Certificates, the City is issuing its $9,315,000* Permanent Improvement Bonds, Series 2013. OFFICIAL STATEMENT By accepting the winning bid, the City agrees to the following representations and covenants to assist the Purchaser in complying with Rule 15c2-12 of the Securities and Exchange Commission ("SEC"). FINAL OFFICIAL STATEMENT: The City has prepared the accompanying Official Statement for dissemination to potential purchasers of the Certificates, but will not prepare any other document or version for such purpose except as described below. The Purchaser will be responsible for informing the City of the initial offering yields. The City will prepare a final Official Statement describing these offering yields, the interest rates on the Certificates, the selling compensation, the final debt service schedule, the ratings assigned to the Certificates (if not currently included), and the terms of and obligor on any policy of municipal bond insurance. Accordingly, the City deems the accompanying Official Statement to be final as of its date, within the meaning of SEC Rule 15c2-12(b)(1), except for the omission of the foregoing items. By delivering the final Official Statement or any amendment or supplement thereto to the Purchaser on or after the sale date, the City represents the same to be complete as of its date, within the meaning of SEC Rule 15c2-12(e)(3). Notwithstanding the foregoing, the only representations concerning the absence of material misstatements or omissions from the Official Statement which are or will be made by the City are those described in the Official Statement under "GENERAL CONSIDERATIONS - Certification as to Official Statement." CHANGES TO OFFICIAL STATEMENT: If, subsequent to the date of the Official Statement, the City learns, through the ordinary course of business and without undertaking any investigation or examination for such purposes, or is notified by the Purchaser of any adverse event which causes the Official Statement to be materially misleading the City will promptly prepare and supply to the Purchaser an appropriate amendment or supplement to the Official Statement satisfactory to the Purchaser; provided, however, that the obligation of the City to do so will terminate when the City delivers the Certificates to the Purchaser, unless the Purchaser notifies the City on or before such date that less than all of the Certificates have been sold to ultimate customers, in which case the City's obligations hereunder will extend for an additional period of time (but not more than 90 days after the date the City delivers the Certificates) until all of the Certificates have been sold to ultimate customers. DELIVERY OF OFFICIAL STATEMENTS: The City will furnish to the Purchaser (and to each other participating purchaser of the Certificates, within the meaning of SEC Rule 15c2-12(a), designated by the Purchaser), within seven days after the sale date, up to 100 copies of the Official Statement. The City will also furnish to the Purchaser a like number of any supplement or amendment prepared by the City for dissemination to potential purchasers of the Certificates as described above as well as such additional copies of the Official Statement or any supplement or amendment as the Purchaser may request prior to the 90th day after the end of the underwriting period referred to in SEC Rule 15c2-12(e)(2). The City will pay the expense of preparing up to 100 copies of the Official Statement and up to 100 copies of any supplement or amendment issued on or before the delivery date, but the Purchaser must pay for all other copies of the Official Statement or any supplement or amendment thereto. OFFICIAL STATEMENT: Upon the award of the sale of the Certificates, the Preliminary Official Statement will be updated to conform to the terms of the Purchaser's bid and, if necessary, to make certain other changes. In connection therewith, the Purchaser will be required to furnish information concerning the initial resale offering prices and yields of the Certificates as well as the names of the members of the underwriting syndicate. ADDITIONAL COPIES OF NOTICE BID FORM AND STATEMENT: A limited number of additional copies of this Official Notice of Sale, the Official Bid Form and the Official Statement, as available over and above the normal mailing, may be obtained at the offices of BOSC, Inc., 1401 McKinney Street, Suite 1000, Houston, Texas, 77010, Financial Advisor to the City. On the date of the sale, the City Council will, in the Ordinance authorizing the issuance of the Certificates, confirm its approval of the form and content of the Official Statement, and any addenda, supplement or amendment thereto, and authorize its use in the reoffering of the Certificates by the Purchaser. /s! Tom Reid Mayor City of Pearland, Texas July 31, 2013 vi OFFICIAL BID FORM August 12, 2013 Mayor and City Council City of Pearland 3519 Liberty Drive Pearland, Texas 77581 Ladies and Gentlemen: Subject to the terms of your Official Notice of Sale and Preliminary Official Statement, dated July 31, 2013, which are incorporated herein by reference, we hereby submit the following bid for the $2,745,000* CITY OF PEARLAND, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013. This offer is being made for all of said Certificates and for not less than all. For said legally issued Certificates, we will pay you a price of $2,786,175, plus accrued interest from their date to the date of delivery to us, for the Certificates maturing and bearing interest per annum as follows: Maturity Principal Interest Maturity Principal Interest (March 1) Amount* Rate (March 1) Amount* Rate 2014(a) $ 75,000 % 2027(a)(b) $110,000 % 2015(a) 85,000 % 2028(a)(b) 110,000 % 2016(a) 85,000 % 2029(a)(b) 120,000 % 2017(a) 85,000 % 2030(a)(b) 120,000 % 2018(a) 85,000 pro 2031(a)(b) 120,000 pro 2019(a) 90,000 % 2032(a)(b) 120,000 % 2020(a) 100,000 % 2033(a)(b) 130,000 % 2021(a) 100,000 % 2034(a)(b) 130,000 % 2022(a) 100,000 % 2035(a)(b) 130,000 % 2023(a) 100,000 % 2036(a)(b) 140,000 % 2024(a)(b) 100,000 % 2037(a)(b) 140,000 % 2025(a)(b) 110,000 % 2038(a)(b) 150,000 % 2026(a)(b) 110,000 % * Preliminary, subject to change. (a) At the option of the Purchaser, any or all of such serial maturities may be designated as term certificates subject to mandatory sinking fund redemption as follows; provided that the mandatory sinking fund amount in each year shall equal the amounts shown above as maturing in such year. Term Certificates Years of First Maturity Date Mandatory Principal Amount Interest (March 1) Redemption of Term Certificates Rate (b) Subject to optional redemption and payment, at the option of the City, in whole or, from time to time, in part, on March 1, 2023, or on any date thereafter at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption. * Preliminary, subject to change. See "THE CERTIFICATES — Adjustment of Principal Amounts" in the Official Notice of Sale. The calculation (which is not part of this bid) of the interest cost from the above, is: TRUEINTEREST COST ........................................................................................... % The Initial Certificates shall be registered in the name of , which will, upon payment for the Certificates, be cancelled by the Paying Agent/Registrar. The Certificates will then be registered in the name of Cede & Co. (DTC's partnership nominee), under the Book-Entry-Only System. We request _ copies of the final Official Statement (not to exceed 100 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 Bank, , Texas, in the amount of $54,900 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 Certificates utilizing the Book-Entry-Only System through DTC and make payment for the Initial Certificates in immediately available funds in the Corporate Trust Office, Wells Fargo Bank, N.A., Dallas, Texas, not later than 10:00 AM, CST, on August 29, 2013, or thereafter on the date the Certificates are tendered for delivery, pursuant to the terms set forth in the Notice of Sale and Bidding Instructions. It will be the obligation of the purchaser of the Certificates to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute and deliver to the City, by the date of delivery of the Certificates, a certificate relating to the "issue price" of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale, with such changes thereto as may be acceptable to the City and its Bond Counsel. Respectfully submitted, Authorized Representative ACCEPTED this 12`h day of August, 2013, the City Council, City of Pearland, Texas. Mayor ATTEST: City Clerk (For your information you will find attached a list of the group of purchasers associated with us in this proposal) CERTIFICATE REGARDING ISSUE PRICE The undersigned hereby certifies as follows with respect to the sale of $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates") of the City of Pearland, Texas (the "Issuer"): 1. The undersigned is the underwriter or the manager of the syndicate of underwriters (the "Underwriter") which has purchased the Certificates from the Issuer at competitive sale. 2. The Underwriter has made a bona fide offering to the public of all of the Certificates of each maturity at the initial offering prices to the public as set forth below. The term "public" as used herein, does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Purchaser or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). 3. The first price/yield at which a substantial amount (i.e., at least ten (10) percent) of the principal amount of each maturity of the Certificates, except for the Certificates maturing in the years , , , and (the "Retained Maturities"), was sold to the public is set forth below: Maturity Date Principal Maturity Date Principal (03/01) Amount Yield (03/01) Amount Yield 2014 $ 75,000 2027 $110,000 2015 85,000 2028 110,000 2016 85,000 2029 120,000 2017 85,000 2030 120,000 2018 85,000 2031 120,000 2019 90,000 2032 120,000 2020 100,000 2033 130,000 2021 100,000 2034 130,000 2022 100,000 2035 130,000 2023 100,000 2036 140,000 2024 100,000 2037 140,000 2025 110,000 2038 150,000 2026 110,000 4. In the case of the Retained Maturities, the Underwriter reasonably expected on the offering date to sell a substantial amount (i.e., at least ten (10) percent) of each Retained Maturity to the public at the initial offering price/yield as set forth above. 5. The issue prices set forth above are determined on the date the Certificates were purchased by the Underwriter (the "sale date") based on the reasonable expectations regarding the initial public offering prices. Each maturity of the Certificates was offered to the public at a price which, on the sale date, was reasonably expected by the Underwriter to be equal to the fair market value of such maturity. 6. Based on the foregoing, the aggregate of the initial offering prices in $ , plus accrued interest of $ , fora total of $ The undersigned understands that the statements made herein will be relied upon (i) by the Issuer in complying with the conditions imposed by the Internal Revenue Code of 1986, as amended, on the exclusion of interest on the Certificates from the gross income of their owners for federal income tax purposes, and (ii) by Andrews Kurth LLP (a) in connection with rendering its opinion as Bond Counsel to the Issuer that interest on the Certificates is excludable from gross income thereof for income tax purposes and (b) for purposes of completing the IRS Form 8038-G. EXECUTED and DELIVERED this day of , 2013. [PURCHASER] Title: OFFICIAL STATEMENT DATED AUGUST 12, 2013 In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX EXEMPTION" herein. Interest on the Certificates 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 consequences for corporations. NEW ISSUE: BOOK -ENTRY-ONLY RATINGS: Standard & Poor's Ratings Services ...................."AA-" See "SALE AND DISTRIBUTION OF THE CERTIFICATES — Municipal Bond Ratings" $2,745,000 CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) CERTIFICATES OF OBLIGATION, SERIES 2013 Dated: August 1, 2013 Due: March 1, as shown below Principal of and interest on the $2,745,000 City of Pearland, Texas, Certificates of Obligation, Series 2013 (the "Certificates") are payable by Wells Fargo Bank, N.A., Dallas, Texas, the paying agent/registrar (the "Paying Agent/Registrar"). Interest on the Certificates is payable on September 1 and March 1 of each year, commencing March 1, 2014 and thereafter until maturity or prior redemption. The definitive Certificates 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 Certificates will be issued in denominations of $5,000 of principal amount or any integral multiple thereof. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of the Certificates 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 Certificates. See "THE CERTIFICATES — Book-Entry-Only System" herein. The Certificates maturing on March 1, 2024 and thereafter are subject to redemption prior to their scheduled maturities on March 1, 2023 or any date thereafter, at the option of the City. Upon redemption the Certificates will be payable at a price equal to the principal amount thereof plus accrued interest to the date of redemption. See "THE CERTIFICATES - Description" and "THE CERTIFICATES - Redemption Provisions." The Certificates, when issued, will constitute valid and binding Obligations of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System") in an amount not to exceed $10,000. See "THE CERTIFICATES - Source of Payment." The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance (the "Ordinance") approved by City Council on August 12, 2013. See "THE CERTIFICATES — Authorization of the Certificates." Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES — Use of Proceeds." PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES (Due March 1) $2,525,000 Serial Certificates Initial CUSIP Maturity Principal Interest Reoffering Nos. (March 1) Amount Rate Yield (a) 704862 (b) 2014 $ 75,000 3.000% 0.500% 2J9 2015 85,000 3.000 0.700 2K6 2016 85,000 3.000 1.100 2L4 2017 85,000 3.000 1.300 2M2 2018 85,000 3.000 1.600 2N0 2019 90,000 3.000 1.900 2P5 2020 100,000 4.000 2.300 2Q3 2021 100,000 5.000 2.600 2R1 2022 100,000 5.000 2.900 2S9 2023 100,000 5.000 3.050 2T7 2024(c) 100,000 5.000 3.400 2U4 2025(c) 110,000 5.000 3.600 2V2 Initial CUSIP Maturity Principal Interest Reoffering Nos. (March 1) Amount Rate Yield (a) 704862 (b) 2028(c) $110,000 4.000% 4.100% 2X8 2029(c) 120,000 4.250 4.200% 2Y6 2030(c) 120,000 4.375 4.300 2Z3 2031(c) 120,000 4.375 4.400 3A7 2032(c) 120,000 4.375 4.450 3B5 2033(c) 130,000 4.500 4.500 3C3 2034(c) 130,000 4.500 4.550 3E9 2035(c) 130,000 4.500 4.600 3F6 2036(c) 140,000 4.625 4.650 3G4 2037(c) 140,000 4.625 4.680 3H2 2038(c) 150,000 4.625 4.700 3D1 $220,000 Term Certificates $220,000 Tenn Certificate Due March 1, 2027 (a)(c)(d) Interest Rate 4.000% (Price $100.000) CUSIP Number 704862 2W0 (b) (a) The initial yields are established by and are the sole responsibility of the Initial Purchaser (hereinafter defined), and may subsequently be changed. (b) CUSIP numbers have been assigned to the Certificates by CUSIP Global Service, managed by Standard & Poor's Financial Services LLC on behalf of the American Banker Association, and are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor, nor the Initial Purchaser are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Certificates maturing on March 1, 2024 and thereafter, are subject to redemption on March 1, 2023 or any date thereafter, at the option of the City, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption. See "THE CERTIFICATES - Redemption Provisions." (d) Subject to mandatory redemption in the years and in the amounts set forth herein under the caption "THE CERTIFICATES — Redemption Provisions — Mandatory Redemption." The Certificates are offered when, as and if issued, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel for the City, as to the validity of the issuance of the Certificates under the Constitution and laws of the State of Texas. See "LEGAL MATTERS." Delivery of the Certificates through DTC is expected to be on or about August 29, 2013. 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 bythe 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 ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING DTC OR ITS BOOK-ENTRY-ONLY SYSTEM. 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 OFFICIAL STATEMENT, INCLUDING THE ATTACHED APPENDICES, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. TABLE OF CONTENTS INTRODUCTORY STATEMENTI' ............................. 4 SALE AND DISTRIBUTION OF'I'HE CERTIFICATES .................................................. 4 Sale of the Certificates ........................................... 4 Prices and Marketability ......................................... 4 Securities Laws ....................................................... 4 Municipal Bond Ratings ........................................ 5 OFFICIAL STATEMENT SUMMARY .................... 6 INTRODUCTION ......................................................... 9 THE CERTIFICATES ................................................. 9 Description.............................................................. 9 Redemption Provisions .......................................... 9 Notice of Redemption .......................................... 10 Book-Entry-Only System ..................................... 10 Successor Paying Agent/Registrar ....................... 12 Source of Payment ................................................ 12 Use of Proceeds .................................................... 12 Authorization of the Certificates .......................... 12 Sources and Uses of Funds .................................. 13 FutureDebt ........................................................... 13 Legal Investments and Eligibility to Secure Public Fund in Texas ....................... 13 Remedies in the Event of Default ........................ 13 INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY .................................................................... 14 Legal Investments ................................................. 14 Investment Policies ............................................... 15 Current Investments ............................................. 16 Additional Provisions ........................................... 16 CITY TAX DEBT ....................................................... 1.7 Tax Supported Debt Statement ............................ 17 Bonded Indebtedness Payable from Ad Valorem Taxes ............................................ 17 Tax Supported Debt Service Schedule ................ 18 Estimated Overlapping Debt ................................ 19 DebtRatios ........................................................... 19 TAX DATA .................................................................. 20 General.................................................................. 20 Property Tax Code and County-Wide Appraisal District ......................................... 20 Tax Rate Limitations ............................................ 20 Property Subject to Taxation by the City ............. 20 Tax Increment Reinvestment Zone ...................... 21 Notice and Hearing Procedures ............................ 22 Levy and Collection of Taxes .............................. 22 Collection of Delinquent Taxes ........................... 23 Historical Analysis of Tax Collection .................. 23 Analysis of Tax Base ............................................ 25 SalesTax ............................................................... 26 SELECTED FINANCIAL DATA ............................. 27 Historical Operations of the City's General Fund ............................................... 27 General Fund and Debt Service Fund Balance for the Past Five Fiscal Years ............................................................ 27 Pension Fund ........................................................ 27 Financial Statements ............................................. 27 ADMINISTRATION OF THE CITY ....................... 28 Mayor and City Council ....................................... 28 Administration ...................................................... 28 Consultants ........................................................... 29 LEGAL MATTERS .................................................... 29 Legal Opinions ..................................................... 29 No-Litigation Certificate ...................................... 30 No Material Adverse Change ............................... 30 TAX EXEMPTION ..................................................... 30 Proposed Tax Legislation and "Fiscal Cliff" ............................................................ 31 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES ................................................ 31 Discount Certificates ............................................ 31 Premium Certificates ............................................ 32 CONTINUING DISCLOSURE OF INFORMATION ................................................ 32 Annual Reports ..................................................... 32 Material Event Notices ......................................... 33 Availability of Information .................................. 33 Limitations and Amendments .............................. 34 Compliance With Prior Undertakings .................. 34 FINANCIAL ADVISOR ............................................ 34 GENERAL CONSIDERATIONS ............................. 34 Sources and Compilation of Information ............. 34 Certification as to Official Statement ................... 34 Forward Looking Statements ............................... 35 Updating of Official Statement ............................ 35 ,APPENDIX A— Economic and Demographic Characteristics APPENDIX. B — Audited Financial Statements of the City APPENDIX C — Form of Bond Counsel Opinion $2,745,000 CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) CERTIFICATES OF OBLIGATION, SERIES 2013 INTRODUCTORY STATEMENT Information contained in this Official Statement, including APPENDICES A and B, has been obtained from the City of Pearland, Texas (the "City") in connection with the offering by the City of its $2,745,000 Certificates of Obligation, Series 2013 (the "Certificates") identified on the cover page hereof. All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. SALE AND DISTRIBUTION OF THE CERTIFICATES Sale of the Certificates After requesting competitive bids for the Certificates, the City has accepted the bid resulting in the lowest true interest cost, which bid was tendered by Robert W. Baird & Co., Inc. ("Initial Purchaser") to purchase the Certificates 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 true interest rate on the Certificates was 4.262322% as calculated pursuant to Chapter 1204, Texas Government Code. Prices and Marketability The delivery of the Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Initial Purchaser on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is a bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. The City has no control over trading of the Certificates after a bona fide offering of the Certificates is made by the Initial Purchaser at the yields specified on the cover page. Information concerning reoffering yields or prices is the responsibility of the Initial Purchaser. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Initial Purchaser after the Certificates are released for sale, and the Certificates may be offered and sold at prices other than the initial offering price, including sales to dealers who may sell the Certificates into investment accounts. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE INITIAL PURCHASERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Securities Laws No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such jurisdictions. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE CERTIFICATES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 4 Municipal Bond Ratings In connection with the sale of the Certificates, the City has made application to Standard & Poor's Ratings Services ("S&P") for a rating and the rating of "AA-", has been assigned to the Certificates. An explanation of the significance of such rating may be obtained from S&P. The rating reflects only the views of S&P, and the City makes no representation as to the appropriateness of such rating. There is no assurance that such rating will continue for any period of time or that such rating will not be revised downward or withdrawn entirely by S&P, if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Certificates. 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. For additional information regarding the City, see "ADMINISTRATION OF THE CITY" and "APPENDIX A — Economic and Demographic Characteristics" herein. The Certificates .............................. $2,745,000 Certificates of Obligation, Series 2013 (the "Certificates"), are dated August 1, 2013. The Certificates mature March 1, 2014 through March 1, 2025, inclusive and on March 1 in the year 2027 and 2028 through 2038, inclusive. Interest on the Certificates accrues from August 1, 2013, and is payable initially on March 1, 2014, and on each September 1 and March 1 thereafter until the earlier of maturity or prior redemption. The Certificates include $2,525,000 principal amount of serial certificates maturing March 1 in each of the years 2014 through 2025, inclusive and 2028 through 2038, inclusive (the "Serial Certificates") and $220,000 principal amount of term certificates maturing March 1 in the year 2027 (the "Term Certificates"). The Serial Certificates and the Term Certificates are collectively referred to herein as the "Certificates." See "THE CERTIFICATES - Description." Other Characteristics ...................... The Certificates are issued in fully registered form in integral multiples of $5,000. The Certificates maturing on and after March 1, 2024 are subject to redemption, at the option of the City, at a price of the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption, on March 1, 2023 or any date thereafter. See "THE CERTIFICATES - Redemption Provisions — Optional Redemption." Term Certificates are also subject to mandatory sinking fund redemption as described under the heading "THE CERTIFICATES — Redemption Provisions — Mandatoiy Redemption. " Authority ......................................... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance (the "Ordinance") approved by City Council on August 12, 2013. See "THE CERTIFICATES — Authorization of the Certificates." Paying Agent/Registrar ................... The initial paying agent/registrar is Wells Fargo Bank, N.A., Dallas, Texas (the "Paying Agent/Registrar"). The City intends to use the book-entry-only system of The Depository Trust Company ("DTC"), but reserves the right on its behalf or on behalf of the DTC to discontinue such system. (See "THE CERTIFICATES - Book-Entry-Only System.") Source of Payment .......................... Principal of and interest on the Certificates are payable from the proceeds of an annual ad valorem tax levied upon all taxable property within the City, within the limits prescribed by law, and are further payable from a limited subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System"), but only to the extent of and in an amount not in excess of $10,000 of the Net Revenues of such System. See "THE CERTIFICATES - Source of Payment." Use of Proceeds .............................. Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES — Use of Proceeds." Ratings ............................................ Standard & Poor's Ratings Services...........................................................11 AA_" Payment Record .............................. The City has never defaulted on the timely payment of principal of and interest on its indebtedness. Tax Exemption ............................... In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX EXEMPTION" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX EXEMPTION" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations. [Remainder of Page Intentionally Left Blank] - Selected Financial Information - (Unaudited) 2012 Adjusted Net Taxable Assessed Valuation .............................................................. $ 6,455,691,712 (a) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2013) .............................................. $ 298,570,000 (b) Plus: The Certificates ............................................................................................... 2,745,000 Plus: The Bonds ........................................................................................................ 9,315,000 (c) Total Tax Supported Debt .................................................................................. $ 310.630.000 EstimatedOverlapping Debt ............................................................................................ Direct and Estimated Overlapping Debt .......................................................................... Debt Service Fund Balance (as of June 30, 2013) ........................................................... % of 2012 Assessed Valuation Debt Ratios: Direct Tax Supported Debt ................................... 4.81% Direct Tax Supported and Estimated Overlapping Debt ............................................. 13.96% 2012 Tax Rate (per $100 of Assessed Valuation) Maintenance and Operation ....................................................................................... DebtService ............................................................................................................. Total ........................:.......................................................................................... Annual Debt Service Requirements: (b)(c) Average (Fiscal Years 2013-2038) ............................................................................ Maximum(2024) ....................................................................................................... Tax Collections: Arithmetic Average, Tax Years (2007-2011)- Current Year Collections ................. - Total Collections .............................. $ 590,893.490 901,523.490 $ 12.156,203 Per Capita (103,800) $2,993 $8,685 $ 0.2151 0.4900 $ 0.7051 $ 18,255,803 $ 25,496,548 98.83% 99.97% (a) Provided by the Brazoria County Appraisal District, Fort Bend Central Appraisal District and Harris County Appraisal District (the "Appraisal Districts") and net of exemptions. Includes $1,453,517,411 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. Does not include value associated with the annexation of Brazoria County Municipal Utility District No. 4 in an amount of $214 million. (b) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (c) Concurrently with the Certificates, the City is issuing $9,315,000 Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. INTRODUCTION This Official Statement and the Appendices hereto provide certain information with respect to the issuance by the City of Pearland, Texas (the "City") in connection with the offering by the City of its $2,745,000 Certificates of Obligation, Series 2013 (the "Certificates"). The Certificates are issued pursuant to the Texas Constitution, the general laws of the State of Texas, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance authorizing issuance of the Certificates (the "Ordinance") adopted by the City Council of the City (the "Council"). There follows in this Official Statement descriptions of the Certificates, the plan of financing, and certain information about the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City upon request. Certain capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance, except as otherwise indicated herein. 11 ,1001 II T W:r11Ixy Description The Certificates are dated August 1, 2013, bear interest from such date at the stated interest rates indicated on the cover page of this Official Statement, which interest is payable March 1, 2014, and each September 1 and March 1 thereafter until the earlier of maturity or prior redemption. The Certificates are issued in fully registered form in denominations of $5,000 each or any multiple thereof. Principal of the Certificates is payable at the principal payment office of Wells Fargo Bank, N.A., Dallas, Texas (the "Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede & Co., the nominee of The Depository Trust Company pursuant to the Book- Entry-Only System described below. In the event the Book-Entry-Only-System is discontinued, the Certificates may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer, but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date (the "Record Date") for the interest payable on any interest payment date means the 15th day of the month next preceding such interest payment date. It will be required that all transfers be made within three business days after request and presentation. The City has agreed to replace mutilated, destroyed, lost or stolen Certificates upon surrender of the mutilated Certificates, or receipt of satisfactory evidence of such destruction, loss or theft, and receipt by the City and the Paying Agent/Registrar of security or indemnity to keep them harmless. The City may require payment of taxes, governmental charges and other expenses in connection with any such replacement. Redemption Provisions - Optional Redemption - The Certificates maturing on March 1, 2024 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on March 1, 2023, or any date thereafter, at the option of the City at a price equal to the principal amount thereof plus accrued interest to the date of redemption. If less than all of the Certificates are to be redeemed, the City may select the maturities of Certificates to be redeemed. If less than all the Certificates of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Certificates are in Book-Entry-Only form) shall determine by lot the Certificates, or portions thereof, within such maturity to be redeemed. If a 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. - Mandatory Redemption - The Term Certificates are subject to mandatory sinking fund redemption and shall be redeemed by the City prior to their scheduled maturities on March 1 in the years and in the amounts set forth below at a redemption price equal to the principal amount redeemed plus accrued interest to the mandatory redemption date (the "Mandatory Redemption Dates"): $220,000 Term Certificates Maturing on March 1, 2027 Mandatory Redemption Date Principal Amount March 1, 2026 $110,000 March 1, 2027 (Final Maturity) 110,000 The particular Term Certificates to be mandatorily redeemed shall be selected by lot or other customary random selection method. The principal amount of any Term Certificates to be mandatorily redeemed on such Mandatory Redemption Date shall be reduced by the principal amount of such Term Certificate 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 Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. Book-Entry-Only System This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC '), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City, the Financial Advisor and the Initial Purchaser believe the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City, the Financial Advisor and the Initial Purchaser cannot and do not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Certificates, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the world's largest securities 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 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- 10 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 is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. 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 rating of "AA+." 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 . Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each 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. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. 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. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within 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. (nor any other DTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or 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 Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. 11 A Beneficial Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Tender Agent, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant's interest in the Certificates, on DTC's records, to the Tender Agent. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Certificates to the Tender Agent's DTC account. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor 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). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes not responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and, (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Successor Paying Agent/Registrar Provision is made in the Ordinance for replacing the Paying Agent/Registrar. If the City replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar's records to the successor paying agent/registrar (the "Successor Paying Agent/Registrar"), and the Successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any Successor Paying Agent/Registrar selected by the City shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Certificates. Source of Payment The Certificates are payable as to principal and interest from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding, it will levy, assess and undertake to collect such tax. The Certificates will be further payable from a limited subordinate pledge of Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System") in an amount not to exceed $10,000. See "TAX DATA - Tax Rate Limitations" and "THE CERTIFICATES - Remedies in the Event of Default." Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) to pay the costs of issuance of the Certificates. Authorization of the Certificates The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and the Ordinance. Further reference to the Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates, as a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. IN Sources and Uses of Funds The proceeds from the sale of the Certificates will be applied as follows: SOURCES OF FUNDS: Principal Amount of Certificates $ 2,745,000.00 Net Premium on the Certificates 99,133.45 Accrued Interest on Certificates 9.03292 Total Sources of Funds $ 2,853,166.37 USES OF FUNDS Deposit to Construction Fund $ 2,745,000.00 Deposit Accrued Interest to Interest and Sinking Fund 9,032.92 Expenses: Initial Purchaser's Discount 57,958.45 Other Issuance Expenses 41,175.00 Total Uses of Funds $ 2.851166.37 Future Debt In addition to the Certificates, the City is issuing $9,315,000 Permanent Improvement Bonds, Series 2013, which are expected to be delivered concurrently with the Certificates on August 29, 2013. After the sale of the $9,315,000 Permanent Improvement Bonds, Series 2013, the City will have $95,155,000 of authorized but unissued bonds. The City plans to issue such authorized bonds over the next five to seven years. The City may also issue unvoted certificates of obligation payable from ad valorem taxes for City projects. Depending on the rate of development within the City, changes in assessed valuation, and the amounts, interest rates, maturities and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds, the Certificates, and future certificates of obligation or bonds. Legal Investments and Eligibility to Secure Public Fund in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201, Texas Government Code, as amended, the Certificates, whether rated or unrated, are (a) legal investments for insurance companies, fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, and such political subdivisions may impose a requirement consistent with such act that the Certificates have a rating of not less than "A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than "A" or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws, rules, regulations or investment criteria that might affect the suitability of the Certificates for any of the above purposes or limit the authority of any of the above entities or persons to purchase or invest in the Certificates. Remedies in the Event of Default The Ordinance does not establish specific events of default with respect to the Certificates or 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. If the City defaults in any payment due on the Certificates or if the City defaults in the observance or performance of any of the covenants, conditions, or obligations set forth in the Ordinance, any registered owner is entitled to seek a writ of mandamus or mandatory injunction from a court of proper jurisdiction to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as they become due or to perform other material covenants, conditions or obligations contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract; and, Texas law provides that, following their approval by the Attorney General and issuance, the Certificates are valid and binding obligations for all purposes according to their terms. However, the 13 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. Such rights are in addition to any other rights the registered owners of the Certificates may be provided by the laws of the State of Texas with respect to the Certificates. Under Texas law there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could file suit against the City if a default occurred in the payment of principal of or interest on any such Certificates; however, a suit for monetary damages could be vulnerable to the defense of sovereign immunity and any judgment could not be satisfied by execution against any property of the City. The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or 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 Certificates are qualified with respect to the customary rights of debtors relative to their creditors. 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 Available City funds are invested as authorized by Texas law and 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. Under Texas 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 of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state 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 that are issued by or through an institution that either has its main office or a branch in Texas, 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 of Texas, (9) 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 (11) through (13) below, 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 of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) 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-I or the equivalent by at least one nationally recognized credit rating agency, (11) 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, (12) no-load money market mutual funds registered with and regulated by the Securities and 14 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 (13) 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 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, bond 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 bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. 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. 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. 15 Current Investments The City's Investment Policy authorizes the City to invest in direct obligations of the U.S. Treasury with maturity dates of three years or less, obligations of agencies of the U.S. Government with maturity dates of three years or less, certificates of deposit, and certain investment pools. The City's investment balances on June 30, 2013 were as follows: Face Principal Market Book Amount Invested Value Value Cash* $74,702,983 $74,702,983 $73,672,670 $74,702,983 Government Securities 11,500,000 11,579,432 11,543,746 11,541,600 Total Portfolio $86,202,983 $86,282,415 $85,216,416 $86,244,583 * Includes Certificates of Deposit. 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. [Remainder of Page Intentionally Left Blank] 16 CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. Bonded Indebtedness Payable from Ad Valorem Taxes 2012 Adjusted Net Taxable Assessed Valuation .............................................................. $ 6,455,691,712 (a) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2013) .............................................. $ 298,570,000 (b) Plus: The Certificates ............................................................................................... 2,745,000 Plus: The Bonds ........................................................................................................ 9,315,000 (c) Total Tax Supported Debt .................................................................................. $ 310.630,000 Debt Service Fund Balance (as of June 30, 2013 ............................................................. $ 12 156,203 (a) Provided by the Brazoria County Appraisal District, Fort Bend Central Appraisal District and Harris County Appraisal District (the "Appraisal Districts") and net of exemptions. Includes $1,453,517,411 in assessed value attributable to Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ"). Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of the such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. Does not include value associated with the annexation of Brazoria County Municipal Utility District No. 4 in an amount of $214 million. (b) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (c) Concurrently with the Certificates, the City is issuing $9,315,000 Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. [Remainder of Page Intentionally Left Blank] 17 Tax Supported Debt Service Schedule The following sets forth the principal and interest on the City's Outstanding Tax Supported Debt, plus the principal and interest on the Certificates. FY Current Total Ending Total Debt Plus: The Certificates Plus: The Bonds (b) Debt Service 9/30 Service (a) Principal Interest Principal Interest Requirements 2013 $ 25,343,548 $ 25,343,548 2014 23,905,389 $ 75,000 $ 124,691 $ 275,000 $ 411,461 24,791,541 2015 23,816,052 85,000 112,613 295,000 370,943 24,679,607 2016 23,811,658 85,000 110,063 295,000 362,093 24,663,813 2017 23,811,234 85,000 107,513 305,000 351,568 24,660,314 2018 23,809,270 85,000 104,963 305,000 339,368 24,643,600 2019 23,802,076 90,000 102,338 320,000 326,868 24,641,281 2020 23,800,785 100,000 98,988 320,000 314,068 24,633,840 2021 23,794,034 100,000 94,488 330,000 301,068 24,619,589 2022 23,767,927 100,000 89,488 330,000 287,868 24,575,282 2023 23,761,365 100,000 84,488 340,000 274,468 24,560,320 2024 24,706,393 100,000 79,488 350,000 260,668 25,496,548 2025 24,700,631 110,000 74,238 360,000 246,468 25,491,336 2026 23,077,742 110,000 69,288 370,000 231,868 23,858,897 2027 23,075,375 110,000 64,888 370,000 217,068 23,837,330 2028 23,066,779 110,000 60,488 380,000 202,068 23,819,334 2029 23,061,885 120,000 55,738 390,000 186,424 23,814,046 2030 14,268,698 120,000 50,563 400,000 169,880 15,009,140 2031 14,266,934 120,000 45,313 410,000 152,411 14,994,658 2032 14,291, 866 120,000 40,063 420,000 134,203 15,006,131 2033 2,994,881 130,000 34,513 430,000 115,288 3,704,681 2034 2,994,294 130,000 28,663 440,000 95,713 3,688,669 2035 1,106,356 130,000 22,813 450,000 75,688 1,784,856 2036 341,909 140,000 16,650 460,000 55,213 1,013,772 2037 140,000 10,175 480,000 33,763 663,938 2038 150,000 3,469 490,000 11,331 654,800 Totals $455,377,081 $2,745,000 $1,685,972 $9,315,000 $5,527,817 $474,650,870 (a) Includes the debt requirements associated with the annexation of Brazoria County Municipal Utility District No. 4. (b) The Permanent Improvement Bonds, Series 2013 are being issued concurrently with the Certificates. Average Annual Requirements (2013-2038) ....................... $18,255,803 Maximum Annual Requirement (2024) .............................. $25,496,548 18 Estimated Overlapping Debt The following table indicates the indebtedness, defined as outstanding obligations payable from ad valorem taxes, of governmental entities overlapping the City and the estimated percentages and amounts of such indebtedness attributable to property within the City. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports. Such figures do not indicate the tax burden levied by the applicable taxing jurisdictions for operation and maintenance or for other purposes. The City has not independently verified the accuracy or completeness of the information shown below except for amounts related to the City. Debt as of Overlapping Taxing Jurisdiction July 1, 2013 Percent Amount Alvin Community College District $ 15,305,000 27.17% $ 4,158,369 Alvin ISD 307,545,000 30.89 95,000,651 Brazoria County 86,515,000 24.19 20,927,979 Brazoria County MUD No. 17 29,215,000 100.00 29,215,000 Brazoria County MUD No. 18 30,595,000 97.35 29,784,233 Brazoria County MUD No. 19 37,480,000 100.00 37,480,000 Brazoria County MUD No. 23 17,510,000 100.00 17,510,000 Brazoria County MUD No. 26 41,560,000 100.00 41,560,000 Brazoria County MUD No. 28 16,905,000 100.00 16,905,000 Brazoria County MUD No. 34 24,800,000 100.00 24,800,000 Brazoria County MUD No. 35 9,410,000 100.00 9,410,000 Brazoria -Fort Bend County MUD No. 1 57,550,000 73.76 42,448,880 Fort Bend County 468,360,000 0.23 1,077,228 Harris County (a) 2,345,417,190 0.13 3,049,042 Harris County Dept. of Education 7,605,000 0.13 9,887 Harris County Flood Control District 96,470,000 0.13 125,411 Pasadena ISD 621,810,000 0.14 870,534 Pearland ISD 300,627,047 71.72 215,609,718 Port of Houston Authority 731,969,397 0.13 951,560 TOTAL ESTIMATED OVERLAPPING 100.00% $590,893,490 City Total Direct Tax Supported Debt (b) 310,630,000 Total Direct and Estimated Overlapping Debt S901.523.490 (a) Harris County Toll Road Certificates are considered self-supporting and are not included in the amount shown for Harris County. (b) Includes the Certificates and the City's $9,315,000 Permanent Improvement Bonds, Series 2013, which are expected to be delivered on August 29, 2013. Also includes the debt associated with the annexation of Brazoria County Municipal Utility District No. 4. Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2012 Assessed Valuation ($6,455,691,712) (a) 4.81% 13.96% Per Capita (103,800) $2,993 $8,685 (a) Includes $1,453,517,411 in assessed valuation attributable to the TIRZ. Tax revenue generated from assessed valuation attributable to the TIRZ are not available to make debt service payments on the Certificates. 19 TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments is the receipts from ad valorem taxation. See "SELECTED FINANCIAL DATA." The following is a recapitulation of (a) the Texas Property Tax Code, including methodology, limitations, remedies and procedures; (b) historical analysis of collection and trends of tax receipts and provisions for delinquencies; (c) an analysis of the tax base, including relative property composition, principal taxpayers and adequacy of the tax base to service debt requirements; and (d) taxation that may add to the City's taxpayers' tax costs. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") establishes for each county in Texas a single appraisal district with responsibility for recording and appraising property for all taxing units within the county, and a single appraisal review board, with responsibility for reviewing and equalizing the values established by the appraisal district. The Property Tax Code requires the appraisal district, by May 15 of each year, or as soon thereafter as practicable, to prepare appraisal records of property as of January 1 of each year based upon market value. The chief appraiser must give written notice before May 15, or as soon thereafter as practicable, to each property owner whose property value is appraised higher than the prior tax year or the value rendered by the property owner or whose property was not on the appraisal roll the preceding year or whose property was reappraised in the current tax year. Notice must also be given if ownership of the property changed during the preceding year. The appraisal review board has the ultimate responsibility for determining the value of all taxable property within the City; however, any property owner who has timely filed notice with the appraisal review board may appeal a final determination by the appraisal review board by filing suit in a Texas district court. Prior to such appeal or any tax delinquency date, however, the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event, the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units such as the City are entitled to challenge certain matters before the appraisal review board, including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption. A taxing unit may not, however, challenge the valuation of individual properties. Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies of the county and all cities, towns, school districts and, if entitled to vote, the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years. It is not known what frequency of reappraisals will be utilized by the Brazoria County, Fort Bend Central and Harris County Appraisal Districts or whether reappraisals will be conducted on a zone or county-wide basis. Tax Rate Limitations Article XI, Section 5 of the Texas Constitution, provides for an overall limitation for Home Rule Cities of $2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy, with respect to Home Rule Cities which have such a $2.50 limitation, of approving ad valorem tax bonds only to the extent that all of such city's ad valorem tax debt can be serviced by a debt service tax rate of $1.50 at 90% collection. Property Subject to Taxation by the City Except for certain exemptions provided by Texas law, all real and tangible personal property and certain categories of intangible personal property with a tax situs in the City are subject to taxation by the City; however, no effort is expected to be made by the Brazoria County, Fort Bend Central and Harris County Appraisal Districts to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions; property used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind-powered energy devices; most individually-owned automobiles; and property of disabled 20 veterans, only to the extent of $12,000; a complete exemption for the value of a residential homestead of disabled veterans judged to be 100% disabled by the U.S. Department of Veterans Affairs is granted by State law. In addition, taxpayers who are disabled or over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of $40,000. These disabled or over 65 exemptions and disabled veterans exemptions amounted to $186,790,895 from the 2012 tax roll. The state constitution permits local governments the option of granting homestead exemptions of up to 20% of market value. The City granted an additional homestead exemption for the 2012 tax year in the amount of 2.5% of the market value of the homestead with a minimum of $5,000. The City has authority to enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. Such abatement agreement may last for a period of up to 10 years. The City has $9,697,991 of such property that was subject to abatement January 1, 2012. The constitution of the State of Texas authorizes a property tax exemption for certain business personal property. The City Council had the option to take official action to override the exemption and to continue taxing the property exempted by the amendment. On December 18, 1989, the City's City Council took such official action not to tax the property in 1990 and to allow the exemption for 1991 and all future years. This Freeport Goods exemption amounted to $46,735,041 on the 2012 tax roll. Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of "goods-in-transit." "Goods-in-transit" is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The City has taken official action and determined not to grant a "goods-in-transit" exemption. Tax Increment Reinvestment Zone Article VIII, Section I-g of the Texas Constitution and the Tax Increment Financing Act, Chapter 311, V.T.C.A. Tax Code (the "TIF Act") authorize municipalities in the State to establish one or more tax increment financing reinvestment zones for development or redevelopment of the territory within the zones. The TIF Act provides that the municipality may appoint a board of directors for a reinvestment zone to develop a project plan and financing plan for the zone and may delegate to the board certain management duties relating to the zone. Project costs, including financing costs, within the zone may be paid from tax increments collected by each of the taxing units in the zone. The amount of a taxing unit's tax increment for a year is the amount of property taxes levied by the unit for that year on the captured appraised value of real property taxable by the unit (the "Captured Appraised Value") and located in the zone. The Captured Appraised Value is the total appraised value of the property for a year, less the tax increment base of the unit. The tax increment base of a taxing unit is the total appraised value of all real property taxable by the unit and located in the zone in the year in which the City created the zone. Participation by a taxing unit in a reinvestment is discretionary with such taxing unit, and it may decide to deposit all or none, or a portion, of its tax increments into the fund and retain for its own purposes the remainder. A taxing unit cannot reduce the amount of its participation once the financing plan has been implemented. The City designated and created Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ") in 1998. The TIRZ initially encompassed approximately 3,467 acres of land (the "Original Area"). The City approved the annexation of an additional 457 acres of land (the "Annexation Area") into the boundaries of the TIRZ on June 26, 2006. The TIRZ encompasses all of the master planned community of Shadow Creek Ranch, which includes approximately 3,300 acres of land. Pursuant to the ordinance that created the TIRZ, the TIRZ shall terminate December 31, 2028. 21 The purpose of the TIRZ is to design, construct and finance or cause to be designed, constructed and financed certain public works and improvements to promote and facilitate the development of the vacant, undeveloped property in the TIRZ. Specifically, the TIRZ is constructing public works and infrastructure improvements to assist in the development of the master planned community, Shadow Creek Ranch ("Shadow Creek Ranch"). The City, Alvin Independent School District ("AISD"), Brazoria County, Texas ("Brazoria County") and Fort Bend County, Texas ("Fort Bend County") have agreed to deposit to a tax increment fund established for the TIRZ (the "Tax Increment Fund") annually a certain percentage of tax collections arising from their taxation of the increase, if any, since January 1, 1998, in the total appraised value of all real property located in the Original Area of the TIRZ and taxable by the City, AISD, Brazoria County and Fort Bend County. The City, Brazoria County and Fort Bend County have further agreed to deposit to the Tax Increment Fund tax collections arising from its taxation of the increase, if any, since January 1, 2006, in the total appraised value of real property located in the Annexation Area of the TIRZ and taxable by the City. The TIRZ Board has nine members, four of whom are appointed by the City. One of the TIRZ Board Members is nominated by AISD, and Brazoria County and Fort Bend County each appoint one member of the TIRZ Board. Finally, the Texas State Senator and Texas State Representative, or their designees, in whose district the TIRZ is located serve as the final two members of the TIRZ Board. The City has agreed to pay 100% of its collected Tax Increments (the "City Tax Increment") to the Tax Increment Fund. However, pursuant to a development plan and a development agreement (the "Development Agreement") by and between the City and Shadow Creek Ranch Development Company, L.P., the master developer of property within the TIRZ (the "Developer"), the City, the Developer and the TIRZ have agreed that a certain portion of the City Tax Increment shall be paid by the TIRZ to the City as an "Administrative Fee" (the "Administrative Fee") to compensate the City for some of its cost of providing City services to the developed property within the TIRZ. Pursuant to the Development Agreement, the Administrative Fee for years 2007-2028 is 64% of the City Tax Increment, provided that the amount of City Tax Increment deposited and retained annually in the Tax Increment Fund for the applicable year shall in no event be less than $0.255 per $100.00 of valuation. For tax year 2012, the assessed value attributable to the TIRZ is $1,453,517,411. As described above, tax revenues generated from assessed value attributable to the TIRZ are deposited into the Tax Increment Fund and are not available to make debt service payments on the Certificates. While a portion of such revenues are to be retained by the City as Administrative Fees, such Administrative Fees may not be available to make debt service payments on the Certificates. Notice and Hearing Procedures The Property Tax Code establishes procedures for providing notice and the opportunity for a hearing for taxpayers in the event of certain proposed tax increases and provides for taxpayer referenda which could result in the repeal of certain tax increases. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values over $1,000, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. Levy and Collection of Taxes The City is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. The City has elected to have Brazoria County bill and collect taxes on behalf of the City. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City, the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations (the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the City held upon petition of 10% of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. 22 The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the "effective tax rate" until it has held a public hearing on the proposed tax rate and has otherwise complied with the Property Tax Code. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. Taxes are due on receipt of the tax bill, and become delinquent after January 31 of the following year, or on the first day of the calendar month next following the expiration of twenty-one (21) days after mailing of the tax bills, whichever occurs later. A delinquent tax account incurs an initial penalty of six percent (6%) of the amount of the tax and accrues an additional penalty of one percent (1%) per month up to July 1, at which time the total penalty becomes twelve percent (12%). In addition, delinquent taxes accrue interest at one percent (1%) per month. If the tax is not paid by July 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the City. The Property Tax Code also makes provision for the split payment of taxes, discounts for early payments, partial payments of taxes and the postponement of the delinquency date of taxes under certain circumstances. Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property owner on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the City, having the power to tax the property. The City's tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. In the event a taxpayer fails to make timely payment of taxes due the City, the City may file suit to foreclose its lien securing payment of the tax, to enforce personal liability for the tax, or both. Whether a lien of the United States is on a parity with or takes priority over a tax lien of the City is determined by applicable federal law. In the absence of such federal law, the City's tax lien takes priority over a tax lien of the United States. The ability of the City to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, the foreclosure sale price attributable to market conditions, the taxpayer's right to redeem the property within two years of foreclosure, or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. Historical Analysis of Tax Collection - Collection Ratios — Tax Rate % of Collections Fiscal Net Per $100 of Current Year Tax Assessed Assessed Adjusted Year Current and Ending Year Valuation (a) Valuation Tax Levy (a) Collection Prior Years 9-30 2003 $2,355,280,316 $0.696000 $18,030,473 98.03% 100.02% 2004 2004 3,019,449,422 0.694800 21,073,788 98.08 99.68 2005 2005 3,576,439,129 0.674400 24,284,597 97.08 99.70 2006 2006 4,412,821,949 0.652659 28,819,229 98.14 100.14 2007 2007 5,389,790,165 0.652600 35,035,569 98.40 99.74 2008 2008 5,904,826,560 0.652600 38,368,354 98.57 100.70 2009 2009 6,269,047,937 0.652600 41,081,407 98.81 98.81 2010 2010 6,331,723,029 0.665100 41,968,046 99.11 100.28 2011 2011 6,369,626,981 0.685100 43,441,792 99.24 99.63 2012 2012 6,539,521,484(b)(d) 0.705100 45,861,482 98.69(c) 98.69(c) 2013 (a) Includes assessed value attributable to the TIRZ and tax levy adjusted for Senior Tax Freeze effective in tax year 2007. (b) Includes $1,453,517,411 in assessed valuation attributable to the TIRZ. Tax revenues generated from assessed valuation attributable to the TIRZ are not available to make debt service payments on the Bonds. (c) Collections as of June 30, 2013. (d) Adjusted tax roll. 23 - Tax Rate Distribution - 2012 2011 2010 2009 2008 Maintenance $0.2151 $0.2151 $0.2151 $0.2201 $0.22010 Debt Service 0.4900 0.4700 0.4500 0.4325 0.43250 Total $0.7051 $0.6851 $0.6651 0.6526 $0.65260 - Analysis of Delinquent Taxes - The following is an analysis, by tax year, of taxes delinquent as of September 30, 2012. Uncollected Adjusted Percentage Tax Year As of September 30, 2012 Tax Levy (a) Of Tax Levy 2011 $ 331,419 $43,441,792 0.76% 2010 218,459 41,968,046 0.52 2009 167,946 41,081,407 0.41 2008 84,048 38,368,354 0.22 2007 45,270 35,035,569 0.13 2006 37,315 28,819,229 0.13 2005 36,224 24,284,597 0.15 2004 23,928 21,073,788 0.11 2003 34,739 18,030,473 0.19 2002 25,194 14,880,007 0.17 (a) The total tax levy has been adjusted to reflect additions and deletions from the tax roll for prior years. Includes levy attributable to the TIRZ. - Delinquent Tax Collection Procedures - In addition to the legal procedures and penalties described under "Levy and Collection of Taxes", the City has retained a delinquent tax attorney on a contract basis to file suit to collect delinquent taxes due the City. The fees due such attorney for acting as delinquent tax attorney are payable from an additional penalty imposed upon the delinquent taxpayer, not to exceed 20% of the tax due. [Remainder of Page Intentionally Left Blank] 24 Analysis of Tax Base - Tax Base Distribution - 2012 Tax Roll 2011 Tax Roll 2010 Tax Roll Type of Property Amount % Amount % Amount % Residential $5,645,372,636 75.78% $5,538,320,529 75.64% $5,411,758,431 74.25% Acreage 93,765,783 1.26 92,047,258 1.26 115,462,851 1.58 Vacant Lots/Tracts 126,876,793 1.70 121,404,806 1.66 136,375,903 1.87 Farm & Ranch 9,235,628 0.12 8,483,859 0.12 8,350,359 0.11 Commercial/Industrial 1,169,417,293 15.70 1,206,544,884 16.48 1,140,785,576 15.65 Utilities 59,004,028 0.79 59,686,620 0.82 61,679,057 0.85 Real Inventory 60,989,786 0.82 73,253,979 1.00 91,173,634 1.25 Other 285,409,427 3.83 222,335,566 3.04 322,574,557 4.43 Gross Assessed Value $7,450,071,374 100.00% $7,322,077,501 100.00% $7,288,160,368 100.00% Less: Exemption (994,379,662) (956,765,192) (953,121,879) Net Assessed Value $6,455,691,712(a)(b) $6,365,312,309(a)(c) 6,335,038,489(a)(d) (a) Value may differ from those shown elsewhere in this Official Statement due to subsequent adjustments to the tax roll. (b) Includes $1,453,517,411 in assessed value attributable to the TIRZ. Pursuant to an agreement between the City and the TIRZ, 100% of the tax revenues generated from assessed value attributable to the TIRZ are deposited in a fund to be used for TIRZ projects and are not available to make debt service payments on the Certificates; however, a portion of such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. (c) Includes $1,372,334,319 in assessed value attributed to the TIRZ. (d) Includes $1,385,656,309 in assessed value attributed to the TIRZ. - Principal Taxpayers — 2012 2011 2010 Taxable Taxable Taxable Assessed Assessed Assessed Principal Taxpayer Type of Property Valuation Valuation Valuation Pearland Town Center LP Amreit SPF Shadow Creek LP Weatherford U.S. Inc. CenterPoint Energy, Inc. 12400 Shadow Creek Parkway LLC Discovery Shadow Creek Shadow Kirby LTD PTRN Pearland Lifestyle Center LP Wal-Mart Real Estate Pearland Investments Ltd. Prt. HCA Healthcare Corp. Villas Shadow Creek Ranch LP MRP Shadow Creek LP Inland American Waterford Ltd Total Ten Principal Taxpayers Retail Development $ 68,763,470 $ 66,933,820 $ 67,661,190 Retail Development 43,671,670 41,006,650 50,744,245 Oil Field Equipment 37,689,240 31,613,080 45,210,463 Utility 28,444,700 26,536,120 25,946,710 Land Development 28,229,200 (a) (a) Retail Development 26,391,910 (a) (a) Land Development 25,000,000 23,114,059 23,114,059 Land Development 23,731,897 (a) 24,153,065 Shopping Center 23,179,360 23,678,280 23,412,910 Land Development 21,154,900 31,696,920 35,554,380 Health Care 19,012,840 19,074,620 20,030,180 Land Development (a) 29,000,460 (a) Land Development (a) 21,000,000 (a) Land Development (a) (a) 17,125,100 $345,269,187 $313,654,009 $332,952,302 Percentage Ten Principal Taxpayers Comprise of Tax Roll 5.35% 4.93% 5.26% (a) Not included as top ten taxpayer for respective tax year. - Tax Adequacy - Average Annual Debt Service Requirements (2013-2038) .................................................. $18,255,803 Tax Rate of $0.298 per $100 assessed valuation against the 2012 Certified Assessed Valuation at 95% collection produces ............................................... $18,276,063 Maximum Annual Tax Debt Service Requirements (in the year 2024) ................................ $25,496,548 Tax Rate of $0.416 per $100 assessed valuation against the 2012 Certified Assessed Valuation at 95% collection produces ............................................... $25,512,894 Sales Tax - Authority - The City has adopted the provisions of Article 1066c, Vernon's Texas Civil Statutes, as amended, which grants the City the power to impose and levy a 1% sales tax. The City has also voted an additional 1/2% sales and use tax for economic development under Article 5190.6, Vernon's Texas Civil Statutes, as amended. The City may not and has not pledged the proceeds from the sales and use tax as security for the Certificates. - Collection History - The State Comptroller, after deduction of a 2% service fee, currently remits the City's portion of sales tax collections monthly. By statute the Comptroller is required to remit at least twice annually. The following is an analysis of the collection history of the City's sales and use tax: Fiscal Year Sales and Use Equivalent Tax Rate % of Actual Ended 9-30 Tax Receipts Tax Year Equivalent Tax Levy 2003 $ 5,859,053 (2002) $0.270 39.40% 2004 6,739,484 (2003) 0.260 37.47 2005 7,785,161 (2004) 0.258 35.15 2006 9,712,118 (2005) 0.253 36.28 2007 10,744,199 (2006) 0.231 37.34 2008 12,234,799 (2007) 0.227 34.89 2009 13,760,714 (2008) 0.255 35.86 2010 13,082,134 (2009) 0.209 31.84 2011 13,331,189 (2010) 0.211 31.77 2012 14,814,936 (2011) 0.233 34.10 [Remainder of Page Intentionally Left Blank] 26 SELECTED FINANCIAL DATA Historical Operations of the City's General Fund The following is a condensed statement of revenues and expenses of the City's General Fund for the past five fiscal years. The inclusion of the following table is not intended to imply that any revenues of the City, other than receipts from ad valorem taxes as provided in the Ordinance, are pledged to pay principal and interest on the Certificates. Fiscal Year Ended September 30, 2012 2011 2010 2009 2008 REVENUES General Property Taxes(a) $10,861,341 $10,867,570 $11,115,823 $10,688,512 $11,259,460 Sales and Use Taxes 14,814,936 13,331,189 13,082,134 13,760,714 12,234,799 Franchise Fees 5,669,958 5,605,394 5,426,110 5,074,602 4,426,856 Licenses & Permits 2,320,103 1,720,856 1,806,692 2,079,099 2,991,549 Fines & Forfeitures 3,164,068 2,714,217 2,310,041 2,213,101 7,511,637 Charges for Services 11,890,808 10,882,021 9,245,791 8,884,529 1,986,530 Intergovernmental --- 350,441 477,929 4,909,362 2,624,517 Other Revenues 678,438 602,817 446,353 487,663 986,404 Total Revenues $49,399,652 $46,074,505 $43,910,873 $48,097,582 $44,021,752 EXPENDITURES General Government $ 8,241,509 $ 8,045,261 $ 8,064,367 $ 8,020,370 $ 7,223,807 Public Safety 25,168,443 23,716,470 23,141,409 22,025,695 19,305,021 Public Works 5,506,477 6,505,139 7,108,143 11,913,119 7,535,792 Community Services 3,861,520 3,027,088 3,648,920 3,204,702 3,402,437 Parks and Recreation 6,775,316 7,171,812 6,069,658 5,753,141 --- Capital Outlay --- --- --- --- 6,557,427 Total Expenditures $49,553,265 $48,465,770 $48,059,497 $50,917,027 $44,024,484 (a) Includes penalties and interest. Source: City's audited financial statements. General Fund and Debt Service Fund Balance for the Past Five Fiscal Years Fiscal Year Ended her 30, 2012 2011 2010 2009 2008 General Fund $17,571,961 $14,523,546 $12,861,796 $12,219,109 $13,526,231 Debt Service Fund 4,992,479 5,159,541 6,705,688 7,246,548 6,835,188 Source: City's audited financial statements. Pension Fund The City participates in the Texas Municipal Retirement System (TMRS), an agency operated by the State of Texas. Employees of the City who participate in TMRS contribute a fixed percentage, currently 7%, of their gross pay and the City matching percent is currently 2 to 1. As employees leave municipal employment other than through retirement, they may withdraw from TMRS those funds they contributed, but forfeit their employer's contributions. Each municipal employer's requirements for current contributions are offset by the amounts of such forfeitures. In 2012, the City employed 536 full-time employees and 137 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's contribution for fiscal year 2012, amounted to approximately $3.5 million which includes amortization of prior service cost over 30 years. The City had no unfunded pension benefit obligation as of September 30, 2012. The liability for prior service benefits will be amortized over a period of thirty years or less by contributions from the City which are a level percentage of payroll. Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2012, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. 27 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 second 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 31 Years 2014 Retired Mayor Tony Carbone 3 Months 2016 Certified Public Accountant Council Member Scott Sherman 4 Years 2015 Attorney Council Member Susan Sherrouse 2 Years 2014 Project Manager Council Member Keith Ordeneaux 2 Years 2014 Energy and Risk Manager Council Member Greg Hill 1 Year 2016 Attorney Mayor Pro Tern 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. 28 Members of the administrative staff are described below: Name Position Period Served (a) Bill Eisen City Manager 12 Years Jon Branson Assistant City Manager 7 Years Mike Hodge Assistant City Manager 8 Years Claire Bogard Director of Finance 7 Years Eric Wilson Director of Public Works 1 Month Young Lorfing City Secretary 16 Years Lata Krishnarao Director of Community Development 10 Years Darrin Coker City Attorney 16 Years Trent Epperson Director of Projects & Engineering 7 Years Christopher Doyle Police Chief 35 Years Michelle Smith Director of Parks & Recreation 13 Years Vance Riley Fire Chief 2 Years Bonita Hall Director of Human Resources 3 Years Daniel Baum EMS Chief 2 Years (a) Reflects the total number of years worked for the City. 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: BondCounsel ............................................................................................................................... Andrews Kurth LLP Houston, Texas Certified Public Accountants ........................................................................................................ Grant Thornton LLP Houston, Texas FinancialAdvisor ........................................................................................................................................BOSC, Inc. Houston, Texas LEGAL MATTERS Legal Opinions The delivery of the Certificates is subject to the approving opinion of the Attorney General of Texas to the effect that the Certificates are valid and legally binding obligations of the City payable from the proceeds of an annual ad valorem maintenance tax levied, within the limits prescribed by law, upon all taxable property in the City, and the approving legal opinion of Andrews Kurth LLP, Bond Counsel to the City ("Bond Counsel"), in substantially the form attached as Appendix C. The various legal opinions to be delivered concurrently with the delivery of the Certificates express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee outcome of any legal dispute that may arise out of the transaction. The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Bond and to the effect that the Certificates 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. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates, or which would affect the provision made for their payment or security, or in any manner questioning the validity of the Certificates 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 Certificates in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent on the sale and delivery of the Certificates. The legal opinion will accompany the Certificates deposited with DTC or will be printed on the Certificates in the event of the discontinuance of the Book-Entry-Only System. 29 No-Litigation Certificate The City will furnish to the Initial Purchaser a certificate, dated as of the date of delivery of the Certificates, executed by appropriate City officials, to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Certificates; restraining or enjoining the issuance, execution or delivery of the Certificates; affecting the provisions made for the payment of or security for the Certificates; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Certificates; or affecting the validity of the Certificates. No Material Adverse Change The obligations of the Initial Purchaser to take and pay for the Certificates, and of the City to deliver the Certificates, are subject to the condition that, up to the time of delivery of and receipt of payment for the Certificates, there shall have been no material adverse change in the condition (financial or otherwise) of the City subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. TAX EXEMPTION In the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, interest on the Certificates is (1) excludable from gross income of the owners thereof for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), and (2) is not includable in the alternative minimum taxable income of individuals or, except as described below, corporations. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the ordinance authorizing the issuance of the Certificates (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 Certificates, 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 Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. Interest on the Certificates owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt or accrual of interest on or acquisition or disposition of the Certificates. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Service with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the City as the "taxpayer," and the owners of the Certificates may have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Certificates, the City may have different or conflicting interests from the owners of the Certificates. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit, regardless of its ultimate outcome. 30 Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. Proposed Tax Legislation and "Fiscal Cliff" Tax legislation, administrative actions taken by tax authorities, and court decisions may cause interest on the Certificates to be subject, directly or indirectly, to federal income taxation or state income taxation, or otherwise prevent the beneficial owners of the Certificates from realizing the full current benefit of the tax status of such interest. For example, future legislation to resolve certain federal budgetary issues may significantly reduce the benefit of, or otherwise affect, the exclusion from gross income for federal income tax purposes of interest on all state and local obligations, including the Certificates. In addition, such legislation or actions (whether currently proposed, proposed in the future or enacted) could affect the market price or marketability of the Certificates. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and its impact on their individual situations, as to which Bond Counsel express no opinion. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates may be offered at an initial offering price which is less than the stated redemption price payable at maturity of such Certificates. If a substantial amount of any maturity of the Certificates is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, an initial owner who purchases the Certificates of that maturity (the "Discount Certificates") will be considered to have "original issue discount" for federal income tax purposes 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 Certificates 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 Certificates 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 Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Bond may be required to take into account such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a 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. 31 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 Certificates by an owner that did not purchase such Certificates in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Certificates should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Certificates and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Discount Certificates. Premium Certificates Some of the Certificates may be offered at an initial offering price which exceeds the stated redemption price payable at the maturity of such Certificates. If a substantial amount of any maturity of the Certificates is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Certificates of such maturity ("Premium Certificates") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium 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 Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Certificates of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Certificates. CONTINUING DISCLOSURE OF INFORMATION In order to provide certain continuing disclosure with respect to the Certificates 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 (the "Rule"), the City has entered into a Disclosure Dissemination Agent Agreement ("Disclosure Dissemination Agreement") for the benefit of the holders of the Certificates with Digital Assurance Corporation, L.L.C. ("DAC"), under which the City has designated DAC as Disclosure Dissemination Agent. The form of Disclosure Dissemination Agreement can be obtained on www.dacbond.com . In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rule Making Board ("MSRB"). Information will be available free of charge via the Electronic Municipal Market Access ("EMMA") system at www.emma.msrb.org . Annual Reports The City will provide certain updated financial information and operating data to the MSRB annually via EMMA. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "INVESTMENT AUTHORITY 32 AND INVESTMENT OBJECTIVES OF THE CITY — Current Investments," "CITY TAX DEBT," "TAX DATA" (except under the subheading "Estimated Overlapping Taxes"), "SELECTED FINANCIAL DATA," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by Rule 15c2-12. 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 the MSRB of the change. Material Event Notices The City will also provide timely notices of certain events to the MSRB. The City will provide notice in a timely manner not in excess of ten business days after the occurrence of the event of any of the following events with respect to the Certificates: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Certificates, or other material events affecting the tax status of the Certificates; (7) modifications to rights of holders of the Certificates, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. As used above, the phrase "bankruptcy, insolvency, receivership or similar event" means the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court of governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if jurisdiction has been assumed by leaving the Board and officials or officers of the City in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. (Neither the Certificates nor the Ordinance make any provision for debt service reserves, liquidity enhancement or credit enhancement, merger, consolidation, or acquisition). 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." For these purposes, any event described in (12) in the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. Availability of Information The City has agreed to provide the foregoing information only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org . 33 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 a breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Certificates may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement 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, if (i) the agreement, as amended, would have permitted an Initial Purchaser to purchase or sell Certificates in the offering described herein 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 (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Certificates consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an Initial Purchaser from lawfully purchasing or selling Certificates in the primary offering of the Certificates. If the City so amends the agreement, it has agreed to include with the next financial information and operating data 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 Due to an administrative oversight by a consultant of the City, the 2009 audit was filed approximately 4 hours late. The City is working with the consultant to ensure that such a filing error will not occur again in the future. Otherwise, during the last 5 years, the City has complied in all material respects with its prior continuing disclosure agreements made in accordance with Rule 15c2-12. FINANCIAL ADVISOR BOSC, Inc. is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information in this Official Statement. GENERAL CONSIDERATIONS Sources and Compilation of Information The information contained in this Official Statement has been obtained primarily from the City and from other sources believed to be reliable. No representation is made as to the accuracy or completeness of the information derived from sources other than the City. The summaries of the statutes, orders, ordinances and other related documents are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. The information contained in this Official Statement in the section entitled "APPENDIX B - Audited Financial Statements of the City" has been provided by Whitley Penn, LLP, Houston, Texas and has been included herein in reliance upon their authority as an expert in the fields of auditing and accounting. Neither this Official statement nor any statement that may have been made orally or in writing is to be constructed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. Certification as to Official Statement At the time of payment for and delivery of the Certificates, the Initial Purchaser will be furnished a certificate, executed by a proper officer acting in his or her official capacity, to the effect that to the best of his or her knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in its Official 34 Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of sale of said Certificates 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 any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they 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. Forward Looking Statements 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. It is important to note that the City's actual results could differ materially from those in such forward-looking statements. The forward-looking statements 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 would prove to be accurate. Updating of Official Statement The City will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the City and, to the extent that information comes to its attention, in the other matters described in the Official Statement, until the delivery of the Certificates to the Initial Purchaser. 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, Texas ATTEST: /s/ Young Lorfing City Secretary City of Pearland, Texas 35 APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF PEARLAND The following information has been derived from various sources, including the U.S. Census data, Texas Workforce Commission, "Sales Management Survey of Buying Power", Claritas, and City of Pearland, Texas officials. While such sources are believed to be reliable, no representation is made as to the accuracy thereof. RESIDENTIAL AND COMMERCIAL DEVELOPMENT Because of the City's proximity to downtown Houston, it has become an area of continuing growth in residential, commercial and some light industrial development. 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. 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. 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 2010 91,252 +0.61 313,166 +29.53 2011 95,600 +4.76 2012 97,200 +1.67 2013(a) 103,800 +6.79 (a) Estimated. Includes annexation of Brazoria County Municipal Utility District No. 4. A-1 City of Pearland 2013(a) 2012 2011 2010 2009 Labor Force 51,372 50,470 49,538 48,447 45,775 Employed 48,859 47,818 46,299 45,305 43,131 Unemployed 2,513 2,652 3,239 3,142 2,644 Unemployment Rate 4.9 5.3 6.5 6.5 5.8 Brazoria County 2013(a) 2012 2011 2010 2009 Labor Force 158,195 155,381 153,203 150,467 146,843 Employed 147,652 144,503 139,914 136,989 135,062 Unemployed 10,543 10,878 13,289 13,478 11,781 Unemployment Rate 6.7 7.0 8.7 9.0 8.0 (a) As of May, 2013. Employment Statistics Source: Texas Workforce Commission A-2 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY CITY OF PEARLAND, TEXAS f _ r v. Fiscal Year Ended September 30, 2012 Officials Issuing Report Bill Eisen Jon Branson Mickiel Hodge Claire Bogard Rick Overgaard City Manager Assistant City Assistant City Director of Finance Assistant Director Manager Manager of Finance Introductory Section (This page intentionally left blank.) fff f Ir r T t• z ~: March 11, 2013 To the Honorable Mayor, Members Of City Council, and Citizens of the City of Pearland, Texas The Comprehensive Annual Financial Report (CAFR) of the City of Pearland, Texas (the "City") for the fiscal year ended September 30, 2012, is hereby submitted as mandated by both local and state statutes. These ordinances and statutes require that the City issue an annual report on its financial position and activity, and that an independent firm of certified public accountants audit this report. Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Whitley Penn, LLP, Certified Public Accountants, have issued an unqualified (or "clean") opinion on the City of Pearland's financial statements for the year ended September 30, 2012. The independent auditor's report is located at the front of the financial section of this report. Management's discussion and analysis (MD&A) immediately follows the independent auditor's report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complements this letter of transmittal and should be read in conjunction with it. PROFILE OF THE GOVERNMENT The City of Pearland, incorporated in 1959, is located across the northern end of Brazoria County and shares a common border with Houston, Texas to the north. The City also extends into Fort Bend and Harris Counties. The City of Pearland, encompassing approximately 48 square miles, is the fastest growing city in Brazoria County, increasing from approximately 18,000 residents in 1990 to 99,800 residents estimated as of September 2012. The City of Pearland is a home-rule City operating under a Council-Manager form of government. Policy-making and legislative authority are vested in a governing council (Council) consisting of the mayor and five other members. The Mayor and all Council 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 To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas of three years and until his/her successor is elected and qualified. Council members are limited to two full consecutive terms of office and there is no limitation on the office of 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 full range of municipal services is provided by the City of Pearland including public safety (police, fire, and emergency medical services); solid waste; water and wastewater utilities; public improvements; repair and maintenance of infrastructure; recreational and community activities; and general administrative services. In addition, the City provides planning for future land use, traffic control, building codes, and health inspections, and plans for new infrastructure and rehabilitation of infrastructure to meet the needs of the citizens today, as well as tomorrow. The City is authorized to issue debt, subject to certain limitations, for the purpose of financing its capital projects and the City is empowered to levy a property tax on real property within its boundaries. Activities of the general, debt service, water and sewer, solid waste, capital project funds, and special revenue funds such as hotel/motel tax are included in the City's annual appropriated budget. Capital project funds are budgeted for project length. The legal level of control for each budget is at the fund level, which is to say that total expenditures for each fund should not exceed total budgeted expenditures for that fund. The City Manager is authorized to transfer budgeted amounts within and among departments. The City Council must approve any budget amendment that increases appropriations by fund. The City amends the budget at the end of each fiscal year to reflect current year projections for revenues and expenditures/expenses. As an independent political subdivision of the State of Texas, the City is considered a primary government. Pursuant to standards established by the Governmental Accounting Standards Board (GASB), the City also reports for all funds for which the City, as the primary government, is financially accountable. As such, this report includes financial activities of three component units as follows: The Pearland Economic Development Corporation was created by the voters of the City in 1995 under the Texas Development Corporation Act of 1979 for the purpose of promoting, assisting, and enhancing economic and related development activities on behalf of the City. The Tax Increment Reinvestment Zone (TIRZ #2) was created in 1998 for the purposes of development and redevelopment in the Zone Area, better known as Shadow Creek Ranch. The City participates in the Zone by contributing a portion of tax increments produced in the Zone to the Tax Increment Fund. The Development Authority of Pearland was created in 2004 to provide financing for the development of TIRZ #2. ECONOMIC CONDITIONS Local Economy Located minutes away from downtown Houston, Texas, the nation's second largest seaport, the world- renowned Texas Medical Center, and NASA-Johnson Space Center, Pearland is the premier location for residential and commercial growth. With abundant land, business facilities, a sound infrastructure, and a diverse workforce supported by educational programs, Pearland's growth has been consistent and will continue to be sustained over time with continued residential and commercial development. it To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The total of all new construction permitted during calendar year 2012 totaled over $254.0 million, a 14.3% increase in value from 2011. New single-family housing permits totaled 951 with a construction value of $192 million. This is 260 permits and $58.0 million more than 2011; however Pearland's economy continues to grow at a respectable pace, faring better than the rest of the nation. Residential permitting activity is anticipated to increase for fiscal year 2013, budgeted at 1,142 permits. For calendar year 2012, the City had 77 commercial permits with a value of $62 million, compared to 42 permits with a value of $23 million in 2011. In addition, one multi-family development was permitted with a value of $19.6 million. The downward trend on the commercial real estate market has turned upward and strengthened. Sales of homes throughout the greater Houston area remained strong in 2012, driven by a combination of good local job numbers and historically low interest rates. The Houston Association of Realtors reported 62,229 single family home sales for 2012, up 16.1% from the 53,606 sales in 2011. Indications are that the Houston area will continue to have a healthy market with a balanced supply of housing inventory and strong pricing — conditions that put Houston in an enviable position compared to other markets around the Country. For fiscal year 2012, Pearland had 696 foreclosure filings, down from the 800 in fiscal year 2011, but still higher than the 588 we saw in fiscal year 2009. These filings also include areas in the ETJ with a Pearland address, but the number of filings only represents less than 3% of total households in Pearland. The decrease in foreclosures is another sign that the economy has turned around. Houston is the world's energy capital, and much of the recovery is from the oil and gas industry. During the recession the exploration sector lost 1,200 jobs, but added 8,100 in the recovery. Oil field services lost 9,700 jobs and have since recouped 9,500. Much of this growth is from hydraulic fracturing and much of it from the South Texas Eagle Ford Shale oil and gas reserves. The Eagle Ford produced 844 barrels of crude per day in 2009; in August of 2012 it produced 297,079 per day. With the high price of oil, and the South Texas Eagle Ford Shale oil and gas reserves, it is forecasted that this trend will continue keeping the Houston oil industry busy for the next 20 years. Pearland's unemployment rate was 5.2% in September 2012, down from 6.7% in September 2011. This is compared to the national unemployment rate of 8.0% and the State of Texas unemployment rate of 7.5% as of September 2012. Pearland's unemployment is less than the national and state rates with the economy turning around. Texas has been recognized by business publications as having the best business climate in the country. Houston's economy will continue to grow next year, adding more jobs in 2013 than in 2012. The Greater Houston Partnership forecasts the region to add 76,000 jobs in 2013. The Houston area is built on businesses, on jobs, and on economic opportunities. Pearland is poised to take advantage of those opportunities. Pearland has two prime areas for commercial, mixed use, livable developments along the Highway 288 corridor. A strategic and target market study completed in 2009 shows that life sciences, port-related activities, production/industrial, campus based back-office, and the education/public sectors are prime areas of interest for the Pearland area. Combined with a mix of reinforcing land uses, urban planning, key entertainment and cultural attractions, public spaces, and walkability and connectivity, all will provide for livable sustainable developments. 111 To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas Kelsey-Seybold, a major healthcare organization of 370 physicians, is building a new 170,000 square foot, four story corporate headquarters on an 18 acre site in Shadow Creek Ranch, which will be home to approximately 750 employees. The facility will be next to the Shadow Creek Business Center, an 80,000 square foot office building built in 2009, and Hospital Corporation of America's (HCA) 78,000 square foot medical office building. Merit Medical Systems, a global medical device company, is building on a 12 acre site, a 120,000 square foot facility for research and development and manufacturing. Merit Medical is expected to employ 220 employees at the Pearland facility. Ref Chem, an oil and gas service company is constructing a 39,000 square foot regional headquarters on Beltway 8 that will employ 100 people. Sales tax for fiscal year 2012 totaled $22.0 million, an increase of $2.2 million or 11.3% over fiscal year 2011. Pearland is a regional shopping destination; however with lower consumer confidence, potential for job loss, debt, credit tightening, etc., homeowners tightened their budgets and spending in 2010 and 2011. The economy, however, has turned around, which should translate to higher consumer confidence. As such, the City projected a 5.4% growth in sales tax in the fiscal year 2013 operating budget. Long-Term Financial Planning The City adopts a one-year operating budget, including a five-year capital improvement program (CIP). Even though a one-year budget is adopted, the budget implements strategies, both financial and operational, to meet existing challenges and to plan for the future. The City's Five-Year CIP for fiscal year 2013 through fiscal year 2017 totals $346 million and continues to implement the $162 million bond program approved by the voters in May 2007, though at a slower pace, which is financially feasible given the slower economy in 2008-2011. Projects include Drainage ($24M), Streets ($149M), Facilities ($24M), Parks ($35M), Water and Wastewater ($114M). Projects in the CIP have identified funding sources or potential funding sources. Funding for these projects comes from the issuance of debt through Certificates of Obligation, General Obligation Bonds, and Revenue Bonds, as well as impact fees, cash, and contributions from the State, County, and other sources. Those projects that are unfunded will be identifying projects for a new bond referendum. The Debt Service Fund forecast projects a need to increase the Debt Service component of the tax rate to $0.5250 by fiscal year 2015 to implement the Five-Year CIP. The debt service component of the tax rate for FY 2013 increased $0.02 to $0.4900, which is consistent with the financial modeling that the City undertook when analyzing the Debt Service tax implications of implementing the $162 million bond referendum. The City completes a Water/Sewer Cost of Service Rate Study annually for the forecast. The study is built around the Five-Year CIP, operating budget, and future needs. Due to funds on hand for pay-as-you go capital improvements, no rate increase was necessary for fiscal year 2011 or 2012, however, the model anticipates rate increases for 2015 and 2016. The City's utility system continues to be self-supporting and financially sound. ry To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas Relevant Financial Policies/Guidelines Financial Policies guide the development and implementation of the budget and are a framework for fiscal decision making and that ensure financial resources are available to meet the current and future needs of the City. City Council adopted a set of Financial Management Policy Statements in August 2009, last amended in September 2011. The policy statements address areas of reporting and auditing, budgeting, revenues, capital improvements, debt, and grants to name a few. Some of the most relevant policies are: • Recurring revenues fund recurring expenditures/expenses. • Non-recurring funds fund non-recurring expenditures/expenses. • General Fund Operating Reserves should be a minimum of two months of operations. • Water and Wastewater Operating Reserves shall strive to be maintained at 25% of operations. • Budget revenues on a conservative basis. • Fund existing services at current service levels. • Enterprise Funds must be self-supporting. • Leverage City dollars by seeking outside funding sources. • Maintain stable property tax rates. Major Initiatives The City Council, staff, and community share a vision that combines progress and innovation with prudent controls to shape Pearland's future, even as it becomes one of the largest suburbs in the Houston area. Some of the major initiatives are as follows: Public Safety Among numerous other reasons, families move to Pearland for a high degree of personal safety and a low crime rate. Pearland was recently rated as one of the safest Cities in the United States ranking number 48 in the nation. Pearland was one of two Cities in the Houston area in the top 50. The City Council continues to emphasize public safety and the City delivers programs in the areas of law enforcement, emergency management, emergency medical services, and fire protection. For more than a decade, the City of Pearland public safety departments have been subscribers to an 800 MHZ trunked radio system provided by Harris County. This system was originally designed for mobile radios in vehicles and at a time when the western half of Pearland was sparsely populated. COP public safety departments have experienced significant radio reception difficulties creating safety issues for the City. Harris County is not able to improve radio coverage in west Pearland, and to switch to the digital version of the Harris County system is costly and would not guarantee improved radio coverage. The City of Houston has recently established a $130 million dollar 700 MHz trunked radio system designed for in-building coverage using portable radios. After radio testing and research, the City of Pearland would be switching to the City of Houston's radio system with tremendous improvements in coverage improving public safety for employees and citizens of Pearland, and at a lesser cost than creating a new radio system or staying as a subscriber to the current radio system. v To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The City of Pearland Police Department communications division currently provides dispatch services for the city's Police, Fire, and EMS departments. Due to the rapid population growth and increased demands for service in the City, it has become apparent that the Police communications division workload is unsustainable. As an alternative to hiring more dispatchers, the City has contracted with Harris County Emergency Corps for the provision of Fire Department and EMS dispatch services. In addition to the cost savings of not having to hire additional employees, the contracted dispatch center brings added capabilities to the Fire and EMS departments. By utilizing personnel specifically trained and certified for the Fire and EMS dispatch role, as well as employing a Computer Aided Dispatch system specifically configured for Fire and EMS dispatching, this arrangement will contribute to better deployment and utilization of resources. Brazoria County MUD's 21 and 22 in cooperation with Friendswood Development have constructed Fire Station 6 in the City's ETJ, which opened in 2012. This station is staffed and operated by Pearland Volunteer Firefighters with the MUD's bearing the cost of operations, pursuant to a Strategic Partnership Agreement. This will greatly enhance response times in the City's southwestern ETJ, where development continues. The City is also currently designing the reconstruction of Fire Station #3 on the eastern edge of the City to accommodate 24/7 fire and EMS crews, improving response times to that area of the City. Economic Development The Pearland Economic Development Corporation (PEDC) is a Type B non-profit corporation under the Texas Development Corporation Act that utilizes a half cent sales tax collected in the City to carry out economic development activities. The Corporation assists new and existing businesses that create new jobs and capital investment. The Corporation works with the City to utilize various tools such as tax abatement and the authority granted the City under Chapter 380 of the Local Government Code to encourage new jobs and investment in the community. PEDC celebrated the successful recruitment of Ref-Chem, L.P. to our community and kicked off their construction with a groundbreaking ceremony in June for the engineering, construction and maintenance firm's new office building. Ref-Chem L.P. is an Odessa, Texas based heavy industrial construction, engineering, EPC and maintenance organization with an annual sales volume of over $100 million. Ref- Chem's new office building will be located on an 11-acre site at Beltway 8 and Tom Bass Parkway. The three-story facility will be 39,000 square feet with space for a staff of approximately 100 employees, including management personnel, engineers, designers and administrative staff. PEDC assisted Hatch Mott MacDonald, a leading North American engineering and environmental consulting firm, in expanding and relocating its Pearland office to a new location in late 2012. HMM was previously located at 2950 Cullen Parkway and moved to its new location on the fourth floor of the Shadow Creek Business Center at 11233 Shadow Creek Parkway in mid-November. The new 20,000 square-foot Pearland office, which serves as headquarters to HMM's Pipeline Division and Houston Subdivision, houses HMM's current 70 local employees, with room for up to 30 additional employees. These two projects are in addition to KS Management Services and Merit Medical previously mentioned. vi To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas In 2012, the PEDC, along with local partners in government, education, healthcare and business, embarked upon a long-term strategic community and economic development planning process in order to create a shared vision for the community's future growth and an action plan to achieve it. The strategic plan process is being headed by a steering committee comprised of 23 community leaders in government, education, healthcare and local business. At the end of the process, Pearland will have a consensus-based, achievable roadmap to guide the community's path to short and long-term economic growth. The final plan will be released in April of 2013. The Pearland Economic Development Corporation continues to promote Pearland and is working with a myriad of companies on future relocations and site visits as well as working with existing businesses on future expansions. Land Use Plan/Annexation Land use planning seeks to order and regulate the use of land in an efficient way, thus preventing land use conflicts. Land use planning is the systematic assessment of land, alternatives for land use, and social and economic conditions in order to select and adopt the best land use options. Its purpose is to select and put into practice those land uses that will best meet the needs of the people while safeguarding resources and ensuring sustainability. PEDC and the City of Pearland, in partnership with Gateway Planning, finalized a market-based master plan and implementation strategy for the area formerly known as the Spectrum District that leverages the area's unique location (the southwest corner of Beltway 8 and SH 288) and creates a de facto "master development" context. The area is planned to be a regional employment center with destination mixed use urban living, and concentrated retail/entertainment areas. The key issues addressed by the plan include drainage, transportation access, linkages, and transit; revision of the existing zoning and development standards; incorporating new development with existing uses; involving the existing municipal management districts; and incorporating public parks and open spaces. The master plan and associated regulatory recommendation of a form-based code envisions a market- based approach and identifies different "character zones" of development, each implementing a unique neighborhood within the Lower Kirby Urban Center. This form-based code is combined with the overall infrastructure strategy that identifies the major regional drainage and roadway improvements needed to bring the plan together. This master plan and implementation strategy for Lower Kirby ensure that the vision for the mixed use regional destination is feasible, but flexible to address changing market conditions. In order to implement this vibrant vision for the Lower Kirby Urban Center, PEDC is working with the City of Pearland and the two area Municipal Management District Boards to create a coordinated action plan that identifies the responsibilities and roles of each of the entities. The City's annexation of Brazoria County MUD #4 occurred December 31, 2012, pursuant to a Strategic Partnership Agreement between the City and MUD. Brazoria County MUD #4 encompasses approximately 600 acres and has an estimated population of 3,100. Upon annexation all assets and obligations of the MUD transferred to the City. vii To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas In January 2013, City Council voted to incorporate the Grand Avenue Master Plan into the City's Comprehensive Plan. The plan is designed to facilitate future development of Grand Avenue as a focal point for the Oldtown Site while also responding to existing growth patterns in the city. A primary initiative for this plan is to reinvent the Oldtown Site as a modern village with a compatible mix of residential and non-residential uses. The Plan recommends adopting form based codes that would be used to ensure buildings and streets are coordinated in a manner that is attractive to pedestrians and encourages outdoor activities. Using form based codes allows for more flexibility and a mix of uses as compared to traditional zoning used throughout the city. Capital Improvement Projects and Planning With continued residential and commercial growth, and to plan for the future, the need to build new infrastructure and maintain existing infrastructure is a priority and will be implemented through an aggressive capital improvement program. The City's Five-Year CIP 2013 — 2017 totals $346 million. Projects include Drainage ($24M), Streets ($151M), Facilities ($23M), Parks ($36M), Water and Wastewater ($112M). Major thoroughfare projects include the widening of Bailey Road between FM1128 and Veterans, widening three miles of Mykawa Road to a four lane facility, reconstruction of one mile of Old Alvin Road from Plum Street to McHard Road, the extension of Pearland Parkway to Dixie Farm Road, McHard Road extension from Mykawa to Cullen, Longwood Street Reconstruction, extension of Business Center Drive between Broadway and CR59, the widening of Max Road between Broadway and Hughes Ranch Road, and the extension of Fite between McLean and Veterans. Major drainage projects include expansion of the D.L. Smith detention pond by approximately 150 acre-feet, an additional 200 acre-feet of storm water storage in the Hickory Slough watershed, and future storm water regional detention. Major park projects include a soccer complex, improvements to Independence and Centennial Parks, Phase I development of the Shadow Creek Ranch Park, and a 7,000 square foot Nature Center. Facility projects include an 11,500 square feet expansion and renovation to the Tom Reid Library, reconstruction of Fire Station #3 to accommodate a 24/7 manned station, Fire/EMS administrative building, traffic signal operational improvements with the takeover of TXDOT signals in 2011, Westside Library, and renovation of Old Police Department building. Water projects include the preliminary design of a 20 million gallon per day surface water plant along with various waterline extensions. Wastewater projects include the replacement of Southdown wastewater treatment plant, extension of trunk sewer on McHard, and various lift station projects. Transportation Improvements and Strategic Planning Charged with planning, establishing, and maintaining an effective transportation system, the City of Pearland is involved in numerous activities to face this challenge. The $84 million transportation bond program (passed in 2007) will construct major projects mentioned previously. The City is also involved in regional efforts for long-range transportation planning. The Mayor is a member of H-GAC's Transportation Policy Council (TPC), and an Assistant City Manager is a member of the Technical Advisory Committee (TAC), a sub-committee of the TPC and the Transportation Improvement Program (TIP) Subcommittee. The City submitted several proposed roadway projects from its Capital Improvement Program for possible funding in the region's Transportation Improvement Program for 2011-2014. In 2011, The TPC and TAC selected four City of Pearland projects for funding. viii To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas The projects are the Traffic Signal System Improvements (2012), Pearland Parkway Extension (2013), Max Road (2014), and Fite Road (2014). These projects will receive 80% funding from state or federal sources totaling $20,180,901 with the city providing 20% matching funds. The City continues to work with the Brazoria County Toll Road Authority (BCTRA) to develop viable low cost alternatives for the Hwy 288 toll facility that can be constructed on a near-term schedule (3-5 years) to provide immediate relief to congestion along the corridor. H-GAC has planned a "Call for Projects" in 2012 for the 2013- 2016 TIP. The City will submit several proposed roadway projects from its Capital Improvement Program in this new "Call for Projects" in an effort to continue to secure state and federal funding for projects in order to reduce the funding burden on the city taxpayers. The City of Pearland, METRO, TxDOT, Brazoria County and Connect Transit have been working together since 2009 to establish a Park & Ride in the Pearland Area. On November 30, 2011, METRO closed on a 15.1 acre parcel of property along Smith Ranch Road and Country Road 403. METRO solicited proposals for Engineering services to do the design and the plans and specifications for the project in November of 2012. It is anticipated that the METRO Board will authorize a contract for Engineering services in early spring of 2013. Once the design contract is let it is anticipated it will take six (6) to eight (8) months to design the project and another twelve to fifteen months to construct the project. The initial phase of the project will include approximately 1,000 parking spaces. The anticipated service area for the Pearland area Park & Ride includes Northern Brazoria County and Southern Harris County. The service will run between the Pearland area and the Texas Medical Center/Transit Center located at Fannin and Galen. The Texas Medical Center, the largest medical center in the world, houses 13 hospitals, 46 institutions (colleges, universities, research facilities, etc.), employs approximately 90,000 people, and services approximately 5.1 million patients annually. The fare for service each way is estimated to be $3.25. The Park & Ride will operate Monday through Friday (weekday service only). The service will be offered weekday mornings from 5:15 AM to 8:15 AM and 3:15 PM to 7:00 PM weekday evenings. It is anticipated that headway times for the busses will be twelve to fifteen minutes. METRO will provide a guaranteed ride home program during the day for those individuals that require a ride home during the times the regular bus service is not in operation. Fiscal Responsibility and Sustainability Fiscal sustainability can be defined as "the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes." City Council takes a pro-active stance in ensuring the fiscal health and sustainability of the City. Council adopted a set of Financial Management Policy Statements and receives quarterly Finance "Snapshot" presentations, which includes economic indicators. The City also prepares a Five-Year Forecast for the City's major funds to see how the spending decisions made today affect the future as well as to identify any issues/concerns that are forthcoming and to put strategies in place today to address those issues/concerns for the future. Fiscal Sustainability is more important given the most recent state of the economy and steady yet slow development. Based on the long-range forecast and impacts to the debt service and operating funds, the City delayed several major capital improvement projects and slotted them in the capital improvement plan, when the City could more afford to do them. In order to minimize the increase to the FY 2013 tax lx To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas rate and fund City infrastructure, the City continues to identify programs and line-items that could be reduced with little or no impact to the citizens and has looked at fees to ensure recoupment of costs resulting in budget reductions totaling $330,227 and revenue enhancements of $522,087, in the City's General Fund budget, for the 2013 fiscal year. Over the past three years base budget reductions to the General Fund totaled $4.9 million. While only a few months into the 2013 fiscal year, the City is already beginning to prepare for the 2014 budget process and up-coming forecast with the same goal of being fiscally responsible to our citizens. AWARDS AND ACKNOWLEDGEMENTS The City of Pearland was awarded a Gold rating from the Scenic City Texas Organization. The rating is based on the quality of our development codes, and the implementation and enforcement of these codes. The result of such work leads to a city full of both scenic roadways and scenic public and private developments. The Scenic City Certification Program is a project of Scenic Texas. Scenic Texas has identified a direct correlation between the success of a city's economic development efforts and the visual appearance of its public spaces. In recognition of this link, Scenic Texas has developed the Scenic City Certification Program to support and recognize municipalities that implement high-quality scenic standards for public roadways and public spaces. The program recognizes Texas cities which already have strong scenic standards and provides an incentive to others to adopt and implement the kind of stringent criteria that has been proven to enhance economic development, improve quality of life and foster a sense of place. The Scenic City application contained 270 possible criteria that earn points, including a high percentage of park and open space, implementation of multi-use trails and recreation areas, strong litter enforcement laws, street lighting standards, parking lot landscaping, utility line management, a budget that supports these programs and their ongoing maintenance, and more. The City of Pearland Planning Department was recently awarded the 2012 Certificate of Achievement for Planning Excellence by the Texas Chapter of the American Planning Association. This award recognizes the professional planning standards demonstrated by the Planning staff and the support exhibited by the City Council and the Planning and Zoning Commission. Pearland received this award for increasing the awareness of professional planning, enhancing neighborhood and citizen recognition of planning efforts, encouraging the funding of professional training for Commissioners and Staff and aiding in economic development and community image. This marks the sixth time the Planning Department has won this award. The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for the Excellence in Financial Reporting to the City of Pearland, Texas, for its Comprehensive Annual Financial Report for the year ended September 30, 2011. This was the 35th consecutive year that the City has received this prestigious award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted principles and applicable legal requirements. x To the Honorable Mayor, Members of City Council, and Citizens of the City of Pearland, Texas A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements, and we are submitting it to GFOA to determine its eligibility for another certificate. The City has also received the GFOA's Distinguished Budget Presentation Award for its annual budget document. In order to qualify for the Distinguished Budget Presentation Award, the government's budget document had to be judged proficient as a policy document, a financial plan, an operations guide, and a communications device. The preparation of this report was accomplished with the dedicated service of the Accounting staff of the Finance Department. We express our sincere appreciation to these individuals who have continually demonstrated the core beliefs of the City and who assisted and contributed to the preparation of this report. We also thank the Mayor and members of the City Council for their support in planning and conducting the financial operations of the City in a responsible manner. Respectfully su mitted z Bill Eisen, City Manager Claire Bogard, Director of Finance Rick ver ard, Assistant Director of Finance xi CITY OF PEARLAND, TEXAS PRINCIPAL OFFICIALS Elected Officials Tom Reid Woody Owens Scott Sherman Susan Sherrouse Keith Ordeneaux Greg Hill Appointed Officials Bill Eisen Darrin Coker Letitia Farnie City Management Mickiel Hodge Jon Branson Claire Bogard Matt Buchanan Daniel Baum Young Lorfing Danny Cameron Bonita Hall Chris Doyle Michelle Smith Vance Riley Andrew Fearn Lata Krishnarao Trent Epperson Position Mayor Council Member at Large - Position One Council Member at Large - Position Two Council Member at Large - Position Three, Mayor Pro Tern Council Member at Large - Position Four Council Member at Large - Position Five Position City Manager City Attorney Municipal Court Judge Position Assistant City Manager Assistant City Manager Director of Finance President, PEDC Emergency Medical Services Chief City Secretary Director of Public Works Director of Human Resources Police Chief Director of Parks and Recreation Fire Chief Head Librarian Director of Community Development Director of Engineering and Capital Projects Term Expires May 2014 2013 2014 2014 2014 2013 X11 ASI:TANT CITY MA1A:E9 ADO 0TAT rYAER CITY OF PEARLAND I TX. ORGANIZATIONAL CHART CifIZENS CF FEAFLAND MA.YCR AND CITY COUNCIL 0 PA CC.1I; C' CITYATC:-' CITY !/At.A E I CCJY .EVELOFET I ENG SEE9 S, G & CADITAL ?FOECT• E;J0 NEER NG& FC'JE0T PAE'ET 1c CC'.1LNITY CEELCMENT LANNtFJG PE97-1IT. INfPECIC E \VIC 1 MEPTAL L. HEALTh HUPMJS4 ESCUE DA ,. _C.EAT ON J Y.L CNTftOL PUBL : RUB AFAIR rp'l EMERGENCY FED ::AL VIC3 I CITY ECETAY FIRE FIRE. MARSHAL E.1E9GENCY ,.'AFAEME4T FOR!;. FUFCKAING I I EJ0GE7 ILL.& I I [TTTTI xlii Certificate of Achievement for Excellence in Financial Reporting Presented to City of Pearland Texas For its Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2011 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. CM RAiN President Executive Director xiv Financial Section (This page intentionally left blank.) e g ~ Houston Office 3411 Richmond Avenue Suite 500 Houston. "texas 77046 713.621.1515 Main wlutieypenn-coal Independent Auditors ' Report 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, 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, 2012, 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 the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of September 30, 2012, 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 March 11, 2013, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 5 through 15, and budgetary comparison, required pension system, and other post-employment benefits on pages 68 through 70 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Dr flas Fort Vvlorth Houston ,........rot err:. _. +ricNn!. To the Honorable Mayor and Members of the City Council We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's financial statements as a whole. The introductory section, combining and individual non-major fund financial statements and schedules, and statistical section, are presented for purposes of additional analysis and are not a required part of the financial statements. The combining and individual non-major fund financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. ~ r L +x.42 March 11, 2013 2 Management's Discussion and Analysis (This page intentionally left blank.) 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, 2012. FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2012, by $629.2 million (net assets). Of this amount, $34.2 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 remaining amount is for investments in capital assets, net of related debt and amounts restricted for capital projects, debt service, and community development projects. • The City's total primary government net assets increased by $8.6 million due to lower accounts payable and long-term debt. • At the close of the current fiscal year, the City of Pearland's governmental funds reported combined ending fund balances of $40.8 million, a decrease of $6.3 million in comparison with the prior year, approximately all of which is related to capital projects. Approximately $13.8 million of the September 30, 2012, fund balance can be attributed to unspent bond proceeds for capital projects. • As of September 30, 2012, the unassigned fund balance for the General Fund was $17.2 million or 35% of total General Fund expenditures. The total fund balance for the General Fund is $17.6 million or 35% of General Fund expenditures. • The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities totaled $289.6 million, a net decrease of $8.7 million over the previous year. The decrease is attributable to principal payments for 2012 with no new money being issued. The City's debt for business activities totaled $124.4 million, a net decrease of approximately $1.4 million from the previous year principal outstanding. 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 or 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 (continued) 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, sewer, and solid waste. The government-wide financial statements can be found on pages 19 through 21 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 22 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. CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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 and Solid Waste 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 26 of this report, provide separate information for the Water and Sewer and Solid Waste Enterprise Funds since it is considered to be a major fund of the City. The basic proprietary fund financial statements can be found on pages 26 through 29 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 32 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 68 of this report. CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSIONAND ANALYSIS (continued) 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 $629.2 million at the close of the most recent fiscal year. By far the largest portion of the City's net assets (90%) 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. COMPARATIVE SCHEDULE OF NET ASSETS September 30, 2012 and 2011 Amounts in (000's) Governmental Activities Business-type Activities Totals 2012 2011 2012 2011 2012 2011 Assets Current and other assets $ 67,257 $ 72,544 $ 48,163 $ 41,119 $ 115,420 $ 113,663 Capital assets 695,702 695,754 266,288 268,051 961,990 963,805 Total Assets 762,959 768,298 314,451 309,170 1,077,410 1,077,468 Liabilities Other liabilities 9,078 12,205 6,996 8,169 16,074 20,374 Long-term liabilities outstanding 305,621 311,649 126,479 124,859 432,100 436,508 Total Liabilities 314,699 323,854 133,475 133,028 448,174 456,882 Net assets Invested in capital assets, net of related debt 410,078 413,439 158,716 156,629 568,794 570,068 Restricted 16,430 16,462 9,821 5,603 26,251 22,065 Unrestricted 21,752 14,543 12,439 13,910 34,191 28,453 Total Net Assets $ 448,260 $ 444,444 $ 180,976 $ 176,142 $ 629,236 $ 620,586 An additional portion of the City's net assets (4%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets (5%) may be used to meet the government's ongoing obligations to citizens and creditors. - The increase in Total Net Assets from the prior year is $8.7 million, which is attributed to a decrease in liabilities. 8 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) COMPARATIVE SCHEDULE OF CHANGES IN NET ASSETS For the Years Ended September 30, 2012 and 2011 Amounts in (000's) Governmental Activities Business-type Activities Totals 2012 2011 2012 2011 2012 2011 Revenues Program revenues: Charges for services $ 12,183 $ 10,356 $ 35,189 $ 35,923 $ 47,372 $ 46,279 Operating grants and contributions 7,662 7,399 205 61 7,867 7,460 Capital grants and contributions 18,843 10,330 8,118 4,215 26,961 14,545 Property taxes 34,305 33,451 34,305 33,451 Sales and use taxes 15,632 13,983 15,632 13,983 Franchise taxes 5,670 5,605 5,670 5,605 Investment earnings 92 157 68 116 160 273 Other 1,510 1,909 443 9 1,953 1,918 Total Revenues 95,897 83,190 44,023 40,324 139,920 123,514 Expenses General Government 13,334 15,637 13,334 15,637 Public Safety 27,403 23,057 27,403 23,057 Public Works 28,510 31,348 28,510 31,348 Community Services 4,267 3,350 4,267 3,350 Parks and Recreation 9,264 8,043 9,264 8,043 Interest on long-term debt 11,572 13,087 11,572 13,087 Water and Sewer 29,392 29,194 29,392 29,194 Solid Waste 7,528 7,285 7,528 7,285 Total Expenses 94,350 94,522 36,920 36,479 131,270 131,001 Increase (decrease) in net assets before transfers 1,547 (11,332) 7,103 3,845 8,650 (7,487) Transfers 2,269 1,475 (2,269) (1,475) Increase in net assets 3,816 (9,857) 4,834 2,370 8,650 (7,487) Net assets - beginning 444,444 454,301 176,142 173,772 620,586 628,073 Net assets - ending $ 448,260 $ 444,444 $ 180,976 $ 176,142 $ 629,236 $ 620,586 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. Net assets increased by $8.7 million with the most significant change occurring in contributions for infrastructure by developers. 0 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Governmental activities - Governmental activities increased the City's net assets by $3.8 million, thereby accounting for 44% percent of the total increase in the net assets of the City. Key elements of this increase are as follows: • Property taxes, sales and use taxes, and franchise taxes totaled $34.3 million, $15.6 million, and $5.7 million respectively. These revenues increased by $2.6 million from prior year primarily as a result of an increase in the debt service tax rate and increased consumer spending. • Capital Contributions totaled $18.8 million as a result of infrastructure contributed by developers. • The revenues were offset by expenses for general government, public safety, and public works of $13.3 million, $27.4 million, and $28.5 million respectively. In total, these expenses were relatively consistent with the prior year. • The increase in net assets was also offset by interest expense on long-term debt of $11.6 million, an increase of $1.5 million from the prior year due to new issuances. Expenses and Program Revenues - Governmental Activities $30,000 $25,000 $20,000 $15,000 •°— $10,000 $5,000 eP ao ~rt o9 o a5 c 5o eoS ~o~ ,ov oV ao , , 410~ CP Revenues by Source - Governmental Activities Charges for services 13% Grants and Other - contributions 2% 27% Property taxes Sales and use taxes 16% 36% Franchise taxes 6% 10 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Business-type activities - Business-type activities increased the City's net assets by $4.8 million. Key elements of this increase are as follows: • Charges for services of $35.2 million decreased approximately $0.7 million over the prior year primarily due to an decrease in water and sewer consumption due to rainfall. • Capital grants and contributions of $8.1 million increased $3.9 million from the prior year due to increased contributions from developers for impact fees. • The revenues listed above were offset by expenses of $29.4 million and $7.5 million respectively for Water and Sewer and Solid Waste. Expenses for Water and Sewer increased from prior year by $0.2 million mainly due to Kirby water well being down for repairs and the completion of Alice water plant. Expenses and Program Revenues - Business-type Activities $35,000 $30,000 $25,000 $20,000 ° $15,000 $10,000 $5,000 Water and Sewer Solid Waste Revenues by Source - Business-type Activities Other 1% Grants and contributions 19% Charges for services 11 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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, unassigned 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 $40.8 million. A portion of the combined fund balance, or $17.2 million, is unassigned and available for day-to-day operations of the City; $13.8 million is restricted for capital projects; and the remaining balance is restricted for debt service and other programs. There was a decrease in the combined fund balance of $6.3 million from the prior year. The decrease in fund balance includes a decrease in the capital projects fund balance of approximately $9.7 million due to draw down of bond proceed $9.2 million, a decrease of $0.2 million in the debt service fund balance, offset by a combined increase of approximately $468,000 in the special revenue funds. $3.0 million increase in the General Fund is seen mainly in Charges for Services for TIRZ Administration fees and Recreation Center/Natatorium fees, the General Fund's fund balance totaled $17.6 million at year end. In the Capital Projects Fund, the City spent $9.2 million on various improvement projects, leaving an ending fund balance of $13.8 million. Proprietary Funds - The City's business-type activities contain two activities (water and sewer, and solid waste). The City's proprietary funds provide the same type of information found in the government-wide financial statements. 12 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) GENERAL FUND BUDGETARY HIGHLIGHTS During the year, there was a $1.0 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 and to reflect projections during the 2011-2012 budget process. Budget estimates for revenues and other sources combined increased by approximately $1.9 million for the year; also to reflect carryovers and revised projections. Actual revenues of $49.4 million were $1.2 million over the final budget mainly in sales and use tax and charges for services. Actual expenditures of $48.5 million were under budget by $3.0 million, resulting in the year-end fund balance of $17.6 million over budget by $3.1 million. At year-end, equipment purchases and several projects were still in progress and part of the $3.1 million will be carried over and reappropriated in the 2012-2013 budget year. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of fiscal year 2012, the City's governmental activities and business-type activities had invested $695.7 million and $266.3 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net decrease of ($1.8)million, or -0.7 percent over the end of last fiscal year for the business-type activities capital assets and governmental activities capital assets stayed relatively flat. Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 Land $ 28,409 $ 28,409 $ 3,610 $ 3,610 $ 32,018 $ 32,018 Construction in progress 23,120 32,868 5,419 24,891 28,539 57,759 Infrastructure 573,752 564,903 199,511 179,648 773,263 744,551 Buildings and improvements 64,378 63,351 27,898 28,615 92,277 91,966 Machinery and equipment 6,043 6,224 1,243 1,299 7,286 7,523 Contractual water rights 28,607 29,988 28,607 29,988 Total Capital Assets $ 695,702 $ 695,754 $ 266,288 $ 268,051 $ 961,990 $ 963,805 Construction in progress at year-end represents numerous ongoing projects, the largest of which relate to street, drainage and water/sewer projects. Additional information on the City's capital assets can be found in Note 4 to the financial statements. 13 7,280 109,305 65,425 3,749 5,225 1,817 $ 432,102 4,145 113,270 91,150 4,453 5,227 1,428 $ 436,508 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Long-Term Debt - At the end of the current fiscal year, the City had total bonds, certificates of obligation, notes, capital leases, and post employment liabilities outstanding of $432.1 million. Of this amount, $239.3 million is composed of general obligation bonds, $65.4 million is composed of certificates of obligation and $109.3 million represents revenue bonds secured solely by specified revenue sources. General obligation bonds Deferred amount for issuance premium/(discount) Revenue bonds Certificates of obligation Capital leases payable Compensated absences Post employment benefit liability Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 $ 224,170 $ 207,105 $ 15,130 $ 9,730 $ 239,300 $ 216,835 6,398 3,489 882 656 109,305 113,270 65,425 91,150 3,407 4,032 342 421 4,686 4,669 539 558 1,535 1,204 282 224 $ 305,621 $ 311,649 $ 126,480 $ 124,859 The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities decreased to $289.6 million. The decrease is due to principal payments with no new monies issued. The City also refunded bonds of $43.6 million, of which $21.0 million was General Obligation bonds refunded, and $22.4 million in Certificates of Obligation. The City's debt for business activities increased to $126.5 million, a net increase of $1.6 million from the previous year, which was a result of the addition of $5.8 million in new Revenue Bonds offset by principal payments. Current ratings on debt issues are as follows: Standard and Poors Fitch General obligation bonds AA- AA Revenue bonds AA- AA- 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 Al from Moody's. The DAP bonds are rated A- by Standard and Poors. Additional information on the City's long- term debt can be found in Note 5 to the financial statements. 14 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES Two primary factors in the 2013 budget are the improving Houston area economy and the continued growth in population served by the City, which will include the annexation of Brazoria MUD No. 4 on December 31, 2012. The improving regional economy will result in substantially improved revenues in the coming fiscal year. Improved economic conditions will be most noticeable in two major revenue sources — sales tax and building permits. Sales tax revenue for FY 2012 was up 11% over FY 2011. The adopted budget for FY 2013 includes a total increase in sales tax of 5.4% over FY 2012 revenues. This increase assumes an overall increase in the dollar value of sales and also incorporates additional revenue from two major new sales tax producers, Sam's Club and Kelsey-Seybold. Building Permit revenue is also projected to maintain the strong levels that have developed during FY 2012. The FY 2012 Adopted Budget was based on an estimated 744 single-family permits. Due to the strengthening regional economy during the FY 2012, housing starts were 931. The FY 2013 Adopted Budget anticipates 1,142 single- family permits. Another economic factor that will impact revenues is an increase in property values of$129 million or 2.6%, due to new construction. Values of existing residential properties have declined slightly over the past few years and indications are that residential property values will stay flat. The impact of new residential and commercial construction will more than offset home values for existing properties for 2013. The budget incorporates an increase of 2 cents in the property tax rate. The entire increase is related to debt service. Of the total adopted tax rate of 70.51 cents per hundred dollars valuation, the operating tax rate remains at 21.51 cents per hundred dollars and the debt service tax rate is 49 cents. With this increase, the overall tax rate will have increased by 5.25 cents since the 2007 bond election. Prior to the election, voters were informed that approval of the bond propositions could result in a tax increase of 13 cents per hundred dollars of value. Another significant factor that impacts the adopted budget is a 7.1% increase in population. This increase in population results in increased services to meet the needs of the new residents. This projected increase in population is a combination of two factors — newly constructed homes and multifamily dwellings and the annexation of Brazoria MUD No. 4 on December 31, 2012. Charges for various services and permits were also reviewed as part of the budget process to determine their recovery for cost of service. As a result, increases in several charges and fees are included in the General Fund FY 2013 budget as well as $330,227 in reductions. Over the past 3 years, a total of $4.4 million in General Fund budget reductions have been taken. The Pearland City Council approved a $58.6 million General Fund budget for FY 2013. This is a 13.7% increase from the FY 2012 adopted budget. The increase is mainly due to new positions added in FY 2013 and an average 3% pay increase for employees. The Water and Sewer fund is able to fund operations, debt service, and bond coverage requirements with no increase in rates. This is mainly attributable to efficient operations and transfers in from water and sewer impact fee funds used towards annual debt service payments. 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 Bogard, 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.citvoft)earland.com . 15 (This page intentionally left blank.) 16 Basic Financial Statements 17 (This page intentionally left blank.) 18 CITY OF PEARLAND, TEXAS STATEMENT OF NET ASSETS September 30, 2012 Assets Cash and equivalents Investments Receivables, net of allowance for uncollectibles Due from other governmental agencies Inventories Prepaid items Restricted cash and investments Deferred charges Capital assets: Capital assets not subject to depreciation Capital assets, net of accumulated depreciation Total Capital Assets Total Assets Liabilities Accounts payable and accrued liabilities Due to other governmental agencies Accrued interest Unearned revenues Customer deposits Long-term liabilities Due within one year Due in more than one year Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted for: Capital improvements Debt service Community development programs Public safety Unrestricted Total Net Assets Primary Government Discretely Presented Governmental Business-type Component Activities Activities Total Units $ 27,003,079 $ 4,422,922 $ 31,426,001 $ 15,705,835 14,024,006 6,051,442 20,075,448 2,002,459 16,600,651 3,492,378 20,093,029 1,674,864 768,652 768,652 134,720 134,720 218,438 63,121 281,559 28,435 32,305,395 32,305,395 665,254 8,507,030 1,827,653 10,334,683 607,575 51,528,815 9,028,352 60,557,167 3,220,907 644,173,218 257,260,089 901,433,307 6,413,293 695,702,033 266,288,441 961,990,474 9,634,200 762,958,609 314,451,352 1,077,409,961 30,318,622 5,261,144 3,676,575 8,937,719 434,463 91,350 91,350 1,004,536 435,835 1,440,371 227,370 2,616,994 2,616,994 195,698 2,791,112 2,986,810 38,333 10,705,778 4,895,325 15,601,103 3,600,000 294,915,760 121,584,984 416,500,744 69,250,043 314,699,910 133,475,181 448,175,091 73,550,209 410,077,968 158,715,983 568,793,951 (63,215,843) 8,689,520 8,689,520 11,223,863 1,131,525 12,355,388 437,884 4,502,287 4,502,287 19,546,372 702,955 702,955 21,751,626 12,439,143 34,190,769 $ 448,258,699 $ 180,976,171 $ 629,234,870 $ (43,231,587) See Notes to Financial Statements. 19 CITY OF PEARLAND, TEXAS STATEMENT OF ACTIVITIES For the Year Ended September 30, 2012 Program Revenue Charges for Operating Grants Capital Grants and Functions/Programs Expenses Services and Contributions Contributions Primary Government Governmental Activities: General Government $ 13,333,899 $ $ 6,045,268 $ Public Safety 27,402,713 4,205,641 711,306 Public Works 28,509,730 42,991 52,538 18,742,786 Community Services 4,267,485 5,854,715 310,919 Parks and Recreation 9,265,497 2,079,614 541,896 100,000 Interest on long-term debt 11,571,519 Total Governmental Activities 94,350,843 12,182,961 7,661,927 18,842,786 Business-type activities: Water and Sewer 29,392,086 27,535,464 204,866 8,117,782 Solid Waste 7,527,713 7,653,933 Total Business-Type Activities 36,919,799 35,189,397 204,866 8,117,782 Total Primary Government $ 131,270,642 $ 47,372,358 $ 7,866,793 $ 26,960,568 Component Units: Pearland Economic Development Corporation $ 3,042,464 $ 414,000 $ $ Tax Increment Reinvestment Zone #2 5,894,105 Development Authority of Pearland 17,373,755 Total Component Units $ 26,310,324 $ 414,000 $ $ 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. FA Net (Expense) Revenue and Changes in Net Assets Primary Government Governmental Business-type Activities Activities Total Component Units $ (7,288,631) $ $ (7,288,631) (22,485,766) (22,485,766) (9,671,415) (9,671,415) 1,898,149 1,898,149 (6,543,987) (6,543,987) (11,571,519) (11,571,519) (55,663,169) (55,663,169) 6,466,026 6,466,026 126,220 126,220 6,592,246 6,592,246 (55,663,169) 6,592,246 (49,070,923) $ (2,628,464) (5,894,105) (17,373,755) (25,896,324) 34,304,615 34,304,615 17,924,775 15,631,576 15,631,576 7,337,389 5,669,958 5,669,958 92,365 68,427 160,792 41,644 1,510,310 442,794 1,953,104 44,353 2,268,910 (2,268,910) 59,477,734 (1,757,689) 57,720,045 25,348,161 3,814,565 4,834,557 8,649,122 (548,163) 444,444,134 176,141,614 620,585,748 (42,683,424) $ 448,258,699 $ 180,976,171 $ 629,234,870 $ (43,231,587) 21 CITY OF PEARLAND, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30, 2012 General Fund Capital Debt Service Projects Fund Other Total Governmental Governmental Funds Funds Assets Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Due from other governments Due from other funds Inventories Prepaid items Total Assets Liabilities and Fund Balances Liabilities Accounts payable Accrued expenditures Deposits Due to other funds Deferred revenue Total Liabilities $ 6,617,774 $ 2,882,399 $ 13,282,463 $ 4,429,607 $ 27,212,243 9,031,025 2,000,595 2,000,386 13,032,006 5,725,094 10,377,470 4,642 482,213 16,589,419 608,705 159,947 768,652 168,548 168,548 134,720 134,720 48,222 166,894 3,322 218,438 $ 22,334,088 $ 15,427,358 $ 15,447,438 $ 4,915,142 $ 58,124,026 $ 1,446,733 $ 166,894 $ 1,671,475 $ 237,844 $ 3,522,946 1,433,509 1,433,509 195,698 195,698 168,548 168,548 1,686,187 10,267,985 6,463 11,960,635 4,762,127 10,434,879 1,671,475 412,855 17,281,336 Fund balances: Non -spendable: Inventories 134,720 134,720 Prepaid items 48,222 166,894 3,322 218,438 Restricted for: Debt service 4,825,585 4,825,585 Capital improvements 13,775,963 13,775,963 Community development programs 3,796,010 3,796,010 Public safety 702,955 702,955 Assigned for: Encumbrances 167,016 167,016 Unassigned General fund 17,222,003 17,222,003 Total fund balances 17,571,961 4,992,479 13,775,963 4,502,287 40,842,690 Total Liabilities and Fund Balances $ 22,334,088 $ 15,427,358 $ 15,447,438 $ 4,915,142 $ 58,124,026 See Notes to Financial Statements. 22 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STA TEMENT OF NET ASSETS September 30, 2012 Total fund balance, governmental funds $ 40,842,690 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. 695,702,033 Certain other long-term assets (property taxes receivable and adjudicated court fines receivable) 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. 9,343,641 Some liabilities 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 (299,400,028) Compensated absences (4,686,124) Accrued interest governmental activity debt (1,004,536) Estimated post employment benefit liability (1,535,386) Deferred bond issuance costs 8,507,030 The assets and liabilities of certain internal service funds are not included in the fund financial statement, but are included in the governmental activities of the Statement of Net Assets. 489,379 Net Assets of Governmental Activities in the Statement of Net Assets $ 448,258,699 See Notes to Financial Statements. IPA CITY OF PEARLAND, TEXAS STATEMENT OF RE VENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2012 Other Total Capital Governmental Governmental General Fund Debt Service Projects Fund Funds Funds $ 10,861,341 $ 23,500,454 $ $ $ 34,361,795 14,814,936 816,640 15,631,576 5,669,958 146,988 5,816,946 2,320,103 2,320,103 3,164,068 209,967 3,374,035 11,890,808 11,890,808 54,614 9,783 23,536 4,130 92,063 1,851,938 1,419,488 3,271,426 623,824 796,087 482,784 455,800 2,358,495 49,399,652 24,306,324 2,358,258 3,053,013 79,117,247 8,241,509 172,191 449,174 8,862,874 25,168,443 193,972 25,362,415 5,506,477 28,136 5,534,613 3,861,520 384,262 4,245,782 6,775,316 490,554 7,265,870 9,373,377 9,373,377 12,400,810 12,400,810 9,025,793 416,557 9,442,350 3,992,293 3,992,293 49,553,265 25,766,480 9,197,984 1,962,655 86,480,384 (153,613) (1,460,156) (6,839,726) 1,090,358 (7,363,137) Revenues Property taxes Sales and use taxes Franchise fees Licenses and permits Fines and forfeitures Charges for services Investment earnings Intergovernmental Other Total Revenues Expenditures Current: General government Public safety Public works Community services Parks and recreation Debt Service: Principal biterest and other charges Bond issuance costs Capital outlay Intergovernmental Total Expenditures Excess (deficiency) of revenues over expenditures Other Financing Sources (Uses) Issuance of debt Refunding bonds issued Payments to refunded bond escrow agent Bond premium Capital leases Transfers in Transfers out Total Other Financing Sources (Uses) Net change in fund balances Fund balances - beginning Fund balances - ending See Notes to Financial Statements. 49,805,000 49,805,000 (54,478,177) (54,478,177) 3,808,801 3,808,801 3,599,482 2,157,471 152,030 5,908,983 (397,453) (2,997,317) (622,042) (4,016,812) 3,202,029 1,293,095 (2,845,287) (622,042) 1,027,795 3,048,416 (167,061) (9,685,013) 468,316 (6,335,342) 14,523,545 5,159,540 23,460,976 4,033,971 47,178,032 $ 17,571,961 $ 4,992,479 $ 13,775,963 $ 4,502,287 $ 40,842,690 24 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE STA TEMENT OF RE VENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STA TEMENT OF ACTIVITIES For /lie Year Ended September 30, 2012 Net change in fund balances - total governmental funds: $ (6,335,342) 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 of $10,462,236 exceeded depreciation of $27,702,583 in the current period. (17,240,347) Governmental funds report only the proceeds from the disposal of capital assets and not the difference between the carrying value and the accumulated depreciation of the asset. This is the amount by which the carrying value exceeded the accumulated depreciation. (105,786) Capital assets net of related debt acquired as a result of in City development. 17,293,695 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. 18,071 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. 1,702,335 Governmental funds report bond issuance costs as expenditures. In contrast, the government wide financial statements amortized such a cost over the life of the bonds. 347,294 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 56,248 Amortization of bond issuance costs 8,657,350 Capital lease activity (426,496) Post employment benefit liability (348,491) Internal service funds are used by management to charge the costs of certain activities, such as property and liability insurance coverage and employee health benefits, to individual funds. The net revenue (expense) of certain internal service funds is reported with governmental activities. 196,034 Change in net assets of governmental activities $ 3,814,565 See Notes to Financial Statements. M CITY OF PEARLAND, TEXAS STA TEMENT OF NET ASSETS PROPRIETARY FUNDS September 30, 2012 Assets Current assets: Cash and cash equivalents Investments Accounts receivable, net of allowance for doubtful accounts Prepaid items Restricted cash and cash equivalents Restricted investments Total current assets Non-current assets: Deferred charges Capital assets: Land and improvements Construction in progress Contractual rights to water supply Infrastructure Buildings Machinery and equipment Less Accumulated depreciation Total non-current assets Total Assets Liabilities Current liabilities: Accounts payable and accrued expenses Accrued interest payable Due to other governments Customer deposits Compensated absences - current portion Bonds and certificates of obligation payable - current portion Capital lease - current portion Total current liabilities Non -current liabilities: Compensated absences Capital lease obligation Other post-employment benefits Bonds and certificates of obligation payable Total non-current liabilities Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted for debt service Restricted for capital projects Unrestricted Total Net Assets See Notes to Financial Statements. Business-type Activities - Enterprise Funds Water and Sewer Solid Waste Fund Fund Total $ 3,481,057 $ 941,865 $ 4,422,922 6,051,442 6,051,442 2,779,458 712,920 3,492,378 63,121 63,121 28,300,088 28,300,088 4,005,307 4,005,307 44,680,473 l654,785 46,335,258 1,827,653 1,827,653 3,609,542 3,609,542 5,418,810 5,418,810 34,511,428 34,511,428 280,739,923 280,739,923 31,256,473 31,256,473 3,465,029 3,465,029 (92,712,764) (92,712,764) 268,116,094 268,116,094 312,796,567 1,654,785 314,451,352 2,364,693 1,311,882 3,676,575 435,835 435,835 91,350 91,350 2,791,112 2,791,112 88,945 88,945 4,725,000 4,725,000 81,380 81,380 10,578,315 1,311,882 11,890,197 449,933 449,933 260,984 260,984 282,467 282,467 120,591,600 120,591,600 121,584,984 121,584,984 132,163,299 1,311,882 133,475,181 158,715,983 158,715,983 1,131,525 1,131,525 8,689,520 8,689,520 12,096,240 342,903 12,439,143 $ 180,633,268 $ 342,903 $ 180,976,171 Governmental Activities - Internal Service Fund $ 782,836 11,232 794,068 794,068 304,689 304,689 _Iu4,oay 489,379 $ 489,379 Ki CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Governmental Business -type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Fund $ 27,535,464 $ 7,653,933 $ 35,189,397 $ 6,494,646 4,790,448 4,790,448 2,325,113 2,325,113 35,144 7,211,131 7,527,713 14,738,844 6,185,794 1,026,885 1,026,885 77,976 626,482 626,482 8,564,822 8,564,822 24,544,881 7,527,713 32,072,594 6,298,914 2,990,583 126,220 3,116,803 195,732 68,050 377 68,427 303 430,038 430,038 204,866 204,866 12,756 12,756 (5,223,944) (5,223,944) (4,508,234) 377 (4,507,857) 303 (1,517,651) 126,597 (1,391,054) 196,035 8,117,782 8,117,782 222,811 222,811 (2,114,982) (2,114,982) 4,707,960 126,597 4,834,557 196,035 175,925,308 216,306 176,141,614 293,344 $ 180,633,268 $ 342,903 $ 180,976,171 $ 489,379 Revenues Charges for services Operating Expenses Personnel services Supplies and materials Contractual services Repairs and maintenance Other expenses Depreciation and amortization Total Operating Expenses Operating income (loss) Non-Operating Revenues (Expenses) Earnings on investments Miscellaneous revenue (expense) Operating grants and contributions Gain (loss) on disposal of capital assets Interest expense Total Non-Operating Revenues (Expenses) Income (loss) before contributions and transfers Capital contributions Transfers in Transfers out Change in net assets Total net assets - beginning Total net assets - ending See Notes to Financial Statements. 27 CITY OF PEARLAND, TEXAS Page 1 of 2 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Governmental Business -type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Fund Cash Flows from Operating Activities Receipts from customers and users $ 27,578,140 $ 7,625,682 $ 35,203,822 $ 6,487,121 Disbursed for personnel services (4,782,920) (4,782,920) Disbursed for goods and services (11,622,829) (8,581,492) (20,204,321) (6,247,156) Net cash provided (used) by operating activities 11,172,391 (955,810) 10,216,581 239,965 Cash Flows from Noncapital Financing Activities Transfers from funds 222,811 222,811 (61,095) Transfers to other funds (2,114,982) (2,114,982) Operating grants and contributions 204,866 204,866 Net cash provided by (used by) noncapital financing activities (1,687,305) (1,687,305) (61,095) Cash Flows from Capital and Related Financing Activities Proceeds from the sale of equipment 12,756 12,756 Capital grants and contributions 6,041,758 6,041,758 Proceeds from the issuance of debt 14,900,000 14,900,000 Principal payments on debt (13,465,000) (13,465,000) Interest paid (5,223,944) (5,223,944) Acquisition and construction of capital assets (7,644,628) (7,644,628) Net cash used by capital and related financing activities (5,379,058) (5,379,058) Cash Flows from Investing Activities Purchase of investments 2,040,257 2,040,257 Interest received 68,050 377 68,427 303 Net cash provided by (used by) investing activities 2,108,307 377 2,108,684 303 Net increase (decrease) in cash and equivalents 6,214,335 (955,433) 5,258,902 179,173 Cash and equivalents, beginning 25,566,810 1,897,298 27,464,108 603,663 Cash and equivalents, end $ 31,781,145 $ 941,865 $ 32,723,010 $ 782,836 Unrestricted cash and equivalents $ 3,481,057 $ 941,865 $ 4,422,922 $ 782,836 Restricted cash and equivalents 28,300,088 28,300,088 $ 31,781,145 $ 941,865 $ 32,723,010 $ 782,836 See Notes to Financial Statements 28 CITY OF PEARLAND, TEXAS Page 2 of 2 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2012 Governmental Business -type Activities - Enterprise Funds Activities - Water and Sewer Solid Waste Internal Service Fund Fund Total Funds Reconciliation of operating income to net cash provided by operating activities Operating income (loss) $ 2,990,583 $ 126,220 $ 3,116,803 $ 195,732 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 8,564,822 8,564,822 (Increase) decrease in accounts receivable (222,682) (28,251) (250,933) (7,525) (Increase) decrease in prepaid expenses 49,740 49,740 Increase (decrease) in accounts payable (482,958) (1,053,779) (1,536,737) 51,758 Increase (decrease) in salaries payable 7,528 7,528 Increase (decrease) in customer deposits 265,358 265,358 Net Cash Provided by Operating Activities $ 11,172,391 $ (955,810) $ 10,216,581 $ 239,965 Summary of non-cash transactions Contributed capital assets $ 2,076,024 $ $ 2,076,024 $ See Notes to Financial Statements. 29 CITY OF PEARLAND, TEXAS COMBINING STATEMENT OF NET ASSETS DISCRETELY PRESENTED COMPONENT UNITS - GO VERNMENTAL ACTIVITIES September 30, 2012 Assets Cash and cash equivalents Investments Receivables - less allowance for uncollectibles Due from primary government Prepaid items Restricted cash Deferred charges Capital assets not subject to depreciation Capital assets net of accumulated depreciation Total Assets Liabilities Accounts payable and accrued expenses Accrued interest Customer deposits Non-current liabilities: Due within one year Due in more than one year Total Liabilities 1,314,864 360,000 1,674,864 28,435 28,435 665,254 665,254 329,660 277,915 607,575 3,220,907 3,220,907 6,413,293 6,413,293 23,536,875 4,655,490 2,126,257 30,318,622 72,986 361,444 33 434,463 93,983 133,385 227,368 38,333 38,333 883,565 2,720,000 3,603,565 23,725,351 45,521,127 69,246,478 24,814,218 361,444 48,374,545 73,550,207 Pearland Economic Development Corporation $ 9,562,003 2,002,459 Tax Increment Development Total Reinvestment Authority of Component Zone #2 Pearland Units $ 4,655,490 $ 1,488,342 $ 15,705,835 2,002,459 Net Assets Invested in capital assets, net of related debt (14,974,716) (48,241,127) (63,215,843) Restricted - debt service 571,271 (133,385) 437,886 Restricted - economic development 13,126,102 4,294,046 2,126,224 19,546,372 Total Net Assets $ (1,277,343) $ 4,294,046 $ (46,248,288) $ (43,231,585) See Notes to Financial Statements. 30 CITY OF PEARLAND, TEXAS COMBINING STATEMENT OFACTIVITIES DISCRETELY PRESENTED COMPONENT UNITS - GOVERNMENTAL ACTIVITIES For the Year Ended September 30, 2012 Program Revenues Net (Expense) and Changes in Net Assets Pearland Tax Increment Development Charges for Economic Reinvestment Authority of Functions/Programs Expenses Services Development Zone #2 Pearland Totals Component Units: Pearland Economic Development Corporation $ 3,042,464 $ 414,000 $ (2,628,464) $ $ $ (2,628,464) Tax Increment Reinvestment Zone#2 5,894,105 (5,894,105) (5,894,105) Development Authority of Pearland 17,373,755 (17,373,755) (17,373,755) $ 26,310,324 $ 414,000 (2,628,464) (5,894,105) (17,373,755) (25,896,324) General Revenues: Taxes: Property taxes Sales and use tax Unrestricted investment earnings Miscellaneous Transfers between component units Total General Revenues and Transfers Change in net assets Net assets, beginning Net assets, ending See Notes to Financial Statements. $ $ 17,924,775 $ $ 17,924,775 7,337,389 7,337,389 34,161 5,844 1,641 41,646 44,353 44,353 (12,016,051) 12,016,051 7,415,903 5,914,568 12,017,692 25,348,163 4,787,439 20,463 (5,356,063) (548,161) (6,064,782) 4,273,583 (40,892,225) (42,683,424) $ (1,277,343) $ 4,294,046 $ (46,248,288) $ (43,231,585) 31 CITY OF 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, fire 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 combination full-time/volunteer part- time/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 (DAP). 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. The component units do not issue separate financial statements. 32 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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 to help existing businesses to expand. The mechanism to fund the operations of the corporation is through a sales 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. A major land owner within the City of Pearland sits on the Board of Directors for the TIRZ #2. 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 Development Authority. 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. 33 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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-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. 34 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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 on a pay-as-you go basis 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 as well as solid waste collection 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. Additionally, the city maintains an Internal Service Fund used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City on a cost- reimbursement basis. Services provided by the Internal Service Funds include property and liability insurance coverage and employee health benefits. The Internal Service Fund is included in governmental activities for government-wide reporting purposes. 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. 35 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) C. Measurement Focus, Basis of Accounting and Financial Statement Presentation (continued) 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. 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. Fund Balance Working Capital Policies As of these financial statements, the City has adopted GASB Statement No. 54, which redefined how fund balances of the governmental funds are presented in the financial statements. Fund balances are classified as follows: Nonspendable — Amounts that cannot be spent either because they are not in a spendable form or because they are legally or contractually required to be maintained intact. Restricted — Amounts that can be spent only for specific purposes because of the City Charter, City Code, State or Federal laws, or externally imposed conditions by grantors or creditors. Committed — Amounts than can be used only for specific purposes determined by ordinances passed by City Council, the City's highest level of decision making authority. Commitments may be modified or rescinded only through ordinances approved by City Council. Assigned — Amounts that are intended to be used for a specific purposes, but do not meet the definition of restricted or committed fund balance. Under the City's policy, amounts can be assigned by the City's Director of Finance. Unassigned — All amounts not included in other spendable classifications. The City Council has authorized the Director of Finance as the official authorized to assign fund balance to a specific purpose. The City shall maintain the fund balance and working capital of the various operating funds at the following levels: General Fund Unassigned Fund Balance The City shall maintain the General Fund unassigned fund balance equivalent to 2 months of recurring operating expenditures, based on current year expenditures. If the fund balance exceeds this amount, funding non-recurring expenditures in the following fiscal year may be used to draw down the balance. 36 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies (continued) Water/Sewer Unreserved Working Capital The City shall maintain a working capital sufficient to provide for reserves for emergencies and revenue shortfalls. A cash equivalent operating reserve will be established and maintained at 25% of the current year's budget appropriation for recurring operating expenses. The cash operating reserve is derived by dividing the total cash equivalents balance by recurring operating expenses. Use of Fund Balance/Working Capital Fund balance/Working Capital shall only be used for emergencies, non-recurring expenditures/expenses or major capital purchases that cannot be accommodated through current year savings. Should such use reduce balances below the level established as the objective for that fund, restoration recommendations will accompany the request/decision to utilize said balances. Debt Service Fund Total Fund Balance The City shall maintain the debt service fund balance at 10% of annual debt service requirements OR a fund balance reserve as required by bond ordinances, whichever is greater. Property Insurance Fund Unrestricted Net Assets The Property Insurance Fund accounts for uninsured and deductible claims for the City's property and liability insurance. Claims cannot be reasonably predicted and budgeted for; therefore the fund will maintain a balance that approximates the prior average annual expense for the last three years, excluding extra-ordinary expenses in the fund. Employee Benefits Fund Unrestricted Net Assets The Employee Benefits Fund is funded through City and employee contributions. Estimated costs shall be determined during each budget year and the contributions adjusted accordingly. There is no minimum balance for this fund. Economic Development Corporation As sales tax revenue fluctuates due to changes in economic conditions, the PEDC shall maintain a fund balance of no less than 10% of budgeted sales tax revenues. Water/Sewer Revenue Debt Coverage Reserves Revenues shall be maintained at 1.15 times coverage in a fiscal year where the water/sewer fund is not issuing additional debt and 1.4 times coverage in a year where debt is anticipated to be issued. Bond Issuance Reserves Debt service reserves should be maintained for each bond issue as required by bond covenants. Contingency Fund Pursuant to the City Charter, a provision shall be made within the annual budget for a contingency fund in an amount not more than seven percent of the total budget (General Fund) to be used in case of unforeseen items of expenditure. 37 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) 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 (U.S.) 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 120 days comprise the trade accounts receivable allowance for uncollectibles. 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 Certain proceeds of the Water and Sewer Enterprise Fund revenue bonds and certain resources set aside for their repayment are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Certain resources are also set aside for repayment of Pearland Economic Development Corporation Bonds and are reported as restricted assets. 38 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) 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 $5,000 and an estimated useful life of three years or more. 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 add to the value of the asset or materially extend assets' lives are not capitalized. Property, plant, and equipment are depreciated using the straight-line method over the following useful lives: Asset Years Buildings and improvements 10-45 Machinery and equipment 3-15 Infrastructure 10-50 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 I 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 16 and over 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 required to work on a City-observed holiday 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 for non-exempt employees. Employees may be paid or receive compensatory time. The maximum accrual for overtime is 60 hours, except for employees involved in public safety, who can accrue up to 120 hours. All sick leave benefits are accumulated and paid to employees upon separation from the City not to exceed 720 hours for employees hired prior to July 24, 2006, and 360 hours for employees hired after. 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. CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) 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. N. Comparative Data and Reclassifications Comparative data for the prior year have been presented in certain sections of the accompanying financial statements in order to provide an understanding of changes in the City's financial position and operations. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with current year's presentation. 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, bankers' 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. 40 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) 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, consisting 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 No. 2 and Development Authority of Pearland are substantially the same as the City. The following schedule shows the City's recorded cash and investments at year-end: Total Fair Value Primary Component Government Units Cash deposits Temporary Investments FFCB discount note FHLB discount note FHLMC discount note FNMA discount note $ 55,706,673 5,004,430 6,055,222 5,005,182 12,035,337 $ 83,806,844 16,371,089 1,000,555 1,001,904 $ 18,373,548 Quoted market prices are the basis of the fair value for U.S. 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: Primary Component Government Units Interest income $ 136,749 $ 38,899 Unrealized gain (loss) on temporary investments 24,043 2,745 Investment earnings $ 160,792 $ 41,644 41 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) 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: Primary Government Component Units Weighted Weighted Average Average Total Fair Value Maturity (days) Total Fair Value Maturity (days) $ 5,004,430 549 $ 1,000,555 509 6,055,222 135 1,001,904 600 5,005,182 346 12,035,337 203 $ 28,100,171 $ 2,002,459 275 555 Temporary Investments FFCB discount note FHLB discount note FHLMC discount note FNMA discount note Portfolio weighted average maturity The City's investment policy specifies a maximum weighted average maturity for the portfolio of 547.5 days or 18 months based on the stated maturity date of the investments. When including cash investments the weighted average maturity for the primary government is 107 days and for the component units is 124 days. 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. Concentration of Credit Risk With the exception of U.S. Treasury Securities and interest-bearing checking accounts that are fully collateralized, no more than 75 percent of the City's total investment portfolio will be invested in a single security type. As of September 30, 2012, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Primary Government Component Units Percentage of ercentage of Total Total Investment Investment Investment Type Total Fair Value Portfolio Total Fair Value Portfolio FFCB discount note $ 5,004,430 18% $ 1,000,555 50% FHLB discount note 6,055,222 21% 1,001,904 50% FHLMC discount note 5,005,182 18% FNMA discount note 12,035,337 43% Total $ 28,100,171 100% $ 2,002,459 100% 42 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Credit Risk Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal National Mortgage Association Discount Notes were rated AA+ 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 Component Government Units Revenue bond debt service $ 1,567,360 $ 665,254 Customer deposits 2,813,050 Capital improvements 27,924,985 Total $ 32,305,395 $ 665,254 43 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables Receivables at September 30, 2012, consisted of the following: Primary Government: Governmental Funds: Other Debt Service Capital Non-Major General Fund Fund Projects Fund Funds Total Receivables Property taxes, including penalties and interest $ 563,152 $ 885,335 $ $ $ 1,448,487 Lease receivable 9,508,179 9,508,179 Sales and other taxes 3,792,071 31,558 3,823,629 Fines and forfeitures 849,821 849,821 Interest 26,369 1,342 4,642 387 32,740 Other 504,776 450,268 955,044 Allowance for uncollectibles (11,095) (17,386) (28,481) $ 5,725,094 $ 10,377,470 $ 4,642 $ 482,213 $ 16,589,419 Proprietary Funds: Water and Sewer Fund Solid Waste Fund Total Receivables Customer accounts $ 2,771,892 $ 777,439 $ 3,549,331 Interest 43,363 43,363 Other 65,937 65,937 Allowance for uncollectibles (101,734) (64,519) (166,253) $ 2,779,458 $ 712,920 $ 3,492,378 Component Units: Pearland Tax Increment Economic Reinvestment Development Development Zone Authority of Corporation Developments Pearland Total Receivables Sales and other taxes $ 1,305,787 $ $ $ 1,305,787 Interest 6,275 6,275 Other 2,802 360,000 362,802. Total $ 1,314,864 $ $ 360,000 $ 1,674,864 44 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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: Delinquent property taxes receivable - general fund Delinquent property taxes receivable - debt service fund Lease revenues-principal Municipal fines and forfeitures Lease interest revenues Grants and revenues prior to meeting all eligibility requirements Total Deferred Revenue for Governmental Funds Unavailable Unearned $ 498,094 $ 759,806 7,235,920 849,821 2,272,259 344,735 $ 9,343,641 $ 2,616,994 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, Harris County, and Fort Bend 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. 45 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets A summary of changes in the primary government's capital assets for the year ended September 30, 2012, follows: Primary Government Balance Balance September 30, September 30, 2011 Increases (Decreases) 2012 Governmental Activities Capital assets not being depreciated: Land $ 28,408,628 $ $ $ 28,408,628 Construction in progress 32,867,609 8,312,244 (18,059,666) 23,120,187 Total capital assets not being depreciated 61,276,237 8,312,244 (18,059,666) 51,528,815 Other capital assets: Infrastructure 771,888,616 32,315,680 804,204,296 Buildings and improvements 76,671,106 3,821,113 80,492,219 Machinery and equipment 15,396,213 1,339,442 (734,542) 16,001,113 Furniture and fixtures Total other capital assets 863,955,935 37,476,235 (734,542) 900,697,628 Less accumulated depreciation for: Infrastructure (206,986,038) (23,466,433) (230,452,471) Buildings and improvements (13,319,668) (2,794,104) (16,113,772) Machinery and equipment (9,171,994) (1,442,049) 655,876 (9,958,167) Furniture and fixtures Total accumulated depreciation (229,477,700) (27,702,586) 655,876 (256,524,410) Other capital assets, net 634,478,235 9,773,649 (78,666) 644,173,218 Totals $ 695,754,472 $ 18,085,893 $ (18,138,332) $ 695,702,033 Balance Balance September 30, September 30, 2011 Increases (Decreases) 2012 Business-type Activities Capital assets not being depreciated: Land and intangibles $ 3,609,542 $ $ $ 3,609,542 Construction in progress 24,891,393 4,432,206 (23,904,789) 5,418,810 Total capital assets not being depreciated 28,500,935 4,432,206 (23,904,789) 9,028,352 Other capital assets: Water and sewer system 254,701,621 26,038,302 280,739,923 Buildings and improvements 31,256,473 31,256,473 Machinery and equipment 3,334,000 236,959 (105,931) 3,465,028 Contractual water rights 34,511,428 34,511,428 Total other capital assets 323,803,522 26,275,261 (105,931) 349,972,852 Less accumulated depreciation for: Water and sewer system (75,053,176) (6,175,936) (81,229,112) Buildings and improvements (2,641,808) (716,274) (3,358,082) Machinery and equipment (2,035,386) (292,154) 105,931 (2,221,609) Contractual water rights (4,523,503) (1,380,457) (5,903,960) Total accumulated depreciation (84,253,873) (8,564,821) 105,931 (92,712,763) Other capital assets, net 239,549,649 17,710,440 257,260,089 Totals $ 268,050,584 $ 22,142,646 $ (23,904,789) $ 266,288,441 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) Depreciation was charged to programs as follows: General government $ 479,575 Public safety 1,894,167 Public works 22,951,248 Community services 178,278 Parks and recreation 2,199,318 Total Governmental Activity $ 27,702,586 Water and sewer $ 8,564,821 Total Business-Type Activity $ 8,564,821 The City had active construction projects as of September 30, 2012. The projects included 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: Project Description Total In Progress Commitment Drainage Improvement $ 15,268,041 $ 5,328,936 Building Improvements 1,037,908 2,868,262 Street Improvement 5,930,085 7,608,379 Park Improvements 884,153 86,584 Water and Sewer Improvements 5,418,810 19,467,693 Totals $ 28,538,997 $ 35,359,854 47 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012. In general, the City uses the General and Debt Service funds to liquidate governmental long-term liabilities. Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Year Governmental Activities Bonds payable: General obligation bonds $ 207,105,000 $ 43,575,000 $ (26,510,000) $ 224,170,000 $ 5,955,000 Certificates of obligation 91,150,000 (25,725,000) 65,425,000 3,480,000 Deferred amount for issuance premium/(discount) 3,489,368 3,548,801 (639,900) 6,398,269 Total bonds payable 301,744,368 47,123,801 (52,874,900) 295,993,269 9,435,000 Other liabilities: Obligations under capital leases 4,032,055 (625,296) 3,406,759 644,610 Compensated absences 4,668,853 2,486,200 (2,468,929) 4,686,124 626,168 Other post-employment benefits 1,204,166 331,220 1,535,386 Total Governmental Activities $ 311,649,442 $ 49,941,221 $ (55,969,125) $ 305,621,538 $ 10,705,778 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) transfers from 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. 48 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (continued) A summary of the terms of general obligation bonds and certificates of obligation, as of September 30, 2012, follows: Series Original Issue Matures Interest Rate (%) Debt Outstanding General Obligation Bonds Permanent Improvement, Series 2003 15,000,000 2028 4.00-6.00 $ 390,000 Permanent Improvement and Refunding Bonds, Series 2005 37,015,000 2029 3.25-5.00 22,570,000 Permanent Improvement and Refunding Bonds, Series 2006 32,165,000 2029 4.00-5.00 31,260,000 Permanent Improvement and Refunding Bonds, Series 2007 69,640,000 2032 4.00-5.00 68,565,000 Permanent Improvement, Series 2008 22,835,000 2032 4.50-5.50 21,930,000 Permanent Improvement and Refunding Bonds, Series 2009 16,735,000 2034 2.00-5.00 15,755,000 Permanent Improvement, Series 2010A 12,415,000 2035 3.00-4.00 11,700,000 Permanent Improvement Refunding, Series 2010B 1,630,000 2018 2.00-4.00 1,215,000 Permanent Improvement, Series 2011 5,400,000 2036 2.125-4.125 5,340,000 Permanent Improvement and Refunding Bonds, Series 2012 43,575,000 2029 3.00-5.00 43,575,000 Annexed Municipal Utility District Bonds BC MUD I Series 2007 1,940,000 2030 3.75-4.35 1,870,000 Total General Obligation Bonds $ 224,170,000 Certificates of Obligation Certificates of Obligation, Series 2003 25,000,000 2023 3.00-4.50 $ 2,330,000 Certificates of Obligation, Series 2004 21,000,000 2028 4.00-5.25 1,805,000 Certificates of Obligation, Series 2006 9,700,000 2029 3.65-4.68 9,160,000 Certificates of Obligation, Series 2007 23,250,000 2032 325-5.25 22,700,000 Certificates of Obligation, Series 2008 9,000,000 2032 3.75-5.00 8,585,000 Certificates of Obligation, Series 2009 8,520,000 2034 2.25-5.00 8,095,000 Certificates of Obligation, Series 2009A 12,145,000 2029 2.00-4.50 10,865,000 Certificates of Obligation, Series 2011 2,095,000 2021 2.09 1,885,000 Total Certificates of Obligation $ 65,425,000 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, 2012, approximately $57.4 million of previously refunded bonds outstanding were considered defeased. Current Year Refunding On February 9, 2012, the City refunded approximately $43.405 million in general obligation bonds and $6.5 million in water and sewer bonds in order to take advantage of lower interest rates which produced $5.3 million in savings over sixteen years. Net Present Value of the refunding is 9.2%, which is well over the City's financial policy of a minimum of 3% for a refunding. The water and sewer revenue bonds will be folded into general obligation bonds, however will be paid from water and sewer revenues. CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (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, Debt Service and Water and Sewer Funds. The historical purchase price of the capital assets under lease is approximately $5.7 million. Following is a summary of future lease payments due on this equipment: Total Less: Interest Fiscal Year 2013 2014 2015 2016 2017 2018-2019 Obligations $. 843,723 843,723 843,723 696,006 516,550 363,422 4,107,146 (358,809) Obligations under capital leases $ 3,748,337 50 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) A. General Obligation Bonds and Certificates of Obligation (continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30, 2012, were as follows: Governmental Activities Fiscal Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 General Obligation Principal Interest $ 5,955,000 $ 9,642,072 6,360,000 9,404,956 7,340,000 9,106,827 8,440,000 8,737,396 8,055,000 8,366,418 7,940,000 8,020,829 10,425,000 7,620,587 11,000,000 7,152,460 11,515,000 6,662,938 12,250,000 6,144,356 12,820,000 5,595,767 13,315,000 5,018,017 13,990,000 4,436,441 14,355,000 3,858,602 14,980,000 3,245,078 15,615,000 2,602,908 16,290,000 1,917,841 8,990,000 1,346,628 9,180,000 921,259 Certificates of Obligation Principal Interest $ 3,480,000 $ 2,726,815 3,635,000 2,597,558 2,660,000 2,480,111 2,035,000 2,390,475 2,105,000 2,308,503 2,680,000 2,207,678 2,920,000 2,090,441 2,950,000 1,966,524 3,065,000 1,838,971 2,960,000 1,706,746 3,080,000 1,569,654 3,210,000 1,425,293 3,320,000 1,273,513 3,580,000 1,111,516 3,730,000 953,652 3,885,000 803,336 4,055,000 644,684 3,290,000 493,950 3,685,000 338,925 2032 9,405,000 488,591 2033 2,220,000 218,131 2034 2,325,000 112,794 2035 1,070,000 36,356 2036 335,000 6,909 $ 224,170,000 $ 110,664,163 4,065,000 159,025 505,000 51,750 530,000 26,500 $ 65,425,000 $ 31,165,623 51 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012. Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Year Business-type Activities Bonds payable: Permanent Improvement Bonds $ 9,730,000 $ 6,230,000 $ (830,000) $ 15,130,000 $ 1,110,000 Water and sewer revenue bonds 113,270,000 8,670,000 (12,635,000) 109,305,000 3,615,000 Deferred amount for issuance premium/(discount) 655,633 347,949 (121,982) 881,600 Total bonds payable 123,655,633 15,247,949 (13,586,982) 125,316,600 4,725,000 Other liabilities: Obligations under capital leases 421,093 (78,729) 342,364 81,380 Compensated absences 558,216 288,223 (307,561) 538,878 88,945 Other post-employment benefits 224,017 58,450 282,467 Total Business-type Activities S 124,858,959 $ 15,594,622 $ (13,973,272) $ 126,480,309 $ 4,895,325 A summary of the terms of certificates of obligation and revenue bonds recorded in the Enterprise Funds as of September 30, 2012, is as follows: Water and Wastewater Fund Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 Water and Sewer System Revenue Bonds, Series 2003 Water and Sewer System Revenue and Refunding Bonds, Series 2006 Water and Sewer System Revenue and Refunding Bonds, Series2007 Water and Sewer System Revenue Bonds, Series 2008 Water and Sewer System Revenue Bonds, Series 2009 Permanent Improvement and Refunding Bonds, Series 2009 Water and Sewer System Revenue Bonds, Series 2010A Water and Sewer System Refunding Bonds, Series 2010B Permanent Improvement and Refunding Bonds, Series 2012 Water and Sewer System Revenue Bonds, Series 2012 Total Utility System Fund Original Issue Matures Interest Rate (%) Debt Outstanding $ 8,000,000 2020 4.41-4.60 $ 2,835,000 9,500,000 2025 4.00-6.00 670,000 13,845,000 2031 3.74-4.82 11,500,000 40,135,000 2031 3.50-5.50 37,505,000 14,950,000 2034 4.125-5.00 14,180,000 13,130,000 2034 3.00-5.50 12,090,000 11,660,000 2018 2.00-5.00 8,900,000 14,040,000 2035 1.75-4.50 13,290,000 8,970,000 2023 1.75-4.00 8,565,000 6,230,000 2025 3.00-5.00 6,230,000 8,670,000 2037 2.00-3.625 8,670,000 $ 124,435,000 52 Revenue Bonds Principal $ 3,615,000 3,765,000 3,575,000 3,725,000 3,880,000 4,030,000 4,195,000 4,370,000 4,615,000 4,810,000 5,025,000 4,190,000 4,440,000 6,155,000 6,450,000 6,765,000 7,080,000 7,375,000 7,680,000 3,710,000 3,895,000 4,075,000 1,180,000 345,000 Interest $ 4,724,111 4,584,324 4,439,468 4,302,208 4,153,814 4,005,011 3,847,690 3,683,168 3,503,757 3,306,021 3,100,221 2,884,169 2,689,273 2,477,948 2,181,686 1,867,325 1,552,814 1,257,306 948,088 625,250 444,575 264,300 75,725 25,556 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) B. Enterprise Fund Debt (continued) The annual requirements to amortize governmental activity revenue bonds and permanent improvement bonds outstanding at September 30, 2012, were as follows: Fiscal Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 Permanent Improvement Bonds Principal Interest $ 1,110,000 $ 565,300 1,155,000 525,325 1,530,000 474,812 1,560,000 427,900 2,415,000 344,001 2,515,000 232,188 365,000 171,700 370,000 157,000 370,000 142,200 385,000 127,100 395,000 111,500 1,480,000 74,000 1,480,000 22,200 360,000 13,050 $ 109,305,000 $ 60,956,857 $ 15,130,000 $ 3,375,226 53 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) 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, 2012: Balance Balance September 30, September 30, Amounts Due 2011 Additions (Reductions) 2012 Within One Ye ar Pearland Economic Development Corporation Sales tax revenue bonds $ 25,330,000 $ $ (840,000) $ 24,490,000 $ 880,000 Deferred amount for issuance premium/(discount) 91,161 (10,364) 80,797 Compensated absences 43,613 25,190 (30,684) 38,119 3,565 Development Authority of Pearland Tax Increment Revenue Bonds 49,230,000 56,915,000 (51,910,000) 54,235,000 2,720,000 Deferred Loss on Refunding (8,649,167) 2,655,294 (5,993,873) Deferred amount for issuance premium/(discount) (316,381) 316,381 $ 74,378,393 48,291,023 $ (49,819,373) 72,850,043 $ 3,603,565 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, 2012, is as follows: Series Original Issue Matures Interest Rate (%) Debt Outstanding Pearland Economic Development Corporation Sales Tax Revenue Bonds, Series 2005 $ 10,590,000 2026 2.30-4.42 $ 7,965,000 Sales Tax Revenue Bonds, Series 2006 10,235,000 2030 3.66-4.75 9,285,000 Sales Tax Revenue Bonds, Series 2010 7,685,000 2030 variable-resets every 6 7,240,000 months Development Authority of Pearland Tax Increment Revenue Bonds, Series 2012 56,915,000 2028 2.50-5.50 54,235,000 Total Component Unit Long-Tenn Debt $ 78,725,000 54 Pearland Principal $ 2,720,000 2,800,000 2,885,000 2,970,000 3,070,000 3,160,000 3,255,000 3,120,000 3,215,000 3,030,000 3,13 0,000 3,225,000 3,320,000 3,425,000 3,530,000 3,635,000 3,745,000 $ 54,235,000 Interest $ 1,665,014 1,581,511 1,495,550 1,406,981 1,315,802 1,221,553 1,124,541 1,024,613 928,828 830,128 737,107 641,016 542,008 440,085 334,937 226,566 114,972 $ 15,631,212 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long-Term Debt (continued) C. Component Unit Long-Term Debt (continued) The annual requirements to amortize component unit revenue bonds outstanding at September 30, 2012, were as follows: Revenue Bonds Pearland Economic Development Development Authority of Corporation Fiscal Year Principal Interest 2013 $ 880,000 $ 1,173,162 2014 920,000 1,132,524 2015 965,000 1,090,031 2016 1,010,000 1,045,383 2017 1,060,000 995,632 2018 1,115,000 943,456 2019 1,175,000 888,202 2020 1,230,000 835,519 2021 1,285,000 779,982 2022 1,350,000 721,322 2023 1,415,000 657,996 2024 1,480,000 591,411 2025 1,555,000 521,215 2026 1,635,000 447,066 2027 1,715,000 369,033 2028 1,805,000 281,379 2029 1,895,000 192,272 2030 2,000,000 98,737 $ 24,490,000 $ 12,764,322 D. Legal Compliance Long-term debt assumed by the City upon dissolution of annexed municipal utility district in fiscal years 2006 and 2007 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. 55 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 6 - Interfund Transactions A summary of interfund transfers, the purpose of which is to cover operational expenses/expenditures, for the year ended September 30, 2012, is as follows: Transfers In General Fund General Fund General Fund Debt Service Fund Debt Service Fund Debt Service Fund Water and Sewer Fund Capital Projects Fund Transfers Out Capital Projects Fund Non-Major Governmental Fund Water and Sewer Fund Water and Sewer Fund General Fund Capital Projects Fund General Fund Non-Major Governmental Fund Amounts Purpose 1,944,269 Transfer of funds for capital projects costs 481,164 Transfer of funds for operating costs 222,811 Transfer of funds for operating costs 152,030 Transfer of funds for operating costs $ 6,131,794 1,174,049 Transfer of funds for administrative costs 434,865 Transfer of funds for debt service payments 163,490 Transfer of funds for debt service payments 1,559,116 Transfer of funds for capital project costs A summary of interfund receivables and payables at September 30, 2012, follows: Receivable Fund Payable Fund Amount Purpose Non-Major General Fund Governmental Fund $ 168,548 Short-term loan to fund operations $ 168,548 Note 7 - Fund Balance / Net Assets The Pearland Economic Development Corporation and the Development Authority of Pearland, discretely presented component units of the City, had negative net asset balances at year-end of approximately $1.3 and $46.2 million respectively. These deficit balances are caused by these entities issuing bonds for economic development related construction projects and, in accordance with state law, transferring the capital assets to the primary government while retaining the related debt. As noted in Note 5, the debt is expected to be retired with future dedicated sales and property tax revenues. 56 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 7 - Fund Balance / Net Assets (continued) Encumbrances Encumbrance accounting is employed as an extension of formal budgetary integration for the General Fund, special revenue funds, and capital projects funds. September 30, 2012, certain amounts which were classified as restricted, committed, or assigned for specific purposes have been encumbered in the governmental funds. Significant encumbrances included in governmental fund balances are as follows: Encumbrances General Fund Assigned $ 167,016 Capital Projects Restricted 9,201,689 Aggregate non-major funds Restricted 140,352 Aggregate component units Restricted 90,585 $ 9,599,642 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 ICMA Retirement Corporation is the plan administrator. 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. 57 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System Plan Description and Provisions The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, defined benefit plan in the state-wide Texas Municipal Retirement System ("TMRS"), one of 842 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: Plan Year 2011 Plan Year 2012 Employee deposit rate Matching ratio (City to employee) Years required for vesting Service retirement eligibility (expressed as age/years of service) Updated Service Credit Annuity Increase (to retirees) 7.0% 2 to 1 60/5, 0/20 100% Repeating, Transfers 70% of CPI Repeating 7.0% 2 to 1 60/5, 0/20 100% Repeating, Transfers 70% of CPI Repeating Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. 58 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) 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 30-year amortization period. The projected unit credit actuarial cost method is used for determining the City contribution rate using a 28-year closed period. 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. The City's total payroll in fiscal year 2012 was $29.9 million and the City's contributions were based on a payroll of $28.4 million. Contributions made by employees totaled $2.0 million, and the City made contributions of $3.5 million during the fiscal year ended September 30, 2012. Three-year trend information is presented below: Annual Pension Cost (APC) Percentage of APC Contributed NPO at the End of Period 2012 2011 $ 3,518,289 $ 3,302,952 100% 100% 2010 $ 2,995,119 100% 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. All assumptions for the December 31, 2011, valuations are contained in the 2011 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 Amortization Method Remaining Amortization Period Asset Valuation Method Actuarial Assumptions: Investment Rate of Return Projected Salary Increases Includes Inflation At Cost-of-Living Adjustments Projected Unit Credit Level Percent of Payroll 27.2 Years - Closed Period Amortized cost 7.00% Varies by age and service 3.00% 2.1% 59 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) In order to provide a reasonable retirement benefit at a reasonable cost to employers and to provide better long-range rate forecasts, TMRS' actual funding method is the Projected Unit Credit method using a 25- 30 year "closed" period. For cities that have adopted annually repeating annuity increases (COLA's) this change in method results in increased contribution rates, which will provide advanced funding and positive improvement in the pension funding rates. The TMRS Board adopted an eight-year phase-in period for new rates to enable cities to slowly increase contributions. These new rates were first reflected in 2009. A schedule of funding status and progress for TMRS for the most recent valuation date follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Accrued Annual Percentage of Valuation Date Actuarial Accrued Percentage Liability Covered Covered December 31, Value of Assets Liabilities Funded (UAAL) Payroll Payroll 2011 $ 61,822,285 $ 78,404,115 79% 16,581,830 $ 27,756,555 60% 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. Note 10 - Other Post -Employment Benefits In addition to pension benefits, the City provides access to medical and dental coverage through its selected insurance carrier, to retirees and/or retiree dependents. The City's other post-employment benefit plan is a single-employer plan. To qualify for retiree's medical or dental insurance, the retiree must have a minimum of ten years of continuous service with the City and be at least sixty years of age, or with 20 years of continuous service at any age. The City provides the coverage on a pay-as-you-go basis similar to current employees, but the City does not pay any portion of the retiree premium. Therefore, there is an implicit subsidy due to the blended rate paid by the retirees, but there is no direct liability due from the City as it does not pay any portion of the retiree's costs. The costs of providing these benefits and number of retired employees are as follows: Emp/Dep Number Total City's Coverage of Retired Cost Cost Cost Employees $ 74,932 $ $ 74,932 9 Retirees who are entitled to receive retirement benefits under the City's retirement plan may purchase continued health benefits coverage for the retiree and the retiree's dependents, but shall pay 100% of the premium for coverage. The retiree, however, is able to receive a lower rate by participating in the City's plan as opposed to individually purchasing health insurance. The City's coverage is secondary to Medicare when the person becomes eligible for these benefits. .1 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 10 - Other Post -Employment Benefits (continued) The Governmental Accounting Standards Board published a guideline regarding accounting and financial reporting by employers for post-employment benefits other than pensions. This document gives guidance regarding the methods and timing for reporting. The effect of the Guideline is to cause the cost of retiree benefits to be accrued for during the working lifetime of the employees. This requires pre-funding or accruing of a liability. The City has elected to accrue the liability, and the unfunded liability will be funded over a period of 30 years. Calculations are based on OPEB benefits provided under the terms of the substantive plan in effect at the time of each valuation and on the pattern of sharing of costs between the City and plan members to that point. The results of the City's most recent actuarial valuation are as follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Accrued Percentage of Valuation Date Accrued Liability Annual Covered October 1, Liabilities (UAAL) Covered Payroll Payroll 2010 $ 6,994,465 $ 6,994,465 $ 26,871,670 26% Net OPEB obligations at year-end for the last three fiscal years are as follows: 2010 2011 2012 Normal cost Amortization of UAAL Annual required contribution (ARC) Interest on prior-year net OPEB obligation Estimated increase in Net OPEB obligation Net OPEB Obligation - beginning of year Net OPEB obligation - end of year $ 323,138 $ 206,293 $ 190,706 116,541 141,837 141,837 439,679 348,130 332,543 23,032 41,540 57,127 462,711 389,670 389,670 575,801 1,038,512 1,428,182 $ 1,038,512 $ 1,428,182 $ 1,817,852 The annual cost recorded to the general ledger for fiscal year 2012 is $389,670, which includes the estimated normal cost of $190,706 to provide for the benefits earned by active employees. The total liability, which is not recorded to the general ledger, is $6,994,465, and represents the actuarial present value of benefits. Actuarial valuations for OPEB plans involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as results are compared to past expectations and new estimates are made about the future. The methods and assumptions used as of the measurement date of October 1, 2010 include using the Projected Unit Credit actuarial costs method, a closed amortization period of 28 years, a discount rate of 4%, medical inflation and ultimate pre-Medicare rate of 10% and 5% respectively, with a straight years of service amortization method. Calculations are based on the OPEB benefits provided under the terms of the substantive plan in effect at the time of each valuation and on the pattern of sharing costs between employer and plan members to that point. Separate, audited GAAP-basis postemployment benefit plan reports are not applicable for the other post retirement benefit plan for the City as there are no separately issued plan financial statements. 61 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 11 - Commitments and Contingencies Litigation and Other Contingencies The City was involved in various lawsuits and arbitration proceedings at September 30, 2012. 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. Reimbursements due to Developers Pursuant to the Local Government Code, the Economic Development Corporation offers incentives to attract and retain businesses to Pearland. The following are the current incentives. Current Incentives Amount Prior Years FY 2012 Balance Altus Harbor $ 87,500 $ 50,000 $ 15,000 $ 22,500 Braska/Neela, Inc 150,000 0 0 150,000 Cardiovascular Systems, Inc. 5,100,000 4,100,000 0 1,000,000 Hatch Mott 100,000 0 0 100,000 KS Management 2,600,000 0 0 2,600,000 KS Management Sales Tax Est. 600,000 0 0 600,000 Merit Medical Systems, Inc 888,000 0 0 888,000 Ref-Chem 340,000 0 0 340,000 SCR HH GP, LLC 300,000 180,000 0 120,000 Speed Shore 80,000 0 66,000 0 TurboCare 105,000 0 101,000 0 Zapp Precision Wire, Inc 29,500 0 0 29,500 Shadow Creek Town Center 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 determined by the Zone Board. 62 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 11- Commitments and Contingencies (continued) Shadow Creek Town Center (continued) On November 13, 2006, the City of Pearland, Pearland Economic Development Corporation (PEDC) and Shadow Creek Retail, LP entered into an agreement whereby the developer would build and construct a mixed use commercial development located at the northwest corner of State Highway 288 and Broadway, also known as FM 518. The Developer provided for the construction of segments of Broadway Street, Business Center Drive, Memorial Hermann Drive, as well as landscaping, underground utilities, pipeline relocation and other associated costs. The source of funds for reimbursement of the public infrastructure is both the TIRZ #2 and City and PEDC sales tax revenue generated from the project. The total funded from TIRZ #2 is $11,749,618 and the amount of TIRZ improvements to be funded from sales tax is $2,001,931. Once completion and tenant occupancy of at least 318,000 square feet is achieved for a period of three consecutive months, the City and PEDC, shall remit, monthly, thirty-three percent of sales tax received by the City and PEDC to the Developer until paid in full plus interest at eight percent per annum for the first two years following completion of the widening of Broadway and interest at five percent per annum for the subsequent two years. The Developer met the targets set forth in the agreement in fiscal year 2008. Through September 30, 2012, the City remitted sales tax to the developer pursuant to the agreement in the amount of $1,456,768, of which $502,699 was remitted in fiscal year 2012. To date, $1.0 million has been reimbursed towards principal and $448,585 for interest. Note 12 - Risk Management The City is exposed to various risks of loss related to torts: theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City's risk management program mainly encompasses obtaining property and liability insurance through Texas Municipal League's Intergovernmental Risk-Pool (TML-IRP), and 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 fiscal year-end September 30, 2012, the City believed the amounts paid on Workers' Compensation would not change significantly from the amounts recorded. 63 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 13 - Capital Lease The City has a 20-year agreement to lease a facility to the University of Houston Clear Lake (UHCL), which commenced in July 2010. Rent or lease payments are broken into two parts, debt service and operating. For accounting purposes the City has classified the lease as a direct financing lease. Because this lease is recorded in a governmental fund, the receivable is deferred and the distinction between a sales and direct financing lease is not relevant at the fund level. UHCL has an option to purchase the facility upon the commencement date of July 2010 until the 61s t day preceding the 20th anniversary of the commencement date. The lease payments related to debt service to be received coincide with debt service payments the City is required to make on a bond that matures on March 1, 2029. At September 30, 2012, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2013 $ 673,447 2014 664,384 2015 654,255 2016 643,059 2017 627,598 2018-2029 6,300,155 Total $ 9,562,898 PEDC Operating Lease Note 14 - Operating Lease The City has a five-year agreement to lease a portion of the UHCL facility to the Pearland Economic Development Corporation which commenced in July 2010. For accounting purposes the City has classified the lease as an operating lease. The agreement calls for up to three additional five-year terms for a total of 20 years. The rent/lease payments are broken into two parts, debt service and operating. The debt service lease payments to be received coincide with debt service payments the City is required to make on a bond that matures on March 1, 2029. At September 30, 2012, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2013 $ 113,384 2014 111,858 2015 110,153 2016 108,268 2017 105,665 2018-2029 1,060,718 Total $ 1,610,046 Note 15 - Subsequent Events 64 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Annexation of Brazoria County MUD No. 4 On December 31, 2012 the City annexed Brazoria County Municipal Utility District No. 4 and abolished the District. This annexation will add 600 acres and an additional 1,332 single family housing units as well as commerical property to the City. All assets and liabilities shall transfer to the City, with the City assuming approximately $2.5 million in debt outstanding and capital assets of $8.7 million, excluding streets and sidewalks. All City services shall be provided to the citizens in the district. Lease Purchase City Council approved a Notice of Intent to reimburse itself from future capital lease proceeds on October 11, 2011 not to exceed $1,300,000. On November 12, 2012 City Council awarded the bid to Chase Equipment Finance that provided the lowest overall interest rate of 1.29%. The amount financed via lease/purchase is $1,179,413.39 as follows: General Fund: Fire Truck $ 550,000 Vactor Truck Body 88,850 Vehicles 379,263 (2) Ambulances 161,300 Total $1,179,413 The first semi-annual payment is due January 2013 in the amount of $137,552.91 with the final semi- annual payment due July 2019 in the amount of $40,989.60. There is no penalty for pre-payment. 65 ANDREWS ATTORNEYS KU R T H LLP 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com DRAFT August 29, 2013 WE HAVE ACTED as Bond Counsel for the CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City") in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013, in the aggregate principal amount of $2,745,000 maturing on March 1 in each year from 2014 through 2025, inclusive, in year 2027, and in years 2028 through 2038, inclusive. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City (the "City Council") authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the Certificates constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, Austin Beijing Dallas Houston London New York The Woodlands Washington, DC HOU:3339491.2 APPENDIX C FORM OF BOND COUNSEL OPINION August 29, 2013 Page 2 moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law; (2) The Certificates are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, within the limits prescribed by law, upon taxable property located within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates; and (3) 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 (the "Net Revenues"), are pledged to the payment of the principal of and interest on the Certificates; provided, however, that such pledge is limited (not to exceed $10,000) and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is further our opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the Issuer comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer 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 Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum HOU:3339491.2 August 29, 2013 Page 3 tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX MATTERS' set forth in the Official Statement. EXCEPT AS DESCRIBED HEREIN, we express no opinions as to any other matters except with respect to the excludability of the interest on the Certificates from gross income from the owners thereof for federal income tax purposes. IN PROVIDING THE FOREGOING OPINIONS, we have relied upon representations of the ISSUER with respect to matters solely within the knowledge of the Issuer, which we have not independently verified, and have assumed the accuracy and completeness thereof. IN ADDITION, EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, 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 credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. HOU:3339491.2 OFFICIAL BID FORM August 12, 2013 Mayor and City Council City of Pearland 3519 Liberty Drive Pearland, Texas 77581 Ladies and Gentlemen: Subject to the terms of your Official Notice of Sale and Preliminary Official Statement, dated July 31, 2013, which are incorporated herein by reference, we hereby submit the following bid for the $2,745,000* CITY OF PEARLAND, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013. This offer is being made for all of said Certificates and for not less than all. For said legally issued Certificates, we will pay you a price of $2,786,175, plus accrued interest from their date to the date of delivery to us, for the Certificates maturing and bearing interest per annum as follows: Maturity Principal Interest Maturity Principal Interest (March 1) Amount* Rate (March 1) Amount* Rate 2014(a) $ 75,000 3.6bO % 2027(a)(b) $110,000 2015(a) 85,000 3.1AQ[) % 2028(a)(b) 110,000 D/o 2016(a) 85,000 S. bbd% 2029(a)(b) 120,000 -1.2-r®/° 2017(a) 85,000 3. (J<.b % 2030(a)(b) 120,000 £4.31 3 % 2018(a) 85,000 3.00D% 203 1(a)(b) 120,000 (1.31 S-% 2019(a) 90,000 3•__D% 2032(a)(b) 120,000 L-1.3-T% 2020(a) 100,000 14.000% 2033(a)(b) 130,000 14. SO % 2021(a) 100,000 S. Ut % 2034(a)(b) 130,000 1 • SO% 2022(a) 100,000 2035(a)(b) 130,000 4. S15y% 2023(a) 100,000 S. ytb % 2036(a)(b) 140,000 '-4.(Z3 % 2024(a)(b) 100,000 5.ODO % 203 7(a)(b) 140,000 (I. C ZT % 2025(a)(b) 110,000 S• Ott% 2038(a)(b) 150,000 L1 • ___ 2026(a)(b) 110,000 * Preliminary, subject to change. (a) At the option of the Purchaser, any or all of such serial maturities may be designated as term certificates subject to mandatory sinking fund redemption as follows; provided that the mandatory sinking fund amount in each year shall equal the amounts shown above as maturing in such year. Term Certificates Years of First Maturity Date Mandatory Principal Amount Interest (March 1) Redemption of Term Certificates Rate 2O2 2t5 2 to $ 22O , OO 0 _ . (b) Subject to optional redemption and payment, at the option of the City, in whole or, from time to time, in part, on March 1, 2023, or on any date thereafter at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption. * Preliminary, subject to change. See "THE CERTIFICATES - Adjustment of Principal Amounts" in the Official Notice of Sale. The calculation (which is not part of this bid) of the interest cost from the above, is: TRUE INTEREST COST .................... . .2(Z32~- ....................................................................... The Initial Certificates shall be registered in the name of c+ l4., 1110i d w.) L, , which will, upon payment for the Certificates, be cancelled by the Paying Agent/Registrar. The Certificates will then be registered in the name of Cede & Co. (DTC's partnership nominee), under the Book-Entry-Only System. We request , copies of the final Official Statement (not to exceed 100 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 Sand as required by Rule 15c2-12 of the Securities and Exchange Commission. Cashier's Check of the Bank, , Texas, in the amount of $54,900 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 Certificates utilizing the Book-Entry-Only System through DTC and make payment for the Initial Certificates in immediately available funds in the Corporate Trust Office, Wells Fargo Bank, N.A., Dallas, Texas, not later than 10:00 AM, CST, on August 29, 2013, or thereafter on the date the Certificates are tendered for delivery, pursuant to the terms set forth in the Notice of Sale and Bidding Instructions. It will be the obligation of the purchaser of the Certificates to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute and deliver to the City, by the date of delivery of the Certificates, a certificate relating to the "issue price" of the Certificates in the form and to the effect attached to or accompanying the Official Notice of Sale, with such changes thereto as may be acceptable to the City and its Bond Counsel. Respectfully submitted, [?gict B y utl rized Representative ACCEPTED this 12'h day of August, 2013, the City Council, City of Pearland, Texas. Mayor ATTEST: (For your information you will find attached a list of the group of purchasers associated with us in this proposal) PAYING AGENT/REGISTRAR AGREEMENT THIS PAYING AGENT/REGISTRAR AGREEMENT dated as of August 12, 2013 (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 Certificates of Obligation, Series 2013 (the "Certificates") in the aggregate principal amount of $2,745,000 to be issued as fully registered certificates. WHEREAS, all things necessary to make the Certificates the valid obligations of the Issuer, in accordance with their terms, will be done upon the issuance and delivery thereof; WHEREAS, the Issuer and the Bank wish to provide the terms under which the Bank will act as Paying Agent to pay the principal of, redemption premium, if any, and interest on the Certificates, in accordance with the terms thereof, and under which the Bank will act as Registrar for the Certificates; and WHEREAS, the Issuer and the Bank have duly authorized the execution and delivery of this Agreement; and all things necessary to make this Agreement the valid agreement of the parties, in accordance with its terms, have been done. NOW, THEREFORE, it is mutually agreed as follows: ARTICLE I. APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.1. Appointment. The Issuer hereby appoints the Bank to act as Paying Agent with respect to the Certificates, to pay to the Registered Owners of the Certificates, in accordance with the terms and provisions of this Agreement and the ordinance authorizing the issuance of the Certificates (the "Ordinance"), the principal of, redemption premium, if any, and interest on all or any of the Certificates. The Issuer hereby appoints the Bank as Registrar with respect to the Certificates. The Bank hereby accepts its appointment, and agrees to act as Paying Agent and Registrar with respect to the Certificates. HOU:3342585.3 Section 1.2. 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 agrees to abide by and accept the terms hereof and of the Ordinance relating to the duties of the Paying Agent/Registrar. ARTICLE II. DEFINITIONS Section 2.1. 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 which is a national bank a duly organized and existing under the laws of the United States of America. "Certificate" or "Certificates" means any one or all of the "City of Pearland, Texas Certificates of Obligation, Series 2013" authorized by the Certificate Ordinance. "Issuer" means the City of Pearland, Texas. "Financial Advisor" means BOSC., Inc. and its successors. "Ordinance" means the Certificate Ordinance. "Paying Agent" means the Bank when it is performing the function of paying agent. "Person" means any individual, corporation, partnership, joint venture, associations, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government or any entity whatsoever. "Registrar" means the Bank when it is performing the function of registrar. "Registered Owner" means the Person in whose name any Certificate is registered in the books of registration maintained by the Bank under this Agreement. All other capitalized terms shall have the meanings assigned to them in the Ordinance. ARTICLE III. DUTIES OF THE BANK Section 3.1. Initial Delivery of the Certificates. I-IOU:3342585.3 2 The Certificates will be initially registered and delivered by the Bank to the purchaser designated by the Issuer as set forth in the Ordinance. If such purchaser delivers a written request to the Bank not later than five business days prior to the date of initial delivery, the Bank will, on the date of initial delivery, exchange the Certificates initially delivered for Certificates of authorized denominations, registered in accordance with the instructions in such request and the Ordinance. Section 3.2. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate funds have been provided to it for such purpose by or on behalf of the Issuer, timely pay on behalf of the Issuer the principal of and interest on each Certificate in accordance with the provisions of the Ordinance. If the issue is to be Depository Trust Company (DTC) eligible, the Paying Agent will comply with all eligibility requirements as outlined and agreed upon in the eligibility questionnaire. Section 3.3. Duties of Registrar. The Bank shall provide for the proper registration of the Certificates and the timely exchange, replacement and registration of transfer of the Certificates in accordance with the provisions of the Ordinance. Any changes to Registered Owners for such exchange, replacement and registration shall be made by the Bank only in accordance with the Ordinance. The Bank will maintain the books of registration in accordance with the Bank's general practices and procedures in effect from time to time; provided, however, that the Bank agrees to maintain books of registration for the Certificates at the City Secretary's office in City of Pearland, Texas, which books of registration may be a copy of the register which shall be kept current by the Bank. Section 3.4. Unauthenticated Obligations. The Issuer shall provide an adequate inventory of unauthenticated Certificates to facilitate transfers. The Bank covenants that it will maintain such unauthenticated Certificates in safekeeping and will use reasonable care in maintaining such Certificates in safekeeping, which shall be not less than the care it maintains for debt securities of other government entities or corporations for which it serves as registrar, or which it maintains for its own bonds. Section 3.5. Reports. Upon request of the Issuer, the Bank will provide the Issuer reports which will describe in reasonable detail all transactions pertaining to the Certificates and the books of registration for the period of time specified by the Issuer. The Issuer may also inspect and make copies of the information in the books of registration and such other documents related to the Certificates and in the Bank's possession at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. HOU:3342585.3 3 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 3.6. Canceled Obligations. All Certificates surrendered for payment, redemption, transfer, exchange or replacement, if surrendered to the Bank, shall be promptly canceled by it and, if surrendered to the Issuer, shall be delivered to the Bank and, if not already canceled, shall be promptly canceled by the Bank. The Issuer may at any time deliver to the Bank for cancellation any Certificates previously authenticated and delivered which the Issuer may have acquired in any manner whatsoever, and all Certificates so delivered shall be promptly canceled by the Bank. All canceled Certificates held by the Bank shall be destroyed and evidence of such destruction shall be furnished to the Issuer. Section 3.7. 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. (e) The Bank may rely and shall be protected by the Issuer against any claim by the Issuer or any other Person in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Certificate, but is protected in acting upon receipt of a Certificate containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the holder or an agent of the holder. The Bank shall not be bound to make any investigation into the acts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security or other paper or document supplied by Issuer. (f) The Bank may consult with legal counsel, and the advice of such counsel or any opinion shall be full and complete authorization and protection with respect to any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; provided that any such written advice or opinion is supplied to the Issuer by the Bank. HOU:3342585.3 4 Section 3.8. Money Held by Bank. Money held by the Bank hereunder shall be held in trust for the benefit of the Registered Owners of the Certificates. The Bank shall be under no obligation to pay interest on any money received by it hereunder. All money deposited with the Bank hereunder shall be secured in the manner and to the fullest extent required by law for the security of funds of the Issuer. All money in excess of the amounts insured by the Federal Deposit Insurance Corporation shall be fully collateralized pursuant to the laws of the State of Texas. Any money deposited with the Bank for the payment of the principal of or interest on any Certificates and remaining unclaimed by the Registered Owner after the expiration of three years from the date such funds have become due and payable shall be reported and disposed of by the Bank in accordance with the provisions of Texas law including, to the extent applicable, Title 6 of the Texas Property Code, as amended. To the extent such provisions of the Property Code do not apply to the funds, such funds shall be paid by the Bank to the Issuer upon receipt of a written request therefor from the Issuer. The Bank shall have no liability to the Registered Owners of the Certificates by virtue of actions taken in compliance with the foregoing provision. The Bank shall deposit all moneys received from the Issuer into a trust account to be held in a fiduciary capacity for the payment of the Certificates, with such moneys in the account that exceed the deposit insurance available by the Federal Deposit Insurance Corporation to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas to secure and be pledged as collateral for trust accounts until the principal and interest on such Certificates have been presented for payment and paid to the Registered Owners. Section 3.9. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 3.10. 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 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 Certificate 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 HOU:3342585.3 5 the Certificate so registered with the same effect as if such successor Bank had itself registered such Certificate. ARTICLE IV. MISCELLANEOUS PROVISIONS Section 4.1. May Own Certificates. The Bank, in its individual or any other capacity, may become the owner or pledgee of Certificates with the same rights it would have if it were not the Paying Agent and Registrar for the Certificates. Section 4.2. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereof. Section 4.3. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 4.4. Notices. Any request, demand, authorization, direction, notice, consent, waiver or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown herein, or such other address as may have been given by one party to the other by 15 days' written notice. Section 4.5. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 4.6. Successors and Assi 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 4.7. 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. HOU:3342585.3 6 Section 4.8. 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 4.9. Ordinances Govern Conflicts. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent and Registrar and if any conflict exists between this Agreement and the Ordinance, the Ordinance shall govern. The Bank agrees to be bound by the terms of the Ordinance with respect to the Certificates. Section 4.10. Term and Termination. This Agreement shall be effective from and after its date and may be terminated for any reason by the Issuer or the Bank at any time upon 60 days' written notice; provided, however, that no such termination shall be effective until a successor has been appointed and has accepted the duties of the Bank hereunder. In the event of early termination, regardless of circumstances, the Bank shall deliver to the Issuer or its designee all funds, Certificates and all books and records pertaining to the Bank's role as Paying Agent and Registrar with respect to the Certificates, including, but not limited to, the books of registration. Section 4.11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 4.12. Governing Law. This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Texas. HOU:3342585.3 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CITY OF PEARLAND, TEXAS B y: I Mayor ADDRESS: 3519 Liberty Drive Pearland, Texas 77581 ATTEST: HOU:3144514.4 WELLS FARGO BANK, N.A. By: Name: ina A. Velasquez Title: AA:sistant Vic',Fresident ADDRESS: Wells Fargo Bank, N.A. N9311-115 625 Marquette Ave. S - 11th Floor Minneapolis, MN 55479 Attn: Corporate Trust Services HOU:3342585.3 9 EXHIBIT A City of Pearland, Texas Certificates of Obligation, Series 2013 Fee Schedule HOU:3342585.3 10 Corporate Trust Services Schedule of fees to provide registrar and paying agent services City of Pearland Certificates of Obligation, Series 2013 Acceptance fee Waived A one-time fee for acting in the capacity of paying agent/registrar. This includes review of the paying agent/registrar agreement and other required documents; acceptance of the appointment; establishment of the registrar records and account records; authentication and delivery of bonds and coordination of closing. The acceptance fee is payable at the time of paying agent/registrar agreement execution. Paying agent annual administration fee $750.00 per series The annual fee is for ordinary administration services provided by the paying agent/registrar. This includes daily routine account management; maintenance of registered bondholder accounts; responding to bondholder inquiries; and processing debt service payments. The annual administration fees are payable in advance, with the first installment due at closing. Fees will not be prorated in case of early termination. Cost of issuance depository fee (if applicable) $750.00 per series Annual fee for providing depository services for the portion of the bond proceeds deposited to pay costs of issuance; and to hold and distribute the amounts deposited subject to the terms and conditions of a depository agreement. Fees will not be prorated in case of early termination. Extraordinary services Market rate Fees for services not contemplated at the time the governing documents are executed or not specifically covered elsewhere in this schedule will be determined by market rates for such services. These services may include, but are not limited to, tax reporting, establishment and administration of trust accounts, express mail and messenger charges, travel expenses to attend closings or other meetings, tender agent services, changes to documents, interim bond calls, rate mode changes, conversions or de- conversions of the account records, default administration and the publication of redemption notices. This proposal is based on the assumption of a book entry only issuance closing at DTC. If the bonds are to be settled in an alternate form of issuance, we will provide an adjusted fee schedule. Assumpti: • 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. Terms and conditions • Should this transaction fail to close through no fault of Wells Fargo Bank, N.A. its acceptance fee and out-of-pocket expenses incurred by Wells Fargo Bank, N.A., may be due and payable. • Invoices outstanding for over 3o days are subject to a 1.5% per month late payment penalty. • Acceptance of the appointment described in this proposal is subject to compliance with the requirements of the USA Patriot Act of 2001 described below, Wells Fargo's satisfactory review of all governing documents, and the execution of the governing documents by all parties. 4. Together well go far © 2013 Wells Fargo Bank N.A. All rights reserved. Corporate Trust Services Schedule of fees to provide registrar and paying agent services City of Pearland Certificates of Obligation, Series 2013 Important information about identifying our customers To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person (individual, corporation, partnership, trust, estate or other entity recognized as a legal person) for whom we open an account. What this means for you: Before we open an account, we will ask for your name, address, date of birth (for individuals), TIN/BIN or other information that will allow us to identify you or your company. For individuals, this could mean identifying documents such as a driver's license. For a corporation, partnership, trust, estate or other entity recognized as a legal person, this could mean identifying documents such as a Certificate of Formation from the issuing state agency. Contact information Regina Velasquez Relationship Manager Wells Fargo Bank, N.A. 625 Marquette Ave Mac: N9311-115 Minneapolis, MN 5540 2 Phone: 612-667-0647 Email: regina.a.velasquez@wellsfargo.com Dated: August 14, 2013 Focus OID: C867816 GENERAL CERTIFICATE STATE OF TEXAS § COUNTIES OF BRAZORIA, FORT BEND § 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 $2,745,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013 (the "Certificates"), now in the process of issuance, as follows: (1) The City is a duly incorporated Home Rule City, having more than 5,000 inhabitants, operating and existing under the Constitution and laws of the State of Texas and the duly adopted Home Rule Charter of the City, which Charter has not been changed since the approval by the Attorney General of the State of Texas of the City of Pearland, Water and Sewer System Revenue and Refunding Bonds, Series 2012, dated September 1, 2012, which are the last obligations issued by or on behalf of the City. (2) The Certificates are being issued to provide funds to pay contractual obligations to be incurred for (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (v) professional services rendered in connection with these projects. (3) The currently effective ad valorem tax appraisal roll of the City (the "Tax Roll") is the Tax Roll prepared and approved during the calendar year 2012, being the most recently approved Tax Roll of the City; the taxable property in the City has been appraised, assessed and valued as required and provided by the Texas Constitution and Property Tax Code (collectively, "Texas law"); the Tax Roll for the year has been submitted to the City Council of the City as required by Texas law, and has been approved and recorded by the City Council; and according to the Tax Roll for the year, the net aggregate taxable value of taxable property in the City (after deducting the amount of all applicable exemptions required or authorized under Texas law), upon which the annual ad valorem tax of the City has been or will be imposed or levied, is $6,455,691,712. (4) From June 1, 2013, 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: HOU:3342634.1 Tom Reid Greg Hill Tony Carbone Scott Sherman Susan Sherrouse Keith Ordeneaux Mayor Mayor Pro-Tern Councilmember Councilmember Councilmember Councilmember (5) From June 1, 2013, to the date hereof, Young Lorfing has been the duly appointed and qualified City Secretary of the City. (6) The Certificates were sold at a price equal to $2,745,000 (representing the par amount of the Certificates). (7) Except as described in the Official Statement, neither the revenues nor the properties of the System are in any way pledged or hypothecated other than the pledge of the Net Revenues of the System to the Bonds now in the process of issuance and the City's Water and Sewer System Revenue and Refunding Bonds, Series 2012, Permanent Improvement Refunding Bonds, Series 2012, Certificates of Obligation, Series 2011, Permanent Improvement Bonds, Series 2011, Water and Sewer System Revenue Bonds, Series 2010A, Water and Sewer System Revenue Refunding Bonds, Series 2010B, Certificates of Obligation, Series 2009A, Certificates of Obligation, Series 2009, Certificates of Obligation, Series 2008, Certificates of Obligation, Series 2007, Certificates of Obligation, Series 2006, Certificates of Obligation, Series 2004, Certificates of Obligation, Series 2003, Certificates of Obligation, Series 2001, Water and Sewer System Revenue Bonds, Series 2009, Water and Sewer System Revenue Bonds, Series 2008, Water and Sewer System Revenue Bonds, Series 2007, 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, and Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999. (8) Attached as Exhibit A is a true, full and correct debt service schedule for all of the City's outstanding tax supported debt, including the Certificates. The principal amount of the City's total outstanding tax supported debt, is $310,630,000. (9) 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, 2012, and for the previous three fiscal years: Fiscal Year Ended September 30, 2012 2011 2010 $8,650,000 $7,487,000 $8,680,000 (10) 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. 2 HOU:3342634.1 (11) 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. [Signature Page Follows] HOU:3342634.1 SIGNED AND SEALED this August J, 2013. CITY OF PEARLAND, TEXAS Mayor l (CITY SEAL) HOU:3144421.3 Exhibit A Debt Service Schedule for All of the City's Outstanding Tax Supported Debt City of Pearland. Texas- General Obligation Debt Current Debt plus New Debt FINAL NUMBERS - Certificates of Obligation, Series 2013 Dated Date 08i01:2013 Series 2013 Certificates of Obligation Delivery Date 08:292013 New Interest Interest Year Current ' Principal Various Various Total Total New Total Debt Ending Debt Due Due Due New Principal Service 09+30 Requirement 03101 03:01 09101 Interest & Interest Requirement 25.34 7.546 _. ,.. 25,343,545 2314 24.591,350 70,002 37,747 5<^^; 94. ~ ._ 4!35= zc 17E ~._? 24.771541 2015 24.431,96.5 55,000 56,944 55369 112,313 '97!313 24,679,337 22166 24.466.751 85,020 55,669 54.354 112.033 195.063 24.633.813 2217 24,467.901 85.020 54334 53.19 107.513 192.513 24.643 314 211E 24.453436 35!023 53,119 51.344 104.903 143,963 24,643,620 2.,1E 24,448,944 93.020 51,344 52,464 102336 1923 336 24.641.261 2323 24 434.853 103!720 ...0,4.4 46.434 96.956 96 966 24.633 40 2221 24.425.101 `02,020 43,494 46,994 74.436 194456 24.619.569 2022 24 385.794 103!020 45.394 43.434 99.466 105.466 24,675, 262 2227 24_3 '83,002 43,434 42994 34.456 134.458 24,563320 2324 25.317.0.-20 "32.0£0 40,764 35,4E4 73,466 179466 25.495,5546 2025 25,307.036 11.020 39.434 35..744 74.236 184.236 25,491 336 2026 23,679,609 111 000 35,744 33.544 63256 17:.2.6 22,656.497 2 027 23.662.44 3,000 33.544 31.44 64.456 174.4 56 2 3,637.330 202 23.645.446 13,023 :11.344 29.144 60.436 173'55 23.615,334 2329 3. 636.309 2-!303 29.144 25.594 55 7 36 =32 23,614,046 20. . 4 638.57 20.000 26.594 23.969 52 563 170.563 15.003,140 2031 14629,346 02.320 23,769 21,344 45 ,313 .64313 14.994.656 23'?,-' 3 645,052 3.023 22 1,344 15.719 43.063 163.803 15.006 131 2232. 543.199 32 '740 16.719 15,764 ..-,.5'13 164.513 s X04.661 2054 532 026• 33 002 15.734 12359 2 5.693 156.663 3638869 2235 1 6320044 02220 12,869 9,944 22 313 152,013 1,704,356 2036 657.102 143.020 9,944 6.726 169.656 156,653 1313772 22 51376-3 050 6.706 3.4€9 10,176 153975 663.935 2£3 50133' 152,006 3 .459 3.469 5?:.9:50 654,620 Totals 5470.219.900 52.745.000 587+3.865 3809,118 51,685,983 54,430.983 5474.650,871 NEW13CO: Dated Crate: 08:01:2013 Principal Due Dates: 0310112014 -03101=2038 Maturing Amount: 2,745.000.00 HOU:3342634.1 Exhibit B Ordinance Establishing Utility Rates of the System HOU:3342634.1 ORDINANCE NO. 1358-9 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS, AMENDING NON-DEVELOPMENT USAGE AND SERVICE FEES (SEWER USE CREDIT PROGRAM); CONTAINING A SAVINGS CLAUSE, A SEVERABILITY CLAUSE AND A REPEALER CLAUSE; PROVIDING FOR PUBLICATION AND AN EFFECTIVE DATE. WHEREAS, various departments of the City charge fees for usage, permits, and other services not related to development; and WHEREAS, the organization of all such non-development fees into one ordinance enhances the efficiency of the fee amendment process and improves customer service; now, therefore, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: Section 1. That the charges and fees contained in the attached Exhibit "A" are hereby adopted. Section 2. Savings. All rights and remedies which have accrued in favor of the City under this Chapter and amendments thereto shall be and are preserved for the benefit of the City. Section 3. 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 4. Repealer. All ordinances and parts of ordinances in conflict herewith are hereby repealed but only to the extent of such conflict. ORDINANCE NO. 1358-9 Section 5. Publication and Effective Date. The City Secretary shall cause this Ordinance, or its caption, to be published in the official newspaper of the City of Pearland, upon passage of such Ordinance. The Ordinance shall then become effective ten (10) days from and after its publication, or the publication of its caption, in the official City newspaper. PASSED and APPROVED ON FIRST READING this the 10 day of June, A. D., 2013. t5~7 ~L' TOM REID MAYOR ATTEST: Y SECRETARY APPROVED AS TO FORM: DARRIN M. COKER CITY ATTORNEY 2 ORDINANCE NO. 1358-9 PASSED and APPROVED ON SECOND AND FINAL READING this the 24th day of June, A. D., 2013, /1 GREG HILL MAYOR PRO-TEM ATTEST: YQ1JJNG RFINGRM CVYSERETAR'1 F APPROVED AS TO FORM: 2~= '- O—L- DARRIN M. COKER CITY ATTORNEY 3 ORDINANCE NO. 1358-9 Exhibit "A" FEE SCHEDULE EMS Ambulance Application Fee $250.00 Ambulance Permit Fee $100.00 FIRE Re-inspection Fees Initial and l st Re-inspection $ 0.00 2" d Re-inspection $75.00 3rd Re-inspection and thereafter, each $200.00 After hours Inspection $200,00 (After 5:00pm Monday-Thursday; after 4:00pni on .Friday, and on weekends) POLICE Accident Report $6.00 (As may he amended from time to time by State Statute) Notarized Accident Report $8.00 (As may be amended from time to time by State Statute) Clearance Letter $5.00 (As may be amended from time to time by State Statute) Copies .10 per page UTILITY BILLING Delinquent Fees: First Time Reconnect $25.00 Subsequent Reconnect Charges $50.00 Connect Fee $30.00 Deposits: Commercial $200.00 + 2 months of garbage Residential Owner $100.00 Residential Renter-low risk rating $150.00 Renter-medium/high risk rating $225.00 Residential Garbage Only $50.00 Commercial Garbage Only 2 months of garbage Additional deposit for services terminated twice within six months Residential $75.00 Commercial $150.00 plus 1 month of garbage Meter Cost: 5/8" 1" 2" 3" 4" 6" 8 " 10 (subject to change based on current contract pricing) Meter Testing: 5/8 —'/a" Meter 1" Meter 1 /2" Meter New $325.00 $425.00 $1775.00 $8,450.00 $9,600.00 $13,350.00 $14,05000 $30,632.00 $60.00 $85.00 $1.00.00 Replacement $275.00 375.00 $1,775.00 $8,450.00 $9,600.00 $13,350.00 $14,050.00 $30,623.00 2" — 8" Meters 8" and above Meters Same Day New Service Connections Grease Traps Meter Inspection: Initial Re-inspection. Temporary Fire Hydrant Meter ($75.00 non refundable) Temporary Fire Hydrant Location Change Additional Recycling Bin Temporary Water/Sewer Service for Residential Landlords/Property Managers *Water Base Charges Single Unit Multi-Unit *Water Volume Residential 0-2,000 gallons 2,001-6,000 $150.00 $200.00 $100.00 $100.00/yr $35.00 $35.00 $1500.00 $50.00 $8.00 $50 for ten days, 2000 gallons and connection $11.98 $10.98 In Base $2.93 2 6,001-15,000 $3.67 15,001.-25,000 $4.40 25,001+ $5.86 *Commercial/Multi-[Jnit 0-2,000 In Base 2,001+ $3.67 *Landscape 0-2,000 In Base 2,001+ $4.40 *Sewer Base Charges for All $14.41 *Sewer Volume 0-2,000 In Base All Users $3.03 Residential Wastewater Cap Standardized monthly billing amount (gallons) to be based on the average consumption of the months of December, January, February, which are typically billed in Jan, Feb, Mar, not to exceed 12,000 gallons. Wastewater Cap would be adjusted each April. New Residents Default billing amount (gallons) of 6,000 gallons Billing Adjustments Water adjustments may be given for leaks and sewer adjustment may be given as it applies to the setting of the Winter Quarter Average. See Ordinance 870-6 Customer without metered water Default billing amount (gallons) of 10,000. *Customer outside City Limits *A.11 charges for water and sewer service are at a rate of 1-1/2 times that existing in the City. Sewer Use Credit Program Application. Fee $500 Monthly Administrative Charge $ 50 Annual Testing Fee See Above If repairs are needed, in addition to the testing fee, there will be charges for labor and parts, plus retesting fee of $75.00 Accounts opened for the purpose of the sewer use credit for sub-metering will not be required to put down a deposit nor billed water or sewer rates. FINANCE NSF Fee $25.00 Alarm Permit: Residential Rates provided in Commercial Ordinance No. 569-3 False Alarm Fee: Police Department (per occurrence after 5 per yr) Rates provided in Fire Department (per occurrence after 5 per yr.) Ordinance No. 569-3 ENGINEERING Grading Permit $125.00 PUBLIC WORKS Water/Sewer Tap Actual. Cost, not less than $250 CITY SECRETARY Copy Charge: (pursuant to State law including but not limited to and as may be amended from time to time by State Statute) Paper. $.10 Diskette $1.00 Magnetic tape Actual Cost Data Cartridge Actual Cost Tape Cartridge Actual Cost Rewritable CD (CD-RW) $1.00 Non-rewritable CD (CD-R) $1.00 Digital video disc (DVD) $3.00 JAZ Drive Actual Cost Other electronic media Actual Cost VHS cassette $2.50 Audio cassette $1.00 Oversize paper copy $.50 Specialty paper Actual Cost Labor charge $15.00/hr Overhead 20% of labor Alcohol Beverage Permit: BE — On Premise $75.00 BQ — Wine & Beer Off-Premise $30.00 BF — Off Premise $30.00 BL — Late Hours On.-Premise $1.25.00 PE — Charge $10.00 4 LB - Late Hours Mixed Beverage $75.00 RM - Mixed Beverage Restaurant $375.00 Peddlers Permit Primary Permit Holder $75.00 max of 3 months Assistant working under primary $5.00 / month for each assistant Surety Bond (required) $1,000.00 ANIMAL CONTROL 1 st impound 30.00 2 impound 40.00 3`4 impound . 50.00 Adoption unaltered 30.00 Transportation 5.00 Adoption altered with Rabies 87.00 Adoption altered w/out Rabies 75.00 Livestock impound per head 100.00 2nd impound 125.00 3`d impound 150.00 Quarantine impound 40.00 Daily board. domestic 10.00 per. day Daily board livestock 25.00 per day City License Altered one year 10.00 3 year 30.00 Un Altered one year 20.00 3 year 60.00 Replacement tag 5.00 Dangerous Dog registration 50.00 Disposal 25.00 Large animal contract 125.00 plus Euthanasia on demand 40.00 Surrender of owned Pet 40.00 Return check fee 25.00 Cat carrier 5.00 Collars 3.00 Micro-chip implant 22.00 Includes pet registration T-shirts 7.00 Hats 7.00 PARKS & RECREATION Advertising • Parks leisure Brochure- Actual Costs (will vary based on number of advertisements purchased) • Parks Web-Site- $25 per ad, per event for those businesses participating in the event ( limited to the Trick or Treat Trail and/or Hometown Christmas Parade events only). • Ad Space at .Recreation/Natatorium — will vary based on size and number of banners/ads Recreation Pro ram Cost Recovery Plan Per Tier Tier Benefits % of direct cost % of indirect recovery recovered I Community as the whole 0-25% 0% benefits 2 Individuals receive direct 1.00% 25% benefit and community receives residual benefit 3 Individuals receive direct 150% 50% benefit Non-resident fees Programs and Leagues Resident Fee • Non-resident charge <$50 +$2Q $51 -$200 +$30 ?$201 _.._. +$4() Non-resident fees for Household & Hazardous Waste $80 per 100 pounds of HIIW Non-resident fees for Electronic Waste $20 per 100 pounds of electronic waste Non-resident fee for Senior. Center $50 /yearTransportation fees for the Melvin Knapp Senior Center $2 round-trip Banner Installation Fee $300 Special Event Permit Fee $50 Deposits • Deposit Centennial Park Pavilions $50 Southdown Park Pavilion $50 Independence Park Large e Pavilion $200 Independence Park Barbue Shelter $100 Independence Park Swimming Pool $100 Gazebo at City Hall $50 Westside Event Center Meeting Room $140 Westside Event Center Banquet Hall $140 Community Center _ $140. Banner Installation $50 6, $25 Indoor rental cleaning Fee $180 Administrative fee for rental cancellations $25 Rental Fees Outdoor Resident Non- Resident Centennial Park Pavilions _ $30/day $b0/da Southdown Park Pavi lion $30/day $60/day Independence Park Large Pavilion $1.30/day $200/day Independence Park Barbeque Shelter $60/day $120/day Independence Park Swimming Pool 1-50 peo le $70 /hr $100/hr 50-100 pple $90 /hr $120/hr 101-150 people $110/hr $110/hr 151-250 people $150/hr $180/hr Gazebo at City Flail $30/day $60/day Indoor Non- Resident Non- Pro fit Reside nt Westside Event Center Meeting $50/hr $60/hr $70/hr Room Westside Event Center Banquet $60/hr $85/hr $95/hr Ha ll Community Center $37.50/hr S65/hr $85/hr Recreation Center and Natatorium Membership Fees Annual Membership with Contract Initiation Fee, for all Recreation Center & Natatorium Category:;;: Adult Additional person Active Adult Additional Active Adult Household Natatorium Only Individual $200. $260 $27 $55 Household $400 $520 Monthly Membership without Contract Recreation Center & Natatorium Category {fate .. Adult $32 Additional person $16 Active Adult $22 Additional Active Adult $11 Household $63 Natatorium Only individual $21 Household $42 Recreation Center and Natatorium Membership includes facilities, drop in child care, basic health and fitness classes Natatorium only membership Includes acces to the natatorium only 30 days for (one-time per Trial Membership $30 individual) Daily Fees Individual 18+ years of age $8 12-17 years of age $5 3-11 years of age $3 Family $12 Child care $5 Organization $12 Formulas used Non-resident Resident rate +30% Monthly fee Annual /12+ 25% Definitions Adult 16-59 years old Active Adult 60+ years old Household Up to 5 people residing in the same home Additional is an addition to an existing membership/fee 8 Child 3-15 years old Group Limit of 5 people and maximum 2 adults Membership Resident Non -Profit Rate (NMI Nonresident (NMI **Minimum 5 Entire Rec Facilitt r~ $225/hour $450/hour $675/hour $900/hour hours **Minimum 3 One Full Court Hourly $40/hour $80/hour $120/hour $160/hour hours **Minimum 5 Daily $400/day $800/day $1,200/day $1,600/day hours **Minimum 5 Entire Gym Hourly $80/hour $160/hour $240/hour $320/hour hours **Minimum 5 Daily $800/day $1,600/da $2,400/da $3,200/day hours One Multipurpose/ **Minimum 3 Activity Room $33/hour $65/hour $98/hour $130/hour hours Entire Multipurpose/ **Minimum 3 Activity Room $65/hour $130/hour $195/hour $260/hour hours Locker Rentals $100 per year (maximum rentals — 10 lockers in each locker room) Recreation Center Rental Rates • Entire Recreation Facility includes the following: Kidz Korner, The Zone, Gymnasium, Multipurpose Room, Track, Activity Room, Racquetball Courts, 2 °d floor cafe area. • Day=1.2 hours • For Non-athletic Events in the Gymnasium the following; :fees apply: Floor Covering: $100/court per day Group Exercise Punch Cards 20 Punch Card $50 10 Punch Card . $25 10 Natatorium Rental Rates "Non-Athletic" ShurtTerm Rental (Personal/Organizational Parties, Meetinge, etc) Nan-Profitf School Membership Rate Resident (NM) No NM ent Minimum f of Hours Minimum If of Lanes ihart term rental Is defined ass rental ranging from one hour to four (4) days In length. 'mm U Pool w/life ands S20/hour $40/hour $60/hour $80 our 2 NA :ern porn only 15 our our hour hour 2 NA `AthleticShort-Term Rental (Swim/Uive Meets, Water Polo Tournaments , etc.) Non-Profit/School Membership Rate Resident Non-Resident Minimum # of Hours Minimum If of Lanes e`Natatorlum is capable of multiple configurations based on the need of the individual/ or nization renting the facility. Meter Pool + Warm Up Pool w/life ards $50/hour NA $100/hour $150/hour 4 NA Meter Pool w/life wards 338/hour NA S76/hour $114/hour 4 NA td/mt 8 to 10 lanes) Configurationw/lifeguards $25/hour NA $50/hour $75 hour 4 NA ing Well Only w/ fifWrds I $I7/hour NA $34/hour $51/hour 4 NA i Athletic tong Term Rentals (Swim/Dive Team Water Polo Practices, etc.) i Non-Profit/school Membership Rate Resident Non-Resident Minimum #of Hours Minimum/Maxlmum #OfLaRes one-term rental Is defined as a rental for practices or env continued event longer than four 141 days in length. A'oer-la ne part icipant limit" f10 participant per lane maxi will be enforced. -~ trm Up Pool (only) w/llfeguordo per lane $263/hour t1 } NA 55.25/hour $738/hour 2 per d ay 1 to 4 Meter Pool+ Warm Up Pool w/lifeguards per lane $7.50/hour i NA S15/hour £22.50/hour 2 per day NA Meter Pool Configuration w/lifeguards per lane $4.75/hour NA 59.501hour $14.25/hour 2 per day 2 to 6 (d/mt Configuration w/llfeguardo per lane $3.38/hour NA $6.75/hour $1413/hour 2 per day 4 to 12 lag Well Only w/ lifeguards ? $13.50/hour NA $27/hour $4050/hour 2 per day 4 or activities mat an not conrorm to one STATE OF TEXAS COUNTIES OF BRAZORIA, HARRIS AND FORT BEND CITY OF PEARLAND Certified as a true and correct copy of tlRrol i4rkh ~r41 ~t t S 3.. A - Witness my hand and seat of office this day of u , A.D. 20 Deputy City Secretary , it) of Pearland, Texas i2 SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE THE STATE OF TEXAS § COUNTIES OF BRAZORIA, FORT BEND 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, to wit: CITY OF PEARLAND, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013 (the "Certificates"). That the Certificates have been duly and officially executed by the undersigned with their manual or facsimile signatures in the same manner appearing hereon, and the undersigned hereby adopt and ratify their respective signatures in the manner appearing on each of the Certificates, whether in manual or facsimile form, as the case may be, as their own signatures. That on the date of such signing and on the date hereof, we were and are the duly chosen, qualified and acting officers authorized to execute the Certificates, and holding the official titles set forth below opposite such signatures. We further certify that no litigation is pending or, to our knowledge, threatened in any court to restrain or enjoin the issuance or delivery of the Certificates, or the levy, collection or application of the ad valorem taxes or revenues pledged or to be pledged to pay the principal of and interest on the Certificates, or the pledge thereof, or in any way contesting or affecting the validity of the Certificates, the ordinance dated August 12, 2013, authorizing the issuance, sale and delivery of the Certificates (the "Ordinance"), or contesting the powers of the City or the authorization of the Certificates or the Ordinance. We further certify that the seal that has been impressed, or placed in facsimile, upon each of the Certificates is the legally adopted, proper and only official seal of the City, such official seal being impressed upon this certificate. We further certify that the information and data contained in the General Certificate dated August 12, 2013, remain true and correct as of this date. In witness whereof we have signed this certificate and delivered it on the 29th day of August, 2013. HOU:3342395.2 SIGNATURES TITLE OF OFFICE Tom Reid, Mayor City of Pearland, Texas Young Lorfing, City Secretary City of Pearland, Texas (CITY SEAL) 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 A %AIL ~& ~ I'b Typed or Printed Name: 04,~Y POD MARIA E. RODRIGUEZ :m Notary Public, State of Texas N9rFOa ~~ My Commission. Expires: 0212612 0 17 (Notary Seal) My Commission Expires: HOU:3342395.1 TAX EXEMPTION CERTIFICATE The undersigned, being the duly chosen and qualified Director of Finance of the City of Pearland, Texas (the "City"), hereby certifies with respect to the City's Public Improvement Bonds, Series 2013, in the aggregate principal amount of $9,315,000 (the "Bonds "), and Certificates of Obligation, Series 2013, in the aggregate principal amount of $2,745,000 (the "Certificates," together with the Bonds (the "Obligations "), as follows: A. General. 1. I, along with other officers of the City, am charged with the responsibility for issuing the Obligations. 2. This certificate is made pursuant to sections 103 and 141-150 of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code "), and the final, temporary, and proposed Treasury Regulations promulgated thereunder and applicable to the Obligations (the "Regulations "). 3. This certificate is based on the facts and estimates described herein in existence on the date hereof; and, on the basis of such facts and estimates, the City expects that the future events described herein will occur. To the best of the knowledge and belief of the undersigned, the expectations set forth herein are reasonable. 4. A capitalized term used and not otherwise defined herein has the meaning ascribed to such term in the Ordinance authorizing the issuance of the Obligations, adopted by the City Council of the City on August 12, 2013 (the "Ordinance "). B. Purpose and Size. 1. The Bonds are being issued pursuant to the Ordinance to finance (i) the construction of improvements to the City's parks, (ii) construction of improvements to the City's drainage system, (iii) construction and improvement of the City's streets (together with (i) and (ii), the "Bond Projects ") and (iv) costs of issuing the Bonds. 2. The Certificates are being issued to finance (i) the construction of hike and bike trails within the City, (ii) upgrades to the City's traffic communication system, (iii) design and construction of a new fire station at Yost Road and FM 518, (iv) construction of an administrative building on Veterans Drive for fire and emergency services, (v) improvements to and equipment of the Westside Library (collectively, with items described in clauses (i) through (iv), the "Certificate Projects," together with the Bond Projects, the "Projects ") and (vi) payment of professional services of attorneys, financial advisors, engineers and other professionals in connection with the Projects and the issuance of the Certificates. 3. Each of the Projects is and will be owned and operated and maintained by the City. The City has not contracted in any manner with any company, firm or other person or entity to operate and/or maintain the Projects or all or part of any one, for and on behalf of the City. The City does not expect to enter into any contract for the operation, maintenance or management of the Projects or all or part of any one, except for contracts complying with Rev. Proc 97-13. -1- I-IOU:3343332. I 4. There is not, and as of the date hereof the City does not anticipate entering into, any lease, contract or other understanding or arrangement having a term of more than one year, such as a take-or-pay contract or output contract, with any person other than a state or local governmental unit (including a municipal utility district), pursuant to which the City expects that proceeds of the Obligations, or the Projects financed therewith, will be used in the trade or business of such person (including all activities of such persons who are not individuals). 5. No receipts from the sale of the Obligations or amounts received from the investment thereof will be used to pay the principal of or interest on any presently outstanding issue of bonds or other similar obligations of the City other than the Obligations. 6. The weighted average maturity of the Obligations is not more than 120% of the expected useful life of the Projects. C. Source and Disbursement of Funds. 1. The City has sold the Obligations to Robert W. Baird & Co., Inc. (the "Underwriter "), in a competitively bid public sale for a purchase price of $12,214,564.84, which is the issue price of the Obligations to the public of $12,391,309.15, as represented by the Underwriter, less underwriter's discount of $215,614.15, plus accrued interest of $38,869.84. 2. The City has caused the closing agent to deposit this day such amounts, as follows: Disposition Amount Deposit to Bond Project Fund $9,315,000.00 Deposit to Certificate Project Fund 2,745,000.00 Deposit to Bond Debt Service Fund 29,836.92 Deposit to Certificate Debt Service Fund 9,032.92 Disbursed to pay costs of issuance 115,695.00 Total $12,214,564.84 D. Temporary Periods. 1. The respective amounts deposited in the Bond Debt Service Fund and the Certificate Debt Service Fund represent accrued interest on the Bonds and the Certificates, respectively, from August 1, 2013, to the date hereof. Such amounts will be used to pay the first payment of debt service due on the Bonds and the Certificates, respectively, on March 1, 2014, and may be invested without restriction as to Yield until so used. 2. The amount disbursed or set aside to pay costs of issuance on the Obligations will be so used within one year from the date hereof, will not be used to pay debt service on the Obligations, and may be invested without restriction as to Yield until so used. 3. Within six (6) months from the date hereof, the City reasonably expects to enter into binding obligations for the acquisition and construction of the Projects which require the Issuer to expend at least $619,565, which is 5% of the net sale proceeds of the Obligations. 4. The City will pursue acquisition and construction of the Projects with due diligence until completion. -2- HOU:3343332.1 5. The City reasonably expects to expend within three years from the date hereof, in addition to the costs of issuance of the Obligations, an amount of proceeds of the Obligations equal to not less than 85% of the net sale proceeds of the Obligations. E. Yield and Nonpurpose Investments. 1. BOSC, Inc., as financial advisor to the City (the "Financial Advisor "), has calculated that a discount factor of at least 4.0364% is required to reduce the principal and interest to be paid on the Obligations to a present value on the date hereof, compounding semiannually, equal to the issue price of the Obligations. 2. No obligations of the City have been sold or delivered pursuant to the same plan of financing and payable from the same source of funds within 15 days before or after August 12, 2013, the date on which the City entered into a binding contract to sell the Obligations (the "Sale Date "). 3. The City has covenanted in the Ordinance that it will account for the Gross Proceeds of the Obligations separately and apart from all other funds of the City from the date hereof, that it will calculate the earnings on all Nonpurpose Investments made with Gross Proceeds of the Obligations and that it will make payments to the United States Treasury of any Rebate Amount as a result of such investments at least every five years and at the maturity of the Obligations, together with any such reports as the Secretary of the Treasury shall prescribe, as may be required by Section 148(f) of the Code. F. Debt Service Fund. 1. Pursuant to the Ordinance, the City has levied an ad valorem tax on all taxable property within its boundaries and has pledged such tax, together with the Net Revenues pledged to pay debt service on the Certificates, to pay debt service on the Obligations. Such amounts will be deposited to the credit of the respective Debt Service Fund maintained in the books of the City. 2. Each Debt Service Fund will be maintained to achieve a proper matching of revenues and debt service within each bond year. The City expects that the following will occur with respect to each Debt Service Fund (other than that portion of each Debt Service Fund, if any, consisting of deposits made to defease in whole or in part the contractual obligations of the City to make deposits thereto): (a) each Debt Service Fund will be depleted at least once a year except possibly for a carry-over amount not greater than the larger of one year's income from the investment of such portion or one-twelfth (1/12) of annual debt service requirements on the Obligations; (b) all deposits to each Debt Service Fund will be spent within 13 months of deposit; and (c) all amounts received from investment of money in each Debt Service Fund will be deposited in each Debt Service Fund and within twelve months of receipt will be expended to pay principal or interest on the Obligations. -3- HOU:3343332.1 3. Of the balance which will remain in the City's interest and sinking funds for the Obligations and the other outstanding debt of the City after the refunding, not more than 3.5%, or approximately $427,266, is allocated to the Obligations, based on the remaining maximum annual debt service on the outstanding issues. The Financial Advisor has advised the City that, based on the scheduled debt service on the Obligations, such balance should be maintained at this time as a balance in the Debt Service Fund allocable to the Obligations and the other outstanding debt of the City consistent with accepted standards of prudent fiscal management for similar governmental districts and in order to provide a reserve against periodic fluctuations in the amount and timing of ad valorem tax collections by the City for payment of debt service. Amounts in the Debt Service Fund allocable to the Obligations may be invested without restriction as to Yield unless such amount exceeds the least of 10% of the proceeds of the Obligations, maximum annual debt service on the Obligations, or 125% of the average annual debt service on the Obligations, in which case any such excess will be invested at a Yield not in excess of the Bond Yield through the use of yield reduction payments as provided in section 1.148-5(c) of the Regulations. 4. Except as described herein, no funds of the City have been pledged to pay principal of or interest on the Obligations or otherwise restricted so as to give reasonable assurance of the availability of such funds for such purpose. G. Obligations Not Hedge Bonds. 1. The City reasonably expects that at least 85% of the proceeds of the Obligations will be used to carry out the governmental purpose of the Obligations within three years after the date hereof. 2. Not more than 50 percent of the proceeds of the Obligations will be invested in Nonpurpose Investments having a substantially guaranteed Yield for 4 years or more. H. No Abusive Arbitrage Device. 1. In connection with the issuance of the Obligations, the City has not employed any action which has the effect of overburdening the market for tax-exempt obligations by issuing more bonds, issuing bonds earlier, or allowing bonds to remain outstanding longer than is reasonably necessary to accomplish the governmental purposes of the Obligations. 2. In connection with the issuance of the Obligations, the City has not taken or omitted to take any action which has the effect of enabling the City to exploit the difference between tax-exempt and taxable interest rates to gain a material financial advantage. -4- HOU:3343332.1 1.XFCUTLD this August 29, 2013. CITY OF PEARLAND, TEXAS By: Claire I3ogard Director of Finance CERTIFICATE OF FINANCIAL ADVISOR The undersigned hereby certifies as follows with respect to the sale and delivery by the City of Pearland, Texas (the "City") of its $9,315,000 Public Improvement Bonds, Series 2013 (the "Bonds") and $2,745,000 Certificates of Obligation, Series 2013 (together with the Bonds, the "Obligations"): 1. The discount factor required to reduce the principal and interest to be paid on the Obligations to a present value on the date hereof equal to the issue price of the Obligations of $12,391,309.15, plus accrued interest of $38,869.84, compounding semiannually, is 4.0364%. 2. The undersigned has advised the City that, based on the scheduled debt service on the Obligations, the amount on deposit in the City's Debt Service Fund for the Obligations and other outstanding debt of the City should be maintained at this time as a balance in the Debt Service Fund consistent with accepted standards of prudent fiscal management for similar governmental entities and in order to provide a reserve against periodic fluctuations in the amount and timing of ad valorem tax collections by the City for payment of debt service. EXECUTED and DELIVERED this 29th day of August, 2013. BOSC, INC. HOU:3343972.1 CERTIFICATE REGARDING ISSUE PRICE The undersigned hereby certifies as follows with respect to the sale of $2,745,000* Certificates of Obligation, Series 2013 (the "Certificates") of the City of Pearland, Texas (the "Issuer"): 1. The undersigned is the underwriter or the manager of the syndicate of underwriters (the "Underwriter") which has purchased the Certificates from the Issuer at competitive sale. 2. The Underwriter has made a bona fide offering to the public of all of the Certificates of each maturity at the initial offering prices to the public as set forth below. The term "public" as used herein, does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Purchaser or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). 3. The first price/yield at which a substantial amount (i.e., at least ten (10) percent) of the principal amount of each maturity of the Certificates except for the Certificates maturing in the years 2017, 2019, 2021, 2022, 2023, 2028, 2029, and 2032 (the "Retained Maturities") was sold to the public is set forth below: Maturity Date Principal Maturity Date Principal (03/01) Amount Yield (03/01) Amount Yield 2014 $75,000 0.500% 2027 220,000 4.000 2015 85,000 0.700 2028 110,000 4.100 2016 85,000 1.100 2029 120,000 4.200 2017 85,000 1.300 2030 120,000 4.300 2018 85,000 1.600 2031 120,000 4.400 2019 90,000 1.900 2032 120,000 4.450 2020 100,000 2.300 2033 130,000 4.500 2021 100,000 2.600 2034 130,000 4.550 2022 100,000 2.900 2035 130,000 4.600 2023 100,000 3.050 . 2036 140,000 4.650 2024 100,000 3,400 2037 140,000 4.680 2025 110,000 3.600 2038 150,000 4.700 4. In the case of the Retained Maturities, the Underwriter reasonably expected on the offering date to sell a substantial amount (i.e., at least ten (10) percent) of each Retained Maturity to the public at the initial offering price/yield as set forth above. 5. The issue prices set forth above are determined on the date the Certificates were purchased by the Underwriter (the "sale date") based on the rooablq expectations., regarding the initial public offering prices. Each maturity of the Certificates was offered to the public ata price which, on the sale date, was reasonably expected by the Underwriter to be equal to the fair market value of such maturity. 6. Based on the foregoing, the aggregate of the initial offering price is $2,844,133.45, plus accrued interest of $9,032.92, for a total of $2,853,166.37. The undersigned understands that the statements made herein will be relied upon (i) by the Issuer in complying with the conditions imposed by the Internal Revenue Code of 1986, as amended, on the exclusion of interest on the Certificates from the gross income of their owners for federal income tax purposes, and (ii) by Andrews Kurth LLP (a) in connection with rendering its opinion as Bond Counsel to the Issuer that interest on the Certificates is excludable from gross income thereof or income tax purposes and (b) for purposes of completing the IRS Form 8038-G. EXECUTED and DELIVERED this 29th day of August, 2013. ROBERT W. AIRD & CO. INCORPORATED By Title: \`( R HOU:3348279.1 Form i3 (Rev. September 2011) Department of the Treasury internal Revenue Service Rrnrtinti Information Return for Tax-Exempt Governmental Obligations - Under Internal Revenue Code section 149(e) OMB No. i5450720 0- See separate instructions, Caution: If the issue price is under $100,000, use Fomi 8038-GC. If Amended Return. check here fl Issuer's name 2 Issuer's employer identification number (EIN) City of Pearland, Texas 74-6028909 3a Name of person (other than issuer) with whom the IRS may communicate about this return (see instructions) 3b Telephone number of other person shown on 3a Rick Witte, Bond Counsel 713-220-3944 4 Number and street (or P.O. box if mail is not delivered to street address) Roomleuite 5 Report number (For IRS Use Only) 3519 Liberty Drive 3 1 1 6 City, town, or post office, state, and ZIP code 7 Date of issue Pearland, TX 77581 86/29/2013 8 Nsmeofissue Certificates of Obligation, Series 2013 9 CUSIP number Permanent Improvement Bonds, Series 2013 704883 2H313D1 10a Name and title of officer or other employee of the issuer whom the IRS may call for more information (see 10b Telephone number of officer or other instructions) employee shown on 10a 1 Tvne of Issue (enter the issue once). See the instructions and attach schedule. 11 12 13 14 15 16 17 18 Education -------------------------------- Health and hospital --------------------------- Transportation ----------------------------- Public safety ------------------------------ Environment (including sewage bonds) --------------------- Housing ------------------------------- Utilities ------------------------------- Other. Describe ' VARIOUS CAPITAL IMPROVEMENTS 11 12 13 14 15 16 17 18 12,391,3091 15 19 20 If obligations are TANS or RANs, check only box 19a ............. If obligations are BANs, check only box 19b ................ If obligations are in the form of a lease or installment sale, check box ........ 0 ' 0 El iTh!Description of Obligations. Complete for the entire issue for which this form is being f i led. (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity (d) Weighted average maturity Is) Yield 21 03/01/2036 $ 12,391,309.15 $ 12,060,000,00 13.46 years 4.0364 % n uses OT i-'roceeas OT t5ona issue jinc i vaing unaenwriters aiscount) 22 Proceeds used for accrued interest ...................... 22 ] 38,869 84 23 Issue price of entire issue (enter amount from line 21, column (b)) ........... 23 j 12,391,309 15 24 Proceeds used for bond issuance costs (including underwriters' discount) 24 331,309 15 25 Proceeds used for credit enhancement ............25 -0- 26 Proceeds allocated to reasonably required reserve or replacement fund 26 -0- 27 Proceeds used to currently refund prior issues .........27 -0- 28 Proceeds used to advance refund prior issues ..........28 -0- 29 Total (add lines 24 through 28) ...................... 29 331,309 15 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) 30 1 12,060,000 1 00 D scription 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 (MM/DD/YYYY) 34 Enter the date(s) the refunded bonds were issued - (MM/DOIYYW) For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63773S Form 8038-G (Rev, 9-201 t( HOU: 3343344 remediated Form 5038-0 (Re^o-2m1) pag e 2 35 Enter the amount of the state volume cap allocated to the issue under section 141 (b)(5) .... 35 -0- - 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (GIC) (see instructions) ..........................-0- 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 380 If this issue is a loan made from the proceeds of another tax-exemp issue, check box 0- F1 and enterthe following information: b Ente r the date of the maste pool obligatio - u Enter t h e EIN of t h e issuer of the maste r pool obligation - d Enter the name of the issuer of the master poo obligation w~ 39 If the issuer has designated the issue under section 265(b)(3)(B)(i)(lll) (small issuer exception), check box 40 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box . . . . . . . . . . . 41a If the issuer has identified a hedge, check here LJ and enter the following information: b Name of hedge providerto- Type of hedge I* Term of hedge Illo- 42 IfIf the issuer has superintegrated the hedge, check box . . . . . . . . . . . . . . . . . . . 43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are according to the requirements under the Code and Regulations (see instructions), check box . . . . . . 44 lithe issuer has established written procedures to monitor the requirements of section 148, check box . 45a If some portion of the proceeds was used to reimburse expenditures, check here - [] and enter the amount of reimbursement . . . . . . .. Under penalties of perjur y , I declare that have examined this return and accornpanyirrg schedules and slatenients, and to the beat ci my knowledge Signature IRS's disclosure of the issuer's return information, as necessary to and process his return, to the person that I have authorized above. Consent |k L,-~`p , Claire Bo o Director of Fi Si g nature Date Type or print name and fitle Paid Preparer Gregg H. Jones I seIf-employed P00969069 Use Only Firm's name Andrews Kurth LLP Firm's FIN 74-1021138 Firm's address 600 Travis Street, Suite 4200, Houston, TX 77002 I Piione no 713-220-4479 HOU: 3343344 AN ID REANDREWS ATTORNEYS KU R `"~ 1 H LLP 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com Gregg H. Jones 713.220.4479 Phone 713.238.7133 Fax gjone s @a n drews kurt h. com August 29, 2013 Internal Revenue Service Ogden, Utah 84201-0020 Re: City of Pearlañd, Texas Certificates of Obligation, Series 2013 City of Pearland, Texas Permanent Improvement Bonds, Series 2013 Ladies and Gentlemen: Enclosed for filing is an original of Form 8038-G with respect to the referenced certificates and bonds. Very truly yours, Gregg nes Enclosure Austin Beijing Dallas Houston London New York Research Triangle Park The Woodlands Washington, DC HOU:3349050.1 Form 8038-G I Information Return for Tax -Exempt Governmental Obligations (Rev. September 2011) I Under Internal Revenue Code section 149(e) OMB No. 1545-0720 ► See separate instructions. I nternal nal Reven ue n the ervice Caution: If the issue price is under $100,000, use Form 8038-GC. Internal Revenue Service n : i• Rennrtina Authority If Amended Return. check here ► I I 1 Issuer's name 2 Issuer's employer identification number (EIN) City of Pearland, Texas 74-6028909 3a Name of person (other than issuer) with whom the IRS may communicate about this return (see instructions) 3b Telephone number of other person shown on 3a Rick Witte, Bond Counsel 713-220-3944 4 Number and street (or P.O. box if mail is not delivered to street address) Room/suite 5 Report number (For IRS Use Only) 3519 Liberty Drive 3 6 City, town, or post office, state, and ZIP code 7 Date of issue Pearland, TX 77581 08/29/2013 8 Name of issue Certificates of Obligation, Series 2013 9 CUSIP number Permanent Improvement Bonds, Series 2013 704883 2H3/3D1 10a Name and title of officer or other employee of the issuer whom the IRS may call for more information (see 10b Telephone number of officer or other instructions) employee shown on 10a •TalU Tvne of Issue (enter the issue nricel. See the instructions and attach schedule. 11 12 13 14 15 16 17 18 19 20 Education . . . . . . . . . . . . . . . . . . . . . . . . Health and hospital . . . . . . . . . . . . . . . . . . . . Transportation . . . . . . . . . . . . . . . . . . . . . . Public safety . . . . Environment (including sewage bonds) . . . . . . . . . . . . . . Housing . . . . . . . . . . . . . . . . . . . . . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . Other. Describe ► VARIOUS CAPITAL IMPROVEMENTS If obligations are TANS or RANs, check only box 19a . . . . . . . . . If obligations are BANS, check only box 19b . . . . . . . . . . . . If obligations are in the form of a lease or installment sale, check box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ► q . . . . ► q . . . . ► q 11 12 13 14 15 16 17 18 12,391,309 15 ITIllI 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 price at maturity (d) Weighted average maturity (e) Yield 21 03/01/2038 $ 12,391,309.15 $ 12,060,000.00 13.46 years 4.0364 Uses of Proceeds of Bond Issue (Including underwriters' discount) 22 Proceeds used for accrued interest . . . . . . . . . . . . . . . . . . . . . 22 38,869 84 23 12,391,309 15 23 Issue price of entire issue (enter amount from line 21, column (b)) . . . . . 24 Proceeds used for bond issuance costs (including underwriters' discount) . . 24 331,309 15 25 Proceeds used for credit enhancement . . . . . . . . . . . . 25 -0- 26 Proceeds allocated to reasonably required reserve or replacement fund . 26 -0- 27 Proceeds used to currently refund prior issues . . . . . . . . . 27 -0- 28 Proceeds used to advance refund prior issues . . . . . . . . . 28 -0- 29 Total (add lines 24 through 28) . . . . . . . . . . . . . . . . . . . . . . . 29 331,309 15 30 12,060,000 00 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) . . . 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 (MM/DD/YYYY) . . . . . . ► 34 Enter the date(s) the refunded bonds were issued ► (MM/DD/YYYY) For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63773S Form 8038-G (Rev. 9-2011) HOU: 3343344 Form 8038-G (Rev. 9-2011) Page 2 Miscellaneous 35 Enter the amount of the state volume cap allocated to the issue under section 141 (b)(5) . . . 35 -0- 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (GIC) (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . 36a -0- b Enter the final maturity date of the GIC ► c Enter the name of the GIC provider ► 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans to other governmental units . . . . . . . . . . . . . . . . . . . . . . . 37 -0- 38a If this issue is a loan made from the proceeds of another tax-exempt issue, check box ► q and enter the following information: b Enter the date of the master pool obligation ► c Enter the EIN of the issuer of the master pool obligation ► d Enter the name of the issuer of the master pool obligation ► 39 If the issuer has designated the issue under section 265(b)(3)(B)(i)(111) (small issuer exception), check box . . . . ► q 40 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box . . . . . . . . . . . . . ► q 41a If the issuer has identified a hedge, check here ► q and enter the following information: b Name of hedge provider ► C Type of hedge ► d Term of hedge ► 42 If the issuer has superintegrated the hedge, check box . . . . . . . . . . . . . . . . . . . . . ► q 43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations (see instructions), check box . . . . . . . . ► q 44 If the issuer has established written procedures to monitor the requirements of section 148, check box . . . . . ► q3 45a If some portion of the proceeds was used to reimburse expenditures, check here ► q and enter the amount of reimbursement . . . . . . . . . ► b Enter the date the official intent was adopted ► Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge Signature and belief, they are true, correct, and complete. I further declare that I consent to the IRS's disclosure of the issuer's return information, as necessary to and proces 61,-rL-. isretun - , to thepersson that I " have authorized above.t Consent &, ~I ~' t 3 Claire Bogard, Director of Finance `Signature of issuer's authorized representative Date , Type or print name and title Paid PrintfType preparer's name Prep is signature Dattei Check q if PTIN Preparer Gregg H . Jones v ~7 self-employed P00969069 Use Only Firm's name ► Andrews Kurth LLP Firm's EIN ► 74-1027138 Firm's address ► 600 Travis Street, Suite 4200, Houston, TX 77002 P hone no. 713-220-4479 Form 8038 -G (Rev. 9-2011) HOU: 3343344 2. Article Number IIII 1111111 IIIII IIIIIIIIMIIIII I II I. OFFICIAL STATEMENT CERTIFICATE THE STATE OF TEXAS COUNTIES OF BRAZORIA, FORT BEND AND HARRIS CITY OF PEARLAND, TEXAS I, the undersigned, Mayor of the City of Pearland, Texas (the "City"), acting in my official capacity as such, hereby certify with respect to that issue of "City of Pearland, Texas, Certificates of Obligation, Series 2013," in the principal amount of $2,745,000 (the "Certificates"), as follows: To the best of my 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 the Certificates 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, the 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 or statements, including financial data, of or pertaining to entities, other than the City, and their activities contained in the 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. (Signature Page Follows) HOU:3327574.1 SIGNED as of , 2013, the date of payment for and delivery of the Bonds. CITY OF PEARLAND, TEXAS Mayor HOU:3327574.1 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com ATTORNEYS KU R T H LLP August 29, 2013 WE HAVE ACTED as Bond Counsel for the CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City") in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013, in the aggregate principal amount of $2,745,000 maturing on March 1 in each year from 2014 through 2025, inclusive, in year 2027, and in years 2028 through 2038, inclusive. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City (the "City Council") authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently in effect; the Certificates constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Certificates may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, Austin Beijing Dallas Houston London New York The Woodlands Washington, DC HOU:3339491.2 August 29, 2013 Page 2 moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Certificates have been authorized and delivered in accordance with law; (2) The Certificates are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, within the limits prescribed by law, upon taxable property located within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Certificates; and (3) 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 (the "Net Revenues"), are pledged to the payment of the principal of and interest on the Certificates; provided, however, that such pledge is limited (not to exceed $10,000) and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is further our opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the Issuer comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer 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 Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum HOU:3339491.2 August 29, 2013 Page 3 tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX MATTERS' set forth in the Official Statement. EXCEPT AS DESCRIBED HEREIN, we express no opinions as to any other matters except with respect to the excludability of the interest on the Certificates from gross income from the owners thereof for federal income tax purposes. IN PROVIDING THE FOREGOING OPINIONS, we have relied upon representations of the ISSUER with respect to matters solely within the knowledge of the Issuer, which we have not independently verified, and have assumed the accuracy and completeness thereof. IN ADDITION, EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, 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 credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. jJr kJ L C P HOU:3339491.2 0 ATTORN EY GENERAL O F TEXAS GREG ABBOTT August 26, 2013 THIS IS TO CERTIFY that the City of Pearland, Texas (the "Issuer"), has submitted the City of Pearland, Texas Certificate of Obligation. Series 2013 (the "Certificate"), in the principal amount of $2,745,000, for approval. The Certificate is dated August 1, 2013, numbered I-1, and was authorized by Ordinance No. 1488 of the Issuer passed on August 12, 2013 (the "Ordinance"). The Office of the Attorney General has examined the law and such certified proceedings and other papers as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation. We express no opinion relating to the official statement or any other offering material relating to the Certificate. Based on our examination, we are 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 Certificate has been issued in accordance with law and is a valid and binding obligation of the Issuer. (2) The Certificate is payable from the proceeds of an annual ad valorem tax levied, within the limits prescribed by law, against all taxable property in the Issuer, and is further payable from and secured by a junior and subordinate lien on and pledge of the Net Revenues, in an amount not to exceed $10,000. Therefore, the Certificate is approved. No. 55977 Attorney 94raI of the State of Texas Book No. 2013-C JCH * See attached Signature Authorization POST OFFICE Box 12548, AUSTIN, TEXAS 78711-2548 TEL: (512) 463-2100 WWW.TEXASATTORNEYGENERAL.GOV An Equal Employment Opportunity Employer • Printed on Recycled Paper M OFFICE OF THE ATTORNEY GENERAL OF THE STATE OF TEXAS I, GREG ABBOTT, Attorney General for the State of Texas, do hereby authorize the employees of the Public Finance Division of the Office of the Attorney General to affix, a digital image of my signature; in my capacity as Attorney General, to the opinions issued by this office approving the issuance of public securities by the various public agencies, non-profit corporations, districts, entities, bodies politic or corporate, or political subdivisions of this State as required by law, the opinions approving those contracts designated by the Legislature as requiring the approval of the Attorney General, and the obligations, proceedings and credit agreements required by law to be approved by the Attorney General. The authorized digital image of my signature is attached as Exhibit A and is hereby adopted as my own for the purposes set forth herein. This supercedes any prior signature authorizations for the same purpose. The authority granted herein is to be exercised on those occasions when I am unavailable to personally sign said opinions, and upon the condition that the opinions to which the digital image signature is affixed have been approved by an authorized Assistant Attorney General following the completion of the Public Finance Division's review of the transcripts of proceedings to which the opinions relate. Given under my hand and seal of office at Austin, Texas, this the ______ day of January, /1' GREG TT Attorney eral of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora , F1 Bond Clerk 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 26th day of August 2013 , I signed the name of the Comptroller to the certificate of registration endorsed upon the: City of Pearland, Texas Certificate of Obligation, Series 2013 , numbered 1-1, dated August 1, 2013 , and that in signing the certificate of registration I used the following signature: IN WITNESS WHER OF I have executed this cer ' icate this the 26th day of August 2013 . 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 82333 . GIVEN under my hand and seal of office at Austin, Texas, this the 26th day of August 2013 . /SdY &n4 SUSAN COMBS Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, SUSAN COMBS, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: City of Pearland, Texas Certificate of Obligation, Series 2013 numbered 1-1, of the denomination of $ 2,745,000 , dated August 1, 2013 , 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 26th day of August 2013 , under Registration Number 82333 . Given under my hand and seal of office, at Austin, Texas, the 26th day of August 2013 . SUSAN COMBS Comptroller of Public Accounts of the State of Texas PA YING AGENT/REGISTRAR'S RECEIPT The undersigned duly authorized representative of Wells Fargo Bank, N.A., paying agent/registrar for the following described bonds: CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2013, dated August 1, 2013, in the total authorized aggregate amount of $2,745,000, certifies that said bonds have been delivered to the Purchaser, and that the purchase price has been received on behalf of the City. EXECUTED AND DELIVERED this 29 th day of August, 2013. WELLS FARGO BANK, N.A. By: Regina A. Velasquez .,: ci;~ >ai Vice President Title: HOU:3348862.1 CITY OF PEARLAND, TEXAS $2,745,000 CERTIFICATES OF OBLIGATION, SERIES 2013 The following information is included in the transcript submitted to the Office of the Attorney General for the purpose of obtaining Attorney General approval of the issuance of the referenced bonds, as required by H.B. 1564, 74th Legislature, Regular Session (Tex. Laws 1995, ch. 383, at 2930). A. An additional copy of the Final Official Statement and the following information, if not included in the Final Official Statement or such statement has not been prepared. N/A 1. Name of bond issue: City of Pearland, Texas Certificates of Obligation, Series 2013 2. a) par amount of issue: $2,745,000 b) dollar amount of bond premium, if any: $99,133.45 c) dollar amount of bond original issue discount, if any: N/A 3. Dated date: August 1, 2013 4. Closing date (expected delivery date, on or about): August 29, 2013 5. By year, maturity amounts, coupon rates, prices or yields: N/A (If no reoffering yield (NRO) indicated, please provide yield separately.) 6. Call provisions, including premiums, if any: See Official Statement 7. Mandatory redemption provisions: See Official Statement 8. Debt-service schedule, principal and interest, and annual totals, with fiscal year identified: N/A 9. Use of derivative products associated with financing: N/A 10. If applicable, schedule of bonds refunded, including, by year, principal amount, coupon, and interest cost: N/A 11. Pledge: tax (ad valorem, sales, other), revenue, combination: Combination 12. Type of credit enhancement (including PSF guarantee): N/A 13. Rating service(s) and rating(s) assigned to issue: N/A B. Additional Information 1. Type of sale: Competitive Sale 2. Pricing: August 12, 2013 approx. 6:00 p.m. 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 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: All of the refunded bonds represent (and accordingly all of the refunding bonds are associated with) "new debt." 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 HOU:3345671.1 7. Costs of Issuance — please provide best estimate of costs. If final costs are significantly different, please submit changes directly to the Texas Bond Review Board. Call (512) 463-1741 or (5,12) 475-4802 (FAX). SERVICE FIRM ONE-TIME FEE ANNUAL FEE (a) in dollars Bond Rating Mood 's N/A Standard & Poor's $3,000.00 Fitch N/A Other General Costs of Issuance (b) $37,675.00 $500 Any Specialized Costs of Issuance (c) N/A Credit Facility N/A Bond Insurance N/A Total Underwriting Spread (d) $57,958.45 Did underwriter pay rating fee(s) No Which one(s)? Did underwriter pay bond insurance fee? N/A PARTICIPANTS FIRM Financial Advisor BOSC, INC. Bond Counsel Andrews & Kurth LLP Paying Agent/Registrar; Authenticating Agent Wells Fargo Bank, N.A. Escrow Agent N/A Underwriter's Counsel N/A (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) 220-3915 Name: Tanya Fischer, Andrews Kurth LLP Fax No. (713) 238-7843 HOU:3345671.1 ACS DAR..r PO OR'S MCGRAW HILL FINANCIAL 500 North Akard Street Lincoln Plaza, Suite 3200 Dallas, TX 75201 tel (214) 871-1400 reference no.:699337 August 7, 2013 City of Pearland 3519 Liberty Drive Pearland, TX 77581 Attention: Ms. Claire Bogard, Director of Finance Re: US$2,745,000 City of Pearland, Texas, Certificates of Obligation, Series 2013, dated: August 1, 2013, due: March 1, 2038 US$9,315,000 City of Pearland, Texas, General Obligation Bonds, Series 2013, dated: August 1, 2013, due: March 1, 2038 Dear Ms. Bogard: Pursuant to your request for a Standard & Poor's Ratings Services ("Ratings Services") rating on the above-referenced obligations, Ratings Services has assigned a rating of "AA-". Standard & Poor's views the outlook for this rating as stable. A copy of the rationale supporting the rating is enclosed. 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PF Ratings U.S. (02/16/13) STANDARD &I" 00R'S RATINGS SERVICES LtErL I1gL LJ;t © Primary Credit Analyst: Brian J Marshall, Dallas (1) 214-871-1414; brian.marshall@standardandpoors.com Secondary Contact: Todd B Helman, Dallas (1) 214-871-1405; todd.helman@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 9, 2013 1 1176527 I 300121141 Summary: US$9.315 mil GO buds ser 2013 dtd 08/01/2013 due 03/01/2038 Long Term Rating AA-/Stable New US$2.745 mil certs of oblig ser 2013 dtd 08/01/2013 due 03/01/2038 Long Term Rating AA-/Stable New Brazoria Cnty Mun Util Dist #1, Texas Pearland, Texas Brazoria Cnty Mun Util Dist #1 GO Unenhanced Rating AA-(SPUR)/Stable Affirmed Rationale Standard & Poor's Ratings Services assigned its 'AA-' long-term rating to Pearland, Texas series 2013 certificates of obligation and permanent improvement bonds. At the same time, Standard & Poor's affirmed its 'AA-' long-term rating and underlying rating (SPUR) on the city's previously issued general obligation (GO) debt. Standard & Poor's also affirmed its 'AA-' SPUR on Brazoria County Municipal Utility District No. 1's GO debt issued for the city. The outlook is stable. The rating reflects what we view as the city's: • Access to Houston's deep economic base; • Very strong wealth and income indicators; and Very strong financial position, supported by what we consider strong financial management practices. Partly offsetting the above strengths, in our view, are Pearland's: • High overall debt burden, along with high carrying charges; and • Ongoing capital needs to address growth. Revenue from the city's ad valorem property tax levied within the legal limit secures the bonds. Officials will use certificate and bond proceeds to construct a fire station and hike and bike trails, to pay for library improvements and equipment, and to make other citywide, city park, and drainage street improvements. Pearland, which borders Houston to the south, has become a center for commercial activity in Brazoria County. The local economy's manufacturing presence is mostly related to the oil industry. Residents who do not work in the city itself have access to employment opportunities throughout the broader Houston metroplex. Reflecting the depth and diversity of the area economy, median household effective buying income is, in our view, a very strong 147% of the national level. Market value, a wealth indicator, is a very strong $71,773 per capita, in our opinion. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 9, 2013 2 1176527 300121141 Summary: Pearland, Texas; General Obligation Residential and commercial growth has recently fueled the city's very strong property tax base expansion. Assessed value (AV) has more than doubled since fiscal 2005 to $6.45 billion. Officials are projecting a 7% increase in property values for fiscal 2014, largely because of the annexation of Brazoria County Municipal Utility District No. 4 last year. Because of general economic conditions, new residential and commercial construction has recently slowed; city officials are projecting continued growth, albeit at a more moderate pace than what Pearland has experienced in the past several years. There is no concentration among the city's 10 leading property taxpayers. Officials are projecting roughly 1,000 new single-family home starts next year, partly because of the expansion of the health care sector. In our opinion, Pearland's financial operations remain very strong. The city ended fiscal 2012 with an available general fund balance of $17.5 million, or 35% of operations. Officials attribute the operational surplus to $3 million in cost cutting measures as well as $1.2 million in higher-than-budgeted revenue. Based on unaudited results, officials project to end fiscal 2013 with an available general fund balance of $15.9 million. For fiscal 2014, management plans to use $2.8 million of reserves to fund one-time capital items. Sales tax collections were the general fund's primary revenue source in fiscal 2012 (30%), followed by charges for services (24%) and property taxes (22%). The city's sales tax revenue more than doubled to $14.8 million in fiscal 2012 from $6.7 million in fiscal 2004. Officials attribute the rise to the city's role as a major commercial center. The city's fiscal 2013 tax rate was less than 71 cents per $100 of AV, with 49 cents allocated for debt service and the remainder for operations. Property tax collection rates remain strong, averaging nearly 99% annually during the past four years. We deem Pearland's financial management practices "strong" under our financial management assessment (FMA) methodology. An FMA of strong indicates our view that practices are strong, well embedded, and likely sustainable. The government maintains best practices, well embedded in its daily operations and practices, deemed critical to supporting credit quality. Formal policies support many of these activities, adding to the likelihood that management will continue these practices, which should transcend operating environment or personnel changes. Management's general fund balance policy calls for the maintenance of at least two months' operating expenditures in reserve. Revenue and expenditure projections are, in our opinion, based on a conservative estimate of economic conditions and historical trends. A formalized debt management policy outlines which types of projects the city can fund with certain debt, along with a goal of a minimum savings of 3% for refunding. Management reviews Pearland's budget and investments monthly and reports its findings in writing to the city council. Management performs capital planning through a five-year rolling plan that identifies funding sources. Officials forecast long-range financial projections five years out for the major operating funds. Officials have also recently adopted Government Accounting Standards Board State No. 54's fund balance policy. Following this issuance, we consider the overall net debt burden a high 14% of fiscal 2013 AV, or $8,646 per capita. About two-thirds of overall debt was overlapping, which management primarily attributes to local school districts and several municipal utility districts. The debt service carrying charge was, in our view, a high 28% of fiscal 2012 total governmental expenditures. Debt amortization is what we regard as average, with officials planning to retire 55% of the principal in 10 years, 97% in 20 years, and all principal by 2038. In May 2007, the electorate authorized the issuance of $162 million of GO bonds; $95 million of unissued authorization remains. Management plans to issue about $17 million of additional GO debt next year, followed by $28.6 million in 2015. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 9, 2013 3 1176527 1 300121141 Summary: Pearland, Texas; General Obligation Pearland provides pension benefits to employees through the state-administered Texas Municipal Retirement System. The city made its annual required contribution of $3.5 million, or 4.6% of general fund expenditures, in fiscal 2012. According to the latest actuary report, the unfunded liability is about $16.6 million, or less than 1% of market value. For retiree health care benefits, the city allows retirees to participate in its group health insurance plan; however, it does not pay any portion of the retiree premium. Therefore, the city has no direct liability. The stable outlook reflects our view that the city will likely successfully manage its growth-related operating and capital pressures despite relatively flat property and sales tax base growth projections, which will challenge the city's revenue stream. Strong financial management policies and practices lend additional stability to the rating. We do not anticipate changing the rating within the two-year outlook horizon, as we believe the city's fund balance will likely remain what we consider very strong and that the debt levels will remain manageable despite the continued capital needs. Related Criteria And Research USPF Criteria: GO Debt, Oct. 12, 2006 L aI"iYes j16J ~a `ill ill tG ~ - : ~ r~y~l„~4-~~i - - - - -~.—,_ _ _---• Pearland GO Long Term Rating AA-/Stable Affirmed Pearland GO (wrap of insured) (FGIC) (MBIA) (National) (SEC MKT) Unenhanced Rating AA-(SPUR)/Stable Affirmed Pearland GO Unenhanced Rating AA-(SPUR)/Stable Affirmed Pearland GO (CIFG) Unenhanced Rating AA-(SPUR)/Stable Affirmed Brazoria Cnty Mun Util Dist #1, Texas Pearland, Texas Brazoria Cnty Mun Util Dist #1 wtrwks & swr Unenhanced Rating AA-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com . 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S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 9, 2013 5 1176527 300121141 UNITED STATES OF AMERICA STATE OF TEXAS CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATION, SERIES 2013 NUMBER DENOMINATION I-1 $2,745,000 REGISTERED REGISTERED DATED DATE: August 1, 2013 REGISTERED OWNER: ROBERT W. BAIRD & CO., INC. PRINCIPAL AMOUNT: TWO MILLION SEVEN HUNDRED FORTY FIVE THOUSAND AND NO/DOLLARS THE CITY OF PEARLAND, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on March 1 of the year of maturity specified below (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption) upon presentation and surrender of this Certificate at the office of Wells Fargo, N.A., or its successor (the "Paying Agent/Registrar"), the principal amount identified set forth in the following schedule: Year of Principal Interest Maturity Amount Rate 3/1/2014 $75,000 3.000% 3/1/2015 $85,000 3.000% 3/1/2016 $85,000 3.000% 3/1/2017 $85,000 3.000% 3/1/2018 $85,000 3.000% 3/1/2019 $90,000 3.000% 3/1/2020 $100,000 4.000% 3/1/2021 $100,000 5.000% 3/1/2022 $100,000 5.000% 3/1/2023 $100,000 5.000% 3/1/2024 $100,000 5.000% 3/1/2025 $110,000 5.000% 3/1/2027 $220,000 4.000% 3/1/2028 $110,000 4.000% 3/1/2029 $120,000 4.250% 3/1/2030 $120,000 4.375% 3/1/2031 $120,000 4.375% 3/1/2032 $120,000 4.375% HOU:3344908.4 3/1/2033 $130,000 4.500% 3/1/2034 $130,000 4.500% 3/1/2035 $130,000 4.500% 3/1/2036 $140,000 4.625% 3/1/2037 $140,000 4.625% 3/1/2038 $150,000 4.625% payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360-day year composed of twelve 30-day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. Interest on this Certificate is payable by check on March 1 and September 1, beginning on March 1, 2014, mailed to the registered owner of record as of the close of business on the last business day of the month next preceding each interest payment date. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the "Certificates") in the aggregate principal amount of $2,745,000 issued pursuant to an ordinance adopted by the City Council of the City on August 12, 2013 (the "Ordinance") for the purpose of providing all or part of the finds to pay contractual obligations to be incurred for the . construction of public works and the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes and for the payment of contractual obligations for professional services, to wit: (i) the construction of hike and bike trails within the City; (ii) upgrades to the City's traffic communication system; (iii) design and construction of a new fire station at Yost Road and FM 518; (iv) construction of an administrative building on Veterans Drive for fire and emergency services; (v) improvements to and equipment of the Westside Library; and (vi) professional services rendered in connection with the above listed projects. THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate is authenticated registered by the Comptroller of Public Accounts of the State of Texas by due execution of the registration certificate endorsed hereon. THE CITY RESERVES THE RIGHT, at its option, to redeem, prior to their maturity, Certificates maturing on and after March 1, 2024, in whole or in part, on March 1, 2023, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES maturing on March 1 in the year 2027, (the "Term Certificates") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Certificates or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: HOU:3344908.4 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 1, 2027 March 1, 2026 $110,000 March 1, 2027 (stated maturity) 110,000 The particular Term Certificates to be redeemed- shall be selected by the Registrar by lot or other customary random selection method, on or before January 15 of each year in which Term Certificates are to be mandatorily redeemed. The principal amount of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Terra. Certificates that have been optionally redeemed and which have not been made the basis for a previous reduction. CERTIFICATES MAY BE REDEEMED IN PART only in integral multiples of $5,000. If a Certificate subject to redemption is in a denomination larger than $5,000, a portion of such Certificate may be redeemed, but only in integral multiples of $5,000. In selecting portions of Certificates for redemption, each Certificate shall be treated as representing that number of Certificates of $5,000 denomination which is obtained by dividing the principal amount of such Certificate by $5,000. Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Ordinance, shall authenticate and, deliver in exchange therefor a Certificate or Certificates of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Certificate so surrendered. NOTICE OF ANY SUCH REDEMPTION, identifying the Certificates or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the books of registration kept by the Paying Agent/Registrar, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Certificates called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Certificates which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the purpose of being paid with the funds so provided for such payment. THIS CERTIFICATE IS TRANSFERABLE only upon presentation and surrender at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of $5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. HOU;3344905.5 THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. IT IS HEREBY DECLARED AND REPRESENTED that this Certificate has been duly and validly issued and delivered; that all acts, conditions and things required or proper to be performed, exist and to be done precedent to or in the issuance and delivery of this Certificate have been performed, exist and have been done in accordance with law; that the Certificates do not exceed any constitutional or statutory limitation; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and such principal matures, have been levied and ordered to be levied, within the limits prescribed by law, against all taxable property in the City and have been irrevocably pledged for such payment. IT IS FURTHER DECLARED AND REPRESENTED that the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $10,000, are pledged to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is filed with the Paying Agent/Registrar, for the full provisions thereof, to all of which the Registered Owners of the Certificates assent by acceptance of the Certificates. HOU:3344908.4 IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and this Certificate to be signed by the Mayor, countersigned by the City Secretary by their manual, lithographed or printed facsimile signatures. CITY OF PEARLAND, TEXAS Mayor COUNTERSIGNED: City cretar HOU:3344908.1 OFFICE OF THE COMPTROLLER § 3 OF PUBLIC ACCOUNTS § REGISTER NO. THE STATE OF TEXAS § I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this certificate has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this Ui26 213 Coiiiptroll r of Public Accounts of the State of Texas [SEAL] HOU:3344908.4 ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto (Please print or type name, address, and zip code of Transferee) (Please insert Social Security or Taxpayer Identification Number of Transferee) the within bond and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer such bond on, the books kept for registration thereof, with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in NOTICE: Signature must be guaranteed by a every particular, without any alteration, member firm of the New York Stock Exchange enlargement or change whatsoever. or a commercial bank or trust company. HOU:3344908.4 F