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Ord. 1503-2014-09-22
CERTIFICATE FOR ORDINANCE NO. 2014-1503 THE STATE OF TEXAS COUN IImS 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 September 22, 2014, 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 Keith Ordeneaux Mayor Pro-Tem Tony Carbone Councilmember Scott Sherman Councilmember Gary Moore Councilmember Greg Hill Councilmember 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 2014; PRESCRIBING THE TERMS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES 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 mecting; 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:3476919.1 SIGNED AND SEALED this Sq-kTfOne.f- 4014. •- ecretary OF PE AND, (SEAL) HOU:3476919.1 •ft:==-../)-7-7 ?„ Mayor CITY OF PEARLAND, TEXAS ORDINANCE NO. 2014-1503 ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2014; PRESCRIBING THE TERMS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES 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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; 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 2014 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 6:30 p.m. on September 22, 2014 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:3459458.4 (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 September 22, 2014, 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. "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 2014, 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 2014 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:3459458.4 "Interest Payment Date," when used in connection with any Certificate, shall mean March 1, 2015, and each September 1 and March 1 thereafter until maturity or earlier redemption of such Certificate. hereto. "MSRB" means the Municipal Securities Rulemaking Board. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements "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, N.A., Minneapolis, Minnesota 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'h 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 teens 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:3459458.4 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 FOUR MILLION SDX HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($4,625,000) 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 2014," and shall be dated October 1, 2014. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of the October 1, 2014 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, 2015, 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 3/1/2015 $230,000 3.000% R-2 3/1/2016 235,000 3.000 R-3 3/1/2017 230,000 2.000 R-4 3/1/2018 230,000 2.000 R-5 3/1/2019 230,000 2.000 4 HOU:3459458.4 Certificate Year of Principal Interest Number Maturity Amount Rate R-6 3/1/2020 230,000 2.000 R-7 3/1/2021 230,000 2.000 R-8 3/1/2022 230,000 2.000 R-9 3/1/2023 230,000 3.000 R-10 3/1/2024 230,000 4.000 R-11 3/1/2025 235,000 4.000 R-12 3/1/2026 230,000 4.000 *** *** *** *** R-13 3/1/2028 470,000 3.000 R-14 3/1/2029 230,000 3.125 R-15 3/1/2030 230,000 3.125 R-16 3/1/2031 230,000 3.250 R-17 3/1/2032 230,000 3.250 *** *** *** *** R-18 3/1/2034 465,000 3.375 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 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, 2025, are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 1, 2024, or any date thereafter, at par plus accrued interest to the date fixed for redemption. 5 HOU:3459458.4 (b) Mandatory Redemption. The Certificates maturing on March 1 in the year 2028 and 2034, (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, 2028 March 1, 2027 $235,000 March 1, 2028 (stated maturity) 235,000 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 1, 2034 March 1, 2033 $230,000 March 1, 2034 (stated maturity) 235,000 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. 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 6 HOU:3459458.4 be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the mariner 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 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 7 HOU:3459458.4 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. 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 8 HOU:3459458.4 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 Only 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. (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 9 HOU:3459458.4 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. 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 o 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. 10 HOU:3459458.4 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 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. 11 HOU:3459458.4 Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2014 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, N.A., Minneapolis, Minnesota 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. 12 HOU:3459458.4 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: Paving 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. 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, Raymond James & Associates, Inc. at a price of $4,699,488.80 (which is the par amount of the Certificates plus a premium on the Certificates of $74,488.80), 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 and produced the lowest net effective interest rate. 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 13 HOU:3459458.4 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 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. 14 HOU:3459458.4 (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 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 15 HOU:3459458.4 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 govemment. 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 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. 16 HOU:3459458.4 (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 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. 17 HOU:3459458.4 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. 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. 18 HOU:3459458.4 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 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" (except under the subheading "Estimated Overlapping Taxes"), "TAX DATA" , "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. 19 HOU:3459458.4 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; (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. 20 HOU:3459458.4 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. 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. 21 HOU:3459458.4 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. 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] 22 HOU:3459458.4 PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this September 22, 2014. CITY OF PEARLAND, TEXAS Mayor ATTEST (SEAL) =fir 1� Exhibit A — Form of Certificate Exhibit B — Paying Agent/Registrar Agreement Exhibit C - Bid Form HOU:3459458.2 OlQ •.~ ••DI, •:.... S-1 EXHIBIT A FORM OF CERTIFICATE UNITED STATES OF AMERICA STATE OF TEXAS CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATION, SERIES 2014 NUMBER IR- REGISTERED DENOMINATION REGISTERED 2INTEREST RATE: 2MATURITY DATE: DATED DATE: March 1, October 1, 2014 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, N.A., 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 most recent 1 Initial Certificate shall be numbered 1-1. 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 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 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:3459458.4 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, 2015, 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 [$4,625,000] issued pursuant to an ordinance adopted by the City Council of the City on September 22, 2014 (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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) professional services rendered in connection with the above listed projects. 4THIS 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, 2025, in whole or in part, on March 1, 2024, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES maturing on March 1 in the year , (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, 20_ March 1, 20_ March 1, 20_ (stated maturity) 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 arc to be mandatorily redeemed. The principal amoun of Term Certificates to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term ° 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:3459458.4 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:3459458.4 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 thc 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:3459458.4 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 THE STATE OF TEXAS REGISTER NO. 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 [SEAL] Comptroller of Public Accounts of the State of Texas * * * 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 By Authorized Signature Date of Authentication: * * * A-5 HOU:3459458.4 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: NOTICE: Signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. HOU:3459458.4 Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in every particular, without any alteration, enlargement or change whatsoever. * * * A-6 EXHIBIT B PAYING AGENT/REGISTRAR AGREEMENT See Tab 8 B-1 HOU:3459458.4 EXHIBIT C Bid Form See Tab #8 C-1 HOU:3459458.4 STATE OF TEXAS COUNTY OF BRAZORIA Personally appeared before the undersigned, a Notary Public within and for said County and State. Buzz Crainer, Representative for Brenda Miller Fergerson, Publisher of the Pearland Journal, a newspaper of general circulation in the County of Brazoria, State of Texas. Who being duly sworn, states under oath that the report of Legal Notice, a true copy of Which is hereto annexed was published in said newspapers in its issue(s) of July 31, 2014. Sworn to and subscribed before me this 1? Notary Public My commission expires on Th • blisher's Representative day of 4_1./.5-b5f,2014. /--/9zo/6 LUCILLE GUERRA c' r. Notary Public, State of Texas My Commission Expires January 18, 2016 i 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 6:30 day of September, 2014, which is the time and place tentati elyy 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 $5,000,000, 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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) professional services rendered in connection with the above listed projects. WITNESS MY HAND AND THE OFFICIAL SEAL OF THE CITY, this 28th day of July, 2014. City Secretary City of Pearland, Texas $4,625,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2014 TRANSCRIPT OF PROCEEDINGS October 16, 2014 Andrews Kurth LLP 600 Travis, Suite 4200 Houston, Texas 77002 (713) 220-4200 HOU:3191335.27 $4,625,000 CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATIONS SERIES 2014 INDEX OF CONTENTS Closing Memorandum and Final Numbers 1 Resolution Authorizing Publication of Notice of Intent to Issue Certificates 2 Affidavit of Publication of Notice of Intent 3 Certified Ordinance Authorizing Issuance of the Certificates 4 Preliminary Official Statement and Notice of Sale 5 Official Statement 6 Winning Bid 7 Paying Agent/Registrar Agreement 8 General Certificate 9 Signature Identification and No -Litigation Certificate 10 Federal Tax Certificate, Issue Price Certificate and Form 8038G 11 Official Statement Certificate 12 Approving Opinion of Bond Counsel 13 Opinion of Attorney General of Texas with 14 Certificate of Comptroller of Public Accounts Paying Agent's Receipt 15 Bond Review Board Questionnaire 16 Rating Letter 17 Specimen Bond 18 HOU:3478703.1 BOSC, Inc. John Robuck Vice President 1401 McKinney Street, Suite 1000 Houston, Texas 77010 Phone: (713) 289-5897 Email: jrobuck@boscinc.com October 13, 2014 Regina Velasquez Wells Fargo Bank, National Association N9311-115 625 Marquette Avenue — 11th Floor East Minneapolis, MN 55479 RE: City of Pearland, Texas $4,625,000 Certificates of Obligation, Series 2014 (the "Certificates") Dear Ms. Velasquez: The delivery of the above referenced certificates is scheduled for Thursday, October 16, 2014 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. After closing, the Good Faith Check in the amount of $92,500 will be returned to Raymond James & Associates, Inc. attention Rebecca Gravely (901) 579-3567at 50 North Front Street, 14th Floor, Memphis, TN 38103. At or prior to closing, Wells Fargo Bank, N.A. ("Wells Fargo") will receive $4,705,129.16 from Raymond James & Associates, Inc. ("Raymond James"), Inc. in immediately available funds calculated as follows: Principal Amount of the Certificates Plus: Net Premium on the Certificates Less: Underwriter's Discount Plus: Accrued Interest $4,625,000.00 114,115.05 39,626.25 5,640.36 $4,705,129.16 Raymond James 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 2014 Page 2 Wells Fargo Bank, N.A. will disburse the total amount of $4,705,129.16 as follows: 1. $4,704,379.16 ($4,622,570.00 representing deposit to the construction fund, $76,168.80 representing costs of issuance and $5,640.36 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 2014 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 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: Clay Pearson, City of Pearland, Texas Claire Bogard, City of Pearland, Texas Rick Witte, Andrews Kurth LLP Tanya Fischer, Andrews Kurth LLP Lisa Donnelly, Raymond James & Associates, Inc. Rebecca Gravely, Raymond James & Associates, 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. Dated Date 10/01/2014 City of Pearland, Texas- General Obligation Debt Current Debt plus New Debt FINAL NUMBERS - Certificates of Obligation, Series 2014 Series 2014 Certificates of Obligation Delivery Date 10/16/2014 Year Ending 09/30 Current Debt Requirement New Principal Due 03/01 Interest Various Due 03/01 Interest Various Due 09/01 Total - New Interest Total New Principal & Interest Total Debt Service Requirement 2014 23,312,373 23,312,373 2015 25,420,971 230,000 56,404 64,234 120,638 350,638 25,771,609 2016 25,361,852 235,000 64,234 60,709 124,944 359,944 25,721,796 2017 25,347,603 230,000 60,709 58,409 119,119 349,119 25,696,721 2018 25,317,539 230,000 58,409 56,109 114,519 344,519 25,662,058 2019 25,299,256 230,000 56,109 53,809 109,919 339,919 25,639,175 2020 25,267,916 230,000 53,809 51,509 105,319 335,319 25,603,235 2021 25,233,099 230,000 51,509 49,209 100,719 330,719 25,563,818 2022 25,158,448 230,000 49,209 46,909 96,119 326,119 25,484,566 2023 25,117,614 230,000 46,909 43,459 90,369 320,369 25,437,983 2024 26,022,990 230,000 43,459 38,859 82,319 312,319 26,335,309 2025 25,998,737 235,000 38,859 34,159 73,019 308,019 26,306,756 2026 24,336,996 230,000 34,159 29,559 63,719 293,719 24,630,714 2027 24,291,100 235,000 29,559 26,034 55,594 290,594 24,581,694 2028 24,250,587 235,000 26,034 22,509 48,544 283,544 24,534,131 2029 24,221,321 230,000 22,509 18,916 41,425 271,425 24,492,746 2030 15,635,090 230,000 18,916 - 15,322 34,238 264,238 15,899,328 2031 15,599,208 230,000 15,322 11,584 26,906 256,906 15,856,114 2032 15,589,281 230,000 11,584 7,847 19,431 249,431 15,838,712 2033 4,267,769 230,000 7,847 3,966 11,813 241,813 4,509,581 2034 4,233,031 235,000 3,966 3,966 238,966 4,471,997 2035 1,784,856 - 1,784,856 2036 1,013,772 1,013,772 2037 663,938 663,938 2038 654,800 654,800 Totals $459,400,147 $4,625,000 8749,515 $693,111 $1,442,639 $6,067,639 $465,467,782 NEWI4CO: Dated Date: 10/01/2014 Principal Due Dates: 03/01/2015 -03/01/2034 Maturing Amount: 4,625,000.00 PEARLAND GO 2014: NEW14C0 AGGPRIOR Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 @ 11:49 v9.83 • Page-1 City of Pearland, Texas- General Obligation Debt Sources & Uses Report FINAL NUMBERS - Certificates of Obligation, Series 2014 Sources of Funds: Principal Amount of Current Interest Bonds (CIBs) CIB Premium CIB Discount Accrued Interest Total SOURCES of Funds 4,625,000.00 136,741.20 -22,626.15 5,640.36 $4,744,755.41 Uses of Funds: Deposit to Construction Fund 4,622,570.00 Accrued Interest Deposit to D/S Fund 5,640.36 Issuance Expenses: ($114,115.05) Underwriter's Spread 39,626.25 Bond Counsel 18,000.00 Attomey General 4,625.00 Moody's Investors Services 6,000.00 Fitch Ratings 6,000.00 Financial Advisor 17,000.00 Paying Agent 750.00 Printing/Distribution 12,000.00 Miscellaneous 10,113.80 Rounding Amount 2,430.00 Total USES of Funds $4,744,755.41 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 10/16/2014 4,625,000.00 4,739,115.05 3.12395901% 2.80973528% PEARLANO GO 2014: RUNI4CO NEWI4CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 @ 11:49 v9.83 Page-2 Dated Date = 10/01/2014 City of Pearland, Texas- General Obligation Debt FINAL NUMBERS - Certificates of Obligation, Series 2014 Series 2014 Certificates of Obligation Delivery Date = 10/16/2014 Term Bond Bond Coupon Interest - Total Fiscal Year Debt Service Dates Maturities Redemptions Proceeds Rate Yield Price Amount Debt Service Debt Service to Call 03/01/2015 - 230,000.00 232,454.10 3.000 0.150000 101.067000 56,403.65 286,403.65 - 286,403.65 09/01/2015 - - - - - - 64,234.38 64,234.38 350,638.03 64,234.38 03/01/2016 - 235,000.00 243,664.45 3.000 0.310000 103.687000 64,234.38 299,234.38 - 299,234.38 09/01/2016 - - - - - - 60,709.38 60,709.38 359,943.76, 60,709.38 03/01/2017 - 230,000.00 237,801.60 2.000 0.560000 103.392000 60,709.38 290,709.38 - 290,709.38 09/01/2017 - - - - - 58,409.38 58,409.38 349,118.76 58,409.38 03/01/2018 - 230,000.00 238,700.90 2.000 0.860000 103.783000 58,409.38 288,409.38 - 288,409.38 09/01/2018 - - - - - - 56,109.38 56,109.38 344,518.76 56,109.38 03/01/2019 - 230,000.00 238,015.50 2.000 1.180000 103.485000 56,109.38 286,109.38 286,109.38 09/01/2019 - - - - - - 53,809.38 53,809.38 339,918.76 53,809.38 03/01/2020 - 230,000.00 236,035.20 2.000 1.490000 102.624000 53,809.38 283,809.38 - 283,809.38 09/01/2020 - - - - - - 51,509.38 51,509.38 335,318.76 51,509.38 03/01/2021 - 230,000.00 232,477.10 2.000 1.820000 101.077000 51,509.38 281,509.38 - 281,509.38 09/01/2021 - - - - - - 49,209.38 49,209.38 330,718.76 49,209.38 03/01/2022 - 230,000.00 228,433.70 2.000 2.100000 99.319000 49,209.38 279,209.38 - 279,209.38 09/01/2022 - - - - - - 46,909.38 46,909.38 326,118.76 46,909.38 03/01/2023 - 230,000.00 241,479.30 3.000 2.340000 104.991000 46,909.38 276,909.38 - 276,909.38 09/01/2023 - - - - - - 43,459.38 43,459.38 320,368.76 43,459.38 03/01/2024 - 230,000.00 259,076.60 4.000 2.480000 112.642000 43,459.38 273,459.38 - 2,593,459.38 09/01/2024 - - - - - - 38,859.38 38,859.38 312,318.76 - 03/01/2025 - 235,000.00 ' 262,624.25 4.000 2.580000 111.755000 38,859.38 273,859.38 - - 09/01/2025 - - - - - - 34,159.38 34,159.38 308,018.76 - 03/01/2026 - 230,000.00 • 254,412.20 4.000 2.710000 110.614000 34,159.38 264,159.38 - - 09/01/2026 - - - - - - 29,559.38 29,559.38 293,718.76 - 03/01/2027 - (1) 235,000.00 * 232,436.15 3.000 3.106654 98.909000 29,559.38 264,559.38 - - 09/01/2027 - - - - - - 26,034.38 26,034.38 290,593.76 - 03/01/2028 470,000.00 (1) 235,000.00 ' 232,436.15 3.000 3.100000 98.909000 26,034.38 261,034.38 - - 09/01/2028 - - - - - - 22,509.38 22,509.38 283,543.76 03/01/2029 - 230,000.00 ' 228,806.30 3.125 3.170000 99.481000 22,509.38 252,509.38 - - 09/01/2029 - - - - - - 18,915.63 18,915.63 271,425.01 - 03/01/2030 - 230,000.00 * 226,536.20 3.125 3.250000 98.494000 18,915.63 248,915.63 - - 09/01/2030 - - - - - - 15,321.88 15,321.88 264,237.51 - 03/01/2031 - 230,000.00 ' 228,546.40 3.250 3.300000 99.368000 15,321.88 245,321.88 - - 09/01/2031 - - - - - - 11,584.38 11,584.38 256,906.26 - 03/01/2032 - 230,000.00 * 226,386.70 3.250 3.370000 98.429000 11,584.38 241,584.38 - - 09/01/2032 - - - - - - 7,846.88 7,846.88 249,431.26 - 03/01/2033 - (2) 230,000.00 • 226,929.50 3.375 3.473697 98.665000 7,846.88 237,846.88 - - 09/01/2033 - - - - - - 3,965.63 3,965.63 241,812.51 - 03/01/2034 465,000.00 (2) 235,000.00 ' 231,862.75 3.375 3.470000 98.665000 3,965.63 238,965.63 238,965.63 - Total 935,000.00 4,625,000.00 4,739,115.05 1,442,635.09 6,067,635.09 6,067,635.09 5,650,122.49 Acc Int - - - -5,640.36 -5,640.36 - - Grand Ttls 935,000.00 4,625,000.00 4,739,115.05 1,436,994.73 6,061,994.73 6,067,635.09 5,650,122.49 ' - Bonds callable ... 03/01/2024@100.000 TIC (Intl. at expenses) 3.12395901% Average Coupon 3.14285319% TIC (Arbitrage TIC) 2.80973528% Average Life (yrs) ... 9.92 IRS Form 8038-G NIC = 2.848906% (with Adjstmnt of $0.00). Bond Years 45,902.08 WAM (yrs) 9.798169 NIC = 1.349849% (with Adjstmnt of -708,911.05). Term bonds and their respective sinking payments are marked by "(n)" where each "n" identifies each respective term bond. Page-3 PEARLAND_GO 2014: NEWI4CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 ©11:50 v9.83 Page-4 Dated Date 10/01/2014 City of Pearland, Texas- General Obligation Debt Proof of Federal Arbitrage Yield FINAL NUMBERS - Certificates of Obligation, Series 2014 Series 2014 Certificates of Obligation Delivery Date 10/16/2014 Dates Face Amounts Proceeds to: Bondholder(+) Issuer(-) Interest to: Bondholder(+) Issuer(-) Recoverable, Recurring Fees Total Debt Service Disc Term Bond Adjstmt for Yld Calc BAB Total (1) "Direct Pymt" Adjusted Adlustment Cash Flow PV of Adj D/S to 10/16/2014 (D 2.80973528% 10/16/2014 0.00 -4,739,115.05 -5,640.36 0.00 0.00 0.00 0.00 -4,744,755.41 -4,744,755.41 03/01/2015 230,000.00 232,454.10 56,403.65 0.00 286,403.65 0.00 0.00 286,403.65 283,422.58 09/01/2015 0.00 0.00 64,234.38 0.00 64,234.38 0.00 0.00 64,234.38 62,685.14 03/01/2016 235,000.00 243,664.45 64,234.38 0.00 299,234.38 0.00 0.00 299,234.38 287,971.68 09/01/2016 0.00 0.00 60,709.38 0.00 60,709.38 0.00 0.00 60,709.38 57,614.96 03/01/2017 230,000.00 237,801.60 60,709.38 0.00 - 290,709.38 0.00 0.00 290,709.38 272,069.42 09/01/2017 0.00 0.00 58,409.38 0.00 58,409.38 0.00 0.00 58,409.38 53,906.92 03/01/2018 230,000.00 238,700.90 58,409.38 0.00 288,409.38 0.00 0.00 288,409.38 262,489.82 09/01/2018 0.00 0.00 56,109.38 0.00 56,109.38 0.00 0.00 56,109.38 50,359.31 03/01/2019 230,000.00 238,015.50 56,109.38 0.00 286,109.38 0.00 0.00 286,109.38 253,231.41 09/01/2019 0.00 0.00 53,809.38 0.00 53,809.38 0.00 0.00 53,809.38 46,966.12 03/01/2020 230,000.00 236,035.20 53,809.38 0.00 283,809.38 0.00 0.00 283,809.38 244,283.77 09/01/2020 0.00 0.00 51,509.38 0.00 51,509.38 0.00 0.00 51,509.38 43,721.53 03/01/2021 230,000.00 232,477.10 51,509.38 0.00 281,509.38 0.00 0.00 281,509.38 235,636.81 09/01/2021 0.00 0.00 49,209.38 0.00 49,209.38 0.00 0.00 49,209.38 40,619.95 03/01/2022 230,000.00 228,433.70 49,209.38 0.00 279,209.38 0.00 0.00 279,209.38 227,280.76 09/01/2022 0.00 0.00 46,909.38 0.00 46,909.38 0.00 0.00 46,909.38 37,655.95 03/01/2023 230,000.00 241,479.30 46,909.38 0.00 276,909.38 0.00 0.00 276,909.38 219,206.15 09/01/2023 0.00 0.00 43,459.38 0.00 43,459.38 0.00 0.00 43,459.38 33,926.56 03/01/2024 230,000.00 259,076.60 43,459.38 0.00 273,459.38 0.00 0.00 738,459.38 568,491.62 09/01/2024 0.00 0.00 38,859.38 0.00 38,859.38 0.00 0.00 29,559.38 22,440.57 03/01/2025 235,000.00 262,624.25 38,859.38 0.00 273,859.38 0.00 0.00 29,559.38 22,129.68 09/01/2025 0.00 0.00 34,159.38 0.00 34,159.38 0.00 0.00 29,559.38 21,823.10 03/01/2026 230,000.00 254,412.20 34,159.38 0.00 264,159.38 0.00 0.00 29,559.38 21,520.76 09/01/2026 0.00 0.00 29,559.38 0.00 29,559.38 0.00 0.00 29,559.38 21,222.61 03/01/2027 235,000.00 232,436.15 29,559.38 0.00 264,559.38 0.00 0.00 264,559.38 187,312.95 09/01/2027 0.00 0.00 26,034.38 0.00 26,034.38 0.00 0.00 26,034.38 18,177.45 03/01/2028 235,000.00 232,436.15 26,034.38 0.00 261,034.38 0.00 0.00 261,034.38 179,731.73 09/01/2028 0.00 0.00 22,509.38 0.00 22,509.38 0.00 0.00 22,509.38 15,283.81 03/01/2029 230,000.00 228,806.30 22,509.38 0.00 252,509.38 0.00 0.00 252,509.38 169,077.94 09/01/2029 0.00 0.00 18,915.63 0.00 18,915.63 0.00 0.00 18,915.63 12,490.26 03/01/2030 230,000.00 226,536.20 18,915.63 0.00 248,915.63 0.00 0.00 248,915.63 162,085.43 09/01/2030 0.00 0.00 15,321.88 0.00 15,321.88 0.00 0.00 15,321.88 9,838.87 03/01/2031 230,000.00 228,546.40 15,321.88 0.00 245,321.88 0.00 0.00 245,321.88 155,349.73 09/01/2031 0.00 0.00 11,584.38 0.00 11,584.38 0.00 0.00 11,584.38 7,234.16 03/01/2032 230,000.00 226,386.70 11,584.38 0.00 241,584.38 0.00 0.00 241,584.38 148,773.46 09/01/2032 0.00 0.00 7,846.88 0.00 7,846.88 0.00 0.00 7,846.88 4,765.35 03/01/2033 230,000.00 226,929.50 7,846.88 0.00 237,846.88 0.00 0.00 237,846.88 142,441.48 09/01/2033 0.00 0.00 3,965.63 0.00 3,965.63 0.00 0.00 3,965.63 2,342.03 03/01/2034 235,000.00 231,862.75 3,965.63 0.00 238,965.63 0.00 0.00 238,965.63 139,173.59 Totals 4,625,000.00 0.00 1,436,994.73 0.00 6,067,635.09 0.00 0.00 1,295,079.68 0.00 Plus PV of Bond Insurance 0.00 0.00 (1) -Adjustments to cash flow are based on the following "yield to call" optional redemption schedule: NEWI4CO - Call the 03/01/2025 maturity on 03/01/2024 © 100.000 NEWI4CO - Call the 03/01/2026 maturity on 03/01/2024 0 100.000 Page-5 PEARLAND GO 2014: NEWI4CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 ©11:50 v9.83. Page-6 Dated Date =10/01/2014 City of Pearland, Texas- General Obligation Debt Partial Form 8038-G Report (Rev. 11-2000) FINAL NUMBERS -Certificates of Obligation, Series 2014 Series 2014 Certificates of Obligation Delivery Date =10/16/2014 Part III Description of Ob igations. (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 03/01/2034 $4,739,115.05 $4,625,000.00 9.798 years 2.809735% Part IV Uses of Proceeds of Bond Issue (including underwriters' discount 22 Proceeds used for accrued interest 22 5,640.36 23 Issue price of entire issue (enter amount from line 21, column (b)) 23 4,739,115.05 24 Proceeds used for bond issuance costs (including underwriters' discount) 24 114,115.05 ## 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) 29 114,115.05 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here 30 4,625,000.00 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 2014: RUNI4CO NEWI4CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 @ 11:50 v9.83 Page-7 City of Pearland, Texas- General Obligation Debt Issuance Expenses for NEWI4CO FINAL NUMBERS - Certificates of Obligation, Series 2014 Expenses for NEWI4CO Expense Raises Expense Title Type Units Arb Yield Exp has no Affect on Arb Yield Total Underwriter's Spread F 39,626.25 0.00 39,626.25 39,626.25 Bond Counsel F 18,000.00 0.00 18,000.00 18,000.00 Attorney General V 1.000000 0.00 4,625.00 4,625.00 Moody's Investors Services F 6,000.00 0.00 6,000.00 6,000.00 Fitch Ratings F 6,000.00 0.00 6,000.00 6,000.00 Financial Advisor F 17,000.00 0.00 17,000.00 17,000.00 Paying Agent F 750.00 0.00 750.00 750.00 Printing/Distribution F 12,000.00 0.00 12,000.00 12,000.00 Miscellaneous F 10,113.80 0.00 10,113.80 10,113.80 Totals $0.00 $114,115.05 $114,115.05 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 2014: EXPI4CO Prepared by: BOSC, Inc. - Houston, Texas (713) 289-5897 (JHR) 09/22/2014 @ 11:50 v9.83 Page-8 CERTIFICATE FOR RESOLUTION NO. 2014-80 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 July 28, 2014, 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 Keith Ordeneaux Mayor Pro Tem Tony Carbone Councilmember Scott Scherman Councilmember Gary Moore Councilmember Greg Hill Councilmember and all of such persons were present, thus constituting a quorum. Whereupon, among other business, the following was transacted at said meeting: a written RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CERTIFICATES OF OBLIGATION, IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $5,000,000, 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: 4 NAYS: 1 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:3453828.2 Ci ecret OF P (SEAL) SIGNED AND SEALED this July 28, 2014. AND, TEXA ,No IIII,,,.i QV R!:4O'%. Mayor CITY OF PEARLAND, TEXAS HOU:3453828.2 RESOLUTION NO. 2014-80 RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CERTIFICATES OF OBLIGATION, IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $5,000,000, 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 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 2014 in an aggregate principal amount not to exceed $5,000,000 (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 of general circulation in the City, the date of the first publication of the Notice to be at least HOU:3453728.3 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. [signature page follows] HOU:3453728.3 2 PASSED AND APPROVED this ag-VIN day of July, 2014. ATTEST: Sec y of Pearland, Texas 0,1I I I /u,,,/ (SEAL) -4====--) Mayor City of Pearland, Texas HOU:3453728.3 EXHIBIT A NOTICE OF INTENTION TO ISSUE CERTIFICATES NOTICE IS HEREBY GIVEN that the City Council of the City of Pearland, Texas (the "City") will meet at its regular meeting place at City Hall, Pearland, Texas at 6:30 p.m. on the 22nd day of September, 2014, 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 $5,000,000, 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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) professional services rendered in connection with the above listed projects. WITNESS MY HAND AND THE OFFICIAL SEAL OF THE CITY, this 28th day of July, 2014. /s/ City Secretary City of Pearland, Texas HOU:3453728.3 AFFIDAVIT OF PUBLICATION STATE OF TEXAS COUNTIES OF BRAZORIA, FORT BEND AND HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Buzz Crainer, of Pearland Journal, a newspaper published in the Counties of Brazoria, Fort Bend and Harris, Texas, who, being by me duly sworn, upon oath deposes and says: That said newspaper is of general circulation in the City of Pearland, Texas, and that the attached`NOTICE OF INTENTION TO ISSUE CERTIFICATES;'hereto attached, was published in said newspaper in its issues of August 14, 2014; August 21, 2014; 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 Ord- ccount Executive SUBSCRIBED AND SWORN TO before me 1' • 2014. . tf Q _ l ot. Public, State of Texas 94EOFt� ��'.� ''•.Fx•piF. '•' b ��`� y commission expires: �`/�`/‘ (Notary Seal) ,., °3 14-20\ HOU:3476924.1 Bay Area Citizen • FriendswoodJournal • Pearland Journal Sal Notices Legal, Notices NOTICE OF SHERIFF'S SALE ,., THE STATE OF TEXAS ) COUNTY OF BRAZORIA } WHEREAS by virtue of a Order of Sale issued out of the 149th. District Court of Brazoria County, Texas on thel7th day of September;: 2007, in cause 'No. 42082, where the Oakbrook Homeowner's Association. Was/were.Plaintiff and Cynthia S. Freeman was/were Defendants on a judgment rendered on the 17th day of September, 2007 in said Court against Defendant and in favor of the said Plaintiff, for the sum of Three thousand. Three Hundred and Seventy Five Dollars and Forty One cents. ($3,375.41) plus court cost and attorney's fees in the amount of $1,951.00, with Interest thereon from the 2nd day of September, 2007, at the rate of-10% percent per annum..1 did, on the ,25th=day ,of July. 2014. at 8:30 o'clock AM, levy upon thefollowing described lot, tract and, parcel of land situated in Brazoria County, .Texas, as the. property of Cynthia S. Freeman 'to wit: 1603 Oak Place court Pearland. Texas. Lot Nine (9).'"Block`0ne (1) of 'Amending Play: Oakbrook-Subdivision.Section One (1). Reserve " B" in the City of Pearland. Brazoria County: Texas: according`to he Mao or Plat thereof Recorded"inVolume 19 Pages325 326, of the Plat Records of Brazoria County Texas (the' "Property") ' and; on the 2nd day of. September, 2014;-being. the first Tuesday of said month, beginning. at.10:00 o'clock A.M. on said day, in the County Court room of Brazoria' County at 111 E, Locust Angleton Texas, I will offer for sale and sell at publc'auction,'for cash to the highest bidder, all :the right title and interest of: Cynthia.S. Freeman 'in and too said above described property. Witness:my hand this the.25th"day.of July. 2014 ,Charles S :Wagner Sheriff• Brazotia County' Texas.:; By Deputy Michael Gingrich PF 08/07, 08/14, 08/21 Legal Notices ".' NOTICE OF SHERIFFS SALE THE STATE OF TEXAS § COUNTY: OF BRAZORIA - § By virtue of anOrder of Sale issued:"out of the Honorable 239th- Judicial District Court of BRAZORIA County on the 16 day of June: 2014 by the Clerk- thereof;., in the case of; . • PEARLAND INDEPENDENT SCHOOL DISTRICT vs. MIKE D. VEASEY AND MELISSA HILL ' Cause Number: 58958 and to me, as SHERIFF directed and delivered, I will proceed to sell, at 10:00 A.M. on the 2nd day of SEPTEMBER 2014, which is the first Tuesday of said mbrith in' the COMMISSIONER'S COURT ROOM of the Courthouse of. BRAZORIA'County; in the City of ANGLETON, Texas; the following described property, to wit: 0.425 ACRES OF LAND .SITUATED IN LOT 24A BEING THE NORTH 1/2 OF THE SOUTHWEST 1/4 OF THE NORTHWEST 1/4 OF SECTION 18, G.C. SMITH SURVEY, ABSTRACT NO.547, BRAZORIA COUNTY, TEXAS:, **BCAD LEGAL: A0547, H.T. & B R R.,,TRACT 24A, LOT 4 cpRONADO; COUNTRY, ACRES 0.425** (BCAD ACCOUNT NO.: 0547.-0031 340): • Levied on the ]._clay of June 2014;as the property of: MIKE D. VEASEY AND MELISSA HILL to satisfy a judgment amounting` to $1.698.79 plus 'all taxes; penalties, and Attorney fees accrued to the date of sale and all costs recoverable by law in favor of PEARLAND INDEPENDENT SCHOOL,. DISTRICT. *ALL BIDDERS MUST COMPLYWITH SECTION 34.015, OF THE TEXAS; PROPERTY TAX CODE.* GIVEN UNDER MY HAND THIS 16DAY OF RUNE,2014. /s/ Charles Wagner` SHERIFF BRAZORIA COUNTY, TEXAS Bv:'' Ro`nnie Eaton PF 07/3.1, 08/07; 08/14 ter ,h�a� NOTICE TO BIDDERS ' Sealed bids will be received by; the City of Pearland Purchasing '; Division, 3519 Liberty Dr., until 2:00 a.m.,:local time, Tuesday ? August 19. 2014 and all bids will be opened and publicly read in , City Hall, 3519 Liberty Drive, Pearland, TX on that date for: QUARTERLY PREVENTATIVE MAINTENANCE OF HVAC SYSTEMS Bidding forms, specifications and all necessary information may be obtained fromahe fallowing website: httas://oearland.ionwave. net:, 'Bids shall be returned -electronically using the City's a -bid system by'the ;closmg date and time stated above bids, The City reserves the right to reject any or bl or to acde t p any bid or combination ofblds;deemed advantageous to it. Vendors may request bid documents by contacting the Purchasing .Division at (28;1) 652-.1;7.90; or by email atx.o ebids©nearlandtov.' Please -make reference to Bid Number 0814-52. Bid Closing,Date: August 19 2014 Young Lorfing TRMC City; Secretary First Publication: August 7 2014 Second Publication: August 14; 2014 NOTICE OF SHERIFFS SALE THE STATE OF TEXAS § COUNTY OF BRAZORIA • ' " § By virtue of an order of Sale issued out of the Honorable 239th Judicial District Court of BRAZORIA County -on the' 16 day of June, 2014 by the Clerk thereof, in the case of: NOTICE OF;INTENTION TO ISSUE CERTIFICATES 1 NOTICE IS 'HEREBY GIVEN that the City Council of the-.Cityt,,, of Pearland, Texas (the"CM) will meat :at its regularrneeting; place'at City Hall, Pearland Texas at5:30 p.m.. on 22nd day of September, 2014, which is the time and place tentatively set for the passage of an ordinance, and `such other' action ase , may be ;deemed; necessary to authorize the issuance of thCity's certificates of obligation, payable from ad valorem taxation and:a limited (in an;amount notto'exceed: $10,000):: subordinate "pledge of: certain revenues of the water and' sewer system of the City, 'lithe maximumaggregate principal .amount of $5,000,000, bearing interest at any rate or rates,;' not to exceed the maximum interest rate now. or. hereafter.: authorized by law,,as phall be determined within the discretion`. ' of the City Council at the timeof issuance, and maturing over , 'a'period of years not to exceed forty(40)years from the date thereof,,for the purpose of evidencing'theindebtedness of the , City to pay all or any part of the contractual obligations to be incurred for the construction of public works and thepurchase 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) improvements; renovations and: additions to the existing. public works service center located 'dt'East Orange,, Street and, Old Alvin. Road, (di)•acquisition'.of land for and;"tle design and construction of two: new ffre_'stations' located at Yost Road and FM'518 and at Harkey. Road and Fite Road, ;(Iv) project management for: parks, street ,and' facility capitak.projectsfwithln the.City; (v) renovations; to the existing City Hall 'Complex and (vi) professional services rendered in connection with the.above listed projects'• • WITNESSMY HAND'AND THE OFFICIAL SEAL'OFTHE ' CITY:this 28th'dayof July; 2014. City` Secretary. _ Z1 Thursday, August 14, 2014, Page 19 NOTICE -OP SHERIFFS SALE THE STATE OF TEXAS § COUNTY OF BRAZORIA § By virtue of an Order of-:Sale..issued out of the Honorable 2 Judicrah District Coot. of BRAZORIA County on the 16'.day of 2014 by the Clerk thereof, in the case of: -: i P.EARLAND, INDEPENDENT SCHOOL DISTRICT vs ARMANDO t JIM Y AND WIFE EMILIA"C. JIMENEZ 'i " Cause Number:'51427 and to me, as SHERIFF directedan delivered, 1. will proceed to sell, at 10;00-A.M. on the 2nd d `SEPTEMBER 2014, which is the first Tuesday of said month, COMMISSIONER'S'COURT ROAM of the Courthouse pf BRAZORIA C y m1the,Cityof>ANGL•ETON, Texas, -the following described'prape "(,; LOT FIVE (5), BLOCK SIX (6), HICKORY CREEK PLACE, A SUBDIVJSI IN BRAZORIA COUNTY, TEXAS, ACCORDING TO THE .MAP :OR PLAT THEREOF RECORDED IN VOLUME 11, PAGE 1 OF THE PLAT RECORDS, OE..BRAZORIA:000NTY, TEXAS. 21I, * BCAD:LEGALe HICKORY'CREEK. PLACE(PEARLAND), BLK 6 L01541 (87.5') ACRES 0.5022**.,. ,aJ:l: (BCAD ACCOUNT NO.: 4860-0072-000) Levied on'the -16day of June 2014, as the property Of: fo ARMANDO Z. JIMENEZ AND WIFE, EMILLIA C. JIMENEZ , 8(1 to satisfy a judgment amounting to .$13.780.04 plus all taxed,. penalties, and Attorney fees accrued to the date of sale'andall costs recoverable by law in favor of,PEARLAND INDEPENDENT SOHO DISTRICT:::: :-ALL BIDDERS MUST'COMPLY WITH SECTION•34015 OF THE TEAS PROPERTY TAX CODE.* + ' GIVEN UNDER MY HAND THIS 16 DAY OF JUNE. 2014. /s/ ..Charles Wagner SHERIFF BRAZORIA COUNTY, TEXAS )3y: Ronnie Eaton PF 07/31, 08/07, 08/14 -NOTICE OF'RECEIPT'OF APPLICATION AND INTENT TO OBTAIN AIR•PERMfi RENEWAL PERMfi NUMBER:72272 APPLICATION Ethyl Corporation has applied to the Texas Commission on'Egwronmental Oita) TCEQ) for renewal of Air Quality Permit Number 72272, which would authorize:coniinued opppgti of an abrasive blasting facility located at 1000 North South Street, Pasadena, Hams County4 77503. This link to an electronic map of the site or facility's general location isprovided as a jjpb d :ourtesyand not part of the applicationorootice For exactiocahoii, refer to application;`htd; Nww.tcea.texas.eov/assets/public/hb610/index.html?tat=29.744722&'In: 35.168333&zoom=13&tvoe=r. The existing facility Is authorized' to emit the following- ontaminantssparticulate matter including particulate matter with diameters of 10 microne or I and 2 5 microns or less. 21 2014. The application will be available i This application was 'submitted to the TCEQ on July . , pp Awing and copying at the TCEQ central office, TCEO Houston regional office, and the Paep,;.' 'ubliel ibrary ,.1201 Jell Ginn Memorial Drive, Pasadena, Harris County, Texas, beginning the ray of;publication of this notice• The fadltty's compliancene, if any exists, is available;for pllb 'eview in.the_Houston regional office of 1heTCEO aj The yxecutive director has determined theiapplication is administratively` complete and will coFldli 3 technical review of the application. Information -in the. application indicates that this permit rep aould•not resultinan increase ioallowable emissions and would not result in the emission olr ;ontaminantnotpreaously.emitted TheTCEQ:mayactonfhls"applicationwbboutseekingfu oubllc•comment or provldingan opportunllytor a contested •case headngif certalncrle f ' met. 'UBLIC COMMENT You. may submit public comments, or a request for a contestedt ieadng tothe Officeof the Chlef-Clerk at the address below. The TCEQ-will consider alit, E .ommenisiq:developingshoal decision0n ibe epphation;The deadline,to submrtpublic common, IS 15 days:: atternewspaper`notice Is published..After'the deadline for pdblic'commett§-,`. §xecutive director will prepare a responseto all relevant and matenal'or.signifieantpublic coma ssuessuth'an propettysalue8°lno se, haffic safety and2oning are outside of the TCEQ'S jurifdl o•addfess n(ibe pe and process After the technical rewew is pdmplete the execiNve director will cons)der`the comments and preps a response to all relevant and material, orsignificant public comments. If only comments are wen he response to comments along with the executive director's dedsiop on The application wit,th 3e mailed to everyone who submdted'public comments erwho is on the ma ling ristfor this appligt 3nless theiapplication is dire lji ratened to a ceiftested case bearing v;° JPPORTl1NITY FORA CONTESTED CASE HEARING You [nay request a contested case hea The applicant or the executive director may also request That The•appfication be directly referred econtested case hearing after technical review of the applicatiOn..A contested case hearing'?$ Nal proceeding similar to a civ l trial in state district court. Unless Witten for a contes se hearing is hledwithin 15 days from this notice; the executve director may act on the applica o f•nb hearing:' request is received within this 15-day period; no further opportunity for head mill be provided According to the, Texas Clean 4rAct § 382,056(o) a contested case hearjng Of any be granted if the applicants compliance'history ie in the -lowest classification under appl!8! 3ayArea Citizen • Friendswood Journal • Pearland Journal egal Notices Legal Notiee$ ;. Z1 Thursday, August L I, zu I4, rage no Legal Notices :_- Legal Notices.: s Legal Notices; Legal Notices LEGAL NOTICE ' Notice is hereby given in accordance with the provisions of the Texas Alcoholic Beverage Code that Malibu Ventures, LLC dba Malibu Steak & Sea, Food is making application with the Texas Alcoholic Beverage Commission for a Mixed beverage restaurant permit with FB and mixed beverage late hours permit to be located at 6425 Broadway in the City of Pearland , Brazoria County, Texas. Officers: Shivendra Rai - Manager. PF 08/21, 08/28 NOTICE TO PROPOSERS Sealed proposals, two (2) originals and five (5) digital copies, marked "Buffet Style Dinner Meals for the Theater" will be received by the City Secretary, City of Deer Park City Hall, 710. East San Augustine Street, Deer Park, Harris County, Texas, until 2:00 o.m on Thursday. August 28. 2014 at which time the proposals are to be opened and publicly read in the Council Chambers. (Per Council Chambers clock). A REQUIRED pre -proposal meeting will be held at 9:00 a.m. on Monday. August 18, 2014 at the Theater/Court Building located at 1302 Center Street, Deer Park, Texas 77536. - The City of Deer Park does not accept emailed or fazed proposals. Proposals are to be submitted on bidders own'forms including name of bidder, contact and telephone number.' City reserves the right to reject any and all bids, or parts of bids; to waive any and all technicalities, and to accept any bid, orpart of bid, which it deems advantageous to itself. - BY ORDER OF THE CITY COUNCIL OF DEER PARK, TEXAS Dated this 6th day of August, 2014. Sandra Watkins, TRMC, CMC City Secretary, City of Deer Park, Texas DP 08/14, 08/21 NOTICE OF SHERIFF'S SALE THE STATE OF TEXAS 1 COUNTY OF BRAZORIA } WHEREAS by virtue of:a Order of Sale issued out of the 149th District Court of Brazoria County, Texas on the 17th day of September, 2007, incauseNo. 42082, wherethe-Oakbrook: Homeowner's Association. Was/were Plaintiff and Cynthia S. Freeman was/were Defendants on a judgment rendered on the 17th-day of September 2007 in said Court .against Defendant and in favor of the said Plaintiff, for the sum of Three thousand. Three Hundred and Seventy Five Dollars and Forty One cents. ($3,375.41) plus court cost and attorney's fees in the amount of $1,951.00, with Interest thereon from the 2nd day of, September, 2007, at the rate of 1036 percent per annum. I did on the:25th dayofJuly. 2014 at 8:30 o'clock AM, levy upon the following described lot, tract and parcel of land situated in Brazoria County, Texas, as the property of Cynthia S. Freeman to wit: 1603 Oak Place court Pearland. Texas. Lot Nine (9). Block One (1) of Amendin¢ Play. Oakbrook Subdivision. Section One (1). Reserve "B" in the City of Pearland, Brazoria County. Texas. according to the Mao or Plat thereof Recorded in Volume 19. Pages 325-326. of the Plat Records of Brazoria County. Texas (the "Property") and on the 2nd day of September, 2014, being the first Tuesday of said month, beginning at 10:00 o'clock A.M. on said day, in the County Court room of Brazoria County at 111-E, Locust Angleton, Texas, l will offer for sale and sell at public auction, for cash to the highest bidder, all the right, title and interest of: Cynthia S. Freeman in and too said above: described property. Witness my hand this the 25th day of July. 2014 , Charles S. Wagner, Sheriff Brazoria 'County, Texas By Deputy Michael Gingrich PF 08/07, 08/14,. 08/21 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 6:30 p.m. on the 22nd. day of September, 2014, 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 $5,000,000, beating 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 heeds and purposesand for the payment of contractual obligations for professional services, to wit: (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land. for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; _Qv) project management for parks, street and'. _facilitycapital projects —Within the City; (v) renovations to the existing City Hall Complex; and (vi)'professional services rendered in connection with the above listed projects. WITNESS MY HAND AND THE OFFICIAL SEAL OF THE ;CITY, -this 28th dayof July2014 City Secretary. a, City of'Pearla rd e' as • NOTICE OF PUBLIC HEARING ON THE PROPOSED OPERATING BUDGET OF THE CITY OF PEARLAND` FOR THE FISCAL YEAR 2014-2015 The City Council of the City of Pearland, Texas, will hold a Public Hearing on the operating budget for Fiscal Year 2014-2015, at 6:30 p.m., on September 2, 2014 In the Council Chambers, City Hall, 3519 Liberty Drive, Pearland, Texas. The budget is estimated to raise more revenue from property taxes than last year's budget by $3,285,438 or 8.6%D, and of that amount $1,853,751 is tax revenue to be raised from new property added to the tax roll this year. ADVERTISEMENT. RR BIDS -d Drymalia:Construction is excepting sub bids for.. the Additionrk and Renovations School for Clear Creek ISD. Plans are at www. drymallaplans.com. Bids are due by September 5, 2014 at. 2:00pm fax 979-732-3663 or.bids@dryrnalla.com. BA 08/21, 08/28 - Your LOCAL Businesses and Services Nace,youp@cl• fq(1,dit hcnooltrte coin Cell us Monday- Friday between 8.00 5:00 pm 855-722-3900 At said hearing all interested parties shall have the right and opportunity to appear and be heard on the subject. Young Lolling, TRMC City Secretary A/C, Heating Sales & Service This site is accessible to disabled individuals. For special assistance, please call Yountl Lorfinq at 281 652.1655, prior to the meeting so that appropriate arrangements can be made. --3Ton A/C Installed Only $169.5.00 3 Ton Complete System Only $2999.00 Senior Citizens, Veterans, Teachers & Police Deparimen RESIDENTIAL & COMMERCIAL 24 HOUR SERVICE ' Licit TACLA11596C INNotice of Project of the Seabrook Economic Development Corporation.OTICI HEREBirtirtri that -the ,SealirookL-EconbmiDeveloppmentCorporation ("SEDC") intends to undertake a project ("the project') for economic development' including -expenditures consistent with the purposes and duties as a Type B corporation. SEDC is proposing to expend SEDC sales tax funds for the following Project: "Development of a Comprehensives Master Plan in an amount not to exceed $100,000." : - - 281-471-2725 Air Conditioning & Heating $25 Service Call with this coupon reg. $45 www.DeerParkAC.com 2013 Best of Pasadena & Deer Park Air Conditioning Reader's. Choice Award Brico Service. s LLC (832)878-8146 TACLB15136E • 27 years experience FREE FREdpN WITH, CHI:CK-UP SCHIELD A/C CALL TODAY 281-387-8795 TACL# A3552P •++.+ +++ COUPON South1. Belt r Aid! PO LUE'AT 111%Tf CERTIFICATE FOR ORDINANCE NO. 2014-1503 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 September 22, 2014, 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 Keith Ordeneaux Mayor Pro-Tem Tony Carbone Councilmember Scott Sherman Councilmember Gary Moore Councilmember Greg Hill Councilmember 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 2014; PRESCRIBING THE TERMS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES 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:3476919.I SIGNED AND SEALED this .�Q_e a ___ J014. ecretary OF PELAND, I XAS `‘01111111,, Cn= (SEAL) i iiiiiitiOs- Mayor CITY OF PEARLAND, TEXAS HOU:3476919.1 ORDINANCE NO. 2014-1503 ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2014; PRESCRIBING THE TERMS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; MAKING OTHER PROVISIONS REGARDING SUCH CERTIFICATES 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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; 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 2014 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 6:30 p.m. on September 22, 2014 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:3459458.4 (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 September 22, 2014, 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. "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 2014, 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 2014 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. HOU:3459458.4 "Interest Payment Date," when used in connection with any Certificate, shall mean March 1, 2015, 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, N.A., Minneapolis, Minnesota 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. 3 HOU:3459458.4 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 FOUR MILLION SIX HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($4,625,000) 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 2014," and shall be dated October 1, 2014. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of the October 1, 2014 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, 2015, 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 3/1/2015 $230,000 3.000% R-2 3/1/2016 235,000 3.000 R-3 3/1/2017 230,000 2.000 R-4 3/1/2018 230,000 2.000 R-5 3/1/2019 230,000 2.000 4 HOU:3459458.4 Certificate Year of Principal Interest Number Maturity Amount Rate R-6 3/1/2020 230,000 2.000 R-7 3/1/2021 230,000 2.000 R-8 3/1/2022 230,000 2.000 R-9 3/1/2023 230,000 3.000 R-10 3/1/2024 230,000 4.000 R-11 3/1/2025 235,000 4.000 R-12 3/1/2026 230,000 4.000 *** *** *** *** R-13 3/1/2028 470,000 3.000 R-14 3/1/2029 230,000 3.125 R-15 3/1/2030 230,000 3.125 R-16 3/1/2031 230,000 3.250 R-17 3/1/2032 230,000 3.250 *** *** *** *** R-18 3/1/2034 465,000 3.375 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 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, 2025, are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 1, 2024, or any date thereafter, at par plus accrued interest to the date fixed for redemption. 5 HOU:3459458.4 (b) Mandatory Redemption. The Certificates maturing on March 1 in the year 2028 and 2034, (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, 2028 March 1, 2027 $235,000 March 1, 2028 (stated maturity) 235,000 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 1, 2034 March 1, 2033 $230,000 March 1, 2034 (stated maturity) 235,000 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. 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 6 HOU:3459458.4 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 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 HOU:3459458.4 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. 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 8 HOU:3459458.4 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 Only 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. (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 9 HOU:3459458.4 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. 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. 10 HOU:3459458.4 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 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. 11 HOU:3459458.4 Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2014 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, N.A., Minneapolis, Minnesota 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. 12 HOU:3459458.4 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. 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, Raymond James & Associates, Inc. at a price of $4,699,488.80 (which is the par amount of the Certificates plus a premium on the Certificates of $74,488.80), 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 and produced the lowest net effective interest rate. 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 herebyauthorized 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 13 HOU:3459458.4 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 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. 14 HOU:3459458.4 (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 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 15 HOU:3459458.4 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 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. 16 HOU:3459458.4 (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 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. 17 HOU:3459458.4 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. 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. 18 HOU:3459458.4 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 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" (except under the subheading "Estimated Overlapping Taxes"), "TAX DATA" "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. 19 HOU:3459458.4 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; (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. 20 HOU:3459458.4 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. 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. 21 HOU:3459458.4 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. 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] 22 HOU:3459458.4 PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this September 22, 2014. CITY OF PEARLAND, TEXAS 24:d Mayor ATTEST (SEAL) Exhibit A — Form of Certificate Exhibit B — Paying Agent/Registrar Agreement Exhibit C - Bid Form S-1 HOU:3459458.2 EXHIBIT A FORM OF CERTIFICATE UNITED STATES OF AMERICA STATE OF TEXAS CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATION, SERIES 2014 NUMBER DENOMINATION IR- REGISTERED REGISTERED 21NTEREST RATE: 2MATURITY DATE: March 1, REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS DATED DATE: October 1, 2014 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, N.A., 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 most recent 1 Initial Certificate shall be numbered I-1. 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 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 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:3459458.4 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, 2015, 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 [$4,625,000] issued pursuant to an ordinance adopted by the City Council of the City on September 22, 2014 (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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) professional services rendered in connection with the above listed projects. 4THIS 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, 2025, in whole or in part, on March 1, 2024, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES maturing on March 1 in the year , (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, 20_ March 1, 20_ $ March 1, 20 (stated maturity) 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 4 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:3459458.4 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:3459458.4 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:3459458.4 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 THE STATE OF TEXAS REGISTER NO. 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 [SEAL] Comptroller of Public Accounts of the State of Texas * * * 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 By Authorized Signature Date of Authentication: * * * A-5 HOU:3459458.4 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: NOTICE: Signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in every particular, without any alteration, enlargement or change whatsoever. * * * HOU:3459458.4 A-6 EXHIBIT B PAYING AGENT/REGISTRAR AGREEMENT SeeTab8 B-1 HOU:3459458.4 EXHIBIT C Bid Form See Tab #8 C-1 HOU:3459458.4 CITY OF PEARLAND, TEXAS (Brazoria, Fort Bend and Harris Counties, Texas) PRELIMINARY OFFICIAL STATEMENT DATED: SEPTEMBER 10, 2014 $4,625,000* CERTIFICATES OF OBLIGATION SERIES 2014 BIDS DUE: 11:00 A.M., HOUSTON TIME MONDAY,. SEPTEMBER 22, 2014 BIDS TO BE AWARDED: 6:30 P.M., HOUSTON T1'ME MONDAY, SEPTEMBER 22, 2014 A.,stA diary of t in9tlCt :l`Et�i (i:;. Financial Advisor Preliminary; subject to change. See "THE CERTIFICATES — Adjustment of Principal' Amounts." U . 5 .5 U 0 o 0 o mt $4,625,000* � CITY OF PEARLAND, TEXAS '� 5 (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) PRELIMINARY OFFICIAL STATEMENT DATED SEPTEMBER 10, 2014 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. The Certificates have NOT been designated as "Qualified Tax -Exempt Obligations for Financial Institutions." NEW ISSUE: BOOK -ENTRY -ONLY RATINGS: Moody's Investors Service, Inc.. "Aa2" Fitch Ratings "AA" "SALE AND DISTRIBUTION OF THE CERTIFICATES — Municipal Bond Ratings" o. , CERTIFICATES OF OBLIGATION, SERIES 2014 • o a Dated: October 1, 2014 Due: March 1; as shown below 5 Q o Principal of and interest on the $4,625,000* City of Pearland, Texas, Certificates of Obligation, Series 2014 (the "Certificates") are payable by Wells 0 Fargo Bank, N.A., Minneapolis, Minnesota, the initial paying agent/registrar (the "Paying Agent/Registrar"). The Certificates are initially registered and o 0 o delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book -Entry -Only System described herein. o cd Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the A 4+4 a Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar 0 .6 to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Certificates. See "THE CERTIFICATES - Book- d ,-. Entry -Only System" herein. U • ' o Interest on the Certificates will accrue from October 1, 2014 and is payable on March 1 and September 1 of each year, commencing March 1, 2015, to the r interest payment dateistered owners r(the "RecCeord Date") pe & Co.) Seering THE CERTIFICATES Descriptionon the registration books of the . Agent/Registrar on the 15th day of the month preceding each o The Certificates, when issued, will constitute valid and bindingCertificates of the Cityof Pearland, Texas(the "City")and will be payable from the 0 0 p Y 0. o o proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's waterworks and sewer system (the "System") 0 a .N — in an amount not to exceed $10,000. See "THE CERTIFICATES - Source of Payment." cd a r '3 :do The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local o 0 Government Code, as amended, Chapter 1434, Texas Government Code, as amended, and an ordinance (the "Certificate Ordinance") to be approved by . , .� i City Council on September 22, 2014. See "THE CERTIFICATES —Authorization of the Certificates." n 0 K 8 Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service center located E 0 at East Orange Street and Old Alvin Road; (iii) acquisition (Aland for and the design and construction of two new fire stations located at Yost Road and u FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the • existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds" and "- Sources and cd n • o Uses of Funds." • o PRINCIPAL AMOUNTS, MATURITIES., INTEREST RATES AND PRICES 0•o (Due March 1) O,.a c 0 Initial CUSIP Initial CUSIP o.• Maturity Principal Interest Reoffering Nos. Maturity Principal Interest Reoffering Nos. ., '74 ((March 1) Amount* Rate Yield (a) 704862 (b) (March 1) Amount* Rate Yield (a) 704862 (b) 0 2015 $230,000 % % 2025(c) $235,000 F. N P s g 2016 235,000 2026(c) 230,000 5 - o • 2017 230,000 2027(c) 235,000 r ' V. 2018 230,000 2028(c) 235,000 U '' 2019 230,000 2029(c) 230,000 U 4 Ly 2020 230,000 2030(c) 230,000 �, ? 2021 230,000 2031(c) 230,000 0 0 2022 230,000 2032(c) 230,000 o 0 'o 2023 230,000 2033(c) 230,000 0 4.1g o `P 2024 230,000 2034(c) 235,000 ;;; * Preliminary, subject to change. o (a) The initial yields will be established by and are the sole responsibility of the Initial Purchaser, and may subsequently be changed. d 0 (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 13anker Association, and are included solely for the convenience of the registered owners of the Certificates. Neither the City, the a y Financial Advisor, nor the Initial Purchaser are responsible for the selection or correctness of the CUSIP numbers set forth herein. ',-;,,--)1 (c) TheCertificates maturing on March 1, 2025* and thereafter, are subject to redemption on March 1, 2024* 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 >✓`: u 0 - 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 October 16, 2014. SELLING: MONDAY, SEPTEMBER 22, 2014 AT 11:00 A.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 final" 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. Cert f cates, shall constitute a "final official statement" of the City with respect to the Certificates, 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, TIE INITIAL PURCHASER 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. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader's convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this final official statement for purposes of, and as that term is defined in, SEC rule 15c2-12. TABLE OF CONTENTS INTRODUCTORY STATEMENT 3 SALE AND DISTRIBUTION OF THE CERTIFICATES 3 Sale of the Certificates 3 Prices and Marketability 3 Securities Laws 3 . Municipal Bond Ratings 4 OFFICIAL STATEMENT SUMMARY 5 INTRODUCTION 8 THE CERTIFICATES 8 Description _ 8 Redemption Provisions 8 Notice of Redemption 9 Book -Entry -Only System 9 Successor Paying Agent/Registrar 11 Source of Payment 11 Authorization of the Certificates 11 Use of Proceeds 11 Sources and Uses of Funds 11 Future Debt 12 Legal Investments and Eligibility to Secure Public Fund in Texas 12 Remedies in the Event of Default 12 INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY 13 Legal Investments 13 Investment Policies 14 Current Investments 14 Additional Provisions 15 CITY TAX DEBT 16 Tax Supported Debt Statement 16 Bonded Indebtedness Payable from Ad Valorem Taxes 16 Pro -Forma Tax Supported Debt Service Schedule 17 Estimated Overlapping Debt 18 Debt Ratios 18 TAX DATA 19 General 19 Property Tax Code and County -Wide Appraisal District 19 Tax Rate Limitations 19 Property Subject to Taxation by the City 19 Tax Increment Reinvestment Zone 20 Notice and Hearing Procedures 21 Levy and Collection of Taxes 21 Collection of Delinquent Taxes 22 Historical Analysis of Tax Collection 22 Analysis of Tax Base 24 Sales Tax 25 SELECTED FINANCIAL DATA 26 Historical Operations of the City's General Fund 26 General Fund and Debt Service Fund Balance for the Past Five Fiscal Years 26 Pension Fund 26 Financial Statements 27 ADMINISTRATION OF THE CITY 27 Mayor and City Council 27 Administration 27 Consultants 28 LEGAL MATTERS 28 Legal Opinions 28 No -Litigation Certificate 29 No Material Adverse Change 29 TAX EXEMPTION 29 Proposed Tax Legislation 30 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES 30. Discount Certificates 30 Premium Certificates 31 CONTINUING DISCLOSURE OF INFORMATION 31 Annual Reports 31 Material Event Notices 32 Availability. of Information 32 Limitations and Amendments 33 Compliance With Prior Undertakings 33 FINANCIAL ADVISOR 33 GENERAL CONSIDERATIONS 33 Sources and Compilation of Information 33 Certification as to Official Statement 33 Forward Looking Statements 34 Updating of Official Statement 34 APPENDIX A — Economic and Demographic Characteristics APPENDIX B — Audited Financial Statements of the City APPENDIX C — Form of Bond Counsel Opinion CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) $4,625,000* CERTIFICATES OF OBLIGATION, SERIES 2014 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 $4,625,000* Certificates of Obligation, Series 2014 (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 a syndicate composed of ("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 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 Bonds, the City has made application to Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings, Inc. ("Fitch") for a rating and a rating of "Aa2" and "AA", respectively, have been assigned to the Bonds. The City has furnished to Moody's and Fitch certain information and materials relating to the Bonds and the City, including certain information and materials which have not been included in this Official Statement. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the view of such organization and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating company, if in the judgment of such rating company, circumstances so warrant. 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 $4,625,000* Certificates of Obligation, Series 2014 (the "Certificates"), are dated October 1, 2014 and mature March 1, 2015 through March 1, 2034. Interest on . the Certificates accrues from October 1, 2014, and is payable initially on March 1, 2015, 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 fore in integral multiples of $5,000. The Certificates maturing on and after March 1, 2025 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, March 1, 2024 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 September 22, 2014. See "THE CERTIFICATES - Authorization of the Certificates." Paying Agent/Registrar The initial paying agent/registrar is Wells Fargo Bank, N.A., Minneapolis, Minnesota (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 The Certificates, when issued, will constitute valid and binding Certificates of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and 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." Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service`center located at East Orange Street and Old .Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use' of Proceeds" and "- Sources and Uses of Funds." Ratings Moody's Investors Service, Inc. • "Aa2" Fitch Ratings "AA" Payment Record.. The City has never defaulted on the timely payment of principal of and interest on its indebtedness. Preliminary, subject to•change. 5 Tax Exemption In the opinion of Bond Counsel, interest on the Certificates are 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) 2014 Adjusted Net Taxable Assessed Valuation $ 7,600,947,549 (a) (100% of market value) 2013 Adjusted Net Taxable Assessed Valuation $ 7,001,455,019 (b). (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2014) $ 306,395,000 (c)(d) Plus: The Certificates 4,625,000 * Total Tax Supported Debt $ 311,020,000 * Estimated Overlapping Debt $ 640,818,464 Direct and Estimated Overlapping Debt $ 951,838,464 Debt Service Fund Balance (as of June 30, 2014) $ 10,454,963 % of 2014 • % of 2013 Per Assessed Assessed Capita Valuation Valuation (106,900) Debt Ratios: Direct Tax Supported Debt 4.09% 4.44% $ 2,909 Direct Tax Supported and Estimated Overlapping Debt 12.52% 13.59% $ 8,904 2013• Tax Rate (per $100 of Assessed Valuation) Maintenance and Operation $ 0.2151 Debt Service 0.4900 Total $ 0.7051 Estimated Annual Debt Service Requirements: (c)(d) Average (Fiscal Years 2014-2038) $ 18,714,289* Maximum (2024) $ 26,374,740* Tax Collections: Arithmetic Average, Tax Years (2008-2012)- Current Year Collections - Total Collections 99.00% 99.74% * 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 $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. (c) Includes a portion of the City's Permanent improvement and Refunding Bonds, Series .2009 and Permanent Improvement Bonds, Series 2012, which is paid by the water and sewer system. (d) Includes the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which are expected to be delivered on September 23, 2014. 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 $4,625,000* Certificates of Obligation, Series 2014 (the "Certificates"). The Certificates, when issued, will constitute valid and binding Certificates of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and 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." 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 October 1, 2014 and bear interest from such date at the stated interest rates indicated on the cover page of this Official Statement, which interest is payable initially on March 1, 2015, 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, Minneapolis, Minnesota (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 satisfactoryevidence 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, 2025 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on March 1, 2024, or any date thereafter, at the option of the City at a price equal to the principal amount thereof plus accrued interest from the most recent interest payment date to the date of redemption. If less than all of either series of the Certificates are redeemed at any time, the maturities of such series of Certificates to be redeemed shall be selected by the City. If less than all of a maturity of a series Certificates is 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 Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (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. 8 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 '9, 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 onfile 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 ale 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 inust 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 9 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 maybe 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. 10 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, when issued, will constitute valid and binding, Certificates of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's System in an amount not to exceed $10,000.. Authorization of the Certificates The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and the provisions of the Certificate Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Certificate Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates, as a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES — Sources and Uses of Funds." 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: Underwriters' Discount Other Issuance Expenses Total Uses of Funds 11 Future Debt After the sale of its $40,410,000 Permanent Improvement and Refunding Bonds Series 2014, which are expected to be delivered on September 23, 2014, the City will have $83,580,000 of authorized but unissued bonds. The City plans to issue such authorized bonds over the next five years. The City also intends to issue approximately $9,210,000* in water and sewer system revenue bonds simultaneously with the Certificates. The City may also issue additional certificates of obligation. for City projects. Depending on the rate of development within the City, changes in assessed valuation, and the amounts, interest rates, maturities and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds, the Bonds, and such 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. 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. Such registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem. tax sufficient to pay principal of and interest on the Certificates as it becomes due. 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. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W.3rd 325 (Tex. 2006) ("Tooke") that a waiver of sovereign immunity must be provided for by statute in "clear and unaibiguous" language. In so ruling, the Court declared that statutory Language such as ."sue and be sued",in and of itself, did not constitute a clear and unambiguous waiver of sovereign immunity. In Tooke, the Court noted the enactment in 2005 of sections 271.151-.160, Texas Local Government Code (the "Local Government Immunity Waiver Act"), which, according to the Court, waives "immunity from suit for contract claims against most local governmental entities in certain circumstances." The Local Government Immunity Waiver Act covers cities and relates to contracts entered into by cities for providing goods or services to cities. The City is not aware of any Texas court construing the Local Government Immunity Waiver Act in the context of whether contractual undertakings of local governments that relate to their borrowing powers are contracts covered by the Act. Neither the remedy of mandamus nor any other type of injunctive relief was at issue in Tooke, and it is unclear whether Tooke will be construed to have any effect with respect to the exercise of mandamus, as such remedy has been interpreted by Texas courts. In general, Texas courts have held that a writ of mandamus may be issued to require public officials to perform ministerial acts that clearly pertain to their duties. Texas courts have held that a ministerial act is defined as a legal duty that is prescribed and defined with a precision and certainty that leaves nothing to the exercise of discretion or judgment, though mandamus is not available to enforce purely contractual duties. However, mandamus may be used to require a public officer to perform legally -imposed ministerial duties necessary for the performance of a valid contract to which the State or a political subdivision of the State is a party (including the payment of monies due under a contract). Preliminary, subject to change. 12 The Ordinance does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. The opinion of Bond Counsel will note that the rights of bondholders are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. 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, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of. the United States; (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 (i) meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code) 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 or, (ii) 'where (a) the funds are invested by the City through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the City as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the City; (iii) the broker or the depository institution selected by the City arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the City; (iv) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (v) the City appoints the depository institution selected under (ii) above, an entity as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker -dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the City with respect to the certificates of deposit issued for the account of the City; (8) fully collateralized repurchase agreements that have a defined termination date, are secured by .a combination of cash and obligations described in clause (1) require the securities being purchased by the City or cash held by the City to be pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City, and are placed. through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State of Texas; (9) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency; (10) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the ,equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (11) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share;.and (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, 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 below. 13 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 of Texas; 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. Alt 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 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 May 31, 2014 were as follows: Face Principal Market Book Amount Invested Value Value Cash $ 9,605,323 $ 9,605,323 $ 9,605,323 $ 9,605,323 Certificates of Deposit 15,632,421 15,632,421 15,630,125 15,632,421 Government Securities 21,509,000 21,528,770 21,571,382 21,499,333 Total Portfolio $96,746,744 $96,766,514 $96,806,830 $96,737,077 14 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 nomore 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] 15 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 2014 Adjusted Net Taxable Assessed Valuation $ 7,600,947,549 (a) (100% of market value) 2013 Adjusted Net Taxable Assessed Valuation $ 7,001,455,019 (b) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2014) $ 306,395,000 (c)(d) Plus: The Certificates 4,625,000 Total Tax Supported Debt $ 311,020,000 Debt Service Fund Balance (as of June 30, 2014) $ 10,454,963 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 $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. (c) Includes a portion of the City's Permanent Improvement and Refunding Bonds, Series 2009 and Permanent Improvement Bonds, Series 2012, which is paid by the water and sewer system. (d) Includes the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which are expected to be delivered on September 23, 2014. [Remainder of Page Intentionally Left Blank] 16 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* Debt Service 9/30 Service (a) Principal* Interest (b) Total Requirements 2014 $ 24,791,541 $ 24,791,541 2015 25,420,971 $ 230,000 $ 264,042 $ 494,042 25,915,013 2016 25,361,852 235,000 213,875 448,875 25,810,727 2017 25,347,603^ 230,000 202,250 432,250 25,779,853 2018 25,317,539 230,000 190,750 420,750 25,738,289 2019 26,299,256 230,000 179,250 409,250 25,708,506 2020 25,267,916 230,000 167,750 397,750 25,665,666 2021 25,233,099 230,000 156,250 386,250 25,619,349 2022 25,158,448 230,000 144,750 374,750 25,533,198 2023 25,117,614 230,000 133,250 363,250 25,480,864 2024 26,022,990 230,000 121,750 351,750 26,374,740 2025 25,998,737 235,000. 110,125 345,125 26,343,862 2026 24,336,996 230,000 98,500 328,500 24,665,496 2027 24,291;100 235,000 86,875 321,875 24,612,975 2028 24,250,587 235,000 75,125 310,125 24,560,712 2029 24,221,321 230,000 63,500 293,500 24,514,821 2030 15,635,090 230,000 52,000 282,000 15,917,090 2031 15,599,208 230,000 40,500 270,500 15,869,708 2032 15,589,281 230,000 29,000 259,000 15,848,281 2033 4,267,769 230,000 17,500 247,500 4,515,269 2034 4,233,031 235,000 5,875 240,875 4,473,906 2035 1,784,856 1,784,856 2036 1,013,772 1,013,772 2037 663,938 663,938 2038 654,800. 654,800 Totals $460,879,313 $4,625,000 . $2,352,917 $6,977,917 $467,857,230 * Preliminary, subject to change. (a) Includes the results of the $40,410;000 Permanent Improvement and Refunding Bonds, Series 2014 which are expected to be delivered on September 23, 2014 and general obligation debt service requirements paid with water and sewer. system revenues. (b). Interest estimated at 'current market rates for illustrative purposes only. Preliminary, subject to change. Estimated Average Annual Requirements (2014-2038) Estimated Maximum Annual Requirement (2024) $18,714,289(a) $26,374,740(a) Principal Payout (All Tax Supported Bonds) 25.05% in 5 years 51.47% in 10 years 82.93% in 15 years 98.81% in 20 years (a) Includes the Certificates and $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014. Preliminary, subject to change. 17 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. Taxing Jurisdiction Debt as of June 1, 2014 Alvin Community College District Alvin ISD Brazoria County Brazoria County MUD No. 17 Brazoria County MUD No. 18 Brazoria County MUD No. 19 Brazoria County MUD No. 23 Brazoria, County MUD No. 26 Brazoria County MUD No. 28 Brazoria County MUD No. 34 Brazoria County MUD No. 35 Brazoria-Fort Bend County MUD No. 1 Fort Bend County Harris County (a) Harris County Dept. of Education Harris County Flood Control District Pasadena ISD Pearland ISD Port of Houston Authority TOTAL ESTIMATED OVERLAPPING The City (b) Total Direct and Estimated Overlapping Debt $ 14,380,000 463,780,000 90,265,000 28,085,000 29,355,000 36,370,000 17,035,000 38,160,000 23,235,000 27,800,000 9,010,000 63,580,000 448,570,000 2,415,028,704 7,410,000 129,525,000 590,315,000 290,825,000 717,624,397 Overlapping Percent Amount 28.36% 31.50 24.14 100.00 97.35 100.00 100.00 100.00 100.00 100.00 100.00 71.73 0.25 0.13 0.13 0.13 0.14 71.79 0.13 100.00% $ 4,078,168 146,090,700 21,789,971 28,085,000 28,577,093 36,370,000 17,035,000 38,160,000 23,235,000 27,800,000 9,010,000 45,605,934 1,121,425 3,139,537 9,633 168,383 826,441 208,783,268 932,912 $640,818,464 311,020,000 $951,838,464 (a) Harris County Toll. Road Bonds are considered self-supporting and are not included in the amount shown for Harris County. (b) Preliminary, subject to' change. Includes the Certificates and the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which are expected to be delivered on September 23, 2014. Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2014 Assessed Valuation ($7,600,947,549) (a) 4.09% 12.52% Per 2013 Assessed Valuation ($7,001,455,019) (b) 4.44% 13.59% Per Capita (106,900) $2,909 $8,904 (a) Includes $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. 18 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 taximposed 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 Horne 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 19 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 $202,181,012 from the 2013 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 $5,341,272 of such property that was subject to abatement January 1, 2013. 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 $52,432,738 on the 2013 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 andtransported 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 "TIP 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 fora 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. 20 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 2013, the assessed value attributable to the TIRZ is $1,562,848,106. 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 "r-ollbaclk 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. 21 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 Tax Year 2003 2004 2005 2006, 2007 2008 2009 2010. 2011 2012 2013 Net Assessed Valuation (a) $2,355,280,316 3,019,449,422 3,576,439,129 4,412,821,949 5,3 89,790,165 5,904,826,560 6,269,047,937 6,331,723,029 6,369,626,981 6,539,521,484 7,001,455,019(b)(d) - Collection Ratios - • Tax Rate % of Collections Fiscal Per $100 of Current Year Assessed Adjusted Year Current and Ending Valuation Tax Levy (a) Collection Prior Years 9-30 $0.696000 $18,030,473 98.03% 100.02% 2004 0.694800 21,073,788 98.08 99.68 2005 0.674400 24,284,597 97.08 99.70 2006 0.652659 . 28,819,229 98.14 100.14 2007 0.652600 35,035,569 98.40 99.74 2008 0.652600 38,368,354 98.57 100.70 2009 0.652600 41,081,407 98.81 98.81 2010 0.665100 41,968,046 99.11 100.28 2011 0.685100 43,441,792 99.24 99.63 2012 0.705100 45,850,625 99.26 99.30 2013 0.705100 49,097,794 98.87(c) 99.25(c) 2014 (a) Includes assessed value attributable to the TIRZ and tax levy adjusted year 2007. (b) Includes $1,562,848,106 in assessed valuation attributable to the T1RZ. valuation attributable to the TIRZ are not available to make debt service (c) Collections as of June 30, 2014. (d) Adjusted tax roll. 22 for Senior Tax Freeze effective in tax Tax revenues generated from assessed payments on the Bonds. - Tax Rate Distribution - 2013 2012 2011 2010 2009 Maintenance $0.2151 $0.2151 $0.2151 $0.2151 $0.2201 Debt Service 0.4900 0.4900 0.4700 0.4500 0.4325 Total $0.7051 $0.7051 $0.6851 $0.6651 0.6526 - Analysis of Delinquent Taxes The following is an analysis, by tax year, of taxes delinquent as of September 30, 2013. Uncollected Adjusted Percentage Tax Year As of September 30, 2013 Tax Levy (a) Of Tax Levy 2012 $341,103 $45,850,625 0.74% 2011 . 133,441 43,441,792 0.31 2010 92,745 41,968,046 0.22 2009 72,298 41,081,407 0.18 2008 64,319 38,368,354 0.17 2007 51,612 35,035,569 0.15 2006 40,167 28, 819,229 0.14 2005 39,997 24,284,597 0.16 2004 31,043 21,073,788 0.15 2003 32,366 18,030,473 0.18 2002 15,567 14,880,007 0.10 (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 Blanlc] 23 Analysis of Tax Base Type of Property Residential Acreage Vacant Lots/Tracts Farm & Ranch Commercial/Industrial Utilities Real Inventory Other Gross Assessed Value Less: Exemption Net Assessed Value - Tax Base Distribution - 2013 Tax Roll Amount $5,991,560,978 94,201,042 124,968,655 499,757 1,258,891,779 66,436,913 62,897,186 475,835,815. 74.20% 1.17 1.54 0.00 15.59 0.82 0.78 5.90 $8,075,292,125 100.00% (1,073,837,106) $7,001,455,019(a)(b) (a) (b) 2012 Tax Roll Amount $5,645,372,636 93,765,783 126,876,793 9,235,628 1,169,417,293 59,004,028 60,989,786 285,409,427 $7,450,071,374 (994,379,662) $6,455,691,712(a)(c) 75.78% 1.26 1.70 0.12 15.70 0.79 0.82 3.83 2011 Tax Roll Amount $5,538,320,529 92,047,258 121,404,806 8,483,859 1,206,544,884 59,686,620 73,253,979 222,335,566 75.64% 1.26 1.66 0.12 16.48 0.82 1.00 3.04 100.00% $7,322,077,501 100.00% (956,765,192) $ 6, 3 6 5, 312, 3 09 (a) (d) Value may differ from those shown elsewhere in this Official Statement due to subsequent adjustments to the tax roll. Includes $1,562,848,106 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 Bonds; however, a portion of such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the. City and the TIRZ. Includes $1,453,517,411 in assessed value attributed to the TIRZ. Includes $1,372,334,319 in assessed value attributed to the TIRZ. - Principal Taxpayers - Principal Taxpayer Weatherford U.S. Inc. Pearland Town Center LP Globe Pipe Supply Amreit SPF Shadow Creek LP CenterPoint Energy, Inc. 12400 Shadow Creek Parkway LLC Discovery Shadow Creek Shadow Kirby LTD PTRN Wal-Mart Real Estate Pearland Lifestyle Center LP HCA Healthcare Corp. Pearland Investments Ltd. Prt. Villas Shadow Creek Ranch LP MRP Shadow Creek LP . Total Ten Principal Taxpayers Type of Property Oil Field Equipment Retail Development Structural Pipe Supplier Retail Development Utility Land Development Retail Development Land Development Shopping Center Land Development health Care Land Development Land Development. Land Development Percentage Ten Principal Taxpayers Comprise of Tax Roll 2013 Taxable Assessed Valuation $ 69,914,860 66,757,240 51,522,280 47,959,306 32,832,920 27,100,030 25,330,000 25,000,000 23,179,360 24,499,227 (a) (a) (a) (a) 2012 Taxable Assessed Valuation 2011 Taxable Assessed Valuation $ 37,689,240 $ 31,613,080 68,763,470 66,933,820 (a) (a) 43,671,670 41,006,650 28,444,700 26,536,120 28,229,200 (a) 26,391,910 (a) 25,000,000 23,114,059 23,179,360 23,678,280 23,731,897 (a) 19,012,840 19,074,620. 21,154,900. 31,696,920 (a) 29,000,460 (a) 21,000,000 $394,095,223 $345,269,187 $313,654,009 5.63% 5.35% 4.93% (a) Not included as top ten taxpayer for respective tax year. 24 - Tax Adequacy - Estimated Average Annual Debt Service Requirements (2014-2038) $18,714,289 (a) Tax Rate of $0.260 per $100 assessed valuation against the 2014 Certified Assessed Valuation of 95% collection produces $18,774,340 Tax Rate of $0.282 per $100 assessed valuation against the 2013 Certified Assessed Valuation at 95% collection produces $18,756,898 Estimated Maximum Annual Tax Debt Service Requirements (in the year 2024) $26,374,740 (a) Tax Rate of $0.366 per $100 assessed valuation against the 2014 Certified Assessed Valuation of 95% collection produces $26,428,495 Tax Rate of $0.397 per $100 assessed valuation against the 2013 Certified Assessed Valuation at 95% collection produces $26,405,987 (a) Includes the Certificates and the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which are expected to be delivered on September 23, 2014. Preliminary, subject to change. 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 2013 15,919,784 (2012) 0.243 34.72 [Remainder of Page Intentionally Left Blank] 25 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, 2013 2012 2011 2010 2009 REVENUES General Property Taxes(a) $11,178,950 $10,861,341 $10,867,570 $11,115,823 $10,688,512 Sales and Use Taxes 15,919,784 14,814,936 13,331,189 13,082,134 13,760,714 Franchise Fees 5,758,776 5,669,958 5,605,394 5,426,110 5,074,602 Licenses & Pennits 2,988,859 2,320,103 1,720,856 1,806,692 2,079,099 Fines & Forfeitures 3,333,675 3,164,068 2,714,217 2,310,041 2,213,101 Charges for Services 12,567,693 11,890,808 10,882,021 9,245,791 8,884,529 Intergovernmental --- --- 350,441 477,929 4,909,362 Other Revenues 869,019 678,438 602,817 446,353 487,663 Total Revenues $52,616,756 $49,399,652 $46,074,505 $43,910,873 $48,097,582 EXPENDITURES General Government $ 7,098,242 $ 8,241,509 $ 8,045,261 $ 8,064,367 $ 8,020,370 Public Safety 26,082,178 25,168,443 23,716,470 23,141,409 22,025,695 Public Works 7,502,356 5,506,477 6,505,139 7,108,143 11,913,119 Community Services 3,263,146 3,861,520 3,027,088 3,648,920 3,204,702 Parks and Recreation 7,111,012 6,775,316 7,171,812 6,069,658 5,753,141 Debt Service 114,486 --- --- Capital Outlay 4,088,048 Total Expenditures $55,259,468 $49,553,265 $48,465,770 $48,059,497 $50,917,027 (a) Includes penalties and interest. • Source: City's audited financial statements. General Fund and Debt Service Fund Balance for the Past Five Fiscal Years General Fund Debt Service Fund Fiscal Year Ended September 30; 2013 2012 2011 2010 2009 $18,623,117 $17,571,961 $14,523,546 $12,861,796 $12,219,109 4,642,821 4,992,479 5,159,541 6,705,688 7,246,548 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 eunpfoyees 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 2013, the City employed 581 full-time employees and 131 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's. contribution for fiscal year 2013, amounted to approximately $3.8 million which includes amortization of prior service cost over 30 years. The City had no unfunded pension benefit • obligation as of September 30, 2013. 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. 26 Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2013, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. ADMINISTRATION OF THE CITY Mayor and City Council Policy -making and supervisory functions are the responsibility of and are vested in the Mayor and City Council for the City, under provisions of the "Charter of the City of Pearland" (the "Charter") approved by the electorate February 6, 1971. The Council is elected at. large on the 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 Expires Council Members Period Served May Occupation Tom Reid 32 Years 2017 Retired Mayor Tony Carbone 1 Year 2016 Certified Public Accountant Council Member Scott Sherman 5 Years 2015 Attorney Council Member Gary Moore (a) 2017 Senior Environmental Technologist Council Member Keith Ordeneaux 3 Years 2015 Energy and Risk Manager Mayor Pro-Tem Greg Hill 2 Years 2016 Attorney Council Member (a) Elected on May 10, 2014. Administration Under provisions of the Charter, the 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 Council, and be responsible for its administration; (3) Prepare and submit to Council a complete report on the finances and administrative activities of the City; (4) Keep, 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 Council. 27 Members of the administrative staff are described below: Name Position Period Served (a) Clay Pearson City Manager 6 Months Jon Branson Deputy City Manager 8 Years Trent Epperson Assistant City Manager 8 Years Claire Bogard Director of Finance 8 Years Eric Wilson Director of Public Works 1 Year Young Lolling City Secretary 17 Years Lata Krishnarao Director of Community Development 11 Years Darrin Coker City Attorney 17 Years Christopher Doyle Police Chief 36 Years Michelle Smith Director of Parks & Recreation 14 Years Vance Riley Fire Chief 3 Years Bonita Hall Director of Human Resources 4 Years Sparkle Anderson Communications Manager 2 Years Matt Buchanon Executive Manager of Development 4 Years Services & PEDC President (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: Bond Counsel Andrews Kurth LLP. Houston, Texas Certified Public Accountants Grant Thornton LLP Houston, Texas Financial Advisor 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 beenfiled 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 tine 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. • 28 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. 29 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 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 Certificate and (b) the initial offering price to the public of such Discount Certificate. Under existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Certificate and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Certificate continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Certificates under the caption "TAX EXEMPTION" generally applies to original issue discount deemed to be earned on a Discount Certificate while held by an owner who has purchased such Certificate at the initial offering price in the initial public offering of the Certificates and that discussion should be considered in connection with this portion of the Official Statement. In the event of a redemption, sale, or other taxable disposition of a Discount Certificate prior to its stated maturity, however, any amount realized by such initial owner in excess of the basis. of such Discount Certificate in the hands of such owner (increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Certificate continues to be held by such initial owner) will be includable in gross income for federal income tax purposes. Because original issue discount on a Discount Certificate will be treated for federal income tax purposes as interest on a Certificate, such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Corporations that purchase Discount Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Certificate may be required to take into account such original issue discount as it is deemed to be earned for purposes. of determining certain collateral federal tax consequences of owning a Certificate. See "TAX EXEMPTION" for a discussion regarding the alternative minimum taxable income consequences for corporations and for a reference to collateral federal tax consequences for certain other owners. 30 The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Certificate or of the City. The portion of the principal of a Discount Certificate representing original issue discount is payable upon the maturity or earlier redemption of such Certificate to the registered owner of the Discount Certificate at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Certificate is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determinedunder 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 Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Certificate by the amount of amortizable bond premium. This reduction in basis will increase the amount of any .gain (or decrease the amount of any loss) recognized for federal income tax purposes upon the sale' or other taxable disposition of a Premium Certificate by the initial purchaser. Generally, no corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium with respect to the Premium Certificates. The amount of bond premium on a Premium Certificate which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Certificate) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. • The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering price for the Certificates of the same maturity may be deteriined 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 of1934, 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 Nfaking Board ("MSRB"). Information will be available free of charge via the Electronic Municipal Market Access ("FNMA") system at www.emma.msrb.org. Annual Reports The City wilt provide certain updated financial information and operating data to the MSRB annually via ElVlVIA. 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 31 AND INVESTMENT OBJECTIVES OF THE CITY — Current Investments," "CITY TAX DEBT," (except under the subheading "Estimated Overlapping Taxes"), "TAX DATA" "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 governmentalauthority 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. 32 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 orr 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 33 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. ATTEST: /s/ City Secretary City of Pearland, Texas /s/ Mayor City of Pearland; Texas 34 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. U.S. Census of Population ECONOMIC AND GROWTH INDICATORS 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 +33.0.46 108,312 +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 +142.43 313,166 +29.53 2011 95,600 +4.76 2012 97,200 +1.67 2013. 103,800 +6.79 2014(a) 106,900 +2.99 •(a) Estimated. Source: U.S. Census Bureau and estimates from the City. A-1 City of Pearland 2014(a) 2013 2012 2011 2010 Labor Force 53,216 52,406 51,179 49,587 48,474 Employed 51,329 49,886 48,469 46,350 45,334 Unemployed 1,887 2,520 2,710 3,237 3,140 Unemployment Rate 3.5% 4.8% 5.3% 6.5% 6.5% 2014(a) Brazoria County 2013 2012 2011 2010 Labor Force 160,501 158,876 155,215 153,346 150,544 Employed 152,720 148,427 144,213 140,067 137,078 Unemployed 7,781 10,449 11,002 13,279 13,466 Unemployment Rate 4.8% 6.6% 7.1% 8.7% 8.9% (a) As of April, 2014. Employment Statistics Source: Texas Workforce Commission A-2 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY Clay Pearson .City Manager CITY OF PEARLAND, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT Fiscal Year Ended September 30, 2013 Officials Issuing Report Jon Branson • Mickiel Hodge Assistant City Assistant City Manager Manager Claire Bogard Director of Finance Rick Overga and Assistant Director of Finance Introductory Section (This page intentionally left blank.) RESPONSIVE RESULTS -ORIENTED City of Pearland 3519 Liberty Drive Pearland, Texas 77581 Tel: 281.652.1600 cityofpearland.com March 10, 2014 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 ending September 30, 2013, 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. Grant Thornton, LLP, Certified Public Accountants, have issued an unqualified (or "clean") opinion on the City of Pearland's financial statements for the year ending September 30, 2013. 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 104,100 residents estimated as of September 2013. The City of Pearland is a home -rule City operating under a Council -Manager form of government. i 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 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 -clay 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; convention and visitors bureau; 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 City in 1995 under the Texas Development Corporation Act of 1979 to promote, assist, and enhance 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 TRIZ #2. All these component units are considered blended component units and have been included as major funds in the Governmental Funds. 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. The total of all new construction permitted during the 2013 calendar year totaled 'over $284.5 million, a 12.0% increase in value from 2012. New single-family housing permits totaled 954 with a construction value of $214 million. While this is only 3 permits higher than last year, permitted value is up $22.0 million or 11.6%. Pearland's economy continues to maintain strong levels. Residential permitting activity for the 2014 fiscal year is expected to remain at 2013 levels, budgeted at 1,000 permits. For calendar year 2013, the City had 184 commercial permits with a value of $74 million, compared to 77 permits with a value of $62 million in 2012. The commercial real estate market also remains strong. Sales of homes throughout the greater Houston area remained robust in 2013, driven by a combination of good local job numbers and historically low interest rates. The Houston Association of Realtors reported 73,232 single family home sales for 2013, up 17.7% from the 62,226 sales in 2012. 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. While new residential constructionand home sales remain strong, the average value of existing homes have slightly declined since fiscal year 2009. The average residential home value in fiscal year 2013 was $172,331, clown half a percent, from the average value in fiscal year 2009 of $173,308. Fiscal year 2014 average value has stayed flat, thereby having to rely on new added value to fund operations and debt service. Houston is the world's energy capital. Growth in the oil and gas industry, spurred by technological advances such as the use of hydraulic fracturing, continued in 2013 reaching levels unseen in 30 years. Texas is now producing more than twice the oil it did three years ago, and more than one-third of all U.S. production, accordingto federal data. Oil production in Texas has surpassed 1.8 million barrels per day and is on track to reach 3 million barrels per day in 2017 and potentially 4 million barrels per clay by 2020. This trend will continue keeping the Houston oil industry busy for many years. Pearland's unemployment rate was 5.0% in September 2013, down from 5.3% in September 2012. This is compared to the national unemployment .rate of 7.6% and the State of Texas unemployment rate of 6.5% as of September 2013. Pearland's unemployment is less than the national and state rates with the economy turning around. Texas has been named the top state for doing business by Area Development Magazine stating "With its proven model of success, the Lone Star State continues to dominate the national conversation on job creation and economic prosperity." Earlier in 2013, the state was also named best business climate by Business Facilities Magazine and the most competitive state by Site Selection Magazine. Chief Executive Magazine has also ranked Texas as the best state for business for nine years in a row through their annual survey of Chief Executive Officer's. Houston added 82,000 jobs in 2013 and. the Greater Houston Partnership is forecasting 69,800 new jobs for 2014. The Houston area, and the State of Texas, is built on businesses, on jobs, and on economic opportunities. Pearland is poised to take advantage of those opportunities. iii Pearland has two prime areas for commercial, mixed use, and livable developments along the Highway 288 corridor. A strategic and target market study shows that energy, healthcare, life sciences, and manufacturing are key areas of interest for Pearland. 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. Kelsey-Seybold, a major healthcare organization of 370 physicians, completed construction of a new 170,000 square foot, four story corporate headquarters on an 18 acre site in Shadow Creek Ranch in the summer of 2013, which is home to approximately 800 employees. The facility is 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, completed of 120,000 square foot facility for research and development and manufacturing in early March 2014. Merit Medical is expected to employ 220 employees at the Pearland facility. HCA Gulf Coast Division broke ground September 17, 2013, for the new $71 million Pearland Medical Center. As an HCA affiliated hospital, Pearland Medical Center joins the continuum of nine other Houston -area medical centers, ambulatory surgery centers, diagnostic imaging facilities, and off -campus emergency centers. The 144,000-square-foot, 30 bed acute -care hospital will open in the fall of 2014 and feature surgical suites, medical/surgical beds, intensive care beds and a 24-hour emergency department. Imaging services will include magnetic resonance imaging, computerized tomography, a catheterization lab, echocardiogram testing, and nuclear medicine modalities. The Center's. new women's services will provide digital mammography, labor and delivery suites, cesarean -section operating rooms and a newborn nursery. The new hospital will be located at the southwest intersection of Highway 288 and. Shadow Creek Parkway on a 48-acre site currently home to a full -service, freestanding emergency department, imaging center and 3- story, 80,000 square foot medical office building. Memorial Hermann Health Systems will also establish a medical campus in Pearland. The centerpiece will be a 64 bed acute care hospital which will open in 2015. It will feature an intensive care unit, operating rooms, cardiac catheterization labs,. surgical units, women's and neonatology services. The campus will be built on a 40-acre site currently home to an outpatient imaging center, diagnostic lab services, and medical office building. The new facility will include a one -of -a -kind convenient care center that will provide one stop coordinated access to adult and pediatric primary care, specialty physicians, sports medicine and a 24 hour emergency room. Sales tax for fiscal year 2013 totaled $23.6 million, an increase of $1.6 million or 7.3% over fiscal year 2012. Of the $23.6 million, $15.7 million went to the City's General Fund for operations and $7.9 million went to the City's Economic Development Corporation for economic development programs and activities. The City's General Fund is 29% funded by sales tax, an elastic revenue stream that will fluctuate with the economy. As such, the City closely monitors sales tax and the economy. Pearland is a regional shopping destination and the economy has turned around since the recession of 2010 and 2011. The City saw a resurgence of spending in 2012, which continued in 2013. As such, the City projected a 7.8% growth in sales tax for fiscal year 2014. The nation's largest retail group, National Retail Federation, expects retail sales to increase at a iv RESULTS-OR3EN'ED slightly faster pace this year than last year as continued improvements in jobs and housing should help shoppers feel more confident about spending. 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 2014 through fiscal year 2018 totals $354 million and continues to implement the $162 million bond program approved by the voters in May 2007. As of September 30, 2013 there was $95.2 million in unissued bonds approved by the voters and based on the 2014-2018 CIP, there would be $12.5 million in unissued bonds approved by the voters at the end of fiscal year 2018. Projects include drainage ($23M), streets ($160M), facilities ($21M), parks ($36M), 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, currently totaling $53.1 million will be identifying projects for the City's next bond referendum, potentially as early as 2016. The Debt Service Fund forecast shows a need to increase the Debt Service component of the tax rate to $0.5325 by fiscal year 2017 to implement the Five -Year CIP, excluding unfunded projects, 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 debt service component of the tax rate for fiscal year 2014 remains the same as in fiscal year 2013 at $0.4900. 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, 2012 or 2013, however, the model anticipates rate increases for 2015, 2017 and 2018. The City's utility system continues to be self-supporting and financially sound. 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. 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. v TRUST@SU1LDER • 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 Intiatives The City Council, staff, and community share a vision that combines progress and innovation with prudent controls to shape Pearland's future, 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 out of the top 50 Cities. 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. Pearland 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 will be switching to the City of Houston's radio system which will result in 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. The City of Pearland Police Department communications division provided dispatch services for the City's Police, Fire, and EMS departmients. Due to the rapid population growth and increased demands for service in the City, it became apparent that the Police communications division workload was 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 has contributed to increased safety for emergency responders as well as 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 vi RESULTS -ORIENTED TRUST -BUILDERS COUNTAB and operated by Pearland Volunteer Firefighters with the MUD's bearing the cost of operations, pursuant to a Strategic Partnership Agreement. This has greatly enhanced response times out in the City's southwestern ETJ, where development continues. The City is also nearing completion of design for the reconstruction of Fire Station #3, anticipated to open fall 2014, on the eastern edge of the City to accommodate a 24/7 crew, and will be beginning design for reconstruction of Fire Station #2, toimprove response times to these service areas of the City. Another initiative of the City, is the approved merger of the Fire and EMS departments effective October 1, 2014. In 2010, the City engaged the firm of McGrath Consulting Group to evaluate the City's Fire and EMS departments. One of the recommendations was to consolidate the Departments; the purpose being to improve the efficiency and effectiveness of current and future delivery of services at the highest possible level of quality while considering costs. The consolidation is multi -year, multi -phase plan with cross -training occurring in fiscal year 2014 and full -implementation in fiscal year 2015. Economic Development The Pearland Economic Development Corporation (PEDC) is a Type 4B 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 for the City. The Corporation is committed to enhancing the City's economic vitality through attraction, retention, and expansion of primary employers. 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. The following highlights a few of the most recent Corporation attraction efforts. Dover Energy kicked off construction in June 2013 for the global manufacturer's new facility in Pearland. Dover Energy, which provides highly -engineered solutions for the safe and efficient extraction and handling of critical fluids worldwide in the drilling, production and downstream markets, selected Pearland during a multi -city site search. The new facility, which will consolidate Dover's multiple Texas locations into one regional facility, is expected to be completed in February 2014. Dover Energy's new consolidated manufacturing and operations center will be located in the Lower Kirby Urban District on a 14-acre site at the northeast corner of Spectrum Boulevard and Hooper Road, directly behind Merit Medical's new facility. The facility will be 150,000 square feet with space for a staff of approximately 200 employees. Amerlux, a manufacturer of energy efficient lighting for retail, supermarket, and commercial markets, just announced plans to build a 100,000 square foot manufacturing facility in Pearland on 11 acres on Kirby Drive. It is anticipated that the facility will open in the fourth quarter of 2014. The facility will include a wide array of new materials and equipment to help produce and service the extensive line of interior and exterior products. Mitsubishi Heavy Industries has chosen Pearland for its first U.S plant. The $100 million new compressor facility will sit on a 26-acre site and include a 100,000 square foot space for assembly, packaging, shipping and storage of compressors that serve the petrochemical facilities. A 40,000 square foot office facility will also be built. The first phase estimated to cost $40 million. should be complete November 2014. By 2016, the full-scale manufacturing facility will be complete with 100 new employees on -site. v The Corporation also spearheaded legislation that passed the State Legislature in 2013, to create a Highway 288 Management District for corridor beautification. The corridor currently is non -landscaped and does not reflect City standards. The goal is to create a vibrant visually appealing corridor that will attract investment' in the City. District board members have been appointed and the District has levied a 10-cent tax rate, which is anticipated to generate approximately $300,000 annually. The next step is to plan the aesthetic improvements and build a phased landscaping program for implementation. 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 planning process resulted in a Pearland 20/20 Strategic Plan incorporating. nine strategies to improve Pearland's product.. The nine strategies are 1. Marketing, 2. Mobility, 3. Corridors, 4. Recreation and Culture, 5. Beautification, 6. Lower Kirby Mixed Use District, 7. Multi -Use Event Center, 8. Workforce Pipeline, and 9. Image Campaign. More than ever before, companies are considering education, workforce, entertainment, parks, etc. into their decisions to locate or remain in the City. It will take a myriad of partners to develop and maintain a successful community product. One of the City's prime areas for development, the Lower Kirby Mixed Use District at Hwy 288 and Beltway 8, has infrastructure needs that make it more difficult to develop. The PEDC is working with two area Municipal Management Districts to coordinate a multi- phase plan for the construction and funding of some of the major infrastructure that is needed. 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. The City's Convention and Visitor's Bureau (CVB), funded by hotel occupancy taxes, also focuses on economic development through tourism and putting heads in beds. In late 2012, the City Council authorized the creation of a city department for the Convention and Visitor's Bureau, service that had been previously contracted out. In fiscal year 2013, an Executive Director and staff was hired. The location of Pearland, as previously mentioned, makes Pearland a perfect hub and spoke for visitors and "A Perfect Pick...to play, stay, meet, and getaway", the tag line for the CVB. The time has come for Pearland to complement and support its development with cultural and lifestyle amenities to include a multi -use events center. This need has been noted in multiple Pearland planning processes as an enhancement to make the city more competitive for employers and residents. Annul hotel occupancy taxes total slightly over $1 million dollars and the funds ending balance is $2.3 million as of September 30, 2013. Land. Use Plan/Annexation Land use planning seeks to order and regulate the use of land in an efficient and ethical way, thus preventing land use conflicts. Lancl 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. viii RESULTS -ORIENTED TRUST -BUILDERS 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, and currently known as the Lower Kirby Mixed Use District, that leverages the area's unique location (on Beltway 8 and 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 Mixed Use District. 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 Mixed Use District, PEDC is working with the City of Pearland and the 1 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 encompassed approximately 600 acres and had an estimated population of 3,100. Upon annexation, all assets and obligations of the MUD transferred to the City. 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 Old Town Site while also responding to existing growth patterns in the city. A primary initiative for this plan is to reinvent the. Old Town Site as a modern village with a compatible mix of residential and non-residential uses. The Plan recommends adopting form based codes that would beused 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 2014 — 2018 totals $354 million. Projects include drainage ($23M), streets ($160M), facilities ($21M), parks ($36M), water and wastewater ($114M). Major thoroughfare projects include the widening of Bailey Road between FM1128 and Veterans, reconstruction of one mile of Old Alvin Road from Plum Street to McHard Road, McHard Road extension from Mykawa to Cullen, expansion of Smith Ranch Road from two' ix RESULTS -ORIENTED TRUST -BUILDERS lanes asphalt to four lanes concrete, curb and gutter from Hughes Ranch to North of Broadway, 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 and future storm water regional detention at FM518 and Cullen. 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 and Fire Station #2 to accommodate a 24/7 manned station, relocation of Fire Station.#1, and City Hall and Hill House Road facility improvements. Water projects include the preliminary design of a 20 million gallon per clay surface water plant along with various waterline extensions. Wastewater projects include the expansion of the Far Northwest, Barry Rose and JHEC wastewater treatment plants, 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 and funding. 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 (TIP) for 2013-2016 and five of the City's projects were selected for funding. The projects are McHard Road Extension (Mykawa to Cullen), Bailey Road (Veterans to FM1128), Smith Ranch Road Extension and Green Tee Terrace and Shadow Creek Ranch Trails. These projects will receive 80% funding from state or federal sources totaling $63,251,113 with the City providing 20% matching funds. These projects are in addition to the four projects that received funding in 2011 totaling $20,180,901 in state or federal funding from the TIP. These projects are slated to be completed within the City's current Five -Year Capital Improvement Program. With the growth in population along the Highway 288 corridor and the number of Pearland residents that rely on Hwy 288 to commute to Houston and the Texas Medical Center, the City along with Brazoria County have been meeting and working with the Texas Department of Transportation to provide traffic relief on the corridor through managed toll lanes. Brazoria County is preparing to begin design work, anticipated to be awarded on March 25, 2014, on four new toll lanes on Texas 288 from the Brazoria-Harris County line to County Road 58. Design will take approximately nine months with bids to be advertised around January 2015. Construction is likely to begin March 2015 with a three-year construction schedule. In 2007, State legislation was passed giving authority for the Brazoria County Toll Road Authority to construct their own toll roads. The Gulf Coast Center operates a transportation program known as Connect Transit. RESULTS -ORIENTED Connect Transit provides "curb cab" service to Pearland. Services are shared ride services with pick-up and delivery from curb to curb by reservation. The City funds approximately $20,000 for this service annually to its citizens meeting the eligibility requirements; seniors, person with disabilities, or low-income. This is a way to provide those needing transportation to grocery stores, doctor visits, etc. 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 proactive 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. Over the past three years because of the sluggish economy the City has seen base budget reductions to the General Fund totaling $4.9 million. During fiscal year 2013, however, we have seen a turnaround in the economy and growth. The improving Houston area economy and the City's increasing population played major roles in the development of the fiscal year 2014 budget. The improving economy will most likely result in improved revenues in the current fiscal year, 2014, most noticeably in sales tax and building permits. Sales tax revenue for fiscal year 2013 is up 7.3% over the prior year. The fiscal year 2014 Adopted Budget includes an increase of 7.8% over fiscal year 2013. Building Permit revenue is also projected to maintain the strong levels that have developed during fiscal year 2013. The Adopted Budget for fiscal year 2014 anticipates 1,000 single family permits. Another significant factor that impacts the Adopted Budget is a 3% increase in population. This increase in population results in a need for increased services to meet needs of new residents. This projected increase in population is the result of both newly constructed homes and multifamily dwellings. The Adopted Budget includes no increase•in either the property tax rate or water and sewer rates. Of thetotal 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 remains unchanged at 49 cents. While only a few months into the 2014 fiscal year, the City is already beginning to prepare for the 2015 budget process and up -coming forecast with the same goal of being fiscally responsible to our citizens. AWARDS AND ACKNOWLEDGEMENTS Parks and Recreation earned national accreditation through the Commission for Accreditation of Park and Recreation Agencies and the National Recreation and Park Association. The accreditation is a measure of the overall quality of operation, management and service to the community and has meet rigorous standards related to the management and administration of lands,facilities, resources, programs, safety and services. The City of Pearland received Crystal Awards in two categories recognizing marketing excellence: Online Social Media -Non Profit for the City's campaign promoting its three social xi media pages; and Maverick Marketing for the promotion of its CATFAX cat adoption event. The Texas Fire Marshal's Association awarded the City with the 2013 Achievement of Excellence Gold Level Award. The award recognizes organizations for performing excellence in fire prevention. 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, 2012. This was the 36th 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. 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 submitted, xii Claire Bogard, ]recto CITY OF PEARLAND, TEXAS PRINCIPAL OFFICIALS Elected Officials Tom Reid Tony Carbone Scott Sherman Susan Sherrouse Keith Ordeneaux Greg Hill Appointed Officials Clay Pearson Darrin Coker Letitia Farnie City Management Mickiel Hodge Jon Branson Claire Bogard Matt Buchanan Daniel Baum Young Lorfing Eric Wilson Bonita Hall Chris Doyle Michelle Smith Vance Riley Andrew Fearn Lata Krishnarao Trent Epperson Kim Sinistore Position Mayor Council Member at Large Council Member at Large Council Member at Large Council Member at Large Council Member at Large - Position One - Position Two - Position Three - Position Four - Position Five, Mayor Pro Tem 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 Executive Director, CVB Term Expires May 2014 2016 2015 2014 2015 2016 ORGANIZATION CHART Capital Ficiects - F-410neer1ng Tralficepea Moini en a nce esographic information — CITY OF PEARLAND, TEXAS Re Miami Emergency • lanagemoot AdminiStretiont Patrol invetligationa - Communally Permits & Services . inspections Suppod Heigh •&• Code • Services Enforcement Comm ertial Vehicle Enforcement . 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Parks MiCa., East Recreallerretrl 1— Natatorium Recycling Center Seolor Center special Netts t wo.slzicle Eve olo Center 'foot Development xiv GD Government Finance Officers Association 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, 2012 Executive Director/CEO XV Financial Section (This page intentionally left blank) ran Thornton REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Honorable Mayor and Members of the City Council City of Pearland, Texas Grant Thornton LLP 700 Milam Street, Suite 300 Houston, TX 77002-2848 T 832.476.3600 F 713.655.8741 GrantThornton.com Iinkd.in/GrantThorntonUS twitter.com/GrantThorntonUS Report on the financial statements 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, 2013, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accountingprinciples generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether clue to fraud or error. In making those risk assessments, the auditor considers internal control relevant ,to the, Entity's. preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the Grant Thurnton LLP U.S. member !inn of Grant Thornton Internalional Ltd. G ar.tIThornton circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 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 of Pearland, Texas as of September 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other matters Required supplementary information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 6 - 16, the Schedule of Revenues, Expenditures and Changes .in Fund Balances — Budget and Actual on pages. 67 - 68 schedules .of funding. progress for Texas Municipal Retirement System and City of Pearland Other Post -Employment Benefit Obligation on page 69 be presented to supplement the basic financial statements. Such information, although not a required 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. This required supplementary information is the responsibility of management. We have applied certain limited' procedures to the required supplementary information. in accordance with auditing standards generally accepted in the United States of America. These limited procedures 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. Supplementary information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining and individual fund statements and schedules are presented for purposes of additional analysis and are not a • requited part of the basic financial statements. Such supplementary information is the 2 Grant fhornton LLP U.S. member lion of Grant Thornton International Ltd. r.a tT ornt ri responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures. These additional procedures included comparing and reconciling the information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other information The introductory section and the statistical section on pages i-xv and 117-147, respectively ate presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has 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. Other reporting required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report, dated March 12, 2014, 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 the effectiveness of internal control over financial reporting of on compliance. That report is an integral part of an audit performed in accordance with Government Auditing . Standards in considering the City's internal control over financial reporting and compliance. Houston, Texas Match 12, 2014 3 ;rant Thornton LLP U.S, member firm of Grant Thornton International Ltd. (This page intentionally left blank.) Management's Discussion and Analysis 5 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, 2013. FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2013, by $645.2 million (net position). Of this amount, $609.6 million is for investments in capital assets, net of related capital debt and $44.2 million is restricted for economic development, capital projects, debt service, public safety, and community development projects. • The City's total primary government net position increased by $58.3 million primarily due to the annexation of Brazoria MUD No. 4 and capital contributions from developers for infrastructure. • At the close of the current fiscal year, the City of Pearland's governmental funds reported combined ending fund balances of $64.8 million, an increase of $4.3 million in comparison with the prior year. Increases are seen in the Pearland Economic Development Corporation of $1.9 million, $1.1 million is in the. General Fund, $800,000 in Capital Project Fund, and the remaining in the City other Governmental Funds. Approximately $48.8 million of the $64.8 million is considered restricted or assigned; $20.8 million for economic development, and $14.5 million can be attributed to unspent bond proceeds for capital projects. • As of September 30, 2013, the unassigned fund balance for the General Fund was $16.9 million or 31% of total General Fund expenditures. This exceeds the City's reserve policy of 16.6%. The total fund balance for the General Fund is $18.6 million or ' 34% of General Fund expenditures. • The City of Pearland's outstanding General Obligation and Certificates of Obligation debt for governmental activities totaled $294.7 million, a net increase of $5.1 million over the previous year. The increase is attributable to new money being issued of $12.1 million offset by principal payments. Revenue Bonds for the City's component units total $75.1 million, down to $3.6 million from last year due to payment of principal. The City's debt for business activities totaled $119.7 million, a net decrease of approximately $4.7 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 Position presents information on all of the City's assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may • serve as a useful indicator of whether the financial position of the City is improving or deteriorating. 6 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS The Statement of Activities presents information showing how the City's net position changed during the fiscal year. All changes in net position are reported when the underlying event giving rise tothe 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). 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, economic development, 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 20 through 22 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 blended component units is reported together with 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 statements 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 govermnental 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 govermnental funds and governmental activities. Beginning on page 23 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, Pearland Economic Development Corporation, Tax Increment Reinvestment Zone #2, and Development Authority of Pearland, which are considered to be major funds. Data from the other governmental funds are combined into a single, aggregated presentation. Individual fund clata for each of these non -major governmental funds is provided in the form of combining statements elsewhere in this report. 7 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS 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. Proprietary Funds - The City maintains two types 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. The City also maintains two internal service funds to account for its property insurance and health insurance. These funds are part of the governmental activities in the government -wide financial statements and are reported separately beginning on page 27 of the Statement of Net Position. 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 can be found on pages 27 through 30 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. 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 31 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 67 of this report. Government -wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government's financial position. In the case of. the City, assets exceeded liabilities by $645.2 million at the close of the most recent fiscal year. By far the largest portion of the City's net position (94 percent) reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment), less any capital 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 capital 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. 8 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF NET POSITION September 30, 2013 and 2012 Amounts in (000's) Governmental Activities Business -Type Activities Totals 2013 2012* 2013 2012 2013 2012* Assets Current and other assets $ 95,694 $ 87,941 $ 42,133 $ 48,163 $ 137,827 $ 136,104 Capital assets ' 749,038 706,242 281,213 266,288 1,030,251 972,530 Total Assets 844,732 794,183 323,346 314,451 ' 1,168,078 1,108,634 Liabilities Other liabilities 17,170 9,778 - 9,147 6,996 26,317 16,774 Long-term liabilities outstanding 375,604 378,471 120,961 126,479 496,565 504,950 Total Liabilities 392,774 388,249 130,108 133,475 522,882 521,724 Net position Net investment in capital assets 442,581 396,009 166,992 158,716 609,573 554,725 Restricted 34,666 36,548 9,542 9,821 44,208 46,369 Unrestricted (25,289) (26,623) 16,704 12,439 (8,585) (14,184) Total Net Position $ 451,958 $ 405,934 $ 193,238 $ 180,976 $ 645,196 $ 586,910 * As restated for comparison purposes. Due to the implementation of GASB 61, The Financial Reporting Entity: Omnibus An Amendment of GASB Statements No. 14 and No. 34 (GASB 61), Pearland Economic Development Corporation, Pearland TIRZ #2 and the .Development Authority of Pearland have been presented as blended component units and therefore are included in the Governmental Activities numbers in this year's annual report. Fiscal year 2012 numbers have been restated for comparative purposes. As a result of this implementation, Unrestricted Net Position for Governmental Activities is negative $25,289 for fiscal year 2013, where historically this has been a positive number. Governmental Accounting Standards require that the Development Authority of Pearland outstanding debt be deducted from the unrestricted component of the government's net position as the Development Authority has acquired no capital assets, therefore the debt is considered non -capital related. If one where to adjust for this, Governmental Activities Unrestricted Net Position would have been a positive $20,628 compared to $21,618 in fiscal year 2012, a reduction of $990 thousand in unrestricted net position. The increase in Total Net Position from the prior year is $58.3 million, which is primarily attributed to an increase incapital assets from developer contributions. 9 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF CHANGES IN NET POSITION September 30, 2013 and 2012 Amounts in (000's) Governmental Activities Business -Type Activities Totals 2013 2012* 2013 2012 2013 2012 Revenues Program revenues: Charges for services $ 22,719 $ 12,597 $ 37,183 $ 35,189 $ 59,902 $ 47,786 Operating grants and contributions 2,325 7,662 - 205 2,325 7,867 Capital grants and contributions 53,101 18,843 16,273 8,118 69,374 26,961 Property taxes 54,433 52,230 - - 54,433 52,230 Sales and use taxes 24,942 22,969 24,942 22,969 Franchise taxes . 5,999 5,670 - - 5,999 5,670 Investment earnings 155 134 95 68 250 202 Other 1,701 1,554 682. 443 2,383 1,997 Total Revenues 165,375 121,659 54,233 44,023 219,608 165,682 Expenses General Government 13,358 13,334 13,358 13,334 Public Safety 28,944 27,403 28,944 27,403 Public Works 31,690 28,510 - 31,690 28,510 Community Services 3,807 4,267 3,807 4,267 Parks and Recreation 9,524 9,264 9,524 9,264 Economic Development 17,411 26,311 17,411 26,311 Interest on long-term debt 16,224 . 11,572 - 16,224 11,572 Water and Sewer - 32,040 29,392 32,040 29,392 Solid Waste 8,324 . 7,528 8,324 7,528 Total Expenses 120,958 120,661 40,364 36,920 161,322 157,581 Increase (decrease) in net position before transfers 44,417 998 13,869 7,103 58,286 8,101 Transfers 1,607 2,269 (1,607) (2,269) - Increase in net position 46,024 3,267 12,262 4,834 58,286 8,101 Net position- beginning, as restated 405,934 402,667 180,976 176,142 • 586,910 578,809 Net position - ending $ 451,958 $ 405,934 $ 193,238 $ 180,976 $ 645,196 $ 586,910 * As restated for comparison purposes. At the end of the current fiscal year, the City is able to report positive balances in all three categories of net position, both for the government as a whole, as well as for its separate governmental and _business - type activities. 10 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Governmental activities - Governmental activities increased the City's net position by $46.0 million, thereby accounting for 79% percent of the total increase in the net position of the City. Key elements of this increase are as follows: • Property taxes, sales and use taxes, and franchise taxes totaled $54.4 million, $24.9 million, and $6.0 million, respectively. These revenues increased by $4.5 million from prior year primarily as a result of the annexation of Brazoria MUD No. 4 and collection of their property taxes, increase in property taxes due to a 2 cent increase in the property tax rate, and increased consumer spending. • Charges for services increased to $22.7 million. This is $10.1 million over the prior year of which $5.4 million is TIRZ administrative fees previously classified as Operating Grants and Contributions. • Capital Contributions totaled $53.1 million as a result of infrastructure contributed by developers, the annexation of Brazoria MUD No. 4, and grants and contributions for capital projects. This is an increase of $34.3 million over last year. • The revenues were offset by expenses for general government, public safety, public works, and economic development of $13.4 million, $28.9 million, $31.7 million, and $17.4 million, respectively. In total, these expenses were relatively consistent with the prior year. S55,C00 $eoeoa :$55,030 $5n,000 145,0410 $40,0 0 $ ,s,cao Sao t o $75,ona $20;130O $15:LYt0 $10,000 $5,010 Expenses and prograrrt:evenues -Governmental Activities 0' o . o` w4 aac ��ti a� aTnc.rudes ScatorraCounty 'MUD 4capital contributinn far[nfrastructure eases: jam Get?ennes"' Revenues by Source - Governmental Activities Charges farSe' Then, • 14% Other, .1%: Ploprty Frairshi..s ra:es,4' Grants and: cantributiCn€, 304 Sa I:es and +Ls+= to ces, 15% CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Business -type activities - Business -type activities increased the City's net position by $12.3 million. Key elements of this increase are as follows: • Charges for services of $37.2 million increased approximately $2.0 million over the prior year primarily due to an increase in water and sewer consumption due to the annexation of Brazoria MUD No. 4. • Capital grants and contributions of $16.3 million increased $8.2 million from the prior year mainly due to the annexation of Brazoria MUD No. 4 and recordation of assets. • The revenues listed above were offset by expenses of $32.0 million and $8.3 million, respectively for Water and Sewer and Solid Waste. Expenses increased from prior year by $2.6 million mainly due to an increase in solid waste of $800,000 due to increase in rates pursuant to the contract, and annexation of Brazoria County MUD No. 4; increase in depreciation and amortization of assets of $770,000, and increase in system repairs of $643,000. Expenses and ProgramRevenues- Business -type Actvities 5,ao1 5a5av 54CO9a • $:30,0017 • $25;Oa0 $20,O Ja 515000 $it}.fl0Oi s'-• t,later and Sew>er 4`incfutte> Sr.azor a Cetnity, PA 4 catiitai centrihn:tieri far infrastruiture Other, 1% • Grants an. d centritnadens.. 30 12 :Cherp:es: far :&&ittes . CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSIONAND ANALYSIS 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 $64.8 million. A portion of the combined fund balance, or $16.9 million, is unassigned and available for day-to-day operations of the City; $14.5 million is restricted for capital projects; $20 8 million for economic development and the remaining. balance is restricted for debtservice and other programs. There was an increase in the combined fund balance of $4.3 million from the prior year. The increase in fund balance includes an increase in the capital projects fund balance of approximately $800,000 due to bond proceeds, a decrease of $300,000 in the debt service fund balance, offset by a combined increase of approximately $973,000 in the special revenue funds. $1.1 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 $18.6 million at year end. In the Capital Projects Fund, the City spent $17.5 million on various improvement projects; leaving an ending fund balance of $14.5 million, which will be spent on various capital projects. The Pearland Economic Development Corporation, TIRZ #2, and Development Authority; the. City's component units, but blended with the primary government, had expenditures totaling $23.9 million, leaving an ending fund balance of $15.4 million, $4.3 million, and $1.8 million, respectively, all considered restricted. 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. GENERAL FUND BUDGETARY HIGHLIGHTS During the year, there was a $2.2 million increase in appropriations between the original and final amended budget, from $57.6 million to $59.8 million. The increase in. appropriations is attributable to carryover funding from prior -year encumbrances and projects and to reflect projections during the 2012-2013 budget process. Budget estimates for revenues and other sources combined increased by approximately $2.8 million for the year; also to reflect carryovers and revised projections. Actual revenues and other sources of $59.4 million were $1.7 million under the final budget mainly due to capital lease financing occurring in FY 2014 versus FY 201.3 for FY 2013 purchases. Actual expenditures of $55.3 million were.under budget by $4.6.million, resulting in the year-end fund balance of $18.6 million over budget by $2.8 million. At year-end, equipment purchases and several projects were still in progress and $976,713 of the $2.8 million was carried over and re -appropriated in the 2013-2014 budget year. 13 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of fiscal year 2013, the City's governmental activities and business -type activities had invested $749.0 million and $281.2 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net increase of $14.9 million, or 5.6 percent over the end of last fiscal year for the business -type activities capital assets and a net increase of $43.7 million or 6.2 percent over the end of last fiscal year for the governmental activities capital assets. The increase is mainly due to the recordation of Brazoria County MUD No. 4 assets upon annexation. Governmental Activities Business -Type Activities Totals 2013 2012 2013 2012 2013 2012 Land $ 31,264 $ 31,260 $ 3,796 $ 3,610 $ 35,060 $ 34,870 Construction in progress 23,306 23,489 8,918 5,419 32,224 28,908 Infrastructure 607,940 573,752 212,666 199,511 820,606 773,263 Buildings and improvements 77,899 70,762 27,168 27,898 105,067 98,660. Machinery and equipment 6,165 5,200 1,401 1,199 7,566 6,399 Furniture and fixtures 2,464 873 37 44. 2,501 917 Contractual water rights - 27,227 28,607 27,227 28,607 Total Capital Assets $ 749,038 $ 705,336 $ 281,213 $ 266,288 $ 1,030,251 $ 971,624 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. 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 $496.6 million. Of this amount, $230.0 million is composed of general obligation bonds, $78.7 million is composed of certificates of obligation and $180.8 million represents revenue bonds secured solely by specified revenue sources. Governmental Activities Business -Type Activities Totals 2013 2012 2013. 2012 2013 2012 General obligation bonds $ 230,040 $ 224,170 $ - $ - $ 230,040 $ 224,170 Certificates of obligation 64,690 65,425 14,020 15,130 78,710 80,555 Revenue bonds • 75,125 78,725 105,690 109,305 180,815 188,030 Unamortized amount for issuance premium/(discount) 6,159 6,479 730 882 6,889 7,361 Deferred loss on refunding (11,053) (12,351) (560) (610) (11,613) (12,961) Capital leases payable 3,681 3,407 261 342 3,942 3,749 Compensated absences 5,007. 4,724 463 539 5,470 5,263 Post employment benefit liability 1,955 1,535 357 282 2,312 1,817 $ 375,604 $ 372,114 $ 120,961 $ 125,870 $ 496,565 $ 497,984 The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities increased to $294.7 million. The $5.1 million increase is due to new monies issued. The City's debt. for . business activities decreased to • $119.7 million, a net decrease of $4.7 million from the previous, year, which was the result of the principal payments. 14 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS 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), blended 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. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES Two primary factors in the 2014 budget are the improving Houston area economy and the continued growth in population served by the City. The improving regional economy will result in substantially improved revenues in the corning fiscal year. Improved economic conditions will be most noticeable in two major revenue sources — sales tax and building permits. Sales tax revenue for FY 2013 was up 7.3% over FY 2012. The adopted budget for FY 2014 includes a total increase in sales tax of 7.8% over FY 2013 revenues. The nation's largest retail group, National Retail Federation, expects retail sales to increase at a slightly faster pace this year than last year as continued improvements in jobs and housing should help shoppers feel more confident about spending. Building Permit revenue is also projected to maintain the strong levels that have developed during FY 2013. The FY 2013 Adopted Budget was based on an estimated .1,000 single-family permits. Due to the strengthening regional economy during FY 2013, housing starts were 941. The FY 2014 Adopted Budget anticipates 1,000 single-family permits. Another economic factor that will impact revenues is an increase in property values of $504 million or 7.7%, due to new construction and the addition of MUD No. 4, which was annexed on December 31, 2012. Values of existing residential properties have declined slightly over the past few years, from an average value in FY 2009 of $173,308 to an average value in FY 2013 of $172,331, and indications are that residential property values have stayed flat for the FY 2014 budget year. The impact of new residential and commercial construction will more than offset home values for existing properties for 2014. The budget incorporates no increase in the property tax rate. 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. Another significant factor that impacts the adopted budget is a 3% 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. The Pearland City Council approved a $63.3 million General Fund budget for FY 2014. This is an 8% increase from the FY 2013 adopted budget. The increase is mainly due to compensation adjustments recommended from a Class and Compensation Study and new positions added in FY 2014 for a new 511' ambulance, opening of Max Road Sportsplex, and manned staffing at Fire Station #t3. In addition, $400,000 is budgeted in FY 2014 for bunker gear and cross -training of emergency medical personnel in anticipation of the approved Fire -EMS rrierger effective October 1, 2014. The FY 2014 budget also includes year one implementation of a Five -Year Information Technology Strategic Plan that recommends the replacement of the City's integrated Financial and Community Development systems in 15 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSIONAND ANALYSIS year two, FY 2015. The Five -Year Plan totals $7.1 million. Caring for the City's existing infrastructure to ensure the long-term economic well being and financial health of the City is a priority. As such, the City budgeted $300,000 in FY 2014 for an in-depth street and sidewalk assessment that will provide for a rehabilitation, replacement, and maintenance program and dollars required. 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 fmancial 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. The report and general information can be found on the City's website at www.cityofpearland.com. 16 (This page intentionally left blank) 17 Basic Financial Statements 18 (This page intentionally left blank) 19 CITY OF PEARLAND, TEXAS STATEMENT OF NET POSITION September 30, 2013 Assets Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Due from other governmental agencies Inventories Prepaid items Restricted cash and investments Unamortized issuance costs Capital assets: Nondepreciable capital assets Capital assets, net of accumulated depreciation Total Capital Assets Total Assets Liabilities Accounts payable and accrued liabilities Accrued interest Unearned revenues Customer deposits Long-term liabilities: Due within one year Due in more than one year Total Liabilities Net Position Net investment in capital assets Restricted for: Capital improvements Debt service Community development programs Economic development Public safety Unrestricted Total Net Position The accompanying notes are an integral par Primary Government Governmental Activities $ 49,965,161 19,960,608 Business -Type Activities $ 4,769,402 5,760,545 21,130,475 3,833,506 753,725 105,230 245,906 716,315 2,816,829 54,570,742 694,467,679 749,03 8,421 844,732,670 12,205,785 1,246,881 3,633,280 84,808 15,918,732 359,684,992 Total 54,734,563 25,721,153 24,963,981 - 753,725 105,230 12,562 258,468 26,679,900 27;396,215 1,076,799 3,893,628 12,714,417 67,285,159 268,498,649 962,966,328 281,213,066 1,030,251,487 323,345,780 5,711,756 411,650 3,023,012 5,082,862 115,878,489 392,774,478 130,107,769 442,581,308 166,991,827 3,568,609 4,161,020 4,756,143 20,527,040 1,652,989 (25,288,917) 7,681,267 1,860,731 16,704,186. 1,168,078,450 17,917,541 1,658,531 3,633,280 3,107,820 21,001,594 475,563,481 522,882,247 609,573,135 11,249,876 6,021,751 4,756,143 20,527,040 1,652,989 (8,584,731) $ 451,958,192 $ 193,238,011 $ 645,196,203 t of these 'basic financial statements. 20 CITY OF PEARLAND, TEXAS STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013 Functions/Programs Primary Government Governmental Activities: General Government Public Safety Public Works. Community Services Parks and Recreation Economic Development Interest on long-term debt Total Governmental Activities Business -Type Activities: Water and Sewer Solid Waste Total Business -Type Activities Total Primary Government Expenses $ 13,358,412 28,944,507 31,689,576 3,807,513 9,523,793 17,410,535 16,223,583 Charges for Services $ 6,326,156 7,410,197 3,095,679 3,263,783 2,209,118 414,000 120,957,919 22,718,933 32,040,246 8,323,786 29,007,476 8,175,198 40,364,032 37,182,674. 161,321,951 59,901,607 General Revenues Taxes: Property taxes Sales and use taxes Franchise taxes Unrestricted investment earnings Gain on sale of assets Miscellaneous Transfers Program Revenue Operating Grants and Contributions $ 43,847 602,850 1,388,392 107,519 182,496 Capital Grants and Contributions $ 180,000 52,921,691 2,325,104 53,101,691 16,273,170 16,273,170 2,325,104 69,374,861 Total General Revenues and Transfers Change in net assets Net position - beginning, as restated Net position - ending The accompanying notes are an integral part of these basic financial statements. 2:l Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business -Type Activities Activities Total (6,808,409) $ $ (6,808,409) (20,931,460) (20,931,460) 25,716,186 25,716,186 (436,211) (436,211) (7,132,179) - (7,132,179) (16,996,535) - (16,996,535) (16,223,583) - (16,223,583) (42,812,191) (42,812,191) • 13,240,400 13,240,400 (148,588) (148,588) 13,091,812 13,091,812 (42,812,191) 13,091,812 (29,720,379) 54,433,047 54,433,047 24,941,540 24,941,540 5,999,154 5,999,154 154,723 94,889 249,612 8,487 .8,487 1,692,870 681,892 2,374,762 1,606,753 (1,606,753) 88,836,574 (829,972) 88,006,602 46,024,3 83 12,261, 840 58,286,223 405,933,809 180,976,171 586,909,980 $ 45.1,958,192 193,238,011 $ 645,196,203 CITY OF PEARLAND, TEXAS BALANCE SHEET Governmental Funds September 30, 2013 Assets Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Due from other governments Due from other funds Inventories Prepaid items Restricted cash Total Assets Liabilities and Fund Balances Liabilities Accounts payable Accrued expenditures Deposits Due to other funds Unavailable/unearned revenue Total Liabilities Fund balances: Non -spendable: Inventories Prepaid items Restricted for: Debt service Capital improvements Community development programs Public safety Economic development Assigned for: Encumbrances Unassigned: General fund Total Fund Balances Total Liabilities and Fund Balances Pearland Tax Economic Increment Development Other Total General Capital Development Reinvestment Authority of Governmental Governmental Fund Debt Service Projects Fund Corporation Zone #2 Pearland Funds Funds $ 8,887,567 $ 3,073,485 $ 14,824,931 $ 4,685,369 $ 4,200,431 $ 8,148,177 $ 5,290,853 $ 49,110,813 8,742,291 1,496,355 744,000 8,729,962 248,000 - 19,960,608 6,094,897 9,692,829 868,241 1,425,984 130,541 12 2,854,234 21,066,738 581,579 - - - - - 172,146 753,725 118,097 - - 118,097 105,230 - - - - 105,230 53,217 166,894 11,547 4,162 235,820 - - 665,254 - 51,061 - 716,315 $ 24,582,878 $ 14,429,563 $ 16,437,172 $ 15,518,116 $ 4,330,972 $ 8,447,250 $ 8,321,395 $ 92,067,346 $ ' 1,707,531 1,197,097 46,475 3,008,658 5,959,761 105,230 53,217 .1,553,390 16,911,280 18,623,117 9,580,978 9,786,742 166,894 4,475,927 1,901,585 14,535,587 166,894 38,870 $ 1,475,090 $ 43,493 426,495 - 38,333 69,785 151,611 11,547 665,254 14,689,704 4,642, 821 14,535,587 15,3 66,505 $ 485 $ 6,639,030 485 4,330,487 4,330,487 $ 155,137 $ 10,187,660 80,946 1,743,408 84,808 118,097 118,097 2,491,869 15,151,290 6,639,030 2,846,049 27,285,263 51,061 1,757,159 1,808,220 4,162 4,756,143 715,041 105,230 235,820 5,192,242 14,535,587 4,756,143 715,041 20,777,350 1,553,390 16,911,280 5,475,346 64,782,083 $ 24,582,878 $ 14,429,563 $ 16,437,172 $ 15,518,116 $ 4,330,972 $ 8,447,250 $ 8,321,395 $ 92,067,346 The accompanying notes are cm integral part of these basic financial statements. 23 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION September 30, 2013 Total fund balance, governmental funds $ 64,782,083 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not current financial resources and therefore are not reported in the fund financial statements, but are reported in the governmental activities of the Statement of Net Position. Certain other long-term assets (property taxes receivable, adjudicated court fines receivable and unamortized bond issuance costs) are not available to pay current period expenditures and therefore are not reported in the fund financial statements, but are reported in the governmental activities of the Statement of Net Position 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 Position: 749,03 8,421 14,334,839 Bonds payable (369,855,000) Unamortized premium/discount (6,158,967) Deferred loss on refunding 11,053,492 Capital lease payable (3,681,366) Compensated absences (5,006,729) Accrued interest payable (1,246,881) Other post employment benefit liability (1,955,154) 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 Position. 653,454 Net Position of Governmental Activities in the Statement of Net Position $ 451,958,192 The accompanying notes are an integral part of these basic financial statements. CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2013 Pearland Tax Economic Increment Development Other Total General Capital Development Reinvestment Authority of Governmental Governmental Fund Debt Service Projects Fund Corporation Zone in Pearland - Funds Funds Revenues Property taxes $ 11,178,950 $ 25,898,494 $ $ - $ 17,397,567 $ $ - $ 54,475,011 Sales and use taxes 15,919,784 - 7,871,396 1,150,360 24,941,540 Franchise fees 5,758,776 - - - 240,378 5,999,154 Licenses and permits 2,988,859 2,988,859. Fines and forfeitures 3,333,675 - - 199,988 3,533,663 Charges for services 12,567,693 - - 414,000 - - 12,981,693 Investment earnings 54,063 19,296 18,070 40,811 12,238 2,182 7,485 154,145 Intergovernmental 3,593,783 - - - 1,001,515 4,595,298 Other 814,956 1,946,973 4,116,743 24,326 1,070,549 7,973,547 Total Revenues 52,616,756 27,864,763 7 728,596 • 8,350,533 17,409 805 2,182 3,670,275 117,642,910 Expenditures Current: - . General government 7,098,242 - - 9,806 849,916 7,957,964 Public safety 26,082,178 - - 122,479 26,204,657 Public works 7,502,356 309,833 - - 7,812,189 Community services 3,263,146' - 259,741 3,522,887 Parks and recreation 7,111,012 - 133,064 7,244,076 Economic development - 4,400,139 6,375,434 6,638,430 - 17,414,003 Debt Service: Principal 86,254 11,950,504 880,000 2,720,000 15,636,758 Interest and other charges 28,232 12,667,961 1,165,585 - 1,671,965 15,533,743 Bond issuance costs - - 324,993 - 324,993 Capital outlay 4,088,048 - 17,487,825 - 525,218 22,101,091 IntergoveTnmentai - 4,057,682 - - - 4,057,682 Total Expenditures 55,259,468 28,676,147 18,122,651 6,445,724 6,375,434 11,040,201 1,890,418 127,810,043 Excess (deficiency) of revenues - over(under)expenditures (2,642,712) (811,384) (10,394,055) 1,904,809 11,034,371 (11,038,019) 1,779,857 (10,167,133) Other Financing Sources (Uses) Issuance of debt - 12,060,000 - 12,060,000 Bond premium - 331,309 - 331,309 Capital leases 1,179,413 - - - - - - 1,179,413 Transfers in 3,613,122 461,726 421,615 - - 10,997,930 20,748 15,515,141 Transfers out (1,098,667) - (1,659,245) - (10,997,930) - (827,546) (14,583,388) Total Other Financing Sources(Uses) 3,693,863 461,726 11,153,679 (10,997,930) 10,997,930 (806,793) 14,502,475 Net change in fund balances 1,051,156 (349,653) 759,624 1,904,809 36,441 (40,089) 973,059 4,335,342 Fund balances -beginning 17,571,961 4,992,479 13,775,963 13,461,696 4,294,046 1,848,309 4,502,287 60,446,741 Fund balances - ending $ 18,623,117 $ 4,642,821 $ 14,535,587 $ 15,366,505 $ 4,330,487 $ 1,808,220 $ 5,475,346 $ 64,782,083 The accompanying notes are an integral part of these basic financial statements. 25 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013 Net change in fund balances - total governmental funds: $ 4,335,342 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 period. This is the amount by which depreciation of $29,360,934 exceeded capital outlays of $22,427,041 in the current period. (6,933,893) 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. (44,911) Capital assets contributed by developers thatdo not represent current assets and are not reflected in the governmental fund financial statements 18,503,918 Capital assets net of related debt acquired as a result of Municipal Utility Annexation 27,098,685 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. 2,174,369 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. Governmental funds report bond issuance costs as expenditures. In contrast the government -wide financial statements amortizes such a cost over the life of the bonds 2,333,691 324,993 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 (14,977) Amortization of bond related costs (940,048) Compensated absences • (282,486) Capital tease activity (274,607) Post employment benefit liability (419,768) 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. 164,075 Change in net position of governmental activities $ 46,024,383 The accompanying notes are an integral part of these basic financial statements. 26 CITY OF PEARLAND, TEXAS STATEMENT OF NET POSITION PROPRIETARY FUNDS September 30, 2013 Business -Type Activities - Enterprise Funds Water and Solid Waste Sewer Fund Fund Total Governmental Activities - Internal Service Fund Assets Current assets: Cash and cash equivalents $ 3,670,426 $ 1,098,976 $ 4,769,402 $ 854,348 Investments 5,760,545 5,760,545 - Accounts receivable, net of allowance for doubtful accounts 3,011,164 822,342 3,833,506 63,737 Prepaid items 12,562 12,562 10,086 Restricted cash and cash equivalents 18,680,551 18,680,551 Restricted investments 7,999,349 7,999,349 Total current assets 39,134,597 1,921,318 41,055,915 928,171 Non -current assets: Unarnortized issuance costs 1,076,799 1,076,799 Capital assets: Land and improvements 3,796,382 3,796,382 Construction in progress 8,918,035 . 8,918,035 Contractual rights to water supply 34,511,428 34,511,428 Infrastructure 300,748,324 - 300,748,324 Buildings and improvement 31,256,473 31,256,473 Machinery and equipment 3,706,656 3,706,656 Furniture and fixtures 106,12,7 106,127 Less: Accumulated depreciation (101,830,359) (101,830,359) Total non -current assets 282,289,865 282,289,865 Total Assets 322,501,261 1,921,318 324,422,579 928,171 Liabilities Current liabilities: Accounts payable and accrued expenses $ 4,002,839 $ 1,708,917 $ 5,711,756 Accrued interest payable 411,650 411,650 Customer deposits 3,023,012 3,023,012 Compensated absences - current portion 78,740 78,740 Bonds payable - current portion 4,920,000 4,920,000 Capital lease - current portion 84,122 84,122 Total current liabilities 274,717 12,520,363 1,708,917 14,229,280 274,717 Non -current liabilities: Compensated absences 384,742 384,742 Capital lease obligation 176,862 - 176,862 Other post -employment benefits 356,544 . - 356,544 Bonds payable, net 114,960,341 114,960,341 Total non -current liabilities 115,878,489 115,878,489 Total Liabilities 128,398,852 Net Position Net Investment in capital assets 166,991,827 Restricted for debt service 1,860,731 Restricted for capital projects 7,681,267 Unrestricted 16,491,785 Total Net Position 1,708,917 130,107,769 274,717 212,401 166,991,827 1,860,731 7,681,267 16,704,186 653,454 $ 193,025,610 $ 212,401 $ 193,238,011 $ .653,454 The accompanying notes are an integral pctrt of these basic financial statements. 27 CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS For the Year Ended September 30, 2013 Governmental Business -Type Activities - Enterprise Funds Activities - Water and Solid Waste Internal Sewer Fund Fund Total Service Fund Revenues Charges for services $ 29,007,476 $ 8,175,198 $ 37,182,674 $ 6,532,572 Operating Expenses Personnel services 5,042,612 5,042,612 Supplies and materials 2,752,203 - 2,752,203 - Contractual services 7,369,515 8,317,836 15,687,351 6,881,016 Repairs and maintenance 1,669,554 1,669,554 4,774 Other expenses 589,398 5,950 595,348 158,285 Depreciation and amortization 9,335,337 - 9,335,337 - Total Operating Expenses 26,758,619 8,323,786 35,082,405 7,044,075 Operating income (loss) 2,248,857 (148,588) 2,100,269 (511,503) Non -Operating Revenues (Expenses) Earnings on investments 94,277 612 94,889 578 Miscellaneous revenue (expense) 664,418 17,474 681,892 - Interest expense (5,281,627) - (5,281,627) Total Non -Operating Revenues (Expenses) (4,522,932) 18,086 (4,504,846) 578 Loss before contributions and transfers (2,274,075) (130,502) (2,404,577) (510,925) Capital contributions 16,273,170 - 16,273,170 - Transfers in 218,961 218,961 675,000 Transfers out (1,825,714) (1,825,714) - Change in net position 12,392,342 (130,502) 12,261,840 164,075 Total net position - beginning 180,633,268 342,903 180,976,171 489,379 Total net position - ending $ 193,025,610 $ 212,401 $ 193,238,011 $ 653,454 The accompanying notes are an integral part of these basic financial statements. 28 CITY OF PEARLAND, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2013 Cash Flows from Operating Activities Receipts from customers and users Receipts from interfund transactions Disbursed for personnel services Disbursed for goods and services Net cash provided by (used in) operating activities Cash Flows From Noncapital Financing Activities Transfers from funds Transfers to other funds Cash received from non -operating revenues Net cash provided by (used in) noncapital financing activities Cash Flows from Capital and Related Financing Activities Proceeds from the sale of equipment Capital grants and contributions Principal payments on debt Principal payments on leases Acquisition and construction of capital assets Net cash used in capital and related financing activities Cash Flow from Investing Activities Purchase of investments Sales of investments Interest received Interest paid Net cash provided by (used in) investing activities Net increase (decrease) in cash and equivalents Cash and equivalents, beginning Cash and equivalents, end Unrestricted cash and equivalents Restricted cash and equivalents Business -Type Activities - Enterprise Funds Water and Solid Waste Sewer Fund Fund Total $ 28,990,245 $ (5,019,856) (10,716,040) 13,254,349 218,961 (1,825,714) 644,316 (962,437) 20,102 5,942,763 (4,725,000) (81,380) (13,866,825) Page 1 of 2 Governmental Activities - Internal Service Fund 8,083,250 $ 37,073,495 $ 5,345,055 1,135,012 (5,019,856). (7,926,751) (18,642,791) (7,084,133) 156,499 13,410, 848 218,961 (1,825,714) 644,316 (962,437) 20,102 5,942,763 (4,725,000) (81,380) (13,866,825) (12,710,340) (12,710,340) (10,776,720) 13,713,512 108,075 (5,305,812) (2,260,945) (2,679,373) 25,030,350 $ 22,350,977 $ 3,670,426 18,680,551 $ 22,350,977 (10,776,720) 13,713,512. 612 108,687 (5,305,812) (604,066) 675,000 675,000 578 612 (2,260,333) 578 157,111 (2,522,262) 941,865 25,972,215 71,512 782,836 1,098,976 $ 23,449,953 $ 854,348 1,098,976 $ 4,769,402 $ 854,348 18,680,551 $ 1,098,976 $ 23,449,953 $ 854,348 The accompanying notes are an integral part of these basic financial statements. 29 CITY OF PEARLAND, TEXAS STATEMENT OF CASHFLOWS .PROPRIETARY FUNDS For the Year Ended September 30, 2013 Page 2 of 2 Governmental Business -Type Activities - Enterprise Funds Activities - Water and Solid Waste Internal Sewer Fund Fund Total Service Fund Reconciliation of operating income (loss) to net cash provided by (used in) operating activities Operating income (loss) $ 2,248,857 $ (148,588) $ 2,100,269 $ (511,503) Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation and amortization 9,335,337 - 9,335,337 Recovery of allowance / - 17,474 17,474 (Increase) decrease in accounts receivable (249,131) (109,422) (358,553) (52,505) (Increase) decrease in prepaid expenses 50,559 50,559 (10,086) Increase (decrease) in accounts payable 1,638,146 397,035 2,035,181 (29,972) Increase (decrease) in compensated absences (75,396) - (75,396) Increase (decrease) in customer deposits 231,900 - 231,900 Increase (decrease) in other post employment benefits 74,077 74,077 Net cash provided by (used in) operating activities Summary of non -cash transactions Contributed capital assets $ 10,330,407 $ - $ 10,330,407 $ Change in value of investments $ 9,791 $ - $ 9,791 $ $ 13,254,349 $ 156,499 $ 13,410,848 $ (604,066) The accompanying notes are an integral part of these basic financial statements. 30 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. 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 and 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. Blended component units are component units that are considered so closely related to the legal entity that the blended component unit funds appear as if the funds are integral parts of the primary government. Based upon GASB 61 criteria, the City's financial statements include the following blended 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 govenunent 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 goverment are that it has a separately elected Governing body; it is legally separate; and itis 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 commponent 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. 3.1 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) A. Financial Reporting Entity (continued) Blended 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 a specific geographic area known as Shadow Creek Ranch, 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. Related Organizations The City Council of Pearland appoints the voting majority of members to the board of directors for the Pearland Municipal Management District No. 1, Pearland Municipal Management District No. 2 and Lower Kirby District. However, the City's accountability for these entities does not extend beyond making appointments. There is no financial benefit/burden relationship or the ability to impose its will on these entities. B. Government -wide and Fund Financial Statements The government -wide financial statements (i.e., the Statement of Net Position and .the Statement of Activities) report information about the City as a whole. These statements include all activities of the primary government and its blended component units. For the most part, the. effect of interfund activity has been eliminated from the governrent-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. 32 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 statement of net position. Proprietary fund -type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net position. 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 govermnent 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-tenn 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 activities column, a reconciliation is presented which briefly explains the adjustments necessary to reconcile fund -based financial statements with the governmental activities 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, community services, public works, parks and recreation, economic development, and public safety. 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 irnprovernent projects. The Capital Projects Fund is considered a major fund for reporting purposes.. 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 (continued) The Pearland Economic Development Corporation fund is used to account for the revenues and expenditures associated with the half -cent sales tax for economic development approved by the voters in 1995. Use of funds are governed by State Law. The Pearland Economic Development Corporation is considered a major fund for reporting purposes. The Tax Increment Reinvestment Zone #2 fund is used to account for the incremental property tax revenues in the specific geographical area and use thereof from the participating taxing entities in the Zone. The Tax Increment Re -investment Zone #2 is considered a major fund for reporting purposes. The Development Authority of Pearland fund is used to account for the financing of the development of the TIRZ #2. The Development Authority of Pearland 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 Internal Service. Funds 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 Funds are included in governmental activities for government -wide reporting purposes. All assets, liabilities, equities, revenues, expenses and transfers relating to the government's business -type • activities are accounted for through proprietary funds. The measurement focus is on determination of net income, financial position and cash flows. As a general rule, the effect of interfund activity has been eliminated from the government -wide financial statements. Exceptions to this general. rule are charges between the City's water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include: (1) charges to customers or applicants for goods, services, or privileges provided, (2) operating grants and contributions, and (3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenue. Likewise, general revenue includes all taxes. 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 hind's principal ongoing operations. The principal operating revenues of the City's Enterprise Funds 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 expenses. 34 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies 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 that 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 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. When multiple categories of fund balance are available for an expenditure, the City would typically use Restricted fund balances first, followed by Committed, and then Assigned, but reserves the right to selectively spend from any of the categories, including Unassigned based upon the individual circumstances. 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. 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. 35 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies (continued) 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 Position 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 Position 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 beused in case of unforeseen items of expenditure. 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. • 36 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) E. Cash and Cash Equivalents (continued) 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.) Goverment Agency securities and Certificates of Deposit with original maturities greater than three months from date of acquisition. 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". Interfund receivables and payables which are not expected to be paid within 12 months are classified as loans from/loans to other fiends. 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 than 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 statement of net position because their use is limited by applicable bond covenants. Certain resources are also set aside for repayment of Pearland Economic Developinent Corporation Bonds and are reported as restricted assets. K. Capital Assets Capital assets which include property, plant, equipment and infrastructure, are reported in the applicable governmental or business -type activities columns in the government -wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $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 37 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) K. Capital Assets (continued) extend assets' lives are not capitalized. Additionally, at September 30, 2013 the City reports intangible assets under business -type activities, which include $34.5 million in surface water rights with a life of 25 years. Property, plant, equipment and intangible assets 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 Intangible Assets - Water Rights 25 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. Employees cannot 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 12 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 compensatory time is 120 hours, including employees involved in public safety. All sick leave benefits are accumulated and paid to employees, in good standing, 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 find financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. M. Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and .the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. 38 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) N. Comparative Data 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. O. Current Accounting Pronouncements In December 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus — an amendment of GASB Statements No. 14 and No. 34. This Statement is intended to improve financial reporting for a governmental financial reporting entity. The requirements of this Statement result in financial reporting entity financial statements being more relevant by improving guidance for including, presenting, and disclosing information about component units and equity interest transactions of a financial reporting entity. This Statement provides amendments to GASB No. 14, "The Financial Reporting Entity," and: GASB No. 34, `Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments." The requirements of this Statement are effective for fiscal periods beginning after June 15, 2012. The City implemented this statement in fiscal year 2013. As a result of implementation, the City determined that the three previously identified discretely presented component units met the criteria for inclusion as blended component units. These blended component units have been reflected as major governmental funds and are included in governmental activities in the government -wide statements. This implementation resulted in a retroactive adjustment to reduce beginning net position by $43,231,585. Additionally, as reflected in Notes 4 and 5, beginning (2012) capital assets and long-term debt have been restated to include the blending of the component units. In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements. This Statement is intended to improve financial reporting by contributing to the GASB's efforts to codify all sources of generally accepted accounting principles for state and local governments so that they derive from a single source. This requirement will bring the authoritative accounting and financial reporting literature together in one place. This Statement will eliminate the need for financial statement preparers and auditors to determine which FASB and AICPA pronouncement provisions apply to state and local governments, resulting in more consistent application of applicable guidance. The requirements of this Statement are effective for fiscal periods beginning after December 15, 2011. The City implemented this statement in fiscal year 2013; this had no effect on the financial statements. In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. / This statement is intended to improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government's net position which required the City tochange references to net assets to net position. It alleviates uncertainty about reporting those financial statement elements by providing guidancewhere none previously existed. The requirements of this Statement are effective for fiscal periods beginning after December 15, 2011. The City implemented this statement in fiscal year 2013, which required the City to change references to net assets to net position. 39 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) O. Current Accounting Pronouncements (continued) Future Accounting Pronouncements In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. This statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflow of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term "deferred" in financial statement presentations. This statement is effective for periods beginning after December 15, 2012. The City anticipates implementation of this statement in fiscal year 2014. Also in March of 2012, the GASB issued Statement No. 66, Technical Corrections — 2012 — an amendment of GASB Statements No. 10 and No. 62. The objective of this statement is to improve accounting and financial reporting for a govermment financial reporting entity by resolving conflicting guidance that resulted from issuance of two pronouncements, Statements No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions" and No. 62, "Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 . FASB and AICPA Pronouncements." The City anticipates implementation of this statement in fiscal year 2014. In June of 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans — an amendment of GASB Statement No. 25. This statement is intended to improve financial reporting by state and local governmental pension plans and replaces the requirements of Statements No. 25, "Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans" and No. 50, "Pension Disclosures." This statement is effective for financial statements for fiscal years beginning after Rine 15, 2013.. The City anticipates implementation of this statement in fiscal year 2014. Also in June of 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions — an amendment of GASB Statement No. 27. The primary objective of this statement is to improve accounting and financial reporting by state and local governments for pensions. It replaces the requirements of Statement No. 27, "Accounting for Pensions by State and Local Governmental Employers" as well as the requirements of Statement No. 50, "Pension Disclosures." This statement is effective for financial statements for fiscal years beginning after June 15, 2014. The City anticipates implementation of this statement in fiscal year 2015. GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations. This statement establishes accounting and financial reporting standards related to government combinations and disposals of government operations. The term, "government combinations," includes a variety of transactions referred to as mergers, acquisitions, and transfers of operations. This statement is effective -for govermment combinations and disposals of government operations occurring. in financial reporting periods beginning after December 15, 2013. The City anticipates, implementation of this statement in fiscal year 2015. 40 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) P. Current Accounting Pronouncements (continued) Future Accounting Pronouncements (continued) GASB issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. This Statement also requires a government that has issued an obligation guaranteed in a nonexchange transaction to report the obligation until legally released as an obligor, and requires a government that is required to repay a guarantor for making a payment on a guaranteed obligation or legally assuming the guaranteed obligation to continue to recognize a liability until legally released as an obligor. This statement is effective for reporting periods beginning after June 15, 2013. The City anticipates implementation of this statement, if applicable in fiscal year 2014. GASB issued Statement No. 71, Pension Transition, for Contributions Made Subsequent to the Measurement Date (an amendment of GASB Statement No. 68). This Statement amends Statement No. 68 related to transition provisions for certain pension contributions made to defined benefit pension plans prior to implementation of Statement No. 68 by employers and nonemployer contributing entities. This statement is effective for fiscal years beginning after June 15, 2014. The provisions of this Statement should be applied simultaneously with the provisions of Statement No. 68. .The City anticipates implementation of this statement in fiscal year 2015. 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 investinent 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 investinent 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 investinent 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. 41 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Authorization for Deposits and Investments (continued) Government or U.S. Government Agencies, obligations of the State of Texas, counties, cities, and other political subdivisions rated not less than A, fully collateralized certificates of deposit, mutual funds, repurchase agreements and local government investment pools. The maximum maturity allowed is five years from date of purchase. The City's investment policy does not allow investments in collateralized mortgage obligations. Deposit and Investment Amounts The City's cash and investments are classified as: cash and cash equivalents, investments, and restricted cash and investments. The cash and cash equivalents include cash on hand, deposits with financial institutions, and short-term investments, which have maturities at purchase of less than three months, 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 as allowed by the City's investment policy. 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 deposits and investments at year-end: Total Fair Value Cash deposits $ 73,177,112 Investments: FFCB discount note 7,513,881 FHLB discount note 3,012,122 FHLMC discount note 5,018,755 FNMA discount note 2,521,657 Certificates of deposit 16,608,404 $ 107,851,931 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 earnings as follows: Interest income $ 245,070 Unrealized gain on ternporaiy investments 4,542 .Investment earnings $ 249,612 42 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Custodial Credit Risk For deposits, custodial credit risk is the risk that in the event of a bank failure, the City's deposits may not be returned to it. The City's investment policy follows state statutes, which require that all deposits in financial institutions be fully collateralized or insured. For investments, custodial credit risk is the risk that in the event of the failure of a counterparty, the City will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. To control custody and safekeeping risk, the City shall have pledged collateral held at an independent third -party institution and evidenced by a written receipt. The value of the pledged collateral should be marked to market monthly and shall be at least 102 percent of par or market value of the investments, whichever is greater. Substitutions of collateral shall meet the requirements of the collateral agreement. Collateral shall not be released until the replacement collateral has been received, if the release of the collateral should result in the value being under 102 percent of par value. The pledge of collateral shall comply with the City's investment policy. The City was not exposed to any custodial credit risk during the year. Interest Rate Risk At year-end, the City had the following investments subject to interest rate risk, under U.S. generally accepted accounting principles: Weighted Average Total Maturity Fair Value (Days) Temporary investments: FFCB discount note $ 7,513,881 332 FHLB discount note 3,012,122 361 FHLMC discount note 5,018,755 996 FNMA discount note 2,521,657 314 $ 18,066,415 Portfolio weighted average maturity 519 The City's investment policy specifies a maximum weighted average maturity for the portfolio of 900 days or 30 monthsbased on the stated maturity date of the investments. When including cash investments, the weighted average maturity for the City is 165 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 five years or 1,825 days from date of purchase. The settlement date is considered the date of purchase. �13 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2.- Deposits (Cash) and Investments (continued) 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, 2013, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Investment Type Percentage of Total Total Investment Fair Value Portfolio. FFCB discount note $ 7,513,881 41% FHLB discount note 3,012,122 17% FHLMC discount note 5,018,755 28% FNMA discount note 2,521,657 14% Total Credit Risk $ 18,066,415 100% Federal Horne Loan Bank, Federal Horne 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. The city had no investments in an investment pool. 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 Revenue bond debt service $ 2,988,697 Customer deposits 3,023,012 Capital improvements 21,3 84,506 Total $ 27,396,215 44 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables Receivables at September 30, 2013, consisted of the following: Governmental Funds: Receivables: Property taxes, including penalties and interest Lease receivable Sales and other taxes Fines and forfeitures Interest Other Allowance for uncollectibles Enterprise Funds: General Fund Debt Service Fund Capital Projects Fund Pearland Economic Development Corporation Tax Increment Reinvestment Zone Developments Development Authority of Pea'rland $ 536,148 $ 873,642 $ $ $ 130,541 $ 8,835,487 3,938,047 - 1,344,827 930,995 - - - 7,801 771 123 8,010 693,515 - 868,118 73,147 (11,609) (17,071) - $ 6,094,897 $ 9,692,829 $ 868,241 $ 1,425,984 $ 130,541 $ Other Non -Major Funds Total - $ - $ 1,540,331 8,835,487 32,981 5,315,855 6,953 937,948 12 71 16,788 2,822,079 4,456,859 (7,850) (36,530) Receivables: Customer accounts Interest Other Allowance for uncollectibles Water and Sewer Fund $ 3,020,156 25,938 19,088 (54,018) 12 $ 2,854,234 $ 21,066,738 Solid Waste Fund $ 867,157 (44,815) Internal Service Fund 63,737 Total $ 3,887,313 25,938 82,825 (98,833) $ 3,011,164 $ 822,342 $ 63,737 $ 3,897,243 Governmental funds report 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 unavailable/unearned 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 Street assessments. Other Lease -interest revenues Grants and revenues prior to meeting all eligibility requirements Unavailable Unearned $ 470,445 $ 745,491 6,809,424 937,948 2,484,917 69,785 2,026,064 1,607,216 Total Gnavailabe/Unearned for Governmental Funds $ 11,518,010 $ 3,633,280 45 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables (continued) 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. Note 4 - Capital Assets A summary of changes in the primary government's capital assets for the year ended September 30, 2013, follows: Governmental Activities Non -depreciable Capital Assets Land Construction in progress Balance September 30, 2012 (Restated) Increases Decreases $ 31,260,913 23,488,810 $ 3,372 18,394,519 Balance September 30, 2013 $ $ 31,264,285 (18,576,872) 23,306,457 Total Non -depreciable capital assets 54,749,723 18,397,891 (18,576,872) 54,570,742 Depreciable Capital Assets Infrastructure 804,204,296 58,680,475 862,884,771 Buildings and improvements 87,473,376 10,457,147 - 97,930,523 Machinery and equipment 13,519,791 2,111,961 (600,435) 15,031,317 Furniture and fixtures 2,662,298 2,037,431 4,699,729 Total depreciable capital assets 907,859,761 73,287,014 (600,435) 980,546,340 Less accumulated depreciation for: Infrastructure Buildings and -improvements Machinery and equipment Furniture and fixtures Total accumulated depreciation Depreciable capital assets, net Totals (230,452,471) (16,711,196) (8,319,855) (1,789,729) (257,273,251) 650,586,510 $ 705,336,233 46 (24,492,719) (3,320,164) - (1,101,666) 555,524 (446,385) (29,360,934) 555,524 (286,078,661) (254,945,190). (20,031,360) (8,865,997) (2,236,114) 43,926,080 (44,911) 694,467,679. $ 62,323,971 $ (18,621,783) $ 749,038,421 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) Business -Type Activities Capital assets: Land Construction in progress Total nondepreciaable capital assets Other capital assets: Water and sewer system Buildings and improvements Machinery and equipment Furniture and fixtures Contractual water rights Total depreciable capital assets Less accumulated depreciation for: Water and sewer system Buildings and improvements Machinery and equipment Furniture and fixtures Contractual water rights Total accumulated depreciation Depreciable capital assets, net Totals Balance September 30, 2012 $ 3,609,542 5,418,810 9,028,352 280,739,923, 31,256,473 3,368,901 96,127 34,511,428 349,972,852 (81,229,112) (3,358,082) (2,169,842) (51,767) (5,903,960) (92,712,763) 257,260,089 $ 266,288,441 Depreciation was charged to programs as follows: General goverm-rent Public safety Public works Community services Parks and recreation Total Government Activity Water and sewer Increases Decreases $ 186,840 $ 3,499,225 3,686,065 20,008,401 492,765 10,000 20,511,166 (6,853,177) (729,978) (314,380) (17,750) (1,380,457) (9,295,742) 11,215,424 $ 14,901,489 $ 23,136 $ 281,213,066 Balance September 30, 2013 $ 3,796,382 8,918,035 12,714,417 300,748,324 31,256,473 (155,010) 3,706,656 106,127 34,511,428 (155,010) 370,329,008 (88,082,289) (4,088,060) 178,146 (2,306,076) (69,517) (7,284,417) 178,146 (101,830,359) 23,136 268,498,649 758,797 1,918,725 24,241,247 227,991 2,214,174 $ 29,360,934 9,295,742 Total Business -Type Activity $ 9,295,742 47 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) The City had active construction projects as of September 30, 2013. 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 Drainage improvement Building improvements Street improvement Park improvements Water and sewer improvements Totals Note 5 - Long -Term Debt Progress $ 5,099,765 2,770,425 12,383,037 2,745,652 9,225,613 $ 32,224,492 Commitment $ 1,997,611 2,534,291 4,212,683 1,617,073 6,678,510 $ 17,040,168 A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds 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 City's component units, which are considered blended components units, have revenue bonds used to acquire and construct or to reirnburse developers for major capital improvements. Revenue bonds are paid through the Pearland Economic Development Corporation from sales tax and through the Development Authority of Pearland from property tax increment. 43 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The following is a summary of changes in the City's total governmental long-term liabilities for the year ended September 30, 2013. In general, the City uses the General and Debt Service funds as well as the Economic Development Corporation and Development Authority to liquidate governmental long-term liabilities. Governmental Activities: Bonds payable: General obligation bonds Certificates of obligation Sales tax revenue bonds Tax increment revenue bonds Deferred loss on refunding Unamortized premium/(discount) Total bonds payable Other liabilities: Obligations under capital leases Compensated absences Other post -employment benefits Total Governmental Activities Balance September 30, 2012 (Restated) Additions . Reductions $ 224,170,000 $ 13,515,000 65,425,000 2,745,000 24,490,000 54,235,000 (12,351,438) - 6,479,066 303,003 362,447,628 16,563,003 3,406,759 1,186,346 4,724,243 2,678,203 1,535,386 419,768 $ (7,645,000) (3,480,000) (880,000) (2,720,000) 1,297,946 (623,102) Balance September 30, 2013 $ 230,040,000 64,690,000 23,610,000 51,515,000 (11,053,492) 6,158,967 (14,050,156) (911,739) (2,395,717) $ 372,114,016 $ 20,847,320 $ (17;357,612) Amounts Due Within One Year $ 6,765,000 3,710,000 920,000 2,800,000 364,960,475 14,195,000 3,681,366 5,006,729 1,955,154 929,000 794,732 $ 375,603,724 $ 15,918,732 Long-term liabilities applicable to the City's govermmental 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. 49 CITY OF PEARLAND, TEXAS. NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) A summary of the terms of general obligation bonds and certificates of obligation, as of September 30, 2013, follows: Interest Debt Series Original Issue Matures Rate (%) Outstanding General Obligation Bonds Permanent Irprovement and Refunding Bonds, Series 2005 37,015,000 2029 4.00-5.00 $ 20,725,000 Permanent hnprovement and Refunding Bonds, Series 2006 32,165,000 2029 4.00-5.00 30,860,000 Permanent Improvement and Refunding Bonds, Series 2007 69,640,000 2032 4.00-5.00 66,625,000 Permanent Improvement, Series 2008 22,835,000 2032 4.50-5.50 21,695,000 Permanent Improvement Refunding Bonds, Series 2009 16,735,000 2034 2.50-5.00 15,375,000 Permanent Improvement, Series 2010A 12,415,000 2035 2.00-4.25 11,350,000. . Permanent Improvement Refunding, Series 2010B 1,630,000 2018 2.00-4.00 1,000,000 Permanent Improvement, Series 2011 5,400,000 2036 3.00-4.125 5,200,000 Permanent Improvement Refunding Bonds, Series 2012 43,575,000 2029 3.00-5.00 43,575,000 Permanent Improvement Bond Series 2013 9,315,000 2038 3.00-4.625 9,315,000 Annexed Municipal Utility District Bonds BC MUD 1 Series 2007 • 1,940,000 2030 3.8-4.35 1,810,000 BC MUD 4 Series 2011 2,640,000 2032 2.50-5.00 2,510,000 Total General Obligation Bonds $ 230,040,000 Certificates of Obligations Certificates of Obligation, Series 2003 25,000,000 2014 3.60-3.75 1,035,000 Certificates of Obligation, Series 2004 21,000,000 2015 4.00 1,420,000 Certificates of Obligation, Series 2006 9,700,000 2029 4.125-6.125 8,825,000 Certificates of Obligation, Series 2007 23,250,000 2032 3.25-5.25 22,450,000 Certificates of Obligation, Series 2008 9,000,000 2032 3.875-5.00 8,480,000 Certificates of Obligation, Series 2009 8,520,000 2034 2.50-5.00 7,835,000 Certificates of Obligation, Series 2009A 12,145,000 2029 2.25-4.50 10,225,000 Certificates of Obligation, Series 2011 .2,095,000 2021 2.09 1,675,000 Certificates of Obligation, Series 2013 2,745,000 2038 3.00-4.625 2,745,000 Total Certificates of Obligation $ 64,690,000 A summary of the terms of the revenue bonds recorded as long-term liabilities in the Pearland Economic Development Corporation and Development Authority of Pearland funds as of September 30, 2013, is as follows: Interest Debt Series Original Issue Matures Rate (%) Outstanding Pearland Economic Development Corporation Sales Tax Revenue and Refunding Bonds, Series 2005 $ 11,050,000 2026 4.0-5.0 $ 7,540,000 Sales Tax Revenue Bonds, Series 2006 10,235,000 2030 4.25-5.0 9,075,000. Sales Tax Revenue Bonds, Series 2010 7,685,000 2030 Variable -resets 6,995,000 every 6 months Development Authority of Pearland Tax Increment Contract Revenue and Refunding Bonds, Series 2012 56,915,000 2028 3.07 * 51,515,000 Total Revenue Bonds $ 75,125,000 x Fixed for 10 years, then rate changes to be 65% of LIBOR, not to exceed 6.0%. 50 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) Prior Year Refunding In prior years, the City defeased certain generalobligation 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, 2013, approximately $26.4 million of previously refunded bonds outstanding were considered defeased. 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 $6.8 million. Following is a summary of future lease payments due on this equipment: Fiscal Year Obligations 2014 $ 1,118,848 2015 1,118,848 2016 809,406 2017 629,950 2018-2019 527,391 Total 4,204,443 Less: Interest 262,093 Obligations under capital leases $ 3,942,350 51 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30, 2013, were as follows: Governmental Activities General Obligation Certificates of Obligation Fiscal Year Principal Interest Principal Interest 2014 $ 6,765,000 $ 9,913,967 $ 3,710,000 $ 2,722,249 2015 7,765,000 9,572,070 2,745,000 2,592,723 2016 8,865,000 9,190,377 2,120,000 2,500,538 2017 8,490,000 8,805,299 2,190,000 2,416,016 2018 8,375,000 8,443,772 2,765,000 .2,312,640. 2019 10,745,000 8,026,805 3,010,000 2,192,779 2020 11,580,000 7,541,328 3,050,000 2,065,511 2021 11,845,000 7,033,931 3,165,000 1,933,459 2022 12,840,000 6,496,949 3,060,000 1,796,233 2023 13,160,000 5,929,679 3,180,000 1,654,141 2024 13,925,000 5,332,766 3,310,000 1,504,781 2025 14,350,000 4,731,384 3,430,000 1,347,751 2026 14,615,000 4,133,095 3,580,000 1,180,803 2027 15,720,000 3,498,791 3,950,000 1,018,540 2028 16,255,000 2,835,511 3,995,000 863,823 2029 16,680,000 2,128,625 4,175,000 700,421 2030 9,650,000 1,534,628 3,410,000 544,513 2031 9,590,000 1,085,420 3,805,000 384,238 2032 10,125,000 627,044 4,185,000 199,088 2033 2,650,000 333,419 635,000 86,263 2034.. 2,765,000 208,507 660,000 55,163 2035 1,520,000 112,044 130,000 22,813 2036 795,000 62,122 140,000 16,650 2037 480,000 33,763 140,000 10,175 2038 490,000 11,331 150,000 3,469 $ 230,040,000 $ 107,622,627 $ 64,690,000 $ 30,124,780 52 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The annual requirements to amortize blended component unit revenue bonds outstanding at September 30, 2013, were as follows: Fiscal Year Governmental Activities Pearland Economic Development Development Authority of Corporation Pearland Principal Interest Principal Interest 2014 $ 920,000 $ 1,110,514 $ 2,800,000 $ 1,581,511 2015 965,00.0 1,068,839 2,885,000 1,495,550 2016 1,010,000 1,025,057 2,970,000 1,406,981 2017 1,060,000 976,218 3,070,000 1,315,802 2018 1,115,000 924,986 3,160,000 1,221,553 2019. 1,175,000 870,739 3,255,000 1,124,541 2020 1,230,000 819,126 3,120,000 1,024,613 2021 1,285,000 764,705 3,215,000 928,828 2022 1,350,000 707,225 3,030,000 830,128 2023 1,415,000 645,158 3,130,000 737,107 2024 1,480,000 579,894 3,225,000 641,016 2025 1,555,000 511,083 3,320,000 542,008 2026 1,635,000 438,397 3,425,000 440,085 2027 1,715,000 361,922 3,530,000 334,937 2028 1,805,000 275,920 3,635,000 226,566 2029 1,895,000 188,544 3,745,000 114,972 2030 2,000,000 96,818 - $ 23,610,000 $ 11,365,145 $ 51,515,000 $ 13,966,198 53 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) B. Enterprise Fund Debt The following is a summaryof changes in the City's total business -type long-term liabilities for the year ended September 30, 2013: Balance Balance Amounts September 30, September 30, Due Within 2012 Additions Reductions 2013 One Year Business -Type Activities: Bonds payable: Permanent Improvement bonds $ 15,130,000 $ $ (1,110,000) $ 14,020,000 $ 1,155,000 Water and sewer revenue bonds 109,305,000 (3,615,000) 105,690,000 3,765,000 Deferred loss on refunding . (610,450) 50,481 (559,969) - Unamortized premium/(discount) 881,600 (151,290) 730,310 Total bonds payable 124,706,150 (4,825,809) 119,880,341 4,920,000 Other liabilities: Obligations under capital leases 342,364 (81,380) 260,984 84,122 Compensated absences 538,878 276,771 (352,167) 463,482 78,740 Other post -employment benefits 282,467 74,077 - 356,544 - Total Business -Type Activities $ 125,869,859 $ 350,848 $ (5,259,356) $ 120,961,351 $ 5,082,862 A summary of the terms of permanent improvement bonds and revenue, bonds recorded in the Enterprise Funds as of September 30, 2013, is as follows: Interest Debt Series Original Issue Matures Rate (%) Outstanding. Water and Wastewater Fund Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 . $ 8,000,000 2020 4.60 $ 2,710,000 Water and Sewer System Revenue Bonds, Series 2003 9,500,000 2014 4.00 340,000 Water and Sewer System Revenue and Refunding Bonds, Series 2006 13,845,000 2031 4.3-5.125 10,850,000 Water and Sewer System Revenue Bonds, Series 2007 40,135,000 2031 3.50-5.50 36,625,000 Water and Sewer System Revenue Bonds, Series 2008 14,950,000 2034 4.125-5.00 13,945,000 Water and Sewer System Revenue Bonds, Series 2009 13,130,000 2034 3.00-5.50 11,720;000 Permanent Improvement and Refunding Bonds, Series 2009 11,660,000 2018 2.50-5.00 7,790,000 Water and Sewer System Revenue Bonds, Series 2010A 14,040,000 2035 2.00-4.50 12,900,000 Water and Sewer System Revenue and Refunding Bonds, Series 2010B • 8,970;000 2023 2.00-4.00 8,225,000 Permanent Lnprovement and Refunding Bonds, Series 2012 6,230,000 • 2025 3.00-5.00 6;230,000 Water and Sewer System Revenue and Refunding Bonds, Series 2012 8,670,000 2037 2.00-3.625 8,375,000 • Total Utility System Fund $ 119,710,000 54 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 business -type activity revenue bonds and permanent improvement bonds outstanding at September 30, 2013, were as follows: Business Type Activities Revenue Bonds Permanent Improvement Bonds Fiscal Year Principal Interest Principal Interest 2014 $ 3,765,000 $ 4,584,324 $ 1,155,000 $ 525,325 2015 3,575,000 4,439,468 1,530,000 474,812 2016 3,725,000 4,302,208 1,560,000 427,900 2017 3,880,000 4,153,814 2,415,000 344,001 2018 4,030,000 4,005,011 2,515,000 232,188 2019 4,195,000 3,847,690 365,000 171,700 2020 4,370,000 3,683,168 370,000. 157,000 2021 4,615,000 3,503,757 370,000 142,200 2022 4,810,000 3,306,021 385,000 127,100 2023 5,025,000 3,100,221 395,000 111,500 2024 4,190,000 2,884,169 1,480,000 . 74,000 2025 4,440,000 2,689,273 1,480,000 22,200 2026 6,155,000 2,477,948 2027 6,450,000 2,181,686 2028 6,765,000 1,867,325 2029 7,080,000 1,552,814 2030 7,375,000 1,257,306 2031 7,680,000 948,088 2032 3,710,000 625,250 2033 3,895,000 444,575 2034 4,075,000 264,360 2035 1,180,000 75,725 2036 345,000 25,556 2037 360,000 13,050 C. Legal Compliance $ 105,690,000 $ 56,232,807 $ 14,020,000 $ 2,809,926 Long-term debt assumed by the City upon dissolution of annexed municipal utility districts in fiscal years 2006, 2007, and 2013 has been recorded as part of the City's long-term debt. A portion of the assumed debt is related to assets recorded iri 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, 2013, is as follows: Summary Table of Interfund Transfers for the Year Ended September 30, 2013 Transfers From Other Funds Transfers To Other Funds General Debt Service Fund Capital Projects Water & Sewer Fund Internal Service Fund Nonmajor - Aggregate Remaining Funds Total General Fund Debt Service $ 161,445 1,654,245 137,263 1,426,126 218,961 560,250 532,751 20,748 3,613,122 1,098,667 Capital Projects 5,000 Water & Sewer Fund 284,838 General Fund • 161,445 Nonmajor - Aggregate Remaining Funds 10,443 Total Debt Service Fund 461,726 Capital Projects General Fund 137,263 1,654,245 Debt Service 5,000 Internal Service Fund 284,352 - Total Capital Projects 421,615 1,659,245 Water & Sewer Debt Service Fund . 284,838 General Fund 218,961 1,426,126 Internal Service Fund - 114,750 Total Water and Sewer 218,961 1,825,714 Internal Service - COP Health Claims Fund General Fund 560,250 Water & Sewer Fund 114,750 Total Internal Service Fund 675,000 Tax Increment Reinvestment Zone #2 Development Authority of Pearland 10,997,930 Development Authority of Pearland Tax Increment Reinvestment Zone #2 10,997,930 Other Governmental Funds General Fund 20,748 532,751 Capital Projects 2.84,352 Debt Service Fund 10,443 Total Other Governmental Funds 20,748 827,546 Total $ 16,409,102 $ 16,409,102 56 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 6 - Interfund Transactions (continued) A summary of interfund receivables and payables at September 30, 2013, follows: Receivable Fund Payable Fund Amount Purpose General Fund Note 7 - Fund Balance Encumbrances Non -Major Governmental Fund $ 118,097 Short-term loan to. fund operations Encumbrance accounting is employed as an extension of formal budgetary integration for the general fund, special revenue funds, and capital projects funds. As of September 30, 2013, certain amounts which were classified as restricted 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 $ 1,553,390 Capital Projects - restricted 5,799,338 Debt service - restricted 7,405 Aggregate non -major funds restricted 357,583 7,717,716 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. 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 ("TNIRS"), one of 849 currently administered by TMRS, an agent multiple -employer public employee retirement system. 57 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Plan Description and Provisions (continued) 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 2012 Plan Year 2013 Employee deposit rate 7.0% 7.0% Matching ratio (City to employee) 2 to 1 2 to 1 Years required for vesting 5 5 Service retirement eligibility (expressed as a age/years of service) 60/5, 0/20 60/5, 0/20 Updated service credit 100% Repeating, Transfers 100% Repeating, Transfers Annuity increase (to retirees) 70% of CPI Repeating 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. 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. 58 CITY OF PEARLAND, TEXAS NOTES TO FINANCL4L STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Contributions (continued) The City's total payroll in fiscal year 2013 was $31.2 million and the City's contributions were based on a payroll of $29.7 million. Contributions made by employees totaled $2 1 million, and the City made contributions of $3.8 million during the fiscal year ended September 30, 2013. Three-year trend information is presented below: Annual Pension Cost (APC) Percentage of APC contributed NPO at the end of the period 2013 2012 2011 $ 3,780,847 100% $ 3,518,289 100% $ 3,302,952 100% 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, 2012, valuations are contained in the 2012 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 25.3 years - closed period Amortized cost 7.00% Varies by age and service 3.00% 2.10% 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. 59 CITY OF PEARLAND, TEXAS NOTES TO FINANCL4L STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Contributions (continued) A schedule of funding status and progress for TMRS for the most recent valuation date follows: Unfunded Actuarial Actuarial (UAAL) as a Valuation Actuarial Actuarial Accrued Annual Percentage Date Value of Accrued Percentage Liability Covered of Covered December 31, Assets Liabilities Funded (UAAL) Payroll Payroll 2012 $ 69,800,322 $ 85,022,771 82% $ 15,222,449 $ 28,876,260 53% 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: Number of Total • City's Emp/Dep Retired Cost Cost Coverage Cost Employees 77,684 $ 77,684 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. 60 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 10 - Other Post -Employment Benefits (continued) The Governmental Accounting Standards Board published guidelines regarding accounting and fmancial reporting by employers for post -employment benefits other than pensions. This standard gives guidance regarding the methods and timing for reporting. The effect of the standard 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. The results of the City's most recent actuarial valuation are as follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Actuarial Accrued Annual Percentage Valuation Date Value Accrued Percentage Liability Covered of Covered October 1, of Assets Liabilities Funded (UAAL) Payroll Payroll 2012 $ - $ 8,339,937 0% $ 8,339,937 $ 28,876,260 29% Net OPEB obligations at year-end for the last three fiscal years are as follows: Normal cost Amortization of UAAL 2011 2012 2013 $ 206,293 $ 190,706 $ 243,253 141,837 141,837 177,878 Annual required contribution (ARC) 348,130 332,543 421,131 Interest on prior -year net OPEB obligation 41,540 57,127 72,715 Estimated increase in net OPEB obligation Net OPEB obligation - beginning of year 389,670 389,670 493,846 1,038,512 1,428,182 1,817,852 Net OPEB obligation - end of year $ 1,428,182 $ 1,817,852 $ 2,311,698 The annual cost recorded to the general ledger for fiscal year 2013 is $493,846, which includes the estimated normal cost of $243,253 to provide for the benefits earned by active employees. The total liability, which is not recorded to the general ledger, is $8,339,937, 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, 2012 include using the Projected Unit Credit actuarial costs method, a closed amortization period of 26 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. 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, 2013. 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 City of Pearland offers incentives to attract businesses to Pearland. The following ate the current incentives. Current Incentives Altus Harbor Braska/Neela, Inc. Cardiovascular Systems, Inc. Hatch Mott KS Management KS Management Sales Tax Est. Merit Medical Systems, Inc. Ref -Chem SCR HH GP, LLC Dover Shadow Creek Town Center Amount Prior Years FY 2013 $ 87,500 150,000 5,100,000 100,000 2,600,000 600,000 888,000 340,000 300,000 180,000 630,000 $ 65,000 4,100,000 Balance 15,000 $ 7,500 150,000 - 1,000,000 0 2,600,000 600,000 888,000 100,00 340,000 120,000 630,000 $ 10,795,500 $ 4,345,000 $ 605,000 $ 5,845,500 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 achievedfor 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, 2013, the City remitted sales tax to the developer pursuant to the agreement in the amount of $1,900,828, of which $444,060 was remitted in fiscal year 2013. To date, $1.5 million has been reimbursed towards principal and $448,585 for interest. The balance due as of September 30, 2013 is $555,820. 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, 2013, the City believed the amounts paid on Workers' Compensation would not change significantly from the amounts recorded. 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. UHCL has an option to purchase the facility upon the commencement date of July 2010 until the 61st day preceding the 20th anniversary of the commencement date. 63 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 13 - Capital Lease (continued) 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, 2013, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2014 $ 664,384 2015 654,255 2016 643,059 2017 627,598 2018 610,030 2019-2023 2,826,396 2024-2029 2,863,729 Total $ 8,889,451 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, 2013, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2014 $ 111,858 2015 110,153 2016 108,268 2017 105,665 2018 102,707 2019-2023 475,863 2024-2029 482,148 Total $ 1,496,662 64 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 15 - Subsequent Events Lease Purchase City Council approved a Notice of Intent to reimburse itself from future capital lease proceed on October 22, 2012 in an amount not to exceed $2,100,000. On October 14, 2013, City Council awarded the bid to U.S. Bancorp Government Leasing and Finance, Inc.. that provided an interest rate of 2.028%. The amount financed via lease/purchase is $1,852,938 as follows: Equipment. Description Financing Amount Alcatel -Lucent data equipment: (11) 0S6850E-P48X switches, (5) OS685pE-P24X switches, (2) OS6450-P10 swithces, (20) wireless access points and appurtenances $ 121,159 Alcatel -Lucent OmniPCX Enterprise Voice Solution system 166,653 (1) Pierce Impel Pumper Truck and (1) Pierce 75' HAL Aerial, quint, alum. body, single axle Truck 1,277,195 (1) New Frazer Type 1 ambulance on F-350 diesel cab/chassis, and (1) refurbished Frazer Type 1 ambulance module onto new F-350 diesel cab/chassis 211,575 (1) Dybapac model CA134PD 54" pad roller 76,356 Total for financing $ 1,852,938 The. first semi-annual payment is due in January, 2014 in. the amount of $141,722 with the final semi-annual payment due in July, 2020 in the amount of $141,722. The total repayment amount for the seven-year lease term will be $1,948,110. There is no pre -payment penalty for early payoff, and the lender has waives its usual administrative and escrow fees. Development Authority of Pearland Bond Sale, Series 2013 On November 26, 2013, the Development Authority of Pearland issued $9,140,000 in tax increment contract revenue bonds. Proceeds from the bonds will be used to reimburse the developer approximately $8.9 million pursuant to the TIRZ financing plan. The remaining amount on the bonds are for issuance costs. The interest rate is 3.75% with an average annual debt service on the bonds of $779,202 and a maturity of 2029. Based on valuation in the Tax Increment Reinvestment Zone, the Zone is able to pay the debt and maintain a 1.25 coverage. 65 APPENDIX C FORM OF BOND COUNSEL OPINION ANDREWS ATTORNEYS }/` U [j, T FLIP , 2014 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com DRAFT 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 2014, dated , 2014, in the aggregate principal amount of $ maturing on March 1 in each year from through . 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 corplete 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 HO U:3474812.1 Beijing Dallas Houston London New York The Woodlands Washington, DC Page 2 , 2014 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:3474812.1 , 2014 Page 3 tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED 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 City with respect to matters solely within the knowledge of the City, 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. HIOU:3474812.1 OFFICIAL STATEMENT DATED SEPTEMBER 22, 2014 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. The Certificates have NOT been designated as "Qualified Tax -Exempt Obligations for Financial Institutions." NEW ISSUE: BOOK -ENTRY -ONLY RATINGS: Moody's Investors Service, Inc.. "Aa2" Fitch Ratings "AA" "SALE AND DISTRIBUTION OF THE CERTIFICATES — Municipal Bond Ratings" $4,625,000 CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) CERTIFICATES OF OBLIGATION, SERIES 2014 Dated: October 1, 2014 Due: March 1, as shown below Principal of and interest on the $4,625,000 City of Pearland, Texas, Certificates of Obligation, Series 2014 (the "Certificates") are payable by Wells Fargo Bank, N.A., Minneapolis, Minnesota, the initial paying agent/registrar (the "Paying Agent/Registrar"). The Certificates are initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book -Entry -Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Certificates. See "THE CERTIFICATES - Book- Entry -Only System" herein. Interest on the Certificates will accrue from October 1, 2014 and is payable on March 1 and September 1 of each year, commencing March 1, 2015, to the registered owners (initially Cede & Co.) appearing on the registration books of the Paying Agent/Registrar on the 15th day of the month preceding each interest payment date (the "Record Date"). See "THE CERTIFICATES - Description." The Certificates, when issued, will constitute valid and biding obligations of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and 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, Chapter 1434, Texas Government Code, as amended, and an ordinance (the "Certificate Ordinance") approved by City Council on September 22, 2014. See "THE CERTIFICATES — Authorization of the Certificates." Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds" and "- Sources and Uses of Funds." PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES (Due March 1) $3,690,000 Serial Certificates Initial CUSIP Initial CUSIP Maturity Principal Interest Reoffering Nos. Maturity Principal Interest Reoffering Nos. (March 1) Amount Rate Yield (a) 704862 (b) (March 1) Amount Rate Yield (a) 704862 (b) 2015 $230,000 3.000% 0.150% 4H1 2024 $230,000 4.000% 2.480% 4S7 2016 235,000 3.000 0.310 4J7 2025(c) 235,000 4.000 2.580 4T5 2017 230,000 2.000 0.560 4K4 2026(c) 230,000 4.000 2.710 4U2 2018 230,000 2.000 0.860 4L2 **** **** *** *** *** 2019 230,000 2.000 1.180 4M0 2029(c) 230,000 3.125 3.170 4X6 2020 230,000 2.000 1.490 4N8 2030(c) 230,000 3.125 3.250 4Y4 2021 230,000 2.000 1.820 4P3 2031(c) 230,000 3.250 3.300 4Z1 2022 230,000 2.000 2.100 4Q1 2032(c) 230,000 3.250 3.370 5A5 2023 230,000 3.000 2.340 4R9 $935,000 Term Certificates $470,000 Term Certificates Due March 1, 2028 (a)(c)(d) Interest Rate 3.000% (Price $98.909) CUSIP Number 704862 4W8 (b) $465,000 Term Certificates Due March 1, 2034 (a)(c)(d) Interest Rate 3.375% (Price $98.665) CUSIP Number 704862 5C1 (b) (a) The initial yields will be established by and are the sole responsibility of the Initial Purchaser, 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, 2025 and thereafter, are subject to redemption on March 1, 2024 or any date thereafter, at the option of the City, at the par value thereof plus accrued interest from the most recent interest payment dale 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 October 16, 2014. 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 INITIAL PURCHASER 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. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader's convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this final official statement for purposes of, and as that term is defined in, SEC rule 15c2-12. 1 TABLE OF CONTENTS INTRODUCTORY STATEMENT 3 SALE AND DISTRIBUTION OF THE CERTIFICATES 3 Sale of the Certificates 3 Prices and Marketability 3 Securities Laws 3 Municipal Bond Ratings 4 OFFICIAL STATEMENT SUMMARY 5 INTRODUCTION 8 THE CERTIFICATES 8 Description 8 Redemption Provisions 8 Notice of Redemption 9 Book -Entry -Only System 9 Successor Paying Agent/Registrar 11 Source of Payment 11 Authorization of the Certificates 11 Use of Proceeds 11 Sources and Uses of Funds 12 Future Debt 12 Legal Investments and Eligibility to Secure Public Fund in Texas 12 Remedies in the Event of Default 12 INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY 13 Legal Investments 13 Investment Policies 14 Current Investments 15 Additional Provisions 15 CITY TAX DEBT 16 Tax Supported Debt Statement 16 Bonded Indebtedness Payable from Ad Valorem Taxes 16 Tax Supported Debt Service Schedule 17 Estimated Overlapping Debt 18 Debt Ratios 18 TAX DATA 19 General 19 Property Tax Code and County -Wide Appraisal District 19 Tax Rate Limitations 19 Property Subject to Taxation by the City 19 Tax Increment Reinvestment Zone 20 Notice and Hearing Procedures 21 Levy and Collection of Taxes 21 2 Collection of Delinquent Taxes 22 Historical Analysis of Tax Collection 22 Analysis of Tax Base 24 Sales Tax 25 SELECTED FINANCIAL DATA 26 Historical Operations of the City's General Fund 26 General Fund and Debt Service Fund Balance for the Past Five Fiscal Years 26 Pension Fund 26 Financial Statements 27 ADMINISTRATION OF THE CITY 27 Mayor and City Council 27 Administration 27 Consultants 28 LEGAL MATTERS 28 Legal Opinions 28 No -Litigation Certificate 29 No Material Adverse Change 29 TAX EXEMPTION 29 Proposed Tax Legislation 30 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES 30 Discount Certificates 30 Premium Certificates 31 CONTINUING DISCLOSURE OF INFORMATION 31 Annual Reports 31 Material Event Notices 32 Availability of Information 32 Limitations and Amendments 33 Compliance With Prior Undertakings 33 FINANCIAL ADVISOR 33 GENERAL CONSIDERATIONS 33 Sources and Compilation of Information 33 Certification as to Official Statement 33 Forward Looking Statements 34 Updating of Official Statement 34 APPENDIX A — Economic and Demographic Characteristics APPENDIX I3 — Audited Financial Statements of the City. APPENDIX C -- Form of Bond Counsel Opinion CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria, Fort Bend and Harris Counties) $4,625,000 CERTIFICATES OF OBLIGATION, SERIES 2014 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 $4,625,000 Certificates of Obligation, Series 2014 (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 a syndicate composed of Raymond James & Associates, 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 2.928115% 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 TIE CERTIFICATES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 Municipal Bond Ratings In connection with the sale of the Bonds, the City has made application to Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings, Inc. ("Fitch") for a rating and a rating of "Aa2" and "AA", respectively, have been assigned to the Bonds. The City has furnished to Moody's and Fitch certain information and materials relating to the Bonds and the City, including certain information and materials which have not been included in this Official Statement. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the view of such organization and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating company, if in the judgment of such rating company, circumstances so warrant. 4 OFFICIAL STATEMENT SUMMARY The following material is a summary of certain information contained herein and is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement. The reader should refer particularly to sections that are indicated for more complete information. The Issuer The City of Pearland, Texas (the "City") is a political subdivision and home rule city of the State of Texas located within Brazoria, Fort Bend and Harris Counties, Texas. For additional information regarding the City, see "ADMINISTRATION OF THE CITY" and "APPENDIX A — Economic and Demographic Characteristics" herein. The Certificates $4,625,000 Certificates of Obligation, Series 2014 (the "Certificates"), are dated October 1, 2014. The Certificates mature March 1, 2015 through March 1, 2026, inclusive and on March 1 in the years 2028, 2029 through 2032, inclusive, and 2034. Interest on the Certificates accrues from October 1, 2014, and is payable initially on March 1, 2015, and on each September 1 and March 1 thereafter until the earlier of maturity or prior redemption. The Certificates include $3,690,000 principal amount of serial certificates maturing March 1 in each of the years 2015 through 2026, inclusive and 2029 through 2032, inclusive (the "Serial Certificates") and $935,000 principal amount of term certificates maturing March 1 in the years 2028 and 2034 (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, 2025 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, March 1, 2024 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 — Mandatory 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 September 22, 2014. See "THE CERTIFICATES — Authorization of the Certificates." Paying Agent/Registrar The initial paying agent/registrar is Wells Fargo Bank, N.A., Minneapolis, Minnesota (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 The Certificates, when issued, will constitute valid and binding obligations of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and 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." Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the 5 existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds" and "- Sources and Uses of Funds." Ratings Moody's Investors Service, Inc. "Aa2" Fitch Ratings "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 are 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] 6 - Selected Financial Information - (Unaudited) 2014 Adjusted Net Taxable Assessed Valuation $ 7,600,947,549 (a) (100% of market value) 2013 Adjusted Net Taxable Assessed Valuation $ 7,001,455,019 (b) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2014) $ 306,395,000 (c)(d) Plus: The Certificates 4,625,000 Total Tax Supported Debt $ 311,020,000 Estimated Overlapping Debt $ 640,818,464 Direct and Estimated Overlapping Debt $ 951,838,464 Debt Service Fund Balance (as of June 30, 2014) $ 10,454,963 % of 2014 % of 2013 Per Assessed Assessed Capita Valuation Valuation (106,900) Debt Ratios: Direct Tax Supported Debt 4.09% 4.44% $ 2,909 Direct Tax Supported and Estimated Overlapping Debt 12.52% 13.59% $ 8,904 2014 Tax Rate (per $100 of Assessed Valuation) Maintenance and Operation $ 0.2221 Debt Service 0.4900 Total $ 0.7121 Annual Debt Service Requirements: (c)(d) Average (Fiscal Years 2014-2038) $ 18,618,711 Maximum (2024) $ 26,335,309 Tax Collections: Arithmetic Average, Tax Years (2008-2012) - Current Year Collections - Total Collections 99.00% 99.74% (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 $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. (c) Includes a portion of the City's Permanent Improvement and Refunding Bonds, Series 2009 and Permanent Improvement Bonds, Series 2012, which is paid by the water and sewer system. (d) Includes the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which was delivered on September 23, 2014. 7 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 $4,625,000 Certificates of Obligation, Series 2014 (the "Certificates"). The Certificates, when issued, will constitute valid and binding obligations of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and 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." 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 October 1, 2014 and bear interest from such date at the stated interest rates indicated on the cover page of this Official Statement, which interest is payable initially on March 1, 2015, 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, Minneapolis, Minnesota (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, 2025 and thereafter are subject to optional redemption prior to maturity, in whole or in part, on March 1, 2024, or any date thereafter, at the option of the City at a price equal to the principal amount thereof plus accrued interest from the most recent interest payment date to the date of redemption. If less than all of either series of the Certificates are redeemed at any time, the maturities of such series of Certificates to be redeemed shall be selected by the City. If less than all of a maturity of a series Certificates is 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 Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (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. 8 - 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"): $470,000 Term Certificates Maturing on March 1, 2028 Mandatory Redemption Date Principal Amount March 1, 2027 March 1, 2028 (Final Maturity) $235,000 235,000 $465,000 Term Certificates Maturing on March 1, 2034 Mandatory Redemption Date Principal Amount March 1, 2033 March 1, 2034 (Final Maturity) $230,000 235,000 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. 9 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 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 10 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. 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, when issued, will constitute valid and binding obligations of the City of Pearland, Texas (the "City") and will be payable from the proceeds of an annual ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City and will be further payable from a limited junior and subordinate pledge of the Net Revenues (as defined in the Ordinance) of the City's System in an amount not to exceed $10,000. Authorization of the Certificates The Certificates are being issued pursuant to the applicable provisions of the Constitution and laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and the provisions of the Certificate Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Certificate Ordinance is hereby made. No election was required as a prerequisite to the sale and issuance of the Certificates, as a petition signed by 5% of the qualified voters of the City was not filed with the City Secretary protesting the issuance of such Certificates prior to the authorization of their issuance. Use of Proceeds Proceeds from the sale of the Certificates will be used for (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and 11 Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) to pay the costs of issuance of the Certificates. See "THE CERTIFICATES — Sources and Uses of Funds." 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: Underwriters' Discount Other Issuance Expenses Total Uses of Funds Future Debt $ 4,625,000.00 114,115.05 5,640.36 $ 4,744,755.41 $ 4,622,570.00 5,640.36 39,626.25 76,918.80 $ 4,744,755.41 After the sale of its $40,410,000 Permanent Improvement and Refunding Bonds Series 2014, which was delivered on September 23, 2014, the City will have $83,580,000 of authorized but unissued bonds. The City plans to issue such authorized bonds over the next five years. The City also intends to issue approximately $9,210,000 in water and sewer system revenue bonds simultaneously with the Certificates. The City may also issue additional certificates of obligation for City projects. Depending on the rate of development within the City, changes in assessed valuation, and the amounts, interest rates, maturities and time of issuance of additional certificates of obligation or bonds, increases in the City's annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the City's outstanding bonds, the Bonds, and such 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. 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. Such registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as it becomes due. 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. 12 On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W.3rd 325 (Tex. 2006) ("Tooke") that a waiver of sovereign immunity must be provided for by statute in "clear and unambiguous" language. In so ruling, the Court declared that statutory language such as "sue and be sued", in and of itself, did not constitute a clear and unambiguous waiver of sovereign immunity. In Tooke, the Court noted the enactment in 2005 of sections 271.151-.160, Texas Local Government Code (the "Local Government Immunity Waiver Act"), which, according to the Court, waives "immunity from suit for contract claims against most local governmental entities in certain circumstances." The Local Government Immunity Waiver Act covers cities and relates to contracts entered into by cities for providing goods or services to cities. The City is not aware of any Texas court construing the Local Government Immunity Waiver Act in the context of whether contractual undertakings of local governments that relate to their borrowing powers are contracts covered by the Act. Neither the remedy of mandamus nor any other type of injunctive relief was at issue in Tooke, and it is unclear whether Tooke will be construed to have any effect with respect to the exercise of mandamus, as such remedy has been interpreted by Texas courts. In general, Texas courts have held that a writ of mandamus may be issued to require public officials to perform ministerial acts that clearly pertain to their duties. Texas courts have held that a ministerial act is defined as a legal duty that is prescribed and defined with a precision and certainty that leaves nothing to the exercise of discretion or judgment, though mandamus is not available to enforce purely contractual duties. However, mandamus may be used to require a public officer to perform legally -imposed ministerial duties necessary for the performance of a valid contract to which the State or a political subdivision of the State is a party (including the payment of monies due under a contract). The Ordinance does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. The opinion of Bond Counsel will note that the rights of bondholders are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. 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, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (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 (i) meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code) 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 or, (ii) where (a) the funds are invested by the City through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the City as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the City; (iii) the broker or the depository institution selected by the City arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the City; (iv) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (v) the City appoints the depository institution selected under (ii) above, an entity as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker -dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the City with respect to the 13 certificates of deposit issued for the account of the City; (8) fully collateralized repurchase agreements that have a defined termination date, are secured by a combination of cash and obligations described in clause (1) require the securities being purchased by the City or cash held by the City to be pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City, and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State of Texas; (9) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at. least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency; (10) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (11) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, 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 below. A political subdivision such as the City may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; 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 14 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 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 May 31, 2014 were as follows: Face Principal Market Book Amount Invested Value Value Cash $ 9,605,323 $ 9,605,323 $ 9,605,323 $ 9,605,323 Certificates of Deposit 15,632,421 15,632,421 15,630,125 15,632,421 Government Securities 21,509,000 21,528,770 21,571,382 21,499,333 Total Portfolio $96,746,744 $96,766,514 $96,806,830 $96,737,077 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] 15 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 2014 Adjusted Net Taxable Assessed Valuation $ 7,600,947,549 (a) (100% of market value) 2013 Adjusted Net Taxable Assessed Valuation $ 7,001,455,019 (b) (100% of market value) Direct Debt: Outstanding Tax Supported Debt (as of July 1, 2014) $ 306,395,000 (c)(d) Plus: The Certificates 4,625,000 Total Tax Supported Debt $ 311,020,000 Debt Service Fund Balance (as of June 30, 2014) $ 10,454 963 (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 $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. (c) Includes a portion of the City's Permanent Improvement and Refunding Bonds, Series 2009 and Permanent Improvement Bonds, Series 2012, which is paid by the water and sewer system. (d) Includes the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which was delivered on September 23, 2014. [Remainder of Page Intentionally Left Blank] 16 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 Debt Service 9/30 Service (a) Principal Interest Total Requirements 2014 $ 23,312,373 $ 23,312,373 2015 25,420,971 $ 230,000 $ 120,638 $ 350,638 25,771,609 2016 25,361,852 235,000 124,944 359,944 25,721,796 2017 25,347,603 230,000 119,119 349,119 25,696,721 2018 25,317,539 230,000 114,519 344,519 25,662,058 2019 25,299,256 230,000 109,919 339,919 25,639,175 2020 25,267,916 230,000 105,319 335,319 25,603,235 2021 25,233,099 230,000 100,719 330,719 25,563,818 2022 25,158,448 230,000 96,119 326,119 25,484,566 2023 25,117,614 230,000 90,369 320,369 25,437,983 2024 26,022,990 230,000 82,319 312,319 26,335,309 2025 25,998,737 235,000 73,019 308,019 26,306,756 2026 24,336,996 230,000 63,719 293,719 24,630,714 2027 24,291,100 235,000 55,594 290,594 24,581,694 2028 24,250,587 235,000 48,544 283,544 24,534,131 2029 24,221,321 230,000 41,425 271,425 24,492,746 2030 15,635,090 230,000 34,238 264,238 15,899,328 2031 15,599,208 230,000 26,906 256,906 15,856,114 2032 15,589,281 230,000 19,431 249,431 15,83 8,712 2033 4,267,769 230,000 11,813 241,813 4,509,581 2034 4,233,031 235,000 3,966 238,966 4,471,997 2035 1,784,856 1,784,856 2036 1,013,772 1,013,772 2037 663,938 663,938 2038 654,800 654,800 Totals $459,400,145 $4,625,000 $1,442,635 $6,067,635 $465,467,780 (a) Includes the results of the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014 which was delivered on September 23, 2014 and general obligation debt service requirements paid with water and sewer system revenues. Average Annual Requirements (2014-2038) Maximum Annual Requirement (2024) $18,618,711(a) $26,335,309(a) Principal Payout (All Tax Supported Bonds) 25.05% in 5 years 51.47% in 10 years 82.93% in 15 years 98.81% in 20 years (a) Includes the Certificates and $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014. 17 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. Taxing Jurisdiction Debt as of June 1, 2014 Alvin Community College District Alvin ISD Brazoria County Brazoria County MUD No. 17 Brazoria County MUD No. 18 Brazoria County MUD No. 19 Brazoria County MUD No. 23 Brazoria County MUD No. 26 Brazoria County MUD No. 28 Brazoria County MUD No. 34 Brazoria County MUD No. 35 Brazoria-Fort Bend County MUD No. 1 Fort Bend County Harris County (a) Harris County Dept. of Education Harris County Flood Control District Pasadena ISD Pearland ISD Port of Houston Authority TOTAL ESTIMATED OVERLAPPING The City (b) Total Direct and Estimated Overlapping Debt $ 14,380,000 463,780,000 90,265,000 28,085,000 29,355,000 36,370,000 17,035,000 38,160,000 23,235,000 27,800,000 9,010,000 63,580,000 448,570,000 2,415,028,704 7,410,000 129,525,000 590,315,000 290,825,000 717,624,397 Overlapping Percent Amount 28.36% $ 4,078,168 31.50 146,090,700 24.14 21,789,971 100.00 28,085,000 97.35 28,577,093 100.00 36,370,000 100.00 17,035,000 100.00 38,160,000 100.00 23,235,000 100.00 27,800,000 100.00 9,010,000 71.73 45,605,934 0.25 1,121,425 0.13 3,139,537 0.13 9,633 0.13 168,383 0.14 826,441 71.79 208,783,268 0.13 932,912 100.00% $640,818,464 311,020,000 $951,838.464 (a) Harris County Toll Road Bonds are considered self-supporting and are not included in the amount shown for Harris County. (b) Includes the Certificates and the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which was delivered on September 23, 2014. Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. Debt Ratios Direct and Direct Debt Overlapping Debt Per 2014 Assessed Valuation ($7,600,947,549) (a) 4.09% 12.52% Per 2013 Assessed Valuation ($7,001,455,019) (b) 4.44% 13.59% Per Capita (106,900) $2,909 $8,904 (a) Includes $1,704,949,938 in estimated 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. (b) Includes $1,562,848,106 in assessed value attributable to the TIRZ. 18 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 rnatters before the appraisal review board, including the level of appraisals of a certaincategory 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 19 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 $202,181,012 from the 2013 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 $5,341,272 of such property that was subject to abatement January 1, 2013. 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 $52,432,738 on the 2013 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 T1RZ 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. 20 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 2013, the assessed value attributable to the TIRZ is $1,562,848,106. 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. 21 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 Tax Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Net Assessed Valuation (a) $2,355,280,316 3,019,449,422 3,576,43 9,129 4,412,821,949 5,389,790,165 5,904,826,560 6,269,047,937 6,331,723,029 6,369,626,981 6,539,521,484 7,001,455,019(b)(d) - Collection Ratios - Tax Rate % of Collections Fiscal Per $100 of Current Year Assessed Adjusted Year Current and Ending Valuation Tax Levy (a) Collection Prior Years 9-30 $0.696000 $18,030,473 98.03% 100.02% 2004 0.694800 21,073,788 98.08 99.68 2005 0.674400 24,284,597 97.08 99.70 2006 0.652659 28,819,229 98.14 100.14 2007 0.652600 35,035,569 98.40 99.74 2008 0.652600 38,368,354 98.57 100.70 2009 0.652600 41,081,407 98.81 98.81 2010 0.665100 41,968,046 99.11 100.28 2011 0.685100 43,441,792 99.24 99.63 2012 0.705100 45,850,625 99.26 99.30 2013 0.705100 49,097,794 98.87(c) 99.25(c) 2014 (a) Includes assessed value attributable to the TIRZ and tax levy adjusted year 2007. (b) Includes $1,562,848,106 in assessed valuation attributable to the T1RZ. valuation attributable to the TIRZ are not available to make debt service (c) Collections as of June 30, 2014. (d) Adjusted tax roll. 22 for Senior Tax Freeze effective in tax Tax revenues generated from assessed payments on the Bonds. - Tax Rate Distribution - 2014 2013 2012 2011 2010 Maintenance $0.2221 $0.2151 $0.2151 $0.2151 $0.2151 Debt Service 0.4900 0.4900 0.4900 0.4700 0.4500 Total $0.7121 $0.7051 $0.7051 $0.6851 $0.6651 - Analysis of Delinquent Taxes - The following is an analysis, by tax year, of taxes delinquent as of September 30, 2013. Uncollected Adjusted Percentage Tax Year As of September 30, 2013 Tax Levy (a) Of Tax Levy 2012 $341,103 $45,850,625 0.74% 2011 133,441 43,441,792 0.31 2010 92,745 41,968,046 0.22 2009 72,298 41,081,407 0.18 2008 64,319 38,368,354 0.17 2007 51,612 35,035,569 0.15 2006 40,167 28, 819,229 0.14 2005 39,997 . 24,284,597 0.16 2004 31,043 21,073,788 0.15 2003 32,366 18,030,473 0.18 2002 15,567 14,880,007 0.10 (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] 23 Analysis of Tax Base Type of Property Residential Acreage Vacant Lots/Tracts Farm & Ranch Commercial/Industrial Utilities Real Inventory Other Gross Assessed Value Less: Exemption Net Assessed Value - Tax Base Distribution - 2013 Tax Roll Amount $5,991,560,978 94,201,042 124,968,655 499,757 1,258,891,779 66,436,913 62, 897,186 475,835,815 74.20% 1.17 1.54 0.00 15.59 0.82 0.78 5.90 $8,075,292,125 100.00% (1,073,837,106) $7,001,455,019(a)(b) 2012 Tax Roll . Amount $5,645,372,636 93,765,783 126,876,793 9,235,628 1,169,417,293 59,004,028 60,989,786 285,409,427 $7,450,071,374 (994,379,662) $6,455,691,712(a)(c) 75.78% 1.26 1.70 0.12 15.70 0.79 0.82 3.83 2011 Tax Roll Amount $5,538,320,529 92,047,258 121,404,806 8,483,859 1,206,544,884 59,686,620 73,253,979 222,335,566 75.64% 1.26 1.66 0.12 16.48 0.82 1.00 3.04 100.00% $7,322,077,501 100.00% (956,765,192) $ 6,3 65,312,309 (a)(d) (a) Value may differ from those shown elsewhere in this Official Statement due to subsequent adjustments to the tax roll. (b) Includes $1,562,848,106 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 Bonds; however, a portion of such revenues are retained by the City for administrative services related to the TIRZ. See "TAX DATA — Tax Increment Reinvestment Zone" for a description of the agreement between the City and the TIRZ. Includes $1,453,517,411 in assessed value attributed to the TIRZ. Includes $1,372,334,319 in assessed value attributed to the TIRZ. - Principal Taxpayers - (c) (d) Principal Taxpayer Weatherford U.S. Inc. Pearland Town Center LP Globe Pipe Supply Amreit SPF Shadow Creek LP CenterPoint Energy, Inc. 12400 Shadow Creek Parkway LLC Discovery Shadow Creek Shadow Kirby LTD PTRN Wal-Mart Real Estate Pearland Lifestyle Center LP HCA Healthcare Corp. Pearland Investments Ltd. Prt. Villas Shadow Creek Ranch LP MRP Shadow Creek LP Total Ten Principal Taxpayers Type of Property Oil Field Equipment Retail Development Structural Pipe Supplier Retail Development Utility Land Development Retail Development Land Development Shopping Center Land Development Health Care Land Development Land Development Land Development Percentage Ten Principal Taxpayers Comprise of Tax Roll 2013 Taxable Assessed Valuation 2012 Taxable Assessed Valuation 2011 Taxable Assessed Valuation $ 69,914,860 $ 37,689,240 $ 31,613,080 66,757,240 68,763,470 66,933,820 51,522,280 (a) (a) 47,959,306 43,671,670 41,006,650 32,832,920 28,444,700 26,536,120 27,100,030 28,229,200 (a) 25,330,000 26,391,910 (a) 25,000,000 25,000,000 23,114,059 23,179,360 23,179,360 23,678,280 24,499,227 23,731,897 (a) (a) 19,012,840 19,074,620 (a) 21,154,900 31,696,920 (a) (a) 29,000,460 (a) (a) 21,000,000 $394,095,223 $345,269,187 $313,654,009 5.63% (a) Not included as top ten taxpayer for respective tax year. 24 5.35% 4.93% - Tax Adequacy - Average Annual Debt Service Requirements (2014-2038) $18,618,711 (a) Tax Rate of $0.258 per $100 assessed valuation against the 2014 Certified Assessed Valuation of 95% collection produces $18,629,922 Tax Rate of $0.280 per $100 assessed valuation against the 2013 Certified Assessed Valuation at 95% collection produces $18,623,870 Maximum Annual Tax Debt Service Requirements (in the year 2024) $26,335,309 (a) Tax Rate of $0.365 per $100 assessed valuation against the 2014 Certified Assessed Valuation of 95% collection produces $26,356,286 Tax Rate of $0.396 per $100 assessed valuation against the 2013 Certified Assessed Valuation at 95% collection produces $26,339,474 (a) Includes the Certificates and the $40,410,000 Permanent Improvement and Refunding Bonds, Series 2014, which was delivered on September 23, 2014. 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 2013 15,919,784 (2012) 0.243 34.72 [Remainder of Page Intentionally Left Blank] 25 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, 2013 2012 2011 2010 2009 REVENUES General Property Taxes(a) $11,178,950 $10,861,341 $10,867,570 $11,115,823 $10,688,512 Sales and Use Taxes 15,919,784 14,814,936 13,331,189 13,082,134 13,760,714 Franchise Fees 5,758,776 5,669,958 5,605,394 5,426,110 5,074,602 Licenses & Permits 2,988,859 2,320,103 1,720,856 1,806,692 2,079,099 Fines & Forfeitures 3,333,675 3,164,068 2,714,217 2,310,041 2,213,101 Charges for Services 12,567,693 11,890,808 10,882,021 9,245,791 8,884,529 Intergovernmental --- --- 350,441 477,929 4,909,362 Other Revenues 869,019 678,438 602,817 446,353 487,663 Total Revenues $52,616,756 $49,399,652 $46,074,505 $43,910,873 $48,097,582 EXPENDITURES General Government $ 7,098,242 $ 8,241,509 $ 8,045,261 $ 8,064,367 $ 8,020,370 Public Safety 26,082,178 25,168,443 23,716,470 23,141,409 22,025,695 Public Works 7,502,356 5,506,477 6,505,139 7,108,143 11,913,119 Community Services 3,263,146 3,861,520 3,027,088 3,648,920 3,204,702 Parks and Recreation 7,111,012 6,775,316 7,171,812 6,069,658 5,753,141 Debt Service 114,486 --- --- --- Capital Outlay 4,088,048 Total Expenditures $55,259,468 $49,553,265 $48,465,770 $48,059,497 $50,917,027 (a) Includes penalties and interest. Source: City's audited financial statements. General Fund and Debt Service Fund Balance for the Past Five Fiscal Years General Fund Debt Service Fund Fiscal Year Ended September 30, 2013 2012 2011 2010 2009 $18,623,117 $17,571,961 $14,523,546 $12,861,796 $12,219,109 4,642,821 4,992,479 5,159,541 6,705,688 7,246,548 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 2013, the City employed 581 full-time employees and 131 part-time and seasonal employees. All full-time employees are covered by TMRS and the City's contribution for fiscal year 2013, amounted to approximately $3.8 million which includes amortization of prior service cost over 30 years. The City had no unfunded pension benefit obligation as of September 30, 2013. 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. 26 Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2013, is attached hereto in the APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. ADMINISTRATION OF THE CITY Mayor and City Council Policy -making and supervisory functions are the responsibility of and are vested in the Mayor and City Council for the City, under provisions of the "Charter of the City of Pearland" (the "Charter") approved by the electorate February 6, 1971. The Council is elected at large on the 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: Council Members Tom Reid Mayor Tony Carbone Council Member Scott Sherman Council Member Gary Moore Council Member Keith Ordeneaux Mayor Pro-Tem Greg Hill Council Member Term Expires Period Served. May Occupation 32 Years 2017 Retired 1 Year 2016 Certified Public Accountant 5 Years 2015 Attorney (a) 2017 Senior Environmental Technologist 3 Years 2015 Energy and Risk Manager 2 Years 2016 Attorney (a) Elected on May 10, 2014. Administration Under provisions of the Charter, the 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 Council, and be responsible for its administration; (3) Prepare and submit to Council a complete report on the finances and administrative activities of the City; (4) Keep Council advised of the financial condition and future needs of the City and make appropriate recommendations; and Perform such other necessary duties as prescribed by the Charter or required by Council. (5) 27 Members of the administrative staff are described below: Name Position Period Served (a) Clay Pearson City Manager 6 Months Jon Branson Deputy City Manager 8 Years Trent Epperson Assistant City Manager 8 Years Claire Bogard Director of Finance 8 Years Eric Wilson Director of Public Works 1 Year Young Lot -ling City Secretary 17 Years Lata Krishnarao Director of Community Development 11 Years Darrin Coker City Attorney 17 Years Christopher Doyle Police Chief 36 Years Michelle Smith Director of Parks & Recreation 14 Years Vance Riley Fire Chief 3 Years Bonita Hall Director of Human Resources 4 Years Sparkle Anderson Communications Manager 2 Years Matt Buchanon Executive Manager of Development 4 Years Services & PEDC President (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: Bond Counsel Andrews Kurth LLP Houston, Texas Certified Public Accountants Grant Thornton LLP Houston, Texas Financial Advisor 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. 28 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 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. 29 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 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 Certificate and (b) the initial offering price to the public of such Discount Certificate. Under existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Certificate and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Certificate continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Certificates under the caption "TAX EXEMPTION" generally applies to original issue discount deemed to be earned on a Discount Certificate while held by an owner who has purchased such Certificate at the initial offering price in the initial public offering of the Certificates and that discussion should be considered in connection with this portion of the Official Statement. In the event of a redemption, sale, or other taxable disposition of a Discount Certificate prior to its stated maturity, however, any amount realized by such initial owner in excess of the basis of such Discount Certificate in the hands of such owner (increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Certificate continues to be held by such initial owner) will be includable in gross income for federal income tax purposes. Because original issue discount on a Discount Certificate will be treated for federal income tax purposes as interest on a Certificate, such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Corporations that purchase Discount Certificates must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Certificate may be required to take into account such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a Certificate. See "TAX EXEMPTION" for a discussion regarding the alternative minimum taxable income consequences for corporations and for a reference to collateral federal tax consequences for certain other owners. 30 The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Certificate or of the City. The portion of the principal of a Discount Certificate representing original issue discount is payable upon the maturity or earlier redemption of such Certificate to the. registered owner of the Discount Certificate at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Certificate is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determined under an actuarial method of accrual, using the yield to maturity as the constant interest rate and semi-annual compounding. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Discount Certificates by an owner that did not purchase such Certificates in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Certificates should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Certificates and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Discount Certificates. Premium Certificates Some of the Certificates 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 Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Certificate by the amount of amortizable bond premium. This reduction in basis will increase the amount of any gain (or decrease the amount of any loss) recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Certificate by the initial purchaser. Generally, no corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium with respect to the Premium Certificates. The amount of bond premium on a Premium Certificate which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Certificate) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering price 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"). [nformation 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 31 AND INVESTMENT OBJECTIVES OF THE CITY — Current Investments," "CITY TAX DEBT," (except under the subheading "Estimated Overlapping Taxes"), "TAX DATA" "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. 32 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 33 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. ATTEST: /s/ Young Lorfing City Secretary City of Pearland, Texas /s/ Tom Reid Mayor City of Pearland, Texas 34 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. U.S. Census of Population ECONOMIC AND GROWTH INDICATORS 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 +142.43 313,166 +29.53 2011 95,600 +4.76 2012 97,200 +1.67 2013 103,800 +6.79 2014(a) 106,900 +2.99 (a) Estimated. Source: U.S. Census Bureau and estimates from the City. A-1 City of Pearland 2014(a) 2013 2012 2011 2010 Labor Force 53,216 52,406 51,179 49,587 48,474 Employed 51,329 49,886 48,469 46,350 45,334 Unemployed 1,887 2,520 2,710 3,237 3,140 Unemployment Rate 3.5% 4.8% 5.3% 6.5% 6.5% Brazoria County 2014(a) 2013 2012 2011 2010 Labor Force 160,501 158,876 155,215 153,346 150,544 Employed 152,720 148,427 144,213 140,067 137,078 Unemployed 7,781 10,449 11,002 13,279 13,466 Unemployment Rate 4.8% 6.6% 7.1% 8.7% 8.9% (a) As of April, 2014. Employment Statistics Source: Texas Workforce Commission A-2 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY Clay Pearson City Manager CITY OF PEARLAND, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT Fiscal Year Ended September 30, 2013 Officials Issuing Report Jon Branson Mickiel Hodge Assistant City Assistant City Manager Manager Claire Bogard Director of Finance Rick Overgaard Assistant Director of Finance Introductory Section (This page intentionally left blank.) RESPONSIVE RESULTS-OR1ENTED TRUST -BUILDERS ACCOUNTABLE City of Pearland 3519 Liberty Drive Pearland, Texas 77581 Tel: 281.652.1600 cityofpearland.com March 10, 2014 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 ending September 30, 2013, 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. Grant Thornton, LLP, Certified Public Accountants, have issued an unqualified (or "clean") opinion on the City of Pearland's financial statements for the year ending September 30, 2013. 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 104,100 residents estimated as of September 2013. The City of Pearland is a home -rule City operating under a Council -Manager form of government. RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE 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 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; convention and visitors bureau; 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 City in 1995 under the Texas Development Corporation Act of 1979 to promote, assist, and enhance 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 TRIZ #2. All these component units are considered blended component units and have been included as major funds in the Governmental Funds. ECONOMIC CONDITIONS Local Economy Located minutes away from downtown Houston, Texas, the nation's second largest seaport, ii RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE 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. The total of all new construction permitted during the 2013 calendar year totaled over $284.5 million, a 12.0% increase in value from 2012. New single-family housing permits totaled 954 with a construction value of $214 million. While this is only 3 permits higher than last year, permitted value is up $22.0 million or 11.6%. Pearland's economy continues to maintain strong levels. Residential permitting activity for the 2014 fiscal year is expected to remain at 2013 levels, budgeted at 1,000 permits. For calendar year 2013, the City had 184 commercial permits with a value of $74 million, compared to 77 permits with a value of $62 million in 2012. The commercial real estate market also remains strong. Sales of homes throughout the greater Houston area remained robust in 2013, driven by a combination of good local job numbers and historically low interest rates. The Houston Association of Realtors reported 73,232 single family home sales for 2013, up 17.7% from the 62,226 sales in 2012. 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. While new residential construction and home sales remain strong, the average value of existing homes have slightly declined since fiscal year 2009. The average residential home value in fiscal year 2013 was $172,331, down half a percent, from the average value in fiscal year 2009 of $173,308. Fiscal year 2014 average value has stayed flat, thereby having to rely on new added value to fund operations and debt service. Houston is the world's energy capital. Growth in the oil and gas industry, spurred by technological advances such as the use of hydraulic fracturing, continued in 2013 reaching levels unseen in 30 years. Texas is now producing more than twice the oil it did three years ago, and more than one-third of all U.S. production, according to federal data. Oil production in Texas has surpassed 1.8 million barrels per day and is on track to reach 3 million barrels per day in 2017 and potentially 4 million barrels per day by 2020. This trend will continue keeping the Houston oil industry busy for many years. Pearland's unemployment rate was 5.0% in September 2013, clown from 5.3% in September 2012. This is compared to the national unemployment rate of 7.6% and the State of Texas unemployment rate of 6.5% as of September 2013. Pearland's unemployment is less than the national and state rates with the economy turning around. Texas has been named the top state for doing business by Area Development Magazine stating "With its proven model of success, the Lone Star State continues to dominate the national conversation on job creation and economic prosperity." Earlier in 2013, the state was also named best business climate by Business Facilities Magazine and the most competitive state by Site Selection Magazine. Chief Executive Magazine has also ranked Texas as the best state for business for nine years in a row through their annual survey of Chief Executive Officer's. Houston added 82,000 jobs in 2013 and the Greater Houston Partnership is forecasting 69,800 new jobs for 2014. The Houston area, and the State of Texas, is built on businesses, on jobs, and on economic opportunities. Pearland is poised to take advantage of those opportunities. iii RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE Pearland has two prime areas for commercial, mixed use, and livable developments along the Highway 288 corridor. A strategic and. target market study shows that energy, healthcare, life sciences, and manufacturing are key areas of interest for Pearland. 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. Kelsey-Seybold, a major healthcare organization of 370 physicians, completed construction of a new 170,000 square foot, four story corporate headquarters on an 18 acre site in Shadow Creek Ranch in the summer of 2013, which is home to approximately 800 employees. The facility is 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, completed of 120,000 square foot facility for research and development and manufacturing in early March 2014. Merit Medical is expected to employ 220 employees at the Pearland facility. HCA Gulf Coast Division broke ground September 17, 2013, for the new $71 million Pearland Medical Center. As an HCA affiliated hospital, Pearland Medical Center joins the continuum of nine other Houston -area medical centers, ambulatory surgery centers, diagnostic imaging facilities, and off -campus emergency centers. The 144,000-square-foot, 30 bed acute -care hospital will open in the fall of 2014 and feature surgical suites, medical/surgical beds, intensive care beds and a 24-hour emergency department. Imaging services will include magnetic resonance imaging, computerized tomography, a catheterization lab, echocardiogram testing, and nuclear medicine modalities. The Center's new women's services will provide digital mammography, labor and delivery suites, cesarean -section operating rooms and a newborn nursery. The new hospital will be located at the southwest intersection of Highway 288 and Shadow Creek Parkway on a 48-acre site currently home to a full -service, freestanding emergency department, imaging center and 3- story, 80,000 square foot medical office building. Memorial Hermann Health Systems will also establish a medical campus in Pearland. The centerpiece will be a 64 bed acute care hospital which will open in 2015. It will feature an intensive care unit, operating rooms, cardiac catheterization labs, surgical units, women's and neonatology services. The campus will be built on a 40-acre site currently home to an outpatient imaging center, diagnostic lab services, and medical office building. The new facility will include a one -of -a -kind convenient care center that will provide one stop coordinated access to adult and pediatric primary care, specialty physicians, sports medicine and a 24 hour emergency room. Sales tax for fiscal year 2013 totaled $23.6 million, an increase of $1.6 million or 7.3% over fiscal year 2012. Of the $23.6 million, $15.7 million went to the City's General Fund for operations and $7.9 million went to the City's Economic Development Corporation for economic development programs and activities. The City's General Fund is 29% funded by sales tax, an elastic revenue stream that will fluctuate with the economy. As such, the City closely monitors sales tax and the economy. Pearland is a regional shopping destination and the economy has turned around since the recession of 2010 and 2011. The City saw a resurgence of spending in 2012, which continued in 2013. As such, the City projected a 7.8% growth in sales tax for fiscal year 2014. The nation's largest retail group, National Retail Federation, expects retail sales to increase at a iv RESPONSIVE RESULTS -ORIENTED TRUST BUILDERS ACCOUNTABLE slightly faster pace this year than last year as continued improvements in jobs and housing should help shoppers feel more confident about spending. Long-7erm 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 2014 through fiscal year 2018 totals $354 million and continues to implement the $162 million bond program approved by the voters in May 2007. As of September 30, 2013 there was $95.2 million in unissued bonds approved by the voters and based on the 2014-2018 CIP, there would be $12.5 million in unissued bonds approved by the voters at the end of fiscal year 2018. Projects include drainage ($23M), streets ($160M), facilities ($21M), parks ($36M), 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, currently totaling $53.1 million will be identifying projects for the City's next bond referendum, potentially as early as 2016. The Debt Service Fund forecast shows a need to increase the Debt Service component of the tax rate to $0.5325 by fiscal year 2017 to implement the Five -Year CIP, excluding unfunded projects, 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 debt service component of the tax rate for fiscal year 2014 remains the same as in fiscal year 2013 at $0.4900. The City completes a Water/Sewer Cost of Service Rate Study annuallyfor 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, 2012 or 2013, however, the model anticipates rate increases for 2015, 2017 and 2018. The City's utility system continues to be self-supporting and financially sound. 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. 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. v RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE • 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, 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 out of the top 50 Cities. 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. Pearland 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 will be switching to the City of Houston's radio system which will result in 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. The City of Pearland Police Department communications division provided 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 became apparent that the Police communications division workload was 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 has contributed to increased safety for emergency responders as well as 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 vi RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE and operated by Pearland Volunteer Firefighters with the MUD's bearing the cost of operations, pursuant to a Strategic Partnership Agreement. This has greatly enhanced response times out in the City's southwestern ETJ, where development continues. The City is also nearing completion of design for the reconstruction of Fire Station #3, anticipated to open fall 2014, on the eastern edge of the City to accommodate a 24/7 crew, and will be beginning design for reconstruction of Fire Station #2, to improve response times to these service areas of the City. Another initiative of the City, is the approved merger of the Fire and EMS departments effective October 1, 2014. In 2010, the City engaged the firm of McGrath Consulting Group to evaluate the City's Fire and EMS departments. One of the recommendations was to consolidate the Departments; the purpose being to improve the efficiency and effectiveness of current and future delivery of services at the highest possible level of quality while considering costs. The consolidation is multi -year, multi -phase plan with cross -training occurring in fiscal year 2014 and full -implementation in fiscal year 2015. Economic Development The Pearland Economic Development Corporation (PEDC) is a Type 4B 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 for the City. The Corporation is committed to enhancing the City's economic vitality through attraction, retention, and expansion of primary employers. 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. The following highlights a few of the most recent Corporation attraction efforts. Dover Energy kicked off construction in June 2013 for the global manufacturer's new facility in Pearland. Dover Energy, which provides highly -engineered solutions for the safe and efficient extraction and handling of critical fluids worldwide in the drilling, production and downstream markets, selected Pearland during a multi -city site search. The new facility, which will consolidate Dover's multiple Texas locations into one regional facility, is expected to be completed in February 2014. Dover Energy's new consolidated manufacturing and operations center will be located in the Lower Kirby Urban District on a 14-acre site at the northeast corner of Spectrum Boulevard and Hooper Road, directly behind Merit Medical's new facility. The facility will be 150,000 square feet with space for a staff of approximately 200 employees. Amerlux, a manufacturer of energy efficient lighting for retail, supermarket, and commercial markets, just announced plans to build a 100,000 square foot manufacturing facility in Pearland on 11 acres on Kirby Drive. It is anticipated that the facility will open in the fourth quarter of 2014. The facility will include a wide array of new materials and equipment to help produce and service the extensive line of interior and exterior products. Mitsubishi Heavy Industries has chosen Pearland for its first U.S plant. The $100 million new compressor facility will sit on a 26-acre site and include a 100,000 square foot space for assembly, packaging, shipping and storage of compressors that serve the petrochemical facilities. A 40,000 square foot office facility will also be built. The first phase estimated to cost $40 million should be complete November 2014. By 2016, the full-scale manufacturing facility will be complete with 100 new employees on -site. vii RESPONSIVE RESULTS -ORIENTED TRUSTBUILDERS ACCOUNTABLE The Corporation also spearheaded legislation that passed the State Legislature in 2013, to create a Highway 288 Management District for corridor beautification. The corridor currently is non -landscaped and does not reflect City standards. The goal is to create a vibrant visually appealing corridor that will attract investment in the City. District board members have been appointed and the District has levied a 10-cent tax rate, which is anticipated to generate approximately $300,000 annually. The next step is to plan the aesthetic improvements and build a phased landscaping program for implementation. 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 planning process resulted in a Pearland 20/20 Strategic Plan incorporating nine strategies to improve Pearland's product. The nine strategies are 1. Marketing, 2. Mobility, 3. Corridors, 4. Recreation and Culture, 5. Beautification, 6. Lower Kirby Mixed Use District, 7. Multi -Use Event Center, 8. Workforce Pipeline, and 9. Image Campaign. More than ever before, companies are considering education, workforce, entertainment, parks, etc. into their decisions to locate or remain in the City. It will take a myriad of partners to develop and maintain a successful community product. One of the City's prime areas for development, the Lower Kirby Mixed Use District at Hwy 288 and Beltway 8, has infrastructure needs that make it more difficult to develop. The PEDC is working with two area Municipal Management Districts to coordinate a multi- phase plan for the construction and funding of some of the major infrastructure that is needed. 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. The City's Convention and Visitor's Bureau (CVB), funded by hotel occupancy taxes, also focuses on economic development through tourism and putting heads in beds. In late 2012, the City Council authorized the creation of a city department for the Convention and Visitor's Bureau, service that had been previously contracted out. In fiscal year 2013, an Executive Director and staff was hired. The location of Pearland, as previously mentioned, makes Pearland a perfect hub and spoke for visitors and "A Perfect Pick...to play, stay, meet, and getaway", the tag line for the CVB. The time has come for Pearland to complement and support its development with cultural and lifestyle amenities to include a multi -use events center. This need has been noted in multiple Pearland planning processes as an enhancement to make the city more competitive for employers and residents. Annul hotel occupancy taxes total slightly over $1 million dollars and the funds ending balance is $2.3 million as of September 30, 2013. Land Use Plan/Annexation Land use planning seeks to order and regulate the use of land in an efficient and ethical 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. vi RESPONSIVE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE 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, and currently known as the Lower Kirby Mixed Use District, that leverages the area's unique location (on Beltway 8 and 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 Mixed Use District. 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 Mixed Use District, 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 encompassed approximately 600 acres and had an estimated population of 3,100. Upon annexation, all assets and obligations of the MUD transferred to the City. 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 Old Town Site while also responding to existing growth patterns in the city. A primary initiative for this plan is to reinvent the Old Town 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 2014 — 2018 totals $354 million. Projects include drainage ($23M), streets ($160M), facilities ($21M), parks ($36M), water and wastewater ($114M). Major thoroughfare projects include the widening of Bailey Road between FM1128 and Veterans, reconstruction of one mile of Old Alvin Road from Plum Street to McHard Road, McHard Road extension from Mykawa to Cullen, expansion of Smith Ranch Road from two ix RESPONSIVE RESULTS -ORIENTED TRUST BUILDERS ACCOUNTABLE lanes asphalt to four lanes concrete, curb and gutter from Hughes Ranch to North of Broadway, 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 and future storm water regional detention at FM518 and Cullen. 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 and Fire Station #2 to accommodate a 24/7 manned station, relocation of Fire Station #1, and City Hall and Hill House Road facility improvements. 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 expansion of the Far Northwest, Barry Rose and JHEC wastewater treatment plants, 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 and funding. 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 (TIP) for 2013-2016 and five of the City's projects were selected for funding. The projects are McHard Road Extension (Mykawa to Cullen), Bailey Road (Veterans to FM1128), Smith Ranch Road Extension and Green Tee Terrace and Shadow Creek Ranch Trails. These projects will receive 80% funding from state or federal sources totaling $63,251,113 with the City providing 20% matching funds. These projects are in addition to the four projects that received funding in 2011 totaling $20,180,901 in state or federal funding from the TIP. These projects are slated to be completed within the City's current Five -Year Capital Improvement Program. With the growth in population along the Highway 288 corridor and the number of Pearland residents that rely on Hwy 288 to commute to Houston and the Texas Medical Center, the City along with Brazoria County have been meeting and working with the Texas Department of Transportation to provide traffic relief on the corridor through managed toll lanes. Brazoria County is preparing to begin design work, anticipated to be awarded on March 25, 2014, on four new toll lanes on Texas 288 from the Brazoria-Harris County line to County Road 58. Design will take approximately nine months with bids to be advertised around January 2015. Construction is likely to begin March 2015 with a three-year construction schedule. In 2007, State legislation was passed giving authority for the Brazoria County Toll Road Authority to construct their own toll roads. The Gulf Coast Center operates a transportation program known as Connect Transit. x RESPON SIDE RESULTS -ORIENTED TRUST -BUILDERS ACCOUNTABLE Connect Transit provides "curb cab" service to Pearland. Services are shared ride services with pick-up and delivery from curb to curb by reservation. The City funds approximately $20,000 for this service annually to its citizens meeting the eligibility requirements; seniors, person with disabilities, or low-income. This is a way to provide those needing transportation to grocery stores, doctor visits, etc. 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 proactive 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. Over the past three years because of the sluggish economy the City has seen base budget reductions to the General Fund totaling $4.9 million. During fiscal year 2013, however, we have seen a turnaround in the economy and growth. The improving Houston area economy and the City's increasing population played major roles in the development of the fiscal year 2014 budget. The improving economy will most likely result in improved revenues in the current fiscal year, 2014, most noticeably in sales tax and building permits. Sales tax revenue for fiscal year 2013 is up 7.3% over the prior year. The fiscal year 2014 Adopted Budget includes an increase of 7.8% over fiscal year 2013. Building Permit revenue is also projected to maintain the strong levels that have developed during fiscal year 2013. The Adopted Budget for fiscal year 2014 anticipates 1,000 single family permits. Another significant factor that impacts the Adopted Budget is a 3% increase in population. This increase in population results in a need for increased services to meet needs of new residents. This projected increase in population is the result of both newly constructed homes and multifamily dwellings. The Adopted Budget includes no increase in either the property tax rate or water and sewer rates. 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 remains unchanged at 49 cents. While only a few months into the 2014 fiscal year, the City is already beginning to prepare for the 2015 budget process and up -coming forecast with the same goal of being fiscally responsible to our citizens. AWARDS AND ACKNOWLEDGEMENTS Parks and Recreation earned national accreditation through the Commission for Accreditation of Park and Recreation Agencies and the National Recreation and Park Association. The accreditation is a measure of the overall quality of operation, management and service to the community and has meet rigorous standards related to the management and administration of lands, facilities, resources, programs, safety and services. The City of Pearland received Crystal Awards in two categories recognizing marketing excellence: Online Social Media -Non Profit for the City's campaign promoting its three social xi RESPONSIVE RESULTS -ORIENTED TRUST BUILDERS ACCOUNTABLE media pages; and Maverick Marketing for the promotion of its CATFAX cat adoption event. The Texas Fire Marshal's Association awarded the City with the 2013 Achievement of Excellence Gold Level Award. The award recognizes organizations for performing excellence in fire prevention. 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, 2012. This was the 36th 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. 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 submitted, %vG Claire Bogard, Director of Finance x i i CITY OF PEARLAND, TEXAS PRINCIPAL OFFICIALS Elected Officials Tom Reid Tony Carbone Scott Sherman Susan Sherrouse Keith Ordeneaux Greg Hill Appointed Officials Clay Pearson Darrin Coker Letitia Farnie City Management Mickiel Hodge Jon Branson Claire Bogard Matt Buchanan Daniel Baum Young Lorfing Eric Wilson Bonita Hall Chris Doyle Michelle Smith Vance Riley Andrew Fearn Lata Krishnarao Trent Epperson Kim Sinistore Position Mayor Council Member at Large Council Member at Large Council Member at Large Council Member at Large Council Member at Large - Position One - Position Two - Position Three - Position Four - Position Five, Mayor Pro Tem 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 Executive Director, CVB Term Expires May 2014 2016 2015 2014 2015 2016 ORGANIZATION CHART Engineering & Capital Projects Administration j- Capital Projects Engineering Traffic ()spec& Mainten-ance Geographic information — Syteins Development Planning Permits & inspections Health & Code , Enforcement *as of 9 -30 -2013 CITY OF PEARLAND, TEXAS CTZENS oF PE4RLAND filAYDA AND. crryCOUticIL MUNICIPAL JUDISES crn f • • • • OR! ct.r,',m.41,4,40ER . . I ASSISTANT CITY MANADER Fire Th4-1(- City Secretary Fire Marshal Emergency Management Enlarge ng htedicat Seeirces Police Administration Patrol -- Investigations Community Services Support Senices Commercial Vehicle Enforcement School Resource Officers Trail lc Ellen-4J Motorcycles Special inve ations Training H Finance ) -- Accounting Budget Information Technology Purchasing Utility Silting &Collections public Works ASSISTANT CITY MANAGER I Convention & .VistorsBureu i Human Resources j H.: Communications Administration Fleet Lift Stations mice :Center Streets -$4 Drainage Distributon -& Collection Water Production Wastevitater Treatment Vatefi$ ewer Construction Puglic Works Geographic ormation- Systems Municipal Court ) Recreation ) Administration Resource Development Aquatics Athletics Custodial Svcs.. Facilities Parks Mice East ParkeMiceWest iRecreation. CtrJ Natatorium Recycling Center Senior Center Special Events Westsicie Events Center Youth Development xiv GD Government Finance Officers Association 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, 2012 Executive Director/CEO Financial Section (This page intentionally left blank.) Gra ntThornton REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Honorable Mayor and Members of the City Council City of Pearland, Texas Grant Thornton LLP 700 Milam Street, Suite 300 Houston, TX 77002-2848 T 832.476.3600 F 713.655.8741 GrantThornton.com linkd.in/GrantThomtonUS twitter.com/GrantThorntonUS Report on the financial statements 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, 2013, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the 1 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd. GraritThorriton circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 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 of Pearland, Texas as of September 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other matters Required supplementary information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 6 - 16, the Schedule of Revenues, Expenditures and Changes in Fund Balances — Budget and Actual on pages 67 - 68 schedules of funding progress for Texas Municipal Retirement System and City of Pearland Other Post -Employment Benefit Obligation on page 69 be presented to supplement the basic financial statements. Such information, although not a required 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. This required supplementary information is the responsibility of management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America. These limited procedures 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. Supplementary information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining and individual fund statements and schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such supplementary information is the 2 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd. GrantThornton responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures. These additional procedures included comparing and reconciling the information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other information The introductory section and the statistical section on pages i-xv and 117-147, respectively are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has 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. Other reporting required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report, dated March 12, 2014, 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 the effectiveness of internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control over financial reporting and compliance. 1,- Houston, Texas March 12, 2014 3 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd. (This page intentionally left blank.) 4 Management's Discussion and Analysis 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, 2013. FINANCIAL HIGHLIGHTS • The assets of the primary government of the City of Pearland exceeded its liabilities as of September 30, 2013, by $645.2 million (net position). Of this amount, $609.6 million is for investments in capital assets, net of related capital debt and $44.2 million is restricted for economic development, capital projects, debt service, public safety, and community development proj ects. • The City's total primary government net position increased by $58.3 million primarily due to the annexation of Brazoria MUD No. 4 and capital contributions from developers for infrastructure. • At the close of the current fiscal year, the City of Pearland's governmental funds reported combined ending fund balances of $64.8 million, an increase of $4.3 million in comparison with the prior year. Increases are seen in the Pearland Economic Development Corporation of $1.9 million, $1.1 million is in the General Fund, $800,000 in Capital Project Fund, and the remaining in the City other Governmental Funds. Approximately $48.8 million of the $64.8 million is considered restricted or assigned; $20.8 million for economic development, and $14.5 million can be attributed to unspent bond proceeds for capital projects. • As of September 30, 2013, the unassigned fund balance for the General Fund was $16.9 million or 31% of total General Fund expenditures. This exceeds the City's reserve policy of 16.6%. The total fund balance for the General Fund is $18.6 million or 34% of General Fund expenditures. • The City of Pearland's outstanding General Obligation and Certificates of Obligation debt for governmental activities totaled $294.7 million, a net increase of $5.1 million over the previous year. The increase is attributable to new money being issued of $12.1 million offset by principal payments. Revenue Bonds for the City's component units total $75.1 million, down to $3.6 million from last year due to payment of principal. The City's debt for business activities totaled $119.7 million, a net decrease of approximately $4.7 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 Position presents information on all of the City's assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. 6 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS The Statement of Activities presents information showing how the City's net position changed during the fiscal year. All changes in net position 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). 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, economic development, 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 20 through 22 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 blended component units is reported together with 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 statements 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 23 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, Pearland Economic Development Corporation, Tax Increment Reinvestment Zone #2, and Development Authority of Pearland, 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. 7 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS 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. Proprietary Funds - The City maintains two types 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. The City also maintains two internal service funds to account for its property insurance and health insurance. These funds are part of the governmental activities in the government -wide financial statements and are reported separately beginning on page 27 of the Statement of Net Position. 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 can be found on pages 27 through 30 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. 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 31 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 67 of this report. Government -wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government's financial position. In the case of the City, assets exceeded liabilities by $645.2 million at the close of the most recent fiscal year. By far the largest portion of the City's net position (94 percent) reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment), less any capital 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 capital 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. 8 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE SCHEDULE OF NET POSITION September 30, 2013 and 2012 Amounts in (000's) Governmental Activities Business -Type Activities Totals 2013 2012* 2013 2012 2013 2012* Assets Current and other assets $ 95,694 $ 87,941 $ 42,133 $ 48,163 $ 137,827 $ 136,104 Capital assets 749,038 706,242 281,213 266,288 1,030,251 972,530 Total Assets 844,732 794,183 323,346 314,451 1,168,078 1,108,634 Liabilities Other liabilities 17,170 9,778 9,147 6,996 26,317 16,774 Long-term liabilities outstanding 375,604 378,471 120,961 126,479 496,565 504,950 Total Liabilities 392,774 388,249 130,108 133,475 522,882 521,724 Net position Net investment in capital assets 442,581 396,009 166,992 158,716 609,573 554,725 Restricted 34,666 36,548 9,542 9,821 44,208 46,369 Unrestricted (25,289) (26,623) 16,704 12,439 (8,585) (14,184) Total Net Position $ 451,958 $ 405,934 $ 193,238 $ 180,976 $ 645,196 $ 586,910 * As restated for comparison purposes. Due to the implementation of GASB 61, The Financial Reporting Entity: Omnibus An Amendment of GASB Statements No. 14 and No. 34 (GASB 61), Pearland Economic Development Corporation, Pearland TIRZ #2 and the Development Authority of Pearland have been presented as blended component units and therefore are included in the Governmental Activities numbers in this year's annual report. Fiscal year 2012 numbers have been restated for comparative purposes. As a result of this implementation, Unrestricted Net Position for Governmental Activities is negative $25,289 for fiscal year 2013, where historically this has been a positive number. Governmental Accounting Standards require that the Development Authority of Pearland outstanding debt be deducted from the unrestricted component of the government's net position as the Development Authority has acquired no capital assets, therefore the debt is considered non -capital related. If one where to adjust for this, Governmental Activities Unrestricted Net Position would have been a positive $20,628 compared to $21,618 in fiscal year 2012, a reduction of $990 thousand in unrestricted net position. The increase in Total Net Position from the prior year is $58.3 million, which is primarily attributed to an increase in capital assets from developer contributions. 9 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSIONAND ANALYSIS COMPARATIVE SCHEDULE OF CHANGES IN NET POSITION September 30, 2013 and 2012 Amounts in (000's) Governmental Activities Business -Type Activities Totals 2013 2012* 2013 2012 2013 2012 Revenues Program revenues: Charges for services $ 22,719 $ 12,597 $ 37,183 $ 35,189 $ 59,902 $ 47,786 Operating grants and contributions 2,325 7,662 205 2,325 7,867 Capital grants and contributions 53,101 18,843 16,273 8,118 69,374 26,961 Property taxes 54,433 52,230 - 54,433 52,230 Sales and use taxes 24,942 22,969 24,942 22,969 Franchise taxes 5,999 5,670 5,999 5,670 Investment earnings 155 134 95 68 250 202 Other 1,701 1,554 682 443 2,383 1,997 Total Revenues 165,375 121,659 54,233 44,023 219,608 165,682 Expenses General Government 13,358 13,334 13,358 13,334 Public Safety 28,944 27,403 28,944 27,403 Public Works 31,690 28,510 31,690 28,510 Community Services 3,807 4,267 3,807 4,267 Parks and Recreation 9,524 9,264 9,524 9,264 Economic Development 17,411 26,311 17,411 26,311 Interest on long-term debt 16,224 11,572 16,224 11,572 Water and Sewer - 32,040 29,392 32,040 29,392 Solid Waste 8,324 7,528 8,324 7,528 Total Expenses 120,958 120,661 40,364 36,920 161,322 157,581 Increase (decrease) in net position before transfers 44,417 998 13,869 7,103 58,286 8,101 Transfers 1,607 2,269 (1,607) (2,269) - - Increase in net position 46,024 3,267 12,262 4,834 58,286 8,101 Net position- beginning, as restated 405,934 402,667 180,976 176,142 586,910 578,809 Net position - ending $ 451,958 $ 405,934 $ 193,238 $ 180,976 $ 645,196 $ 586,910 As restated for comparison purposes. At the end of the current fiscal year, the City is able to report positive balances in all three categories of net position, both for the government as a whole, as well as for its separate governmental and business - type activities. 10 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Governmental activities - Governmental activities increased the City's net position by $46.0 million, thereby accounting for 79% percent of the total increase in the net position of the City. Key elements of this increase are as follows: • Property taxes, sales and use taxes, and franchise taxes totaled $54.4 million, $24.9 million, and $6.0 million, respectively. These revenues increased by $4.5 million from prior year primarily as a result of the annexation of Brazoria MUD No. 4 and collection of their property taxes, increase in property taxes due to a 2 cent increase in the property tax rate, and increased consumer spending. • Charges for services increased to $22.7 million. This is $10.1 million over the prior year of which $5.4 million is TIRZ administrative fees previously classified as Operating Grants and Contributions. • Capital Contributions totaled $53.1 million as a result of infrastructure contributed by developers, the annexation of Brazoria MUD No. 4, and grants and contributions for capital projects. This is an increase of $34.3 million over last year. • The revenues were offset by expenses for general government, public safety, public works, and economic development of $13.4 million, $28.9 million, $31.7 million, and $17.4 million, respectively. In total, these expenses were relatively consistent with the prior year. S65,000 960,000 Sss,oao $so,000 $45,000 S40,000 $.35,000 ▪ $30,000 525,000 $20,000 S15,000 $10,000 $5,000 Expenses and Program Revenues- Governmental Activities Escpenses ■ Program Revenues' xincfudes Brazoria County MUD 4 capital contribution for infrastructure Revenues by Source - Governrriental Activities Charges for Services, Other, 1%. Franchise taxes, 4 4% Grants and. contributions, 34% Safes and use taxes, 150 11 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS Business -type activities - Business -type activities increased the City's net position by $12.3 million. Key elements of this increase are as follows: • Charges for services of $37.2 million increased approximately $2.0 million over the prior year primarily due to an increase in water and sewer consumption due to the annexation of Brazoria MUD No. 4. • Capital grants and contributions of $16.3 million increased $8.2 million from the prior year mainly due to the annexation of Brazoria MUD No. 4 and recordation of assets. • The revenues listed above were offset by expenses of $32.0 million and $8.3 million, respectively for Water and Sewer and Solid Waste. Expenses increased from prior year by $2.6 million mainly due to an increase in solid waste of $800,000 due to increase in rates pursuant to the contract, and annexation of Brazoria County MUD No. 4; increase in depreciation and amortization of assets of $770,000, and increase in system repairs of $643,000. Expenses and Program Revenues Business -type Activities $50,000 645,000 $40,0©0 535,000 • $30,000 $25,000 $20,000 $115,000 $10,000 $5 000 $- Exenses ■Frograrn Revenues` ;hfaterr ancf Sewer *Includes Brazoria County IVIU1214 capitat contribution far infrastntcture Revenues by Source - Business -type Activities Other, 1 Grants and contributions, .30% Solid Waste Charges for Services, 12 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS 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 $64.8 million. A portion of the combined fund balance, or $16.9 million, is unassigned and available for day-to-day operations of the City; $14.5 million is restricted for capital projects; $20.8 million for economic development and the remaining balance is restricted for debt service and other programs. There was an increase in the combined fund balance of $4.3 million from the prior year. The increase in fund balance includes an increase in the capital projects fund balance of approximately $800,000 due to bond proceeds, a decrease of $300,000 in the debt service fund balance, offset by a combined increase of approximately $973,000 in the special revenue funds. $1.1 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 $18.6 million at year end. In the Capital Projects Fund, the City spent $17.5 million on various improvement projects; leaving an ending fund balance of $14.5 million, which will be spent on various capital projects. The Pearland Economic Development Corporation, TIRZ #2, and Development Authority; the City's component units, but blended with the primary government, had expenditures totaling $23.9 million, leaving an ending fund balance of $15.4 million, $4.3 million, and $1.8 million, respectively, all considered restricted. 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. GENERAL FUND BUDGETARY HIGHLIGHTS During the year, there was a $2.2 million increase in appropriations between the original and final amended budget, from $57.6 million to $59.8 million. The increase in appropriations is attributable to carryover funding from prior -year encumbrances and projects and to reflect projections during the 2012-2013 budget process. Budget estimates for revenues and other sources combined increased by approximately $2.8 million for the year; also to reflect carryovers and revised projections. Actual revenues and other sources of $59.4 million were $1.7 million under the final budget mainly due to capital lease financing occurring in FY 2014 versus FY 2013 for FY 2013 purchases. Actual expenditures of $55.3 million were under budget by $4.6 million, resulting in the year-end fund balance of $18.6 million over budget by $2.8 million. At year-end, equipment purchases and several projects were stillin progress and $976,713 of the $2.8 million was carried over and re -appropriated in the 2013-2014 budget year. 13 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of fiscal year 2013, the City's governmental activities and business -type activities had invested $749.0 million and $281.2 million, respectively, in a variety of capital assets and infrastructure, as reflected in the following schedule. This represents a net increase of $14.9 million, or 5.6 percent over the end of last fiscal year for the business -type activities capital assets and a net increase of $43.7 million or 6.2 percent over the end of last fiscal year for the governmental activities capital assets. The increase is mainly due to the recordation of Brazoria County MUD No. 4 assets upon annexation. Land Construction in progress Infrastructure Buildings and improvements Machinery and equipment Furniture and fixtures Contractual water rights Total Capital Assets Governmental Activities Business -Type Activities Totals 2013 2012 2013 2012 2013 2012 $ 31,264 $ 31,260 $ 3,796 $ 3,610 $ 35,060 $ 34,870 23,306 23,489 8,918 5,419 32,224 28,908 607,940 573,752 212,666 199,511 820,606 773,263 77,899 70,762 27,168 27,898 105,067 98,660 6,165 5,200 1,401 1,199 7,566 6,399 2,464 873 37 44 2,501 917 - - 27,227 28,607 27,227 28,607 $ 749,038 $ 705,336 $ 281,213 $ 266,288 $ 1,030,251 $ 971,624 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. 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 $496.6 million. Of this amount, $230.0 million is composed of general obligation bonds, $78.7 million is composed of certificates of obligation and $180.8 million represents revenue bonds secured solely by specified revenue sources. General obligation bonds Certificates of obligation Revenue bonds Unamortized amount for issuance premium/(discount) Deferred loss on refunding Capital leases payable Compensated absences Post employment benefit liability Governmental Activities Business -Type Activities Totals 2013 2012 $ 230,040 $ 224,170 64,690 65,425 75,125 78,725 6,159 6,479 (11,053) (12,351) 3,681 3,407 5,007 4,724 1,955 1,535 $ 375,604 $ 372,114 2013 2012 2013 2012 $ - $ 14,020 105,690 730 (560) 261 463 357 $ 120,961 $ 230,040 $ 224,170 15,130 78,710 80,555 109,305 180,815 188,030 882 6,889 7,361 (610) (11,613) (12,961) 342 3,942 3,749 539 5,470 5,263 282 2,312 1,817 $ 125,870 $ 496,565 $ 497,984 The City of Pearland's General Obligation and Certificates of Obligation debt for governmental activities increased to $294.7 million. The $5.1 million increase is due to new monies issued. The City's debt for business activities decreased to $119.7 million, a net decrease of $4.7 million from the previous year, which was the result of the principal payments. 14 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS 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), blended 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. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES Two primary factors in the 2014 budget are the improving Houston area economy and the continued growth in population served by the City. 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 2013 was up 7.3% over FY 2012. The adopted budget for FY 2014 includes a total increase in sales tax of 7.8% over FY 2013 revenues. The nation's largest retail group, National Retail Federation, expects retail sales to increase at a slightly faster pace this year than last year as continued improvements in jobs and housing should help shoppers feel more confident about spending. Building Permit revenue is also projected to maintain the strong levels that have developed during FY 2013. The FY 2013 Adopted Budget was based on an estimated 1,000 single-family permits. Due to the strengthening regional economy during FY 2013, housing starts were 941. The FY 2014 Adopted Budget anticipates 1,000 single-family permits. Another economic factor that will impact revenues is an increase in property values of $504 million or 7.7%, due to new construction and the addition of MUD No. 4, which was annexed on December 31, 2012. Values of existing residential properties have declined slightly over the past few years, from an average value in FY 2009 of $173,308 to an average value in FY 2013 of $172,331, and indications are that residential property values have stayed flat for the FY 2014 budget year. The impact of new residential and commercial construction will more than offset home values for existing properties for 2014. The budget incorporates no increase in the property tax rate. 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. Another significant factor that impacts the adopted budget is a 3% 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. The Pearland City Council approved a $63.3 million General Fund budget for FY 2014. This is an 8% increase from the FY 2013 adopted budget. The increase is mainly due to compensation adjustments recommended from a Class and Compensation Study and new positions added in FY 2014 for a new 5th ambulance, opening of Max Road Sportsplex, and manned staffing at Fire Station #3. In addition, $400,000 is budgeted in FY 2014 for bunker gear and cross -training of emergency medical personnel in anticipation of the approved Fire -EMS merger effective October 1, 2014. The FY 2014 budget also includes year one implementation of a Five -Year Information Technology Strategic Plan that recommends the replacement of the City's integrated Financial and Community Development systems in 15 CITY OF PEARLAND, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS year two, FY 2015. The Five -Year Plan totals $7.1 million. Caring for the City's existing infrastructure to ensure the long-term economic well being and financial health of the City is a priority. As such, the City budgeted $300,000 in FY 2014 for an in-depth street and sidewalk assessment that will provide for a rehabilitation, replacement, and maintenance program and dollars required. 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 fmances. If you have questions about this report or need any additional fmancial information, contact Claire Bogard, Director of Finance, at 3519 Liberty Drive, Pearland, Texas 77581, or call (281) 652-1600. The report and general information can be found on the City's website at www.cityofpearland.com. l6 (This page intentionally left blank) 17 Basic Financial Statements 18 (This page intentionally left blank) 19 CITY OF PEARLAND, TEXAS STATEMENT OF NET POSITION September 30, 2013 Assets Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Due from other governmental agencies Inventories Prepaid items Restricted cash and investments Unamortized issuance costs Capital assets: Nondepreciable capital assets Capital assets, net of accumulated depreciation Total Capital Assets Total Assets Liabilities Accounts payable and accrued liabilities Accrued interest Unearned revenues Customer deposits Long-term liabilities: Due within one year Due in more than one year Total Liabilities Net Position Net investment in capital assets Restricted for: Capital improvements Debt service Community development programs Economic development Public safety Unrestricted Total Net Position Governmental Activities Primary Government Business -Type Activities $ 49,965,161 $ 4,769,402 19,960,608 5,760,545 21,130,475 3,833,506 753,725 105,230 - 245,906 12,562 716,315 26,679,900 2,816,829 1,076,799 54,570,742 12,714,417 694,467,679 268,498,649 749,03 8,421 281,213,066 844,732,670 323,345,780 12,205,785 1,246,881 3,633,280 84,808 15,918,732 359,684,992 5,711,756 411,650 3,023,012 5,082,862 115,878,489 392,774,478 130,107,769 442,581,308 166,991,827 3,568,609 7,681,267 4,161,020 1,860,731 4,756,143 20,527,040 1,652,989 (25,288,917) 16,704,186 $ 451,958,192 $ 193,238,011 The accompanying notes are an integral part of these basic financial statements. Total $ 54,734,563 25,721,153 24,963,981 753,725 105,230 258,468 27,396,215 3,893,628 67,285,159 962,966,328 1,030,251,487 1,168,078,450 17,917,541 1,658,531 3,633,280 3,107,820 21,001,594 475,563,481 522,882,247 609,573,135 11,249,876 6,021,751 4,756,143 20,527,040 1,652,989 (8,584,731) $ 645,196,203 20 CITY OF PEARLAND, TEXAS STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013 Functions/Programs Primary Government Governmental Activities: General Government Public Safety Public Works Community Services Parks and Recreation Economic Development Interest on long-term debt Total Governmental Activities Business -Type Activities: Water and Sewer Solid Waste Total Business -Type Activities Total Primary Government Expenses $ 13,358,412 28,944,507 31,689,576 3,807,513 9,523,793 17,410,535 16,223,583 Program Revenue Charges for Services $ 6,326,156 7,410,197 3,095,679 3,263,783 2,209,118 414,000 120,957,919 22,718,933 32,040,246 8,323,786 29,007,476 8,175,198 40,364,032 37,182,674 161,321,951 59,901,607 General Revenues Taxes: Property taxes Sales and use taxes Franchise taxes Unrestricted investment earnings Gain on sale of assets Miscellaneous Transfers Operating Grants and Contributions Capital Grants and Contributions $ 43,847 $ 180,000 602,850 1,388,392 52,921,691 107,519 182,496 2,325,104 53,101,691 Total General Revenues and Transfers Change in net assets Net position - beginning, as restated Net position - ending The accompanying notes are an integral part of these basic financial statements. 16,273,170 16,273,170 2,325,104 69,374,861 21 Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business -Type Activities Activities Total $ (6,808,409) $ $ (6,808,409) (20,931,460) (20,931,460) 25,716,186 25,716,186 (43 6,211) (436,211) (7,132,179) (7,132,179) (16,996,535) (16,996,535) (16,223,583) - (16,223,583) (42,812,191) - (42,812,191) (42, 812,191) 13,240,400 13,240,400 (148,588) (148,588) 13,091,812 13,091,812 13,091,812 (29,720,379) 54,433,047 - 54,433,047 24,941,540 24,941,540 5,999,154 5,999,154 154,723 94,889 249,612 8,487 - 8,487 1,692,870 681,892 2,374,762 1,606,753 (1,606,753) 88,836,574 (829,972) 88,006,602 46,024,3 83 12,261,840 58,286,223 405,933,809 180,976,171 586,909,980 $ 451,958,192 193,238,011 $ 645,196,203 CITY OF PEARLAND, TEXAS BALANCE SHEET Governmental Funds September 30, 2013 Pearland Tax Economic Increment Development Other Total General Capital Development Reinvestment Authority of Governmental Governmental Fund Debt Service Projects Fund Corporation Zone #2 Pearland Funds Funds Assets Cash and cash equivalents $ 8,887,567 $ 3,073,485 $ 14,824,931 $ 4,685,369 $ 4,200,431 $ 8,148,177 $ 5,290,853 $ 49,110,813 Investments 8,742,291 1,496,355 744,000 8,729,962 248,000 - 19,960,608 Receivables, net of allowance for uncollectibles 6,094,897 9,692,829 868,241 1,425,984 130,541 12 2,854,234 21,066,738 Due from other govemments 581,579 - - 172,146 753,725 Due from other funds 118,097 - 118,097 Inventories 105,230 - - 105,230 Prepaid items 53,217 166,894 11,547 - 4,162 235,820 Restricted cash - - 665,254 51,061 - 716,315 Total Assets $ 24,582,878 $ 14,429,563 $ 16,437,172 $ 15,518,116 $ 4,330,972 $ 8,447,250 $ 8,321,395 $ 92,067,346 Liabilities and Fund Balances Liabilities Accounts payable $ 1,707,531 $ 166,894 $ 1,475,090 $ 43,493 $ 485 $ 6,639,030 $ 155,137 $ 10,187,660 Accrued expenditures 1,197,097 38,870 426,495 - 80,946 1,743,408 Deposits 46,475 - 38,333 - 84,808 Due to other funds - - - 118,097 118,097 Unavailable/uneamedrevenue 3,008,658 9,580,978 69,785 2,491,869 15,151,290 Total Liabilities 5,959,761 9,786,742 1,901,585 151,611 485 6,639,030 2,846,049 27,285,263 Fund balances: Non -spendable: Inventories 105,230 - - - - 105,230 Prepaid items 53,217 166,894 11,547 4,162 235,820 Restricted for: Debt service 4,475,927 665,254 51,061 5,192,242 Capital improvements - 14,535,587 14,535,587 Community development programs 4,756,143 4,756,143 Public safety - - - 715,041 715,041 Economic development 14,689,704 4,330,487 1,757,159 - 20,777,350 Assigned for: Encumbrances 1,553,390 - - 1,553,390 Unassigned: General fund 16,911,280 16,911,280 Total Fund Balances 18,623,117 4,642,821 14,535,587 15,366,505 4,330,487 1,808,220 5,475,346 64,782,083 Total Liabilities and Fund Balances $ 24,582,878 $ 14,429,563 $ 16,437,172 $ 15,518,116 $ 4,330,972 $ 8,447,250 $ 8,321,395 $ 92,067,346 The accompanying notes are an integral part of these basic financial statements. 23 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION September 30, 2013 Total fund balance, governmental funds $ 64,782,083 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not current financial resources and therefore are not reported in the fund financial statements, but are reported in the governmental activities of the Statement of Net Position. Certain other long-term assets (property taxes receivable, adjudicated court fines receivable and unamortized bond issuance costs) are not available to pay current period expenditures and therefore are not reported in the fund financial statements, but are reported in the governmental activities of the Statement of Net Position 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 Position: 749,038,421 14,334,839 Bonds payable (369,855,000) Unamortized premium/discount (6,158,967) Deferred loss on refunding 11,053,492 Capital lease payable (3,681,366) Compensated absences (5,006,729) Accrued interest payable (1,246,881) Other post employment benefit liability (1,955,154) 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 Position. Net Position of Governmental Activities in the Statement of Net Position The accompanying notes are an integral part of these basic financial statements. 653,454 $ 451,958,192 24 CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2013 Pearland Tax Economic Increment Development Other Total General Capital Development Reinvestment Authority of Governmental Governmental Fund Debt Service Projects Fund Corporation Zone 62 Pearland Funds Funds Revenues Property taxes $ 11,178,950 $ 25,898,494 $ $ - $ 17,397,567 $ - $ - $ 54,475,011 Sales and use taxes 15,919,784 - 7,871,396 1,150,360 24,941,540 Franchise fees 5,758,776 - 240,378 5,999,154 Licenses and permits 2,988,859 - - 2,988,859 Fines and forfeitures 3,333,675 - - 199,988 3,533,663 Charges for services 12,567,693 - - 414,000 - - 12,981,693 Investment earnings 54,063 19,296 18,070 40,811 12,238 2,182 7,485 154,145 Intergovernmental 3,593,783 - - 1,001,515 4,595,298 Other 814,956 1,946,973 4,116,743 24,326 1,070,549 7,973,547 Total Revenues 52,616,756 27,864,763 7,728,596 8,350,533 17,409,805 2,182 3,670,275 117,642,910 Expenditures Current: General government 7,098,242 - - - 9,806 849,916 7,957,964 Public safety 26,082,178 - - - - - 122,479 26,204,657 Public works 7,502,356 - 309,833 - - 7,812,189 Community services 3,263,146 - 259,741 3,522,887 Parks and recreation 7,111,012 - - - 133,064 7,244,076 Economic development 4,400,139 6,375,434 6,638,430 - 17,414,003 Debt Service: Principal 86,254 11,950,504 - 880,000 2,720,000 15,636,758 Interest and other charges 28,232 12,667,961 - 1,165,585 1,671,965 15,533,743 Bond issuance costs - - 324,993 - - 324,993 Capital outlay 4,088,048 17,487,825 525,218 22,101,091 Intergovernmental - 4 057 682 - - 4,057,682 Total Expenditures 55,259,468 28,676,147 18,122,651 6,445,724 6,375,434 11,040,201 1,890,418 127,810,043 Excess (deficiency) of revenues over (under) expenditures (2,642,712) (811,384) (10,394,055) 1,904,809 11,034,371 (11,038,019) 1,779,857 (10,167,133) Other Financing Sources (Uses) Issuance of debt 12,060,000 - - 12,060,000 Bond premium 331,309 - 331,309 Capital leases 1,179,413 - - - - - 1,179,413 Transfers in 3,613,122 461,726 421,615 - 10,997,930 20,748 15,515,141 Transfers out (1,098,667) - (1,659,245) - (10,997,930) - (827,546) (14,583,388) Total Other Financing Sources (Uses) 3,693,868 461,726 11,153,679 (10,997,930) 10,997,930 (806,798) 14,502,475 Net change in fund balances 1,051,156 (349,658) 759,624 1,904,809 36,441 (40,089) 973,059 4,335,342 Fund balances -beginning 17,571,961 4,992,479 13,775,963 13,461,696 4,294,046 1,848,309 4 502,287 60,446,741 Fund balances- ending $ 18,623,117 $ 4,642,821 $ 14,535,587 $ 15,366,505 $ 4,330,487 $ 1,808,220 $ 5,475,346 $ 64,782,083 The accompanying notes are an integral part of These basic financial statements. 25 CITY OF PEARLAND, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013 Net change in fund balances - total governmental funds: $ 4,335,342 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 period. This is the amount by which depreciation of $29,360,934 exceeded capital outlays of $22,427,041 in the current period. (6,933,893) 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. (44,911) Capital assets contributed by developers that do not represent current assets and are not reflected in the governmental fund financial statements 18,503,918 Capital assets net of related debt acquired as a result of Municipal Utility Annexation 27,098,685 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. 2,174,369 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. Governmental funds report bond issuance costs as expenditures. In contrast the government -wide financial statements amortizes such a cost over the life of the bonds 2,333,691 324,993 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 (14,977) Amortization of bond related costs (940,048) Compensated absences (282,486) Capital lease activity (274,607) Post employment benefit liability (419,768) 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. 164,075 Change in net position of governmental activities $ 46,024,383 The accompanying notes are an integral part of these basic financial statements. 26 CITY OF PEARLAND, TEXAS STATEMENT OF NET POSITION PROPRIETARY FUNDS September 30, 2013 Business -Type Activities - Enterprise Funds Governmental Activities - Water and Solid Waste Internal Sewer Fund Fund Total Service Fund Assets Current assets: Cash and cash equivalents $ 3,670,426 $ 1,098,976 $ 4,769,402 $ 854,348 Investments 5,760,545 - 5,760,545 - Accounts receivable, net of allowance for doubtful accounts 3,011,164 822,342 3,833,506 63,737 Prepaid items 12,562 - 12,562 10,086 Restricted cash and cash equivalents 18,680,551 18,680,551 - Restricted investments 7,999,349 - 7,999,349 Total current assets 39,134,597 1,921,318 41,055,915 928,171 Non -current assets: Unamortized issuance costs 1,076,799 1,076,799 Capital assets: Land and improvements 3,796,382 - 3,796,382 Construction in progress 8,918,035 8,918,035 Contractual rights to water supply 34,511,428 34,511,428 Infrastructure 300,748,324 300,748,324 Buildings and improvement 31,256,473 - 31,256,473 Machinery and equipment 3,706,656 - 3,706,656 Furniture and fixtures 106,127 106,127 Less: Accumulated depreciation (101,830,359) - (101,830,359) Total non -current assets 282,289,865 - 282,289,865 Total Assets Liabilities Current liabilities: Accounts payable and 322, 501,261 1,921,318 324,422,579 928,171 accrued expenses $ 4,002,839 $ 1,708,917 $ 5,711,756 $ 274,717 Accrued interest payable 411,650 - 411,650 - Customer deposits 3,023,012 3,023,012 Compensated absences - current portion 78,740 78,740 Bonds payable - current portion 4,920,000 4,920,000 Capital lease - current portion 84,122 84,122 Total current liabilities 12,520,363 1,708,917 14,229,280 274,717 Non -current liabilities: Compensated absences 384,742 384,742 Capital lease obligation 176,862 176,862 Other post -employment benefits 356,544 - 356,544 Bonds payable, net 114,960,341 114,960,341 Total non -current liabilities 115,878,489 - 115,878,489 Total Liabilities 128,398,852 Net Position Net Investment in capital assets 166,991,827 Restricted for debt service 1,860,731 Restricted for capital projects 7,681,267 Unrestricted 16,491,785 Total Net Position 1,708,917 130,107,769 274,717 212,401 166,991,827 1,860,731 7,681,267 16,704,186 653,454 $ 193,025,610 $ 212,401 $ 193,238,011 $ 653,454 The accompanying notes are an integral part of these basic financial statements. 27 CITY OF PEARLAND, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS For the Year Ended September 30, 2013 Revenues Charges for services Operating Expenses Governmental Business -Type Activities - Enterprise Funds Activities - Water and Solid Waste Internal Sewer Fund Fund Total Service Fund 29,007,476 $ 8,175,198 $ 37,182,674 $ 6,532,572 Personnel services 5,042,612 - 5,042,612 Supplies and materials 2,752,203 - 2,752,203 Contractual services 7,369,515 8,317,836 15,687,351 6,881,016 Repairs and maintenance 1,669,554 - 1,669,554 4,774 Other expenses 589,398 5,950 595,348 158,285 Depreciation and amortization 9,335,337 - 9,335,337 Total Operating Expenses 26,758,619 8,323,786 35,082,405 7,044,075 Operating income (loss) 2,248,857 (148,588) 2,100,269 (511,503) Non -Operating Revenues (Expenses) Earnings on investments 94,277 612 94,889 578 Miscellaneous revenue (expense) 664,418 17,474 681,892 Interest expense (5,281,627) - (5,281,627) Total Non -Operating Revenues (Expenses) (4,522,932) 18,086 (4,504,846) 578 Loss before contributions and transfers (2,274,075) (130,502) (2,404,577) (510,925) Capital contributions 16,273,170 16,273,170 - Transfers in 218,961 218,961 675,000 Transfers out (1,825,714) (1,825,714) - Change in net position 12,392,342 (130,502) 12,261,840 164,075 Total net position - beginning 180,633,268 342,903 180,976,171 489,379 Total net position - ending $ 193,025,610 $ 212,401 $ 193,238,011 $ 653,454 The accompanying notes are an integral part of these basic financial statements. 28 CITY OF PEARLAND, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2013 Cash Flows from Operating Activities Receipts from customers and users Receipts from interfund transactions Disbursed for personnel services Disbursed for goods and services Net cash provided by (used in) operating activities Cash Flows From Noncapital Financing Activities Transfers from funds Transfers to other funds Cash received from non -operating revenues Net cash provided by (used in) noncapital financing activities Cash Flows from Capital and Related Financing Activities Proceeds from the sale of equipment Capital grants and contributions Principal payments on debt Principal payments on leases Acquisition and construction of capital assets Net cash used in capital and related financing activities Cash Flow from Investing Activities Purchase of investments Sales of investments Interest received Interest paid Net cash provided by (used in) investing activities Net increase (decrease) in cash and equivalents Cash and equivalents, beginning Cash and equivalents, end Unrestricted cash and equivalents Restricted cash and equivalents Business -Type Activities - Enterprise Funds Water and Solid Waste Sewer Fund Fund Total $ 28,990,245 (5,019,856) (10,716,040) 13,254,349 218,961 (1,825,714) 644,316 (962,437) 20,102 5,942,763 (4,725,000) (81,380) (13, 866, 825) (12,710,340) (10,776,720) 13,713,512 108,075 (5,305,812) (2,260,945) (2,679,373) 25,030,350 $ 22,350,977 $ 3,670,426 18,680,551 $ 22,350,977 Page 1 of 2 Governmental Activities - Internal Service Fund $ 8,083,250 $ 37,073,495 $ 5,345,055 1,135,012 (5,019,856) (7,926,751) (18,642,791) (7,084,133) 156,499 13,410,848 (604,066) 612 612 218,961 (1,825,714) 644,316 (962,437) 20,102 5,942,763 (4,725,000) (81,380) (13,866,825) (12,710,340) (10,776,720) 13,713,512 108,687 (5,305,812) (2,260,333) 157,111 (2,522,262) 941,865 25,972,215 675,000 675,000 578 578 71,512 782,836 $ 1,098,976 $ 23,449,953 $ 854,348 $ 1,098,976 $ 4,769,402 $ 854,348 18,680,551 $ 1,098,976 $ 23,449,953 $ 854,348 The accompanying notes are an integral part of these basic financial statements. 29 CITY OF PEARLAND, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended September 30, 2013 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities Operating income (loss) Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation and amortization Recovery of allowance (Increase) decrease in accounts receivable (Increase) decrease in prepaid expenses Increase (decrease) in accounts payable Increase (decrease) in compensated absences Increase (decrease) in customer deposits Increase (decrease) in other post employment benefits Net cash provided by (used in) operating activities Summary of non -cash transactions Contributed capital assets Change in value of investments Business -Type Activities - Enterprise Funds Water and Solid Waste Sewer Fund Fund Total Page 2 of 2 Governmental Activities - Internal Service Fund $ 2,248,857 $ (148,588) $ 2,100,269 $ (511,503) 9,335,337 (249,131) 50,559 1,638,146 (75,396) 231,900 74,077 17,474 (109,422) 397,035 9,335,337 17,474 (358,553) 50,559 2,035,181 (75,396) 231,900 74,077 (52,505) (10,086) (29,972) $ 13,254,349 $ 156,499 $ 13,410,848 $ (604,066) $ 10,330,407 $ $ 9,791 $ - $ 10,330,407 $ - $ 9,791 $ The accompanying notes are an integral part of these basic financial statements. 30 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. 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 and 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. Blended component units are component units that are considered so closely related to the legal entity that the blended component unit funds appear as if the funds are integral parts of the primary government. Based upon GASB 61 criteria, the City's financial statements include the following blended 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. 31 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) A. Financial Reporting Entity (continued) Blended 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 a specific geographic area known as Shadow Creek Ranch, 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. Related Organizations The City Council of Pearland appoints the voting majority of members to the board of directors for the Pearland Municipal Management District No. 1, Pearland Municipal Management District No. 2 and Lower Kirby District. However, the City's accountability for these entities does not extend beyond making appointments. There is no financial benefit/burden relationship or the ability to impose its will on these entities. B. Government -wide and Fund Financial Statements The government -wide financial statements (i.e., the Statement of Net Position and the Statement of Activities) report information about the City as a whole. These statements include all activities of the primary government and its blended 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. 32 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 statement of net position. Proprietary fund -type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net position. 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 activities column, a reconciliation is presented which briefly explains the adjustments necessary to reconcile fund -based financial statements with the governmental activities 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, community services, public works, parks and recreation, economic development, and public safety. 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. 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 (continued) The Pearland Economic Development Corporation fund is used to account for the revenues and expenditures associated with the half -cent sales tax for economic development approved by the voters in 1995. Use of funds are governed by State Law. The Pearland Economic Development Corporation is considered a major fund for reporting purposes. The Tax Increment Reinvestment Zone #2 fund is used to account for the incremental property tax revenues in the specific geographical area and use thereof from the participating taxing entities in the Zone. The Tax Increment Re -investment Zone #2 is considered a major fund for reporting purposes. The Development Authority of Pearland fund is used to account for the financing of the development of the TIRZ #2. The Development Authority of Pearland 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 Internal Service Funds 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 Funds are included in govermnental activities for government -wide reporting purposes. All assets, liabilities, equities, revenues, expenses and transfers relating to the government's business -type activities are accounted for through proprietary funds. The measurement focus is on determination of net income, financial position and cash flows. As a general rule, the effect of interfund activity has been eliminated from the government -wide financial statements. Exceptions to this general rule are charges between the City's water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include: (1) charges to customers or applicants for goods, services, or privileges provided, (2) operating grants and contributions, and (3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenue. Likewise, general revenue includes all taxes. 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 Funds 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 expenses. 34 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies 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 that 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 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. When multiple categories of fund balance are available for an expenditure, the City would typically use Restricted fund balances first, followed by Committed, and then Assigned, but reserves the right to selectively spend from any of the categories, including Unassigned based upon the individual circumstances. 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. 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. 35 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) D. Fund Balance Working Capital Policies (continued) 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 Position 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 Position 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. E. Cash and Cash Equivalents The City's cash and cash equivalents are considered to be cash on hand, demand deposits, and short -teen investments with original maturities of three months or less from thedate 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. 36 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) E. Cash and Cash Equivalents (continued) 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 and Certificates of Deposit with original maturities greater than three months from date of acquisition. 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 fiinds" or "due to other funds". Interfund receivables and payables which are not expected to be paid within 12 months are classified as loans from/loans to other funds. 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 than 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 statement of net position 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. 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 37 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) K. Capital Assets (continued) extend assets' lives are not capitalized. Additionally, at September 30, 2013 the City reports intangible assets under business -type activities, which include $34.5 million in surface water rights with a life of 25 years. Property, plant,equipment and intangible assets 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 Intangible Assets - Water Rights 25 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. Employees cannot 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 12 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 compensatory time is 120 hours, including employees involved in public safety. All sick leave benefits are accumulated and paid to employees, in good standing, 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. 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. 38 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1 - Summary of Significant Accounting Policies (continued) N. Comparative Data 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. O. Current Accounting Pronouncements In December 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus — an amendment of GASB Statements No. 14 and No. 34. This Statement is intended to improve financial reporting for a governmental financial reporting entity. The requirements of this Statement result in financial reporting entity financial statements being more relevant by improving guidance for including, presenting, and disclosing information about component units and equity interest transactions of a financial reporting entity. This Statement provides amendments to GASB No. 14, "The Financial Reporting Entity," and GASB No. 34, "Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments." The requirements of this Statement are effective for fiscal periods beginning after June 15, 2012. The City implemented this statement in fiscal year 2013. As a result of implementation, the City determined that the three previously identified discretely presented component units met the criteria for inclusion as blended component units. These blended component units have been reflected as major governmental funds and are included in governmental activities in the government -wide statements. This implementation resulted in a retroactive adjustment to reduce beginning net position by $43,231,585. Additionally, as reflected in Notes 4 and 5, beginning (2012) capital assets and long-term debt have been restated to include the blending of the component units. In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements. This Statement is intended to improve financial reporting by contributing to the GASB's efforts to codify all sources of generally accepted accounting principles for state and local governments so that they derive from a single source. This requirement will bring the authoritative accounting and financial reporting literature together in one place. This Statement will eliminate the need for financial statement preparers and auditors to determine which FASB and AICPA pronouncement provisions apply to state and local governments, resulting in more consistent application of applicable guidance. The requirements of this Statement are effective for fiscal periods beginning after December 15, 2011. The City implemented this statement in fiscal year 2013; this had no effect on the financial statements. In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This statement is intended to improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government's net position which required the City to change references to net assets to net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. The requirements of this Statement are effective for fiscal periods beginning after December 15, 2011. The City implemented this statement in fiscal year 2013, which required the City to change references to net assets to net position. 39 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) O. Current Accounting Pronouncements (continued) Future Accounting Pronouncements In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. This statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflow of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term "deferred" in financial statement presentations. This statement is effective for periods beginning after December 15, 2012. The City anticipates implementation of this statement in fiscal year 2014. Also in March of 2012, the GASB issued Statement No. 66, Technical Corrections — 2012 — an amendment of GASB Statements No. 10 and No. 62. The objective of this statement is to improve accounting and financial reporting for a government financial reporting entity by resolving conflicting guidance that resulted from issuance of two pronouncements, Statements No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions" and No. 62, "Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements." The City anticipates implementation of this statement in fiscal year 2014. In June of 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans — an amendment of GASB Statement No. 25. This statement is intended to improve financial reporting by state and local governmental pension plans and replaces the requirements of Statements No. 25, "Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans" and No. 50, "Pension Disclosures." This statement is effective for financial statements for fiscal years beginning after June 15, 2013. The City anticipates implementation of this statement in fiscal year 2014. Also in June of 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions — an amendment of GASB Statement No. 27. The primary objective of this statement is to improve accounting and financial reporting by state and local governments for pensions. It replaces the requirements of Statement No. 27, "Accounting for Pensions by State and Local Governmental Employers" as well as the requirements of Statement No. 50, "Pension Disclosures." This statement is effective for financial .statements for fiscal years beginning after June 15, 2014. The City anticipates implementation of this statement in fiscal year 2015. GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations. This statement establishes accounting and financial reporting standards related to government combinations and disposals of government operations. The term, "government combinations," includes a variety of transactions referred to as mergers, acquisitions, and transfers of operations. This statement is effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013. The City anticipates implementation of this statement in fiscal year 2015. 40 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 1- Summary of Significant Accounting Policies (continued) P. Current Accounting Pronouncements (continued) Future Accounting Pronouncements (continued) GASB issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. This Statement also requires a government that has issued an obligation guaranteed in a nonexchange transaction to report the obligation until legally released as an obligor, and requires a government that is required to repay a guarantor for making a payment on a guaranteed obligation or legally assuming the guaranteed obligation to continue to recognize a liability until legally released as an obligor. This statement is effective for reporting periods beginning after June 15, 2013. The City anticipates implementation of this statement, if applicable in fiscal year 2014. GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date (an amendment of GASB Statement No. 68). This Statement amends Statement No. 68 related to transition provisions for certain pension contributions made to defined benefit pension. plans prior to implementation of Statement No. 68 by employers and nonemployer contributing entities. This statement is effective for fiscal years beginning after June 15, 2014. The provisions of this Statement should be applied simultaneously with the provisions of Statement No. 68. The City anticipates implementation of this statement in fiscal year 2015. 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 morerestrictive than the PFIA requires. It is the City's policy to restrict its direct investments to obligations of the U.S. 4l CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Authorization for Deposits and Investments (continued) Government or U.S. Government Agencies, obligations of the State of Texas, counties, cities, and other political subdivisions rated not less than A, fully collateralized certificates of deposit, mutual funds, repurchase agreements and local government investment pools. The maximum maturity allowed is five years from date of purchase. The City's investment policy does not allow investments in collateralized mortgage obligations. Deposit and Investment Amounts The City's cash and investments are classified as: cash and cash equivalents, investments, and restricted cash and investments. The cash and cash equivalents include cash on hand, deposits with financial institutions, and short-term investments, which have maturities at purchase of less than three months, 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 as allowed by the City's investment policy. 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 deposits and investments at year-end: Total Fair Value Cash deposits $ 73,177,112 Investments: FFCB discount note 7,513,881 FHLB discount note 3,012,122 FHLMC discount note 5,018,755 FNMA discount note 2,521,657 Certificates of deposit 16,608,404 $ 107,851,931 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 earnings as follows: Interest income Unrealized gain on temporary investments $ 245,070 4,542 Investment earnings $ 249,612 42 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) Custodial Credit Risk For deposits, custodial credit risk is the risk that in the event of a bank failure, the City's deposits may not be returned to it. The City's investment policy follows state statutes, which require that all deposits in financial institutions be fully collateralized or insured. For investments, custodial credit risk is the risk that in the event of the failure of a counterparty, the City will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. To control custody and safekeeping risk, the City shall have pledged collateral held at an independent third -party institution and evidenced by a written receipt. The value of the pledged collateral should be marked to market monthly and shall be at least 102 percent of par or market value of the investments, whichever is greater. Substitutions of collateral shall meet the requirements of the collateral agreement. Collateral shall not be released until the replacement collateral has been received, if the release of the collateral should result in the value being under 102 percent of par value. The pledge of collateral shall comply with the City's investment policy. The City was not exposed to any custodial credit risk during the year. Interest Rate Risk At year-end, the City had the following investments subject to interest rate risk, under U.S. generally accepted accounting principles: Weighted Average Total Maturity Fair Value (Days) Temporary investments: FFCB discount note $ 7,513,881 332 FHLB discount note 3,012,122 361 FHLMC discount note 5,018,755 996 FNMA discount note 2,521,657 314 $ 18,066,415 Portfolio weighted average maturity 519 The City's investment policy specifies a maximum weighted average maturity for the portfolio of 900 days or 30 months based on the stated maturity date of the investments. When including cash investments, the weighted average maturity for the City is 165 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 five years or 1,825 days from date of purchase. The settlement date is considered the date of purchase. 43 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 2 - Deposits (Cash) and Investments (continued) 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, 2013, the City had investments in U.S. Agency securities that exceeded five percent of the total investment portfolio at year-end. Investment Type Percentage of Total Total Investment Fair Value Portfolio FFCB discount note $ 7,513,881 41% FHLB discount note 3,012,122 17% FHLMC discount note 5,018,755 28% FNMA discount note 2,521,657 14% Total Credit Risk $ 18,066,415 100% 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. The city had no investments in an investment pool. 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 Revenue bond debt service $ 2,988,697 Customer deposits 3,023,012 Capital improvements 21,384,506 Total $ 27,396,215 44 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables Receivables at September 30, 2013, consisted of the following: Governmental Funds: Pearland Tax Increment Capital Economic Reinvestment Development Other General Debt Service Projects Development Zone Authority of Non -Major Fund Fund Fund Corporation Developments Pearland Funds Total Receivables: Property taxes, including penalties and interest $ 536,148 $ 873,642 $ $ $ 130,541 $ $ - $ 1,540,331 Lease receivable 8,835,487 - - - 8,835,487 Sales and other taxes 3,938,047 - 1,344,827 32,981 5,315,855 Fines and forfeitures 930,995 - - - - 6,953 937,948 Interest 7,801 771 123 8,010 12 71 16,788 Other 693,515 - 868,118 73,147 - 2,822,079 4,456,859 Allowance for uncollectibles (11,609) (17,071) - - - (7,850) (36,530) $ 6,094,897 $ 9,692,829 $ 868,241 $ 1,425,984 $ 130,541 $ 12 $ 2,854,234 $ 21,066,738 Enterprise Funds: Water and Solid Waste Internal Service Sewer Fund Fund Fund Total Receivables: Customer accounts $ 3,020,156 $ 867,157 $ $ 3,887,313 Interest 25,938 25,938 Other 19,088 63,737 82,825 Allowance for uncollectibles (54,018) (44,815) (98,833) $ 3,011,164 $ 822,342 $ 63,737 $ 3,897,243 Governmental funds report 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 unavailable/unearned revenue reported in the governmental funds were as follows: Unavailable Unearned Delinquent property taxes receivable - general fund $ 470,445 $ Delinquent property taxes receivable - debt service fund 745,491 Lease revenues -principal 6,809,424 Municipal fines and forfeitures 937,948 Street assessments 2,484,917 Other 69,785 Lease interest revenues 2,026,064 Grants and revenues prior to meeting all eligibility requirements 1,607,216 Total Unavailabe/Unearned for Governmental Funds $ 11,518,010 $ 3,633,280 45 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 3 - Receivables (continued) 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. Note 4 - Capital Assets A summary of changes in the primary government's capital assets for the year ended September 30, 2013, follows: Governmental Activities Non -depreciable Capital Assets Land Construction in progress Balance September 30, 2012 (Restated) Increases Decreases $ 31,260,913 23,488,810 $ 3,372 18,394,519 Balance September 30, 2013 $ - $ 31,264,285 (18,576,872) 23,306,457 Total Non -depreciable capital assets 54,749,723 18,397,891 (18,576,872) 54,570,742 Depreciable Capital Assets Infrastructure Buildings and improvements Machinery and equipment Furniture and fixtures Total depreciable capital assets Less accumulated depreciation for: Infrastructure Buildings and improvements Machinery and equipment Furniture and fixtures Total accumulated depreciation Depreciable capital assets, net Totals 804,204,296 87,473,376 13,519,791 2,662,298 907,859,761 (230,452,471) (16,711,196) (8,319,855) (1,789,729) (257,273,251) 650,586,510 $ 705,336,233 58,680,475 10,457,147 2,111,961 2,037,431 73,287,014 862,884,771 97,930,523 (600,435) 15,031,317 4,699,729 (600,435) 980,546,340 (24,492,719) (3,320,164) - (1,101,666) 555,524 (446,385) - (29,360,934) 555,524 43,926,080 (44,911) $ 62,323,971 $ (18,621,783) (254,945,190) (20,031,360) (8,865,997) (2,236,114) (286,078,661) 694,467,679 $ 749,038,421 46 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) Business -Type Activities Capital assets: Land Construction in progress Total nondepreciaable capital assets Other capital assets: Water and sewer system Buildings and improvements Machinery and equipment Furniture and fixtures Contractual water rights Total depreciable capital assets Less accumulated depreciation for: Water and sewer system Buildings and improvements Machinery and equipment Furniture and fixtures Contractual water rights Total accumulated depreciation Depreciable capital assets, net Totals Balance September 30, 2012 $ 3,609,542 5,418,810 9,028,352 280,739,923 31,256,473 3,368,901 96,127 34,511,428 349,972,852 (81,229,112) (3,358,082) (2,169,842) (51,767) (5,903,960) (92,712,763) 257,260,089 $ 266,288,441 Depreciation was charged to programs as follows: General government Public safety Public works Community services Parks and recreation Total Government Activity Water and sewer Increases Decreases $ 186,840 $ 3,499,225 3,686,065 20,008,401 492,765 10,000 20,511,166 (6,853,177) (729,978) (314;380) (17,750) (1,380,457) (9,295,742) 11,215,424 $ 14,901,489 $ 23,136 $ 281,213,066 Balance September 30, 2013 $ 3,796,382 8,918,035 12,714,417 300,748,324 31,256,473 (155,010) 3,706,656 106,127 34,511,428 (155,010) 370,329,008 (88,082,289) (4,088,060) 178,146 (2,306,076) (69,517) (7,284,417) 178,146 (101,830,359) 23,136 268,498,649 $ 758,797 1,918,725 24,241,247 227,991 2,214,174 $ 29,360,934 $ 9,295,742 Total Business -Type Activity $ 9,295,742 47 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 4 - Capital Assets (continued) The City had active construction projects as of September 30, 2013. 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 Drainage improvement Building improvements Street improvement Park improvements Water and sewer improvements Totals Note 5 - Long -Term Debt Progress $ 5,099,765 2,770,425 12,383,037 2,745,652 9,225,613 $ 32,224,492 A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds Commitment $ 1,997,611 2,534,291 4,212,683 1,617,073 6,678,510 $ 17,040,168 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 City's component units, which are considered blended components units, have revenue bonds used to acquire and construct or to reimburse developers for major capital improvements. Revenue bonds are paid through the Pearland Economic Development Corporation from sales tax and through the Development Authority of Pearland from property tax increment. 48 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The following is a summary of changes in the City's total governmental long-term liabilities for the year ended September 30, 2013. In general, the City uses the General and Debt Service funds as well as the Economic Development Corporation and Development Authority to liquidate governmental long-term liabilities. Governmental Activities: Bonds payable: General obligation bonds Certificates of obligation Sales tax revenue bonds Tax increment revenue bonds Deferred loss on refunding Unamortized premium/(discount) Total bonds payable Other liabilities: Obligations under capital leases Compensated absences Other post -employment benefits Balance September 30, 2012 (Restated) Additions $ 224,170,000 $ 13,515,000 65,425,000 2,745,000 24,490,000 54,235,000 - (12,351,438) 6,479,066 303,003 362,447,628 16,563,003 3,406,759 1,186,346 4,724,243 2,678,203 1,535,386 419,768 Total Governmental Activities $ 372,114,016 Reductions $ (7,645,000) (3,480,000) (880,000) (2,720,000) 1,297,946 Balance September 30, 2013 $ 230,040,000 64,690,000 23,610,000 51,515,000 (11,053,492) (623,102) 6,158,967 Amounts Due Within One Year $ 6,765,000 3,710,000 920,000 2,800,000 (14,050,156) 364,960,475 14,195,000 (911,739) (2,395,717) 3,681,366 5,006,729 1,955,154 929,000 794,732 $ 20,847,320 $ (17,357,612) $ 375,603,724 $ 15,918,732 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. 49 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) A summary of the terms of general obligation bonds and certificates of obligation, as of September 30, 2013, follows: Interest Debt Series Original Issue Matures Rate (%) Outstanding General Obligation Bonds Permanent Improvement and Refunding Bonds, Series 2005 37,015,000 2029 4.00-5.00 $ 20,725,000 Permanent Improvement and Refunding Bonds, Series 2006 32,165,000 2029 4.00-5.00 30,860,000 Permanent Improvement and Refunding Bonds, Series 2007 69,640,000 2032 4.00-5.00 66,625,000 Permanent Improvement, Series 2008 22,835,000 2032 4.50-5.50 21,695,000 Permanent Improvement Refunding Bonds, Series 2009 16,735,000 2034 2.50-5.00 15,375,000 Permanent Improvement, Series 2010A 12,415,000 2035 2.00-4.25 11,350,000 Permanent Improvement Refunding, Series 2010B 1,630,000 2018 2.00-4.00 1,000,000 Permanent Improvement, Series 2011 5,400,000 2036 3.00-4.125 5,200,000 Permanent Improvement Refunding Bonds, Series 2012 43,575,000 2029 3.00-5.00 43,575,000 Permanent Improvement Bond Series 2013 9,315,000 2038 3.00-4.625 9,315,000 Annexed Municipal Utility District Bonds BC MUD 1 Series 2007 1,940,000 2030 3.8-4.35 1,810,000 BC MUD 4 Series 2011 2,640,000 2032 2.50-5.00 2,510,000 Total General Obligation Bonds $ 230,040,000 Certificates of Obligations Certificates of Obligation, Series 2003 25,000,000 2014 3.60-3.75 1,035,000 Certificates of Obligation, Series 2004 21,000,000 2015 4.00 1,420,000 Certificates of Obligation, Series 2006 9,700,000 2029 4.125-6.125 8,825,000 Certificates of Obligation, Series 2007 23,250,000 2032 3.25-5.25 22,450,000 Certificates of Obligation, Series 2008 9,000,000 2032 3.875-5.00 8,480,000 Certificates of Obligation, Series 2009 8,520,000 2034 2.50-5.00 7,835,000 Certificates of Obligation, Series 2009A 12,145,000 2029 2.25-4.50 10,225,000 Certificates of Obligation, Series 2011 2,095,000 2021 2.09 1,675,000 Certificates of Obligation, Series 2013 2,745,000 2038 3.00-4.625 2,745,000 Total Certificates of Obligation $ 64,690,000 A summary of the terms of the revenue bonds recorded as long-term liabilities in the Pearland Economic Development Corporation and Development Authority of Pearland funds as of September 30, 2013, is as follows: Interest Debt Series Original Issue Matures Rate (%) Outstanding Pearland Economic Development Corporation Sales Tax Revenue and Refunding Bonds, Series 2005 $ 11,050,000 2026 4.0-5.0 $ 7,540,000 Sales Tax Revenue Bonds, Series 2006 10,235,000 2030 4.25-5.0 9,075,000 Sales Tax Revenue Bonds, Series 2010 7,685,000 2030 Variable -resets 6,995,000 every 6 months Development Authority of Pearland Tax Increment Contract Revenue and Refunding Bonds, Series 2012 56,915,000 2028 3.07 * 51,515,000 Total Revenue Bonds $ 75,125,000 Fixed for 10 years, then rate changes to be 65% of LIBOR, not to exceed 6.0%. 50 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) 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, 2013, approximately $26.4 million of previously refunded bonds outstanding were considered defeased. 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 $6.8 million. Following is a summary of future lease payments due on this equipment: Fiscal Year Obligations 2014 $ 1,118,848 2015 1,118,848 2016 809,406 2017 629,950 2018-2019 527,391 Total 4,204,443 Less: Interest 262,093 Obligations under capital leases $ 3,942,350 51 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The annual requirements to amortize governmental activity general obligation bonds and certificates of obligation outstanding at September 30, 2013, were as follows: Fiscal Year Governmental Activities General Obligation Certificates of Obligation Principal Interest Principal Interest 2014 $ 6,765,000 $ 9,913,967 $ 3,710,000 $ 2,722,249 2015 7,765,000 9,572,070 2,745,000 2,592,723 2016 8,865,000 9,190,377 2,120,000 2,500,538 2017 8,490,000 8,805,299 2,190,000 2,416,016 2018 8,375,000 8,443,772 2,765,000 2,312,640 2019 10,745,000 8,026,805 3,010,000 2,192,779 2020 11,580,000 7,541,328 3,050,000 2,065,511 2021 11,845,000 7,033,931 3,165,000 1,933,459 2022 12,840,000 6,496,949 3,060,000 1,796,233 2023 13,160,000 5,929,679 3,180,000 1,654,141 2024 13,925,000 5,332,766 3,310,000 1,504,781 2025 14,350,000 4,731,384 3,430,000 1,347,751 2026 14,615,000 4,133,095 3,580,000 1,180,803 2027 15,720,000 3,498,791 3,950,000 1,018,540 2028 16,255,000 2,835,511 3,995,000 863,823 2029 16,680,000 2,128,625 4,175,000 700,421 2030 9,650,000 1,534,628 3,410,000 544,513 2031 9,590,000 1,085,420 3,805,000 384,238 2032 10,125,000 627,044 4,185,000 199,088 2033 2,650,000 333,419 635,000 86,263 2034 2,765,000 208,507 660,000 55,163 2035 1,520,000 112,044 130,000 22,813 2036 795,000 62,122 140,000 16,650 2037 480,000 33,763 140,000 10,175 2038 490,000 11,331 150,000 3,469 $ 230,040,000 $ 107,622,627 $ 64,690,000 $ 30,124,780 52 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 5 - Long -Term Debt (continued) A. General Obligation Bonds, Certificates of Obligation and Revenue Bonds (continued) The annual requirements to amortize blended component unit revenue bonds outstanding at September 30, 2013, were as follows: Fiscal Year Governmental Activities Pearland Economic Development Development Authority of Corporation Pearland Principal Interest Principal Interest 2014 $ 920,000 $ 1,110,514 $ 2,800,000 $ 1,581,511 2015 965,000 1,068,839 2,885,000 1,495,550 2016 1,010,000 1,025,057 2,970,000 1,406,981 2017 1,060,000 976,218 3,070,000 1,315,802 2018 1,115,000 924,986 3,160,000 1,221,553 2019 1,175,000 870,739 3,255,000 1,124,541 2020 1,230,000 819,126 3,120,000 1,024,613 2021 1,285,000 764,705 3,215,000 928,828 2022 1,350,000 707,225 3,030,000 830,128 2023 1,415,000 645,158 3,130,000 737,107 2024 1,480,000 579,894 3,225,000 641,016 2025 1,555,000 511,083 3,320,000 542,008 2026 1,635,000 438,397 3,425,000 440,085 2027 1,715,000 361,922 3,530,000 334,937 2028 1,805,000 275,920 3,635,000 226,566 2029 1,895,000 188,544 3,745,000 114,972 2030 2,000,000 96,818 $ 23,610,000 $ 11,365,145 $ 51,515,000 $ 13,966,198 53 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, 2013: Balance Balance Amounts September 30, September 30, Due Within 2012 Additions Reductions 2013 One Year Business -Type Activities: Bonds payable: Permanent Improvement bonds $ 15,130,000 $ $ (1,110,000) $ 14,020,000 $ 1,155,000 Water and sewer revenue bonds 109,305,000 (3,615,000) 105,690,000 3,765,000 Deferred loss on refunding (610,450) 50,481 (559,969) Unamortized premium/(discount) 881,600 (151,290) 730,310 Total bonds payable 124,706,150 (4,825,809) 119,880,341 4,920,000 Other liabilities: Obligations under capital leases 342,364 (81,380) 260,984 84,122 Compensated absences 538,878 276,771 (352,167) 463,482 78,740 Other post -employment benefits 282,467 74,077 356,544 Total Business -Type Activities $ 125,869,859 $ 350,848 $ (5,259,356) $ 120,961,351 $ 5,082,862 A summary of the terms of permanent improvement bonds and revenue bonds recorded in the Enterprise Funds as of September 30, 2013, is as follows: Series Original Issue Matures Interest Debt Rate (%) Outstanding Water and Wastewater Fund Water and Sewer System Adjustable Rate Revenue Bonds, Series 1999 $ 8,000,000 2020 4.60 $ 2,710,000 Water and Sewer System Revenue Bonds, Series 2003 9,500,000 2014 4.00 340,000 Water and Sewer System Revenue and Refunding Bonds, Series 2006 13,845,000 2031 4.3-5.125 10,850,000 Water and Sewer System Revenue Bonds, Series 2007 40,135,000 2031 3.50-5.50 36,625,000 Water and Sewer System Revenue Bonds, Series 2008 14,950,000 2034 4.125-5.00 13,945,000 Water and Sewer System Revenue Bonds, Series 2009 13,130,000 2034 3.00-5.50 11,720,000 Permanent Improvement and Refunding Bonds, Series 2009 11,660,000 2018 2.50-5.00 7,790,000 Water and Sewer System Revenue Bonds, Series 2010A 14,040,000 2035 2.00-4.50 12,900,000 Water and Sewer System Revenue and Refunding Bonds, Series 2010E 8,970,000 2023 2.00-4.00 8,225,000 Permanent Improvement and Refunding Bonds, Series 2012 6,230,000 2025 3.00-5.00 6,230,000 Water and Sewer System Revenue and Refunding Bonds, Series 2012 8,670,000 2037 2.00-3.625 8,375,000 Total Utility System Fund $ 119,710,000 54 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 business -type activity revenue bonds and permanent improvement bonds outstanding at September 30, 2013, were as follows: Business Type Activities Fiscal Year Revenue Bonds Permanent Improvement Bonds Principal Interest Principal Interest 2014 $ 3,765,000 $ 4,584,324 $ 1,155,000 $ 525,325 2015 3,575,000 4,439,468 1,530,000 474,812 2016 3,725,000 4,302,208 1,560,000 427,900 2017 3,880,000 4,153,814 2,415,000 344,001 2018 4,030,000 4,005,011 2,515,000 232,188 2019 4,195,000 3,847,690 365,000 171,700 2020 4,370,000 3,683,168 370,000 157,000 2021 4,615,000 3,503,757 370,000 142,200 2022 4,810,000 3,306,021 385,000 127,100 2023 5,025,000 3,100,221 395,000 111,500 2024 4,190,000 2,884,169 1,480,000 74,000 2025 4,440,000 2,689,273 1,480,000 22,200 2026 6,155,000 2,477,948 2027 6,450,000 2,181,686 2028 6,765,000 1,867,325 2029 7,080,000 1,552,814 2030 7,375,000 1,257,306 2031 7,680,000 948,088 2032 3,710,000 625,250 2033 3,895,000 444,575 2034 4,075,000 264,360 2035 1,180,000 75,725 2036 345,000 25,556 2037 360,000 13,050 C. Legal Compliance $ 105,690,000 $ 56,232,807 $ 14,020,000 $ 2,809,926 Long-term debt assumed by the City upon dissolution of annexed municipal utility districts in fiscal years 2006, 2007, and 2013 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, 2013, is as follows: Summary Table of Interfund Transfers for the Year Ended September 30, 2013 Transfers From Other Funds Transfers To Other Funds General Debt Service Fund Capital Projects Water & Sewer Fund Internal Service Fund Nonmajor - Aggregate Remaining Funds Total General Fund Debt Service $ 161,445 1,654,245 137,263 1,426,126 218,961 560,250 532,751 20,748 3,613,122 1,098,667 Capital Projects 5,000 Water & Sewer Fund 284,838 General Fund 161,445 Nonmajor - Aggregate Remaining Funds 10,443 Total Debt Service Fund 461,726 Capital Projects General Fund 137,263 1,654,245 Debt Service 5,000 Internal Service Fund 284,352 - Total Capital Projects 421,615 1,659,245 Water & Sewer Debt Service Fund 284,838 General Fund 218,961 1,426,126 Internal Service Fund - 114,750 Total Water and Sewer 218,961 1,825,714 Internal Service - COP Health Claims Fund General Fund 560,250 Water & Sewer Fund 114,750 Total Internal Service Fund 675,000 Tax Increment Reinvestment Zone #2 Development Authority of Pearland 10,997,930 Development Authority of Pearland Tax Increment Reinvestment Zone #2 10,997,930 Other Governmental Funds General Fund 20,748 532,751 Capital Projects - 284,352 Debt Service Fund 10,443 Total Other Governmental Funds 20,748 827,546 Total $ 16,409,102 $ 16,409,102 56 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 6 - Interfund Transactions (continued) A summary of interfund receivables and payables at September 30, 2013, follows: Receivable Fund Payable Fund Amount Purpose General Fund Non -Major Governmental Fund $ 118,097 Short-term loan to fund operations Note 7 - Fund Balance Encumbrances Encumbrance accounting is employed as an extension of formal budgetary integration for the general fund, special revenue funds, and capital projects funds. As of September 30, 2013, certain amounts which were classified as restricted 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 $ 1,553,390 Capital Projects - restricted 5,799,338 Debt service - restricted 7,405 Aggregate non -major funds - restricted 357,583 $ 7,717,716 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. 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 849 currently administered by TMRS, an agent multiple -employer public employee retirement system. 57 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Plan Description and Provisions (continued) 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 2012 Plan Year 2013 Employee deposit rate 7.0% 7.0% Matching ratio (City to employee) 2 to 1 2 to 1 Years required for vesting 5 5 Service retirement eligibility (expressed as a age/years of service) 60/5, 0/20 60/5, 0/20 Updated service credit 100% Repeating, Transfers 100% Repeating, Transfers Annuity increase (to retirees) 70% of CPI Repeating 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. 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. 58 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Contributions (continued) The City's total payroll in fiscal year 2013 was $31.2 million and the City's contributions were based on a payroll of $29.7 million. Contributions made by employees totaled $2.1 million, and the City made contributions of $3.8 million during the fiscal year ended September 30, 2013. Three-year trend information is presented below: 2013 2012 2011 Annual Pension Cost (APC) $ 3,780,847 $ 3,518,289 $ 3,302,952 Percentage of APC contributed 100% 100% 100% NPO at the end of the period $ - $ - $ Because the actuary determines contribution rates on an annual basis and the City pays the calculated rate each month, the City will always have a net pension obligation (NPO) of zero at the beginning and end of the period, and the annually required contributions (ARC) will always equal contributions made. All assumptions for the December 31, 2012, valuations are contained in the 2012 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 25.3 years - closed period Amortized cost 7.00% Varies by age and service 3.00% 2.10% 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. 59 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 9 - Employee Retirement System (continued) Contributions (continued) A schedule of funding status and progress for TMRS for the most recent valuation date follows: Unfunded Actuarial Actuarial (UAAL) as a Valuation Actuarial Actuarial Accrued Annual Percentage Date Value of Accrued Percentage Liability Covered of Covered December 31, Assets Liabilities Funded (UAAL) Payroll Payroll 2012 $ 69,800,322 $ 85,022,771 82% $ 15,222,449 $ 28,876,260 53% 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: Number of Total City's Emp/Dep Retired Cost Cost Coverage Cost Employees $ 77,684 $ $ 77,684 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. 60 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 10 - Other Post -Employment Benefits (continued) The Governmental Accounting Standards Board published guidelines regarding accounting and financial reporting by employers for post -employment benefits other than pensions. This standard gives guidance regarding the methods and timing for reporting. The effect of the standard 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. The results of the City's most recent actuarial valuation are as follows: Unfunded Actuarial (UAAL) as a Actuarial Actuarial Actuarial Accrued Annual Percentage Valuation Date Value Accrued Percentage Liability Covered of Covered October 1, of Assets Liabilities Funded (UAAL) Payroll Payroll 2012 $ $ 8,339,937 0% $ 8,339,937 $ 28,876,260 29% Net OPEB obligations at year-end for the last three fiscal years are as follows: Normal cost Amortization of UAAL 2011 2012 2013 $ 206,293 $ 190,706 $ 243,253 141,837 141,837 177,878 Annual required contribution (ARC) 348,130 332,543 421,131 Interest on prior -year net OPEB obligation 41,540 57,127 72,715 Estimated increase in net OPEB obligation 389,670 389,670 493,846 Net OPEB obligation - beginning of year 1,038,512 1,428,182 1,817,852 Net OPEB obligation - end of year $ 1,428,182 $ 1,817,852 $ 2,311,698 The annual cost recorded to the general ledger for fiscal year 2013 is $493,846, which includes the estimated normal cost of $243,253 to provide for the benefits earned byactive employees. The total liability, which is not recorded to the general ledger, is $8,339,937, 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, 2012 include using the Projected Unit Credit actuarial costs method, a closed amortization period of 26 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. 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, 2013. 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 City of Pearland offers incentives to attract businesses to Pearland. The following are the current incentives. Current Incentives Altus Harbor Braska/Neela, Inc. Cardiovascular Systems, Inc. Hatch Mott KS Management KS Management Sales Tax Est. Merit Medical Systems, Inc. Ref -Chem SCR HH GP, LLC Dover Shadow Creek Town Center Amount Prior Years FY 2013 Balance $ 87,500 $ 65,000 150,000 5,100,000 4,100,000 100,000 2,600,000 600,000 888,000 340,000 300,000 180,000 630,000 $ 15,000 150,000 100,000 340,000 $ 7,500 1,000,000 2,600,000 600,000 888,000 120,000 63.0,000 $ 10,795,500 $ 4,345,000 $ 605,000 $ 5,845,500 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 T1RZ 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, 2013, the City remitted sales tax to the developer pursuant to the agreement in the amount of $1,900,828, of which $444,060 was remitted in fiscal year 2013. To date, $1.5 million has been reimbursed towards principal and $448,585 for interest. The balance due as of September 30, 2013 is $555,820. 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, 2013, the City believed the amounts paid on Workers' Compensation would not change significantly from the amounts recorded. 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. UHCL has an option to purchase the facility upon the commencement date of July 2010 until the 61st day preceding the 20`h anniversary of the commencement date. 63 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 13 - Capital Lease (continued) 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, 2013, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2014 $ 664,384 2015 654,255 2016 643,059 2017 627,598 2018 610,030 2019-2023 2,826,396 2024-2029 2,863,729 Total $ 8,889,451 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, 2013, the future minimum debt service lease payments to be received under the lease are as follows: Fiscal year ending September 30, Payment 2014 $ 111,858 2015 110,153 2016 108,268 2017 105,665 2018 102,707 2019-2023 475,863 2024-2029 482,148 Total $ 1,496,662 64 CITY OF PEARLAND, TEXAS NOTES TO FINANCIAL STATEMENTS (continued) Note 15 - Subsequent Events Lease Purchase City Council approved a Notice of Intent to reimburse itself from future capital lease proceed on October 22, 2012 in an amount not to exceed $2,100,000. On October 14, 2013, City Council awarded the bid to U.S. Bancorp Government Leasing and Finance, Inc. that provided an interest rate of 2.028%. The amount financed via lease/purchase is $1,852,938 as follows: Equipment Description Financing Amount Alcatel -Lucent data equipment: (11) 0S6850E-P48X switches, (5) OS685pE-P24X switches, (2) 0S6450-P10 swithces, (20) wireless access points and appurtenances $ 121,159 Alcatel -Lucent OmniPCX Enterprise Voice Solution system 166,653 (1) Pierce Impel Pumper Truck and (1) Pierce 75' HAL Aerial, quint, alum. body, single axle Truck 1,277,195 (1) New Frazer Type 1 ambulance on F-350 diesel cab/chassis, and (1) refurbished Frazer Type 1 ambulance module onto new F-350 diesel cab/chassis 211,575 (1) Dybapac model CA134PD 54" pad roller 76,356 Total for financing $ 1,852,938 The first semi-annual payment is due in January, 2014 in the amount of $141,722 with the final semi-annual payment due in July, 2020 in the amount of $141,722. The total repayment amount for the seven-year lease term will be $1,948,110. There is no pre -payment penalty for early payoff, and the lender has waives its usual administrative and escrow fees. Development Authority of Pearland Bond Sale, Series 2013 On November 26, 2013, the Development Authority of Pearland issued $9,140,000 in tax increment contract revenue bonds. Proceeds from the bonds will be used to reimburse the developer approximately $8.9 million pursuant to the TIRZ financing plan. The remaining amount on the bonds are for issuance costs. The interest rate is 3.75% with an average annual debt service on the bonds of $779,202 and a maturity of 2029. Based on valuation in the Tax Increment Reinvestment Zone, the Zone is able to pay the debt and maintain a 1.25 coverage. 65 APPENDIX C FORM OF BOND COUNSEL OPINION AN D REWS ATTORNEYS KU RT H ELP October 16, 2014 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com DRAFT 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 2014, dated October 1, 2014, in the aggregate principal amount of $4,625,000. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest, mature 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:3474812. t October 16, 2014 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 I-IOU:3474812.1 October 16, 2014 Page 3 tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED 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 City with respect to matters solely within the knowledge of the City, 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. FIOU:3474812.1 OFFICIAL BID FORM September 22, 2014 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 September 10, 2014, which are incorporated herein by reference, we hereby submit the following bid for the $4,625,000* CITY OF PEARLAND, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2014, dated October 1, 2014. This offer is being made for all of said Certificates and for not less than all. e For said legally issued Certificates, we will pay you a price of $4, locKi,t4 , us 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 .O 2015(a) $ 230,000 3d % 2025(a)(b) $235,000 T •00 % 2016(a) 235,000 3.a, % 2026(a)(b) 230,000 It_% 2017(a) 230,000 2..0t% 2027(a)(b) 235,000 3,a? 2018(a) 230,000 % 2028(a)(b) 235,000 3 % 2019(a) 230,000 % 2029(a)(b) 230,000 3.19 < % 2020(a) 230,000 % 2030(a)(b) 230,000 y,. V1. % 2021(a) 230,000 % 2031(a)(b) 230,000 J,L% 2022(a) 230,000 % 2032(a)(b) 230,000 ..0.1.5 % 2023(a) 230,000 3. Co % 2033(a)(b) 230,000 3.31S % 2024(a) 230,000 ' j .SCL% 2034(a)(b) 235,000 3 s i' % Preliminary, subject to change. 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 (March 1) Redemption Principal Amount of Term Certificates Interest 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, 2024, 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." The calculation (which is not part of this bid) of the interest cost from the above, is: TRUE INTEREST COST ,.. _ �+ 2.�j Z. �I 15 The Initial Certificates shall be registered in the name of l_.e4e' s (.0 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 $92,500 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 fiords in the Corporate Trust Office, Wells Fargo Bank, N.A., Minneapolis, Minnesota, not later than 10:00 AM, CST, on October 16, 2014, 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, ilr c SSFr,Niev Pete, II, C- , Oh/k Cri By )� XgOtkieS, • Th-nrre_111 RA Authorized Represe ACCEPTED this _day of , 2014, the City Council, City of Pearlan Mayor (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 September 22, 2014 (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 2014 (the "Certificates") in the aggregate principal amount of $4,625,000 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:3476948.1 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 2014" 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. HOU:3476948.1 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:3476948.1 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:3476948.1 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:3476948.1 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 Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their successors and assigns, whether so expressed or not. This Agreement shall not be assigned by the Bank without the prior written consent of the Issuer. Section 4.7. 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:3476948.1 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:3476948.1 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ATTEST: (SEAL) i�- CITY OF PEARLAND, TEXAS By: )aryt 2E-02 Mayor ADDRESS: 3519 Liberty Drive Pearland, Texas 77581 HOU:3476948.1 8 WELLS FARGO BANK, N.A. Regina A. Velasquez Assistant Vice President ADDRESS: Wells Fargo Bank, N.A. N9311-115 625 Marquette Ave. S - 1 l th Floor Minneapolis, MN 55479 Attn: Corporate Trust Services HOU:3476948.1 9 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 $4,625,000 CITY OF PEARLAND, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2014, dated October 1, 2014 (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, Permanent Improvement and Refunding Bonds, dated September 1, 2014, 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) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (iii) acquisition of land for and the design and construction of two new fire stations located at Yost . Road and FM 518 and at Harkey Road and Fite Road; (iv) project management for parks, street and facility capital projects within the City; (v) renovations to the existing City Hall Complex; and (vi) professional services rendered in connection with the above listed projects. (3) The currently effective ad valorem tax appraisal roll of the City (the "Tax Roll") is the Tax Roll prepared and approved during the calendar year 2014, 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 $7,600,947,549. (4) From June 1, 2014, 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:3477318.3 Tom Reid Mayor Keith Ordeneaux Mayor Pro-Tem Tony Carbone Councilmember Scott Sherman Councilmember Gary Moore Councilmember Greg Hill Councilmember (5) From June 1, 2014, to the date hereof, Young Lorfing has been the duly appointed and qualified City Secretary of the City. (6) The Certificates are hereby sold and shall be delivered to the Purchaser, Raymond James & Associates, Inc. at a price of $4,699,488.80 (which is the par amount of the Certificates plus a premium on the Certificates of $74,488.80), plus accrued interest. (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 Permanent Improvement Refunding Bonds, Series 2014, Certificates of Obligation, Series 2013, Permanent Improvement Bonds, Series 2013, 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 $311,020,000. (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, 2013, and for the previous three fiscal years: Fiscal Year Ended September 30, 2013 2012 2011 $12,184,453 $11,841,077 $13,319,474 2 HOU:3477318.3 (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. (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. (12) To the extent that the City uses any proceeds of the Certificates to purchase real property, it will comply with Section 252.051, Texas Local Government Code, as amended. (13) The project management fees will be used for architectural and engineering costs for city parks, streets and facility capital projects. [Signature Page Follows] 3 HOU:3477318.3 SIGNED AND SEALED this September 1), , 2014. 8(...... (CITY SEAL) ::Z.5 icar. . CITY OF PEARLAND, TEXAS HOU:3477318.1 4 Exhibit A Debt Service Schedule for All of the City's Outstanding Tax Supported Debt FY Current Ending Total Debt 9130 Service (a) principal s: The Certificates Interest Total Debt Service Total Requirements 2014 $ 23,312,373 $ .13,31.2,373 1015 75,420,971 $ 230,000 $ 120,638 $ 3.50„638 25,771,609 20,16 25,361,852 .235,000 124944 3.59„944 25,721,796 2017 25,347,603 230,000119,1.19 349,119 25,696,721 2018 25.317,539 230,000 114,519 344.519 25,662,058 2019 25,299,256 230,000' 109,919 339,919 25,639,175 2020 25,267,916 230,000 105,319 335319 25,603,235 2021 25,233,099 230,000' 100,719 330319 25,563,818 2-022 25,158,448 230,000 96,1.19 32.6,119 25,484,566 2023 25,117,614- 230,000 90,369 320;369 -25,437,983 2024 26,0.22,990 230,000 82,319 312,319 26,335,309 2025 25,998,737 235,000, 73,019 308,019 26,306,756 2026 24,336,996 230,000 63,719 293.,719 24,630,714 2027 24,291,100 235,000' 55,594 290,594 24,581,694 2028 24,250,587 235,000 48,544 283,544 24,534,131 2029 74,711,371 230,000 41,425 271,425 24,492,746 2030 15,635,090 .230,000, 34,238 -264,238 15,899,328 2031 15„.599,208 230,000 26,906 256,906 15,856,114 2032 15„.589,281 230,000 19,431 249,431 15,838,712 203:3 4,267,769 230,000 11,813 241,813. 4,509,581. 2034 4,233,031 235,000 3,966 238,966 4,471,997 2035 1,784,856 1,784,856 2036 1,013,772 :1,013,772 2037 663,938 663,938 2038 654,800 654,800 Totals $459,400,145 $4,625,000 $1,442,635 $6,067,635 $465,467,780 (a) Includes.: the results. ofthe- $40,41.0.000 .Permanent .Improvemeut and Raindiu.s Bonds, Series 2014 which was delivered on September 23, 20:14 and general Obligation debt service requirements paid with water and sewer system revenues. Average Annual Requirements. (2)14-2038) Maximum Annual Requirement (2024) Principal Payout (All Tax SupportedBonds) $18,618,711(a) S26,335,309(a) 25,05% in 5 years 51.47% in 10-years 82.93% in 15 years 98.81%. in 2.0 years (a) lucludes the Cethficates and $40,410,000. Permanent Improvement and Refinulinz Bonds, Series 2014, HOU:3477318.2 Exhibit B Ordinance Establishing Utility Rates of the System HOU:3477318.2 ORDINANCE NO. 1358-11 An Ordinance of the City Council of the City of Pearland, Texas, amending non -development usage and service fees; 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. 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, QRDINANCE NO. 1358-11 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 22nd day of September, A. D., 2014. APPROVED AS TO FORM: DARRIN M. COKER CITY ATTORNEY 2 TOM REID MAYOR ORDINANCE NO. 1358-11 PASSED and APPROVED ON SECOND AND FINAL READING this the 29th day of September, A. D., 2014. ATTEST: UNG Y SE ►' - ETARY APPROVED AS TO FORM DARRIN M. COKER CITY ATTORNEY 3 TOM REID MAYOR VOTING RECORD SECOND AND FINAL READING SEPTEMBER 29. 2014 Voting "Aye" — Councilmembers, Carbone, Sherman, Hill, Ordeneaux and Moore. Voting "No" - None. Motion passes 5 to 0. PUBLICATION DATE: October 2, 2014 EFFECTIVE DATE: October 11, 2014 PUBLISHED AS REQUIRED BY SECTION 3.10 OF THE CHARTER OF THE CITY OF PEARLAND 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 2014, dated October 1, 2014 (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 September 22, 2014, 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 September 22, 2014, remain true and correct as of this date. In witness whereof we have signed this certificate and delivered it on the 16th day of October, 2014. HOU:3477338.1 SIGNATURES (CITY SEAL) 001111 • i TITLE OF OFFICE Tom Reid, Mayor City of Pearland, Texas Young Lorfing, City Secretary City of Pearland, Texas 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 MARIA E. RODRIGUEZ Notary Public, State of Texas My Commission Expires: ©2/26/2©17 (Notary Seal) C. AAA - Notary Public Typed or Printed Name: 1,4 44 to Q. R6O2(CiuZ My Commission Expires: . L i7 HOU:3477338.1 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 $4,625,000 Certificates of Obligation, Series 2014 (the "Certificates"), as follows: A. General. 1. I, along with other officers of the City, am charged with the responsibility for issuing the Certificates. 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 Certificates (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 Ordinance No. 1503, authorizing the issuance of the Certificates, adopted by the City Council on September 22, 2014 (the "Ordinance"). B. Purpose and Size. 1. The Certificates are being issued pursuant to the Ordinance to finance (i) improvements, renovations and additions to the existing public works service center located at East Orange Street and Old Alvin Road; (ii) acquisition of land for and the design and construction of two new fire stations located at Yost Road and FM 518 and at Harkey Road and Fite Road; (iii) project management for parks, street and facility capital projects within the City; (iv) renovations to the existing City Hall Complex (together with (i) through (iii), the "Projects") and (v) costs of issuing the Certificates. 2. Each of the Projects 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. 3. 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 Certificates, 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). -1- HOU:3478836.1 4. The amount received from the sale of the Certificates, when added to the amounts expected to be received from the investment thereof, is not expected to exceed the amounts required to pay costs of the Projects and costs of issuing the Certificates, including the Insurance Premium. 5. No receipts from the sale of the Certificates 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 Certificates. 6. BOSC, Inc., as financial advisor to the City (the "Financial Advisor"), has advised the City that the weighted average maturity of the Certificates is 9.798 years. The weighted average maturity of the Certificates 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 Certificates to Raymond James & Associates (the "Underwriter") in a competitively bid public offering for a purchase price of $4,705,129.16, which is the issue price of the Certificates of $4,739,115.05, as represented by the Underwriter, plus accrued interest of $5,640.36, less underwriter's discount of $39,626.25. follows: 2. The City has caused the closing agent to deposit such amount this day as Disposition Deposit to Project Fund Deposit to Debt Service Fund Disbursed to pay costs of issuance Total D. Temporary Periods and Time for Expenditures. Amount $4,625,000.00 5,640.36 114,115.05 $ 4,705,129.16 1. The amount deposited in the Debt Service Fund represents accrued interest on the Certificates from October 1, 2014, to the date hereof. Such amount will be used to pay the first payment of debt service due on the Bonds on March 1, 2015, 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 Certificates will be so used within ninety days from the date hereof 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 City to expend at least $236,956, which is 5% of the net sale proceeds of the Certificates. 4. The City will pursue acquisition and construction of the Projects with due diligence until completion. -2- HOU:3478836.1 5. The City reasonably expects to expend within three years from the date hereof, in addition to the costs of issuance of each series of the Certificates, proceeds of the Certificates equal to not less than 85% of the net sale proceeds of the Certificates. E. Yield and Nonpurpose Investments. 1. The Financial Advisor has calculated that a discount factor of at least 2.8097% is required to reduce the principal and interest to be paid on the Certificates to a present value on the date hereof, compounding semiannually, equal to the issue price of the Certificates, plus the accrued interest. 2. Other than the Certificates, no other 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 September 22, 2014, the date on which the City entered into a binding contract to sell the Certificates (the "Sale Date"). 3. The City has covenanted in the Ordinance that it will account for the Gross Proceeds of the Certificates 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 Certificates 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 Certificates, 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 Funds. 1. 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, to pay debt service on the Certificates. Such amounts will be deposited to the credit of the Debt Service Fund maintained in the books of the City. 2. The 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 the Debt Service Fund (other than that portion of the 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) the 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 Certificates; (b) all deposits to the Debt Service Fund will be spent within 13 months of deposit; and (c) all amounts received from investment of money in the Debt Service Fund will be deposited in the Debt Service Fund and within twelve months of receipt will be expended to pay principal or interest on the Certificates. -3- HOU:3478836.1 3. Except as described herein, no funds of the City have been pledged to pay principal of or interest on the Certificates or otherwise restricted so as to give reasonable assurance of the availability of such funds for such purpose. G. Certificates Not Hedge Bonds. 1. The City reasonably expects that at least 85% of the proceeds of the Certificates will be used to carry out the governmental purpose of the Certificates within three years after the date hereof. 2. Not more than 50% of the proceeds of the Certificates 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 Certificates, 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 Certificates. 2. In connection with the issuance of the Certificates, 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. EXECUTED this 16th day of October, 2014. CITY OF PEARLAND, TEXAS By: (!Un' an &r'�lr I n1 Claire Bogard Director of Finance -4- HOU:3478836.1 ISSUE PRICE CERTIFICATE I, the undersigned officer of Raymond James & Associates, Inc., which is acting as the representative (the "Representative") of the syndicate of underwriters listed on the signature page of the Bond Purchase Agreement dated September 22, 2014 (the "Underwriters") with respect to the Certificates of Obligation, Series 2014 (the "Certificates") being issued on the date hereof by the City of Pearland, Texas (the "Issuer"), make this certification with respect to the Certificates: 1. I am the duly chosen, qualified and acting officer of the Representative for the office shown below my signature; as such, I am familiar with the facts herein certified and I am duly authorized to execute and deliver this Issue Price Certificate on behalf of the Representative. 2. The Underwriters have made a bona fide public offering to the public of all the Certificates of each maturity at the respective initial offering price for each maturity (the "Initial Offering Price") set out on the cover page of the Issuer's Official Statement dated September 22, 2014, prepared in connection with the offering of the Certificates (the "Official Statement"). 3. The Initial Offering Price represents (i) the Underwriters' reasonable determination, based upon their experience with bonds similar to the Certificates and then - prevailing market conditions, of the fair market value of each maturity of the Certificates on the sale date, (ii) the price at which the Underwriters reasonably expected to sell each maturity of the Certificates to the public, based on market conditions on the sale date, and (iii) the first price at which at least 10 percent of each maturity of the Certificates, except for the Certificates maturing in the years 2015, 2020, 2021, 2022, 2024, 2026, 2031, 2032, and 2034, was, in fact, sold to the public. 4. On the sale date, the Underwriters reasonably expected to sell at least 10% of each maturity of the Certificates maturing in the years 2015, 2020, 2021, 2022, 2024, 2026, 2031, 2032, and 2034 to the public at the respective Initial Offering Price for such maturity. 5. The aggregate of such Initial Offering Prices of all of the Certificates is $4,739,115.05, plus $5,640.36 accrued interest, for a total of $4,744,755.41. 6. The term "public," as used herein, does not include bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers. The term "sale date," as used herein, means the first day on which there is a binding contract in writing for the sale or exchange of the bond, and for the Certificates was September 22, 2014. The Issuer may rely on the statements made herein in connection with making the representations set forth in the Tax Exemption Certificate and in its efforts to comply with the conditions imposed by the Code on the exclusion of interest on the Certificates from the gross income of their owners. Andrews Kurth LLP, also may rely on this Issue Price Certificate for purposes of its opinion regarding the treatment of interest on the Certificates as excludable from gross income for federal income tax purposes and the preparation of the Internal Revenue Service Form 8038-G. Except as expressly set forth above, the certifications set forth herein may not be relied upon or used by any third party or for any other purpose. Notwithstanding anything set forth herein, the Representative is not engaged in the practice of law, and nothing HOU:3484127.1 herein represents the undersigned's interpretation of any laws, in particular the regulations under section 148 of the Internal Revenue Code of 1986 (the "Code"), or the application of any laws to these facts. Accordingly, the Representative makes no representation as to the legal sufficiency of the factual matters set forth herein. The undersigned is authorized to execute this certificate on behalf of the Representative, which certifications are not necessarily based on personal knowledge, but may instead be based on either inquiry deemed adequate by the undersigned or institutional knowledge (or both) regarding the matters set forth herein. In connection with the above certifications, we have relied, in part, on the undertakings and representations of the other Underwriters respecting the offering of the Certificates as set forth in the contract with the other Underwriters. Although certain information furnished in this certificate has been derived from such other Underwriters and cannot be independently verified by us, we have no reason to believe such information to be untrue in any material respect. The undersigned is certifying only as to facts in existence on the date hereof. EXECUTED as of this 16th day of October, 2014. RAYMOND JAMES & ASSOCIATES, INC. By c 1 L a. Lisa Donnelly First Vice President HOU:3484127.1 Form 8038-G (Rev. September 2011) Department of the Treasury Internal Revenue Service Information Return for Tax -Exempt Governmental Obligations ► Under Internal Revenue Code section 149(e) ► See separate instructions. Caution: if the issue price is under $100, 000, use Form 8038-GC. OMB No. 1545-0720 Part I Reporting Authority If Amended Return, check here ► ❑ 1 Issuer's name City of Pearland, Texas 2 Issuer's employer identification number (EIN) 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 4 Number and street (or P.O. box if mail is not delivered to street address) 3519 Liberty Drive Room/suite 5 Report number (For IRS Use Only) 13 6 City, town, or post office, state, and ZIP code Pearland, TX 77581 7 Date of issue 10/16/2014 8 Name of issue Certificates of Obligation, Series 2014 9 CUSIP number 704862 5C1 10a Name and title of officer or other employee of the issuer whom the IRS may call for more information (see instructions) Claire Bogard, Director of Finance 10b Telephone number of officer or other employee shown on 10a 281-652-1671 Part II Type of Issue (enter the issue price). See the instructions and attach schedule. 11 Education 12 Health and hospital 13 Transportation 14 Public safety 15 Environment (including sewage bonds) 16 Housing 17 Utilities 18 Other. Describe ► VARIOUS CAPITAL IMPROVEMENTS 11 12 13 14 15 16 17 18 4,739,115 05 19 If obligations are TANs or RANs, check only box 19a ► ■ If obligations are BANs, check only box 19b ► ■ 20 If obligations are in the form of a lease or installment sale, check box ► ■ Part III Description of Obligations. Complete for the entire issue for which this form is being filed. 21 (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity (d) Weighted average maturity (e) Yield 03/01/2034 $ 4,739,115.05 $ 4,625,000.00 9.798 years 2.8097 % Part IV Uses of Proceeds of Bond Issue (including underwriters' discount) 22 Proceeds used for accrued interest 23 Issue price of entire issue (enter amount from line 21, column (b)) 24 Proceeds used for bond issuance costs (including underwriters' discount) . . 24 114,115 05 22 5,640 36 23 4,739,115 05 114,115 05 25 Proceeds used for credit enhancement 25 -o- 26 Proceeds allocated to reasonably required reserve or replacement fund . 26 -o- 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) 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) . . 29 30 9,625,000 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 . ► 32 Enter the remaining weighted average maturity of the bonds to be advance refunded . ► 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) Years years For Paperwork Reduction Act Notice, see separate instructions. HOU: 3478845 Cat. No. 63773S Form 8038-G (Rev. 9-2011) Form 8038-G (Rev. 9-2011) Page 2 Part VI Miscellaneous 35 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) . . . . 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (GIC) (see instructions) b c 37 38a b c d 39 40 41a b c d 42 43 44 45a b Enter the final maturity date of the GIC ► Enter the name of the GIC. provider Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans to other governmental units If this issue is a loan made from the proceeds of another tax-exempt issue, check box ► Enter the date of the master pool obligation 0- Enter the EIN of the issuer of the master pool obligation ► Enter the name of the issuer of the master pool obligation III - If the issuer has designated the issue under section 265(b)(3)(B)(i)(III) (small issuer exception), check box I. ❑ If the issuer has elected to pay a penalty In lieu of arbitrage rebate, check box O. ❑ If the issuer has identified a hedge, check here ► ❑ and enter the following information: Name of hedge provider► Type of hedge I. Term of hedge I. If the issuer has superintegrated the hedge, check box ► ❑ 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 ► 35 -0- Elk 36a -0- 37 -0- ❑ and enter the following information: If the issuer has established written procedures to monitor the requirements of section 148, check box . ► ❑ If some portion of the proceeds was used to reimburse expenditures, check here ► ❑ and enter the amount of reimbursement ► Enter the date the official intent was adopted 0- Signature and Consent Paid Preparer Use Only Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. I further declare that I consent to the IRS's disclosure of the issuer's return information, as necessary to proces�this r��tum,� the�rso\ that I have above. ' Signature of issuer's authorized representative Date Claire Bogard, Director of Finance Type or print name and title Print/Type preparer's name Gregg H. Jones Firm's name ► Andrews Kurth LLP Preparer's signature Firm's address ► 600 Travis Street, Suite 4200, Houston, TX 77002 Date Check ❑ if self -employe Firm's EIN ► Phone no. PTIN d P00969069 74-1027138 713-220-4479 Form 8038-G (Rev. 9-2011) HOU: 3478845 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 2014," in the principal amount of $4,625,000 (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:3477591.1 SIGNED as of Sce3.e,.,c `2014, the date of payment for and delivery of the Certificates. CITY OF PEARLAND, TEXAS Mayor HOU:3477591.1 ANDREWS ATTORNEYS K U R T H LLP October 16, 2014 600 Travis, Suite 4200 Houston, Texas 77002 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com 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 2014, dated October 1, 2014, in the aggregate principal amount of $4,625,000. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof, bear interest, mature 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, moratorium or other similar laws affecting the rights of creditors of political Austin Beijing Dallas Dubai Houston London New York The Woodlands Washington, DC HOU:3474812.1 October 16, 2014 Page 2 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:3474812.1 October 16, 2014 Page 3 tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED 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 City with respect to matters solely within the knowledge of the City, 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:3474812.1 ATTORNEY GENERAL OF TEXAS GREG ABBOTT October 15, 2014 THIS IS TO CERTIFY that the City of Pearland, Texas (the "Issuer"), has submitted the City of Pearland, Texas Certificate of Obligation, Series 2014 (the "Certificate"), in the principal amount of $4,625,000, for approval. The Certificate is dated October 1, 2014, numbered I-1, and was authorized by an Ordinance of the Issuer passed on September 22, 2014 (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 a pledge of the Net Revenues of the Issuer's water and sewer system in an amount not to exceed $10,000. Therefore, the Certificate is approved. Attorney >►'ral of the State of Texas. No. 57711 Book No. 2014-D 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 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, 2009. • GREG ACTT Attorney 1C r(eral 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 2014 numbered 1.1, of the denomination of $ 4,625,000, dated October 1, 2014, 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 15th day of October 2014, under Registration Number 84082. Given under my hand and seal of office, at Austin, Texas, the 15th day of October 2014. %ow& 6141.4.-- SUSAN COMBS Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora, Bond Clerk g 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 15th day of October 2014, I signed the name of the Comptroller to the certificate of registration endorsed upon the: City of Pearland, Texas Certificate of Obligation, Series 2014, numbered 1_1 dated October 1, 2014, and that in signing the certificate of registration I used the following signature: IN WITNESS WHE have execu#ed this cert'cy this the 15th day of October 2014. 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 84082. GIVEN under my hand and seal of office at Austin, Texas, this the 15th day of October 2014. /444,L ds-frais- SUSAN COMBS Comptroller of Public Accounts of the State of Texas PAYING 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 2014, dated October 1, 2014, in the total authorized aggregate amount of $4,625,000, 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 16th day of October, 2014. WELLS FARGO BANK, N.A. By: I Assistant Vice President Title: HOU:3488555.1 OFFICE OF THE ATTORNEY GENERAL PUBLIC FINANCE DIVISION Additional Transcript Requirements Pursuant to Texas Government Code §1202.008 Please submit excel copy of this form to brblgs@brb.state.tx.us The following information is to be included in the transcript submitted to the Office of the Attorney General to obtain Attorney General approval of the issuance of bonds or other obligations. This information has been designated by the Bond Review Board as that to be collected pursuant to Texas Government Code S1202.008. If space is limited, please provide a specific cross-reference to the page in the Final Official Statement. A. Please provide the following information as well as an additional copy of the Final Official Statement. (Provide the requested information on this worksheet. The Bond Review Board does not receive the full transcript): 1. a. Name of the Governmental Entity: City of Pearland, Texas b. Name of Bond Issue: Certificates of Obligation, Series 2014 c. Type of Issuer: Governmental Entity List Component/Related Entity/Other 2. a. Total Par Amount: $4,625,000.00 b. New Money Par: $4,625,000.00 c. Refunding Par: n/a d. Dollar Amount of Bond Premium, if any: $136,741.20 e. Cash Premium (Competitive Sales, usually found in the Initial Purchasers Section), if any: $0.00 f. Dollar Amount of Bond Original Issue Discount, if any: $22,626.15 g. If available, please email the DF2 file to brblgs@brb.state.tx.us. 3. Dated Date: 10/1/2014 4. Date Interest Accrues from: 10/16/2014 5. Closing Date (expected delivery date, on or about): 10/16/2014 6. First Interest Payment Date: 3/1/2015 7. Maturity Dates, Maturity Amounts, Coupon Rates, Prices or Yields (If no reoffering yield (NRO) indicated, please provide yield separately.): See cover page of Official Statement 8. Call Provisions, including Premiums, if any: See page 8 of Official Statement 9. Mandatory Sinking Fund Redemption Dates: See page 9 of Official Statement 10. Debt -Service Schedule (Principal and Interest, and Annual Totals, with the Fiscal Year identified): See page 17 of Official Statement 11. Do the bonds have a specific designation as qualified tax-exempt obligations? No 12. Derivative Products (Swaps, Interest Rate Management Agreements, etc.) - List any derivatives associated with financing: n/a 13. Pledge: tax (ad valorem, sales, other), revenue, combination: Combination Tax/Rev 14. Credit Enhancement (including PSF guarantee): n/a Updated June 2014 15. Ratings: Assigned to the issue/Underlying: Assigned to this issue Underlying Moody's Aa2 Aa2 S&P n/a n/a Fitch AAA AAA Other Not Rated B. Additional Information 16. Type of Sale: (Competitive, Negotiated, Private Placement, Other) Competitive If other please explain 17. Date of Sale: 9/22/2014 18. Net effective interest rate pursuant to Government Code Chapter 1204.005: 3.12% 19. Governmental Purchaser - please name purchaser (i.e. Texas Water Development Board): n/a 20. Refunded Obligations - If applicable, include a schedule of obligations refunded by year, principal amount, and coupon. n/a 21. Gross Cash and Present Value Savings/Loss - If a refunding bond issue, please provide final schedule of gross cash and present value savings or loss. n/a 22. Cash Defeasances - List all issues and maturities that have been cash defeased since the last issue of public securities approved by the Attorney General. n/a 23. If voter approved - Provide bond election date(s), original amount(s) authorized and current amounts of principal and premium charged against voted authority. n/a 24. Authorized but Unissued - For issues that require the use of voted bond authorization, list all authorized but unissued voted authority available, if any. n/a 25. Upcoming Called Bond Election: Please provide an attached schedule which shows date of election, purpose and amount by proposition. n/a 26. CABs and CIBs — If not provided in the OS, please provide the per annum bond interest rates by maturity as shown in the bond order document. If provided in the OS, list the page(s): n/a 27. Commercial Paper Authorized - List all commercial paper programs, the amounts authorized and the amounts currently outstanding. n/a 28. Population - Provide the most current available population data: 106,900 City 29. Federal Program - If the debt is being issued under any direct special government program; name the program and the amount of authority being used: n/a 30. If the issuer is an ISD, is any portion of the debt exempt from Texas Education Agency Code 45.0031 (50-cent Debt test)? n/a Updated June 2014 31. Costs of Issuance - Provide the information below: (If final costs are materially different, please submit changes directly to the Texas Bond Review Board, 512-463-1741 or fax 512-475-4802) Service Firm One -Time Fee Annual Fees (1) Bond Rating: Moody's 6,000.00 Standard & Poor's n/a Fitch 6,000.00 Other: Other Costs of Issuance: (2) Financial Advisor BOSC, Inc. 17,000.00 Bond Counsel Andews Kurth, LLP 18,000.00 Co Bond Counsel n/a Issuer Counsel n/a Bank Counsel n/a Disclosure Counsel n/a Paying Agent Wells Fargo Bank, N.A. 750.00 750.00 Trustee n/a Remarketing Fees n/a Liquidity Fees n/a Accountant/CPA n/a Printing 12,000.00 Attorney General's Fee 4,625.00 Issuer Fees Escrow Agent Escrow Verification Fees Misc. Costs of Issuance: (3) contingency 10,113.80 Total Costs of Issuance: 74,488.80 750.00 Credit Facility Bond Insurance Underwriting Spread: Takedown Management Fee Underwriter Counsel Spread Expenses Total Underwriting Spread: (4) 39,626.25 - Did Underwriter Pay Rating Fee? (Yes or No) No Did Underwriter Pay Bond Insurance Fee? (Yes or No) No Did Underwriter Pay Underwriter Counsel's Fee? (Yes or No) No (1) Refers to any recurring costs of an issuance including fees for paying agent, remarketing agent, credit provider and other similar services (may be expressed as a formula as appropriate). (2) Include all fees and expenses paid or reimbursed by the issuer. (3) Provide all other costs of issuance and identify the service provider and associated fees. (4) Include all marketing and selling costs including structuring (management) fee, takedown, underwriting risk fee and expenses. Updated June 2014 UW Participants Firm Senior Managing Underwriter n/a Other Underwriters n/a Person Completing Form: Name: Tanya Fischer Firm: Andrews Kurth LLP Telephone: 713-220-3915 E-mail: tanyafischer@andrewskurth.com The information presented on this form is used by the Texas Bond Review Board for compiling outstanding debt information and related costs of issuance for governmental issuers in Texas. For more information please see http://www.brb.state.tx.us/lgs/lgs.aspx Updated June 2014 FitchRatimm 33 Whitehall Street T 212 908 0500 / 800 75 FITCH New York, NY 10004 www.fitchratings.com August 22, 2014 Ms. Claire Bogard Director of Finance Pearland 3519 Liberty Drive Pearland, TX 77581 Dear Ms. Bogard: Fitch Ratings has assigned one or more ratings and/or otherwise taken rating action(s), as detailed in the attached Notice of Rating Action. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings should understand that neither an enhanced factual investigation nor any third - party verification can ensure that all of the information Fitch relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward - looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. 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Jeff Schaub Managing Director, Operations U.S. Public Finance / Global Infrastructure & Project Finance JS/mb Enc: Notice of Rating Action (Doc ID: 192673) Notice of Rating Action Outlook/ Bond Description Rating Type Action Rating Watch Eff Date Notes Pearland (TX) ctfs of oblig ser 2014 Long Term New Rating AA RO:Sta 20-Aug- 2014 Pearland (TX) permanent improv & rfdg bonds ser Long Term New Rating AA RO:Sta 20-Aug- 2014 2014 Key: RO: Rating Outlook, RW: Rating Watch; Pos: Positive, Neg: Negative, Sta: Stable, Evo: Evolving (Doc ID: 192673) Page 1 of 1 FitchRatings FITCH RATES PEARLAND, TEXAS'S 2014 GOS & COS 'AA'; OUTLOOK STABLE Fitch Ratings-Austin-20 August 2014: Fitch Ratings has assigned an 'AA' rating to the following limited tax obligations for Pearland, Texas (the city): - -$34.475 million permanent improvement and refunding bonds, series 2014; - -$4.625 million certificates of obligation (COs), series 2014. The bonds are scheduled for sale via negotiation as early as Aug. 21; the COs are scheduled for competitive sale Sept. 22. Proceeds from the bonds will be used to finance street and park improvements and to refund outstanding debt for interest cost savings. Proceeds from the COs will be used to finance a new fire station and other facility improvements. In addition, Fitch affirms the following ratings for the city: - -$206.15 million permanent improvement bonds series 2005, 2006, 2007, 2008, 2009, and 2012 at 'AA' - -$57.075 million COs series 2004, 2006, 2007, 2008, 2009, and 2009A at 'AA'. The Rating Outlook is Stable. SECURITY Permanent improvement bonds are voted general'obligations of the city. Both the bonds and the COs are secured by a property tax levy that is limited to $2.50 per $100 of assessed valuation. The COs are additionally secured by a limited pledge of net revenues from the city's water and sewer system. KEY RATING DRIVERS PRUDENT FINANCIAL MANAGEMENT: The city maintains satisfactory reserve levels and a consistent record of conservative budget practices. Fitch expects reserves to remain healthy given the city's sound management policies. STRONG REGIONAL ECONOMY; RAPID GROWTH: The city benefits from its location within the strong and diverse Houston metropolitan statistical area (MSA). Rapid growth within the city is of some concern but wealth levels are above average, unemployment is low, and the tax base is expanding. LARGE DEBT PROFILE: The city's high debt levels are the key credit risk. Rapid growth and development, as well as sizable overlapping municipal utility district (MUD) debt, yields a high debt burden unlikely to change given growth related needs. SALES TAX DEPENDENCE: The city relies heavily on sales tax revenues for operations, but healthy reserve levels temper risk from volatility in sales tax performance. RATING SENSITIVITIES RESERVES CREATE FINANCIAL CUSHION: Fitch expects the city to retain its healthy reserve position to counterbalance concerns over the reliance on sales tax revenue and the high overall debt levels, credit factors that Fitch believes limit the rating to its current level. CREDIT PROFILE Pearland is located just south of Houston's outer loop, mostly in Brazoria County. The city experienced rapid population growth of 142% between the 2000 and 2010 census, rising to approximately 106,900 in 2014. MANAGEMENT PRACTICES SUPPORT HEALTHY FINANCIAL PROFILE The city maintains a sound financial profile with healthy general fund reserve levels in excess of its formal fund balance policy. The city's policy is to maintain reserves equivalent to two months (roughly 17%) of recurring operating expenditures. The unrestricted general fund balance at the close of fiscal year 2013 was $18.5 million or 33% of spending. Unaudited results for fiscal 2014 reflect a $3 million use of fund balance for nonrecurring expenditures, in contrast to a budgeted $4 million operating deficit. The city's annual budget process prudently includes the preparation of a multi -year forecast. The 2015-2017 forecast anticipates use of general fund reserves resulting in reserve levels reaching a low point of 20% of spending in fiscal 2016, consistent with the city's minimum reserve policy. Fitch believes the city is likely to continue its practice of outperforming the budget and views healthy reserves as a key mitigant to sales tax volatility and a high debt load. ROBUST SALES TAX ACTIVITY; GROWTH RELATED SPENDING Economically sensitive sales taxes typically comprise about 30% of general fund revenues. Receipts increased by a strong 7% in fiscal 2013, and year-to-date receipts for fiscal 2014 are up an additional 7% over the prior year. The city projects future annual growth of 6% which Fitch believes is somewhat aggressive though consistent with recent figures. The city's expense base is largely driven by service related costs associated with rapid growth, reflected in increases to public safety and public works. The self -funded health insurance plan recently saw a large increase in claims, resulting in a large projected increase to premiums in fiscal 2015. The proposed budget for fiscal 2015 includes a $3.4 million general fund drawdown for both recurring and nonrecurring expenditures. Draws on the health insurance fund will be restored with proceeds from the sale of city property, and recent changes to insurance benefits are expected to reduce future costs to the city. HIGH DEBT BURDEN; OTHER LONG-TERM LIABILITIES MANAGEABLE Fitch expects debt levels to remain high. Overall debt is $9,014 per capita and 11.9% of market value including overlapping MUD and school district debt. The rate of amortization of direct debt is slightly below average. The five-year capital improvement plan (CIP) is expansive, though the city has adequate existing bond authorization for its near -term capital plans. The current offerings provide for a new park, soccer complex, and fire station, as well as various street improvements. The city plans to borrow an additional $28 million from existing authorization in 2015 for various public improvements. The city participates in the Texas Municipal Retirement System for pension benefits to civil employees and has contributed 100% of its annually required contribution (ARC) for at least the last three fiscal years. The funded position of the city's plan is adequate at 82% for fiscal year 2013, based on an assumed 7% rate of return which Fitch considers reasonable. Other postemployment benefits (OPEB) are handled on a paygo basis. The city's OPEB liability is modest, offering only an implicit rate subsidy. Carrying costs for debt service, 100% funding of the pension ARC, and OPEB expense are average at 22% of governmental fund spending. TRANSITIONING BEDROOM COMMUNITY WITH ACCESS TO HOUSTON MSA Pearland's proximity to the Houston core provides easy access to major transportation arteries and the broad, diverse economy of the MSA. Residential development continues to occur throughout the city, as evidenced by the increasing number of single family permits issued in 2012 and 2013. The taxable assessed value (TAV) for fiscal 2015 is $7.6 billion, up 21% from five years ago. Tax base growth and diversification are expected to continue with recent investments from the healthcare and manufacturing sectors, including two hospitals scheduled to open during 2015. Wealth indicators are substantially higher than state and national levels, with median household income 68% higher than the national average. Employment growth is robust, yielding an unemployment rate of 4.2% for June 2014 that is below the state and national rates of 5.5% and 6.3%, respectively. Contact: Primary Analyst Shane Sellstrom Analyst +1-512-215-3727 Fitch Ratings, Inc. 111 Congress Ave., Suite 2010 Austin, TX 78701 Secondary Analyst Jose Acosta Senior Director +1-512-215-3726 Committee Chairperson Karen Ribble Senior Director +1-415-732-5611 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's Tax -Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, the. Municipal Advisory Council of Texas, and the National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax -Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax -Supported Rating Criteria http://www.fitchratings. com/creditdesk/reports/report_frame. cfm?rpt_id=686015 U.S. Local Government Tax -Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame. cfm?rpt_id=685314 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/ UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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MOODY'S INVESTORS SERVICE New Issue: Moody's assigns Aa2 to the City of Pearland's, TX $39M GO bonds; outlook is stable Global Credit Research -19 Aug 2014 Aa2 affects $189.9M outstanding GO debt including current offering PEARLAND (CITY OF) TX Cities (including Towns, Villages and Townships) TX Moody's Rating ISSUE RATING Certificates of Obligation, Series 2014 Aa2 Sale Amount $4,625,000 Expected Sale Date 08/28/14 Rating Description General Obligation Limited Tax Permanent Improvement and Refunding Bonds, Series 2014 Aa2 Sale Amount $34,475,000 Expected Sale Date 08/28/14 Rating Description General Obligation Limited Tax Moody's Outlook STA Opinion NEW YORK, August 19, 2014 --Moody's Investors Service has assigned a Aa2 underlying rating to the City of Pearland's (TX) $34.5 million Permanent Improvement and Refunding Bonds, Series 2014 and $4.6 million Certificates of Obligation, Series 2014. Concurrently, we have affirmed the Aa2 rating on the city's $150.8 million in outstanding rated parity general obligation limited tax bonds, excluding the refunding portion of the current offering. The rating also incorporates $121.8 million of outstanding unrated parity debt. The outlook is stable. Proceeds from the permanent improvement and refunding bonds will fund street, drainage, and park improvements, as well as refund certain maturities of outstanding GOLT debt for a net present value savings. The certificates of obligation will fund various facility improvements. RATING RATIONALE The permanent improvement and refunding bonds and certificates are payable as to principal and interest from the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against taxable property located within the city. The certificates are future secured by a limited pledge of the surplus revenues of the City's waterworks and sewer system but only to the extent of an in an amount not in excess of $10,000. The Aa2 rating reflects the city's sizable and growing tax base, favorable socioeconomic profile, healthy financial reserve levels, and elevated debt burdens. STRENGTHS -Sizable tax base that continues to experience assessed valuation growth -Healthy General Fund reserve levels CHALLENGES -Reliance on volatile sales tax revenues -Debt burdens expected to remain elevated given plans for future debt issuances DETAILED CREDIT DISCUSSION SIZEABLE AND AFFLUENT TAX BASE CONTINUES TO REALIZE ASSESSED VALUE GROWTH The City of Pearland is located approximately 15 miles south of Houston (Aa2 stable) along State Highway 288 and consists of a predominantly residential base within Brazoria County (Aa2). Although the national recession slowed the city's economic expansion, its strong population growth and economic diversification supported annual assessed value growth through the recession. From fiscal 2010 to fiscal 2014, assessed values grew 3.5% per year to a sizeable $7 billion. Pearland's economy continues to diversify, having attracted a number of commercial, retail, and healthcare entities over the last decade, led by its favorable access to employment centers throughout the Houston metro area. Preliminary fiscal 2015 assessed valuation exhibits another favorable 8.5% increase to approximately $7.6 billion from market value appreciation of residential properties and new construction. While residential values account for approximately 75% of total assessed values, residential development is expected to continue in the near term given ongoing construction among several active subdivisions. Officials project to issue 1,000 single family residential housing permits annually over the next couple years. Commercial developments are also expected to accompany and service the residential growth experienced by the city, including retail centers and two new medical facilities. Management incorporates conservative tax base growth assumptions for budgeting and planning, but anticipates current growth rates will continue in the near term. The city exhibits minimal taxpayer concentration as the ten largest property taxpayers account for 5.6% of total fiscal 2014 taxable values. The top taxpayers consist of a large oilfield equipment company, an electric utility, and multiple retail developments. From 2000 to 2010, the city's population grew by a substantial 53,612 residents (142.4%) to 91,252 residents as of the 2010 US Census. Wealth indicators are favorable, measured by per capita income and median family income levels (2012 American Community Survey estimates), equal to 129% and 160.1% of the national average, respectively. As of June 2014, the city's unemployment rate of 4.2% remains below the state (5.5%) and nation (6.3%). We expect the city's favorable location to various industries in the Houston MSA and its large amount of undeveloped, but developable acreage will continue to support the favorable trend of assessed value growth over the intermediate term. HEALTHY GENERAL FUND RESERVE LEVELS; RELIANCE ON SALES TAX REVENUES Pearland's conservative financial management and growing economy has strengthened its financial position, as reflected by increasing General Fund reserves. Since fiscal 2010, increasing sales tax collections and conservative expenditure budgeting generated surplus financial operations, which improved General Fund reserves. The city implemented a formal policy to maintain a level of reserves equivalent to two months of recurring expenditures. Historically, audited year-end financial results are in excess of this policy, but consistent with reserve levels of the current rating category. Fiscal 2013 ended with a favorable $1.1 million increase in total General Fund balance to $18.6 million, a healthy 33.1% of revenues. Management attribute the favorable financial operations in fiscal 2013 to improving economic conditions, as evidenced by a 7.5% increase in sales tax revenues ($15.9 million), which accounted for 28.3% of revenues. Economically sensitive sales taxes are the city's single -largest revenue source. While susceptible to economic volatility, the city's healthy General Fund reserves minimize the added risk of relying upon economically sensitive revenues to fund nearly one-third of its operating budget. Management projects a one-time $3.1 million draw on reserves in fiscal 2014 to purchase fire station and other capital equipment. If realized, the draw on reserves would decrease the total General Fund balance to approximately $15.5 million, which reflects a still healthy 24.5% of anticipated revenues. Projected revenue collections exhibit a 7% increase in sales tax receipts over the prior year, to roughly $16.8 million. Management reports the possibility of a $3.3 million use of reserves in fiscal 2015 to fund various capital expenditures, such as equipment at new parks. Officials note the fiscal 2015 budget reflects conservative assumptions and expects positive variances at year-end will likely reduce the amount drawn on reserves. The consecutive annual use of fund balance will decrease its reserves to approximately 20% of operating expenditures, which is slightly above the city's formal policy. Once at this desired reserve level, officials plan to make the necessary budgetary adjustments to return to surplus operations in fiscal 2017. Although the projected use of reserves in fiscal 2014 and budgeted draws on fund balance in subsequent fiscal years yield a level of General Fund reserves below the national Aa2 median, we expect the city will maintain an adequate fund balance in excess of its formal policy given historical trends and management's conservative budgeting practices. DEBT BURDENS EXPECTED TO REMAIN ELEVATED The city's direct debt burden of 4.6% of fiscal 2014 full valuation (inclusive of the current sales and refunding) is expected to remain elevated given future debt issuance plans, but remain manageable with the anticipated assessed valuation growth. The overall debt burden is much higher at 12.7% due to frequent debt issuances by Pearland ISD (Aa3 stable), Alvin ISD (Aa2 stable), as well as several municipal utility districts. Officials expect to fund $102 million of the city's $170.1 million five-year capital improvement plan with future general obligation debt. Current principal amortization is below average for the rating category, with 49.6% of principal retired in ten years. The interest rate on the city's outstanding debt is fixed and the city is not a party to any variable rate debt or swaps. The city has a manageable employee pension burden, based on unfunded liabilities for its share of the Texas Municipal Retirement System (TMRS), a multiple -employer plan administered by the state. Moody's adjusted net pension liability (ANPL) for the city, under our methodology for adjusting reported pension data, is $52.5 million, or a manageable 0.52 times fiscal 2013 operating revenues. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the city's reported liability information, but to improve comparability with other rated entities. We determined the city's share of liability for the state -run TMRS in proportion to its contributions to the plan. OUTLOOK The stable outlook reflects our expectation that the city will continue to experience assessed valuation growth and maintain adequate reserves. The outlook also incorporates that debt burdens will remain elevated due to future debt issuance plans, but remain manageable given assessed valuation growth expectations. What could make the rating go up: - Substantial economic expansion measured by assessed valuation growth - Trend of surplus operations supporting significantly improved General Fund reserves -Significant moderation of its debt burden What could make the rating go down: - Economic contractions measured by declines in taxable values - Trend of operating deficits that decrease General Fund reserves - Substantial increases in the city's debt burdens KEY STATISTICS: Assessed Value (Full Value), Fiscal 2014: $7 billion Assessed Value (Full Value) Per Capita, Fiscal 2014: $67,257 Median Family Income as % of US Median (2012 American Community Survey): 153.9% Fund Balance as % of Revenues, Fiscal 2013: 27.49% 5-Year Dollar Change in Fund Balance as % of Revenues: 8.94% Cash Balance as % of Revenues, Fiscal 2013: 26.60% 5-Year Dollar Change in Cash Balance as % of Revenues: 4.21% Institutional Framework: "Aa" 5-Year Average Operating Revenues / Operating Expenditures: 1.00x Net Direct Debt as % of Assessed Value: 4.63% Net Direct Debt / Operating Revenues: 3.89x 3-Year Average ANPL as % of Assessed Value: 0.62% 3-Year Average ANPL / Operating Revenues: 0.52x RATING METHODOLOGY The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. 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MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for "retail clients" to make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser. NUMBER I-1 REGISTERED DATED DATE: REGISTERED OWNER: PRINCIPAL AMOUNT: UNITED STATES OF AMERICA STATE OF TEXAS CITY OF PEARLAND, TEXAS CERTIFICATE OF OBLIGATION, SERIES 2014 October 1. 2014 41, RAYMOND JAM.ES & ASSOCIATE FOUR MILLION SIX HUN AND NO/DOLLARS THE CITY OF PEARLAND, "(ity"). for value received. hereby E.)ro nises registered assigns. on March 1 of th , • 41, • of have been paid or deemed to have this Certificate at the office ' 'ells the principal amount iden 110.t.r:.4.82966. I DENOMINATION $4,625,000 'VNREGISTER.ED THOI1SAND ipa corporation of the State of Texas (the the4legistered Owner identified above or its ecified below (or so much thereof as shall not redemption) upon presentation and surrender or or its successor (the "Paying Agent/Registrar"), orth TI-Va4following. schedule: tipo o Bk. N.A., ar of Principal Interest uritv Amount Rate 3/r/2015 $230.000 3.000% 3/1/2016 $235,000 3.000% 3/1/2017 $230,000 2.000%, 3/1/2018 $230,000 2.000% 3/1/2019 $230000 2.000% 3/1/2020 $230,000 2.000% 3/1/2021 $230,000 2.000% 3/1/2022 5230,000 2000'., 3/1/2023 S230,000 3.000% 3/1/2024 $230,000 4.000% 3/1/2025 52,35,000 4.000% 3/1/2026 $230,000 4.000% 3/1/2028 $470.000 3.000% 3/1/2029 $230,000 3.125% 3/1/2030 $230.000 3.1)5% 3/1/2031 $230.000 3.250% 3/1/2032 5230,000 3.250% 3/1/2034 $465,000 3.375% payable in any coin or currency of the United •States of America which on the date of payment of such principal is legal tender for the payment. of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360-day year composed of twelve 30-day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. interest on this Certificate is payable by check on March 1 and September 1, beginning on March 1, 2015. mailed to the registered owner of record as of the close of business on the last business day of the month next preceding each interest p ent date. THIS CERTIFICATE IS ONE OF A DULY A CERTIFICATES (the "Certificates") in the aggregate principal amount an ordinance adopted by the City Council of the City on September purpose of providing alt or part of the funds to pay contra construction of public works and the purchase of materials up land and rights -of -way for authorized needs and purposes for professional services. to wit: (i) improvements, re ltion. Old Led s, stre-t an d (vi service center located at East Orange Street an design and construction of two new fire stati and Fite Road; (iv) project management for renovations to the existing City Hall ' exAt$ the above listed projects. ITII OF ,625, ,10„, isSued pursuant to the "didinance) for the obl to be incurred for the equIpment; machinery, buildings, .ayment of contractual obligations dditiOns to the existing public works R 'A; ‘01) acquisition of land for and the ,ost tad and FM 518 and at Harkey Road 'ineility Laptal projects within the City. ofessional services rendered in connection with THIS CEL. T 410i0i, be valid or obligatory for any purpose or be entitled to any benefit under the Or. 111t4rilessihjs Certificate is authenticated registered by the Comptroller of Public Accounts o Stat exas by due execution of the registration certificate endorsed hereon. REvERvEs THE RIGHT, at its option, to redeem, prior to their maturity, Certificates matuni on *t1 after March 1, 2025, in whole or in part, on March 1, 2024. or any date thereafter, at par plus Wiled interest to the date fixed for redemption. THE CERTIFICATES maturing on March I in the year 2028 and 2034, (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: TER.M BONDS MATURING IN THE YEAR 2028 Mandatory Redemption Principal Amount September I, 2027 $235,000 September 1. 2028 (maturity) $235,000 TERM BONDS MATURING IN THE YEAR 2034 Mandatory Redemption Principal Amount September J. 2034 $230,000 September I, 2035 (maturity) $235,000 110U:3452966.1 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. 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, portion Certificates for redemption, each Certificate shall be treated as representing that number r. *ates of $5,000 denomination which is obtained by dividing the principal amount of sucl *ert ,,5,000. Upon surrender of any Certificate for redemption in part, the Payimz, Agen .trar, '';,,ecl'irdarice with the provisions of the Ordinance, shall authenticate and deliver i exnJthereih. a Certificate or Certificates of like maturity and interest rate in an aggregate, p al a iiiite9),tal to the unredeemed portion of the Certificate so surrendered. NOTICE OF .ANY SUCH REDEN rO,,,, c tffling the Certificates or portions thereof to be redeemed, shall be sent by Uni ..;.,.:':,.. es t firgig, postage prepaid, to the Registered Owners thereof at their addresses as sl vn on the poks of registration kept by the Paying Agent/Registrar, not less than thirt 4 ) d befoOthe 'date fixed for such redemption. By the date fixed for redemption, due provisi all c m -pwiiiithe Pa mg Agent/Registrar for the payment of the .. redemption price of the Ce '. teat-V.k-evr,,'.4 for redeinptiOn. ' If such notice of redemption is given, and if , due provision for sucl t is a e.;,',..ill as provided above, the Certificates which are to be so redectind thereby auto ' al., shall be redeemed prior to their scheduled maturities, they shall not bear .,* interest after tl fixe rtedemption, and they shall not he regarded as being outstanding except for the purpose oftin, d v 'itthe funds so provided for such payment • , — TRIS (ERTLFICATE ISTRANSFERABLE only upon presentation and surrender at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of $5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions oldie Ordinance. HOU:3482966.1 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 operty in the City and have been irrevocably pledged for such payment. IT IS PURIFIER DECLARED AND REPRESENTED j thp‘r eV et . s derived from the City's water and sewer system, after the payment •of al r,zerati main anee expenses thereof (the 'Net Revenues"), in an amount not to exceed 00 e pi .0g0the.- payment of the principal of and interest on the Certificates, provided Ne enues is and shall be junior and subordinate in all respects to the pie - of 'N payment of any obligation of the City, whether authorized heretofore or hetwhic e C • gnates as having a pledge senior to the pledge of the Net Revenues to pay nt of tE e C "fica es. The City also reserves the right to issue, for any lawful purpose at e, in or re n stallments, bonds, certificates of obligation and other obligations of an !ind, j m w m part by a pledge of Net Revenues, that may be prior and superior in ri a , or junior and subordinate to the pledge of Net Revenues securing the Cert.' -eines. with the Paying the Certificates a $482%6.1 ' ENt IS HEREBY MADE TO THE ORDINANCE, a copy of which is filed egis ar, for the full provisions thereof, to all of which the Registered Owners of • aceeptance 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. Mitt 7:1.)f 7:148296; 1 CITY OF PEARLAND, TEXAS City Secretary .„, OFFICE OF THE CONFPTROLI.,ER OF PUBLIC .ACCOUNTS THE STATE OF TEXAS I EGISTER 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 oftlte State of Texas WI.'INESS MVY SIG,\A"F(JRE..AND. SEAL. OF OFFICE.this Comptroller of the State of [SEAL] H?a U 345296i6.9 Recounts For value ASSIGNMENT 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 said Bond on the books kept for registration thereof, h j power of substitution in the premises, DATED: Signature Guaranteed: NOTICE: Signature must be gua by a member firm of the N or Exchange or a COMMere company. HOU3482966.1 r tinst ist Ter , The signature above must co $'pond to the name of the registered wner as shown on the face of this Bond in every particular, without any alteration, enlargement or change whatsoever.