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Home My WebLink AboutO-2007-2989REQUEST FOR CITY COUNCIL AG NnA TTVX4 Agenda Date Requested: May 21, 2007 Requested By: Michael Dolby, ntteerim Director of Finance Department: FINANCE �% (�- Report: Resolution: Ordinance: xx Exhibits: Exhibits: Appropriation Source of Funds: N/A Account Number: N/A Amount Budgeted: Amount Requested: N 7A Budgeted Item: SUMMARY & RECOMMENDATION At this time, we would like to issue Certificates of Obligation Bonds for the following projects: Waste Water Treatment Plant Sports Complex (Amateur Ball Fields) Golf Course Cart Paths Issuance Cost Total 6,000,000 1,600,000 300,000 175.000 $8,075,000 We are requesting consideration and approval of an ordinance authorizing the issuance of City of La Porte Texas Certificates of Obligations, Series 2007. Action Required by Council:, Approve Ordinance authorizing the sale of $8.075 million in Certificates of Obligation Series 2007. Approved for City Council Agenda O John ;Joos;, Interi ty Manager Date—�/ ORDINANCE AUTHORIZING ISSUANCE OF CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007 Dated May 21, 2007 HOU:2690632.2 TABLE OF CONTENTS Page ARTICLE I FINDINGS AND DETERMINATIONS.................................................................... 1 Section 1.1: Findings and Determinations.............................................................................. 1 ARTICLE II DEFINITIONS AND INTERPRETATIONS........................................................... 2 Section2.1: Definitions........................................................................................................... 2 ARTICLE III TERMS OF THE CERTIFICATES......................................................................... 3 Section 3.1: Amount, Purpose and Authorization................................................................... 3 Section 3.2: Designation, Date and Interest Payment Dates ................................................... 3 Section 3.3: Numbers, Denomination, Interest Rates and Maturities ..................................... 4 Section 3.4: Redemption Prior to Maturity............................................................................. 5 Section 3.5: Manner of Payment, Characteristics Execution and Authentication ................. 6 Section3.6: Authentication..................................................................................................... 6 Section3.7: Ownership........................................................................................................... 7 Section 3.8: Registration, Transfer and Exchange.................................................................. 7 Section 3.9: Book -Entry Only System.................................................................................... 8 Section 3.10: Replacement Certificates................................................................................ 9 Section3.11: Cancellation.................................................................................................. 10 ARTICLE IV FORM OF CERTIFICATES................................................................................. 10 Section 4.1: Form of Certificates.......................................................................................... 10 ARTICLE V SECURITY FOR THE CERTIFICATES............................................................... 10 Section 5.1: Pledge and Lew of Taxes and Revenues......................................................... 10 Section 5.2: Debt Service Fund............................................................................................ 11 Section 5.3: Further Proceedings......................................................................................... 11 ARTICLE VI CONCERNING THE PAYING AGENT/REGISTRAR...................................... 12 Section6.1: Acceptance....................................................................................................... 12 Section6.2: Trust Funds............................................................................................. 12 Section 6.3: Certificates Presented........................................................................................ 12 Section 6.4: Unclaimed Funds Held by the Paving Agent/Registrar .................................... 12 Section 6.5: Paving Agent/Registrar May Own Certificates ................................................ 12 Section 6.6: Successor Payingg Agents/Registrars ................................................................. 12 ARTICLE VII PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OFCERTIFICATES..................................................................................................................... 13 Section 7.1: Sale of Certificates; Insurance.......................................................................... 13 Section 7.2: Approval, Registration and Delivery................................................................ 13 Section 7.3: Offering Documents; Ratings .......................................................................... 14 i HOU:2690632.2 Section 7.4: Application of Proceeds of Certificates,• Appropriation ................................... 14 Section7.5: Tax Exemption.................................................................................................. 14 Section 7.6: Qualified Tax -Exempt Obligations ................................................................... 17 Section7.7: Related Matters................................................................................................. 17 ARTICLE VIII CONTINUING DISCLOSURE UNDERTAKING ............................................ 17 Section8.1: Annual Reports................................................................................................ 17 Section 8.2: Material Event Notices.................................................................................... 18 Section 8.3: Limitations, Disclaimers and Amendments...................................................... 19 Section8.4: Definitions......................................................................................................... 20 ARTI CLEIX MISCELLANEOUS.............................................................................................. 20 Section9.1: Defeasance........................................................................................................ 20 Section 9.2: Ordinance a Contract - Amendments Section9.3: ................................................................ Legal Holidays 21 Section 9.4: .................................................................................................. Power to Revise Form of Documents 21 Section 9.5: ............................................................... No Recourse Against City Officials 21 ................................................................. 22 Section 9.6: Further Proceedings .......................................................................................... 22 Section9.7: Severability Section9.8: ....................................................................................................... Open Meeting 22 Section9.9: .................................................................................................... Repealer 22 Section9.10: ............................................................................................................ Emer encX 22 Section9.11: .................................................................................................... Effective Date 22 .............................................................................................. 22 ii HOU:2690632.2 ORDINANCE NO. _-2007 � Aq gq ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007; AND CONTAINING OTHER MATTERS INCIDENT THERETO BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF LA PORTE, 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 La Porte, 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) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course, including replacement of cart paths, tunnel and restrooms, (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure to be located South of Fairmont Parkway and East of Willow Spring Bayou, and (iv) professional services rendered in connection with the above listed projects. (b) The City Council authorized the publication of a notice of intention to issue City of La Porte, Texas, Certificates of Obligation, Series 2007 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 6:00 p.m. on May 21, 2007, at its regular meeting place to adopt an ordinance authorizing the issuance of the Certificates to be payable from (i) an ad valorem tax levied, within the limits prescribed by law, on the taxable property located within the City, and (ii) the revenues to be derived from the City's water and sewer system (the "System") after the payment of all operation and maintenance expenses thereof (the "Net Revenues") in an amount not to exceed $1,000, to the extent that ad valorem taxes are ever insufficient or unavailable for such purposes, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. (c) Such notice was published at the times and in the manner required by the Act. (d) No petition signed by at least five percent (5%) of the qualified voters of the City has been filed with or presented to any official of the City protesting the issuance of such Certificates on or before the date of passage of this Ordinance. HOU:2690632.2 (e) The City has determined that it is in the best interests of the City and that it is otherwise desirable to issue the Certificates to provide all or part of the funds to pay contractual obligations to be incurred for the purposes authorized by the Act. ARTICLE II DEFINITIONS AND INTERPRETATIONS Section 2.1: Definitions. As used herein, the following terms shall have the meanings specified, unless the context clearly indicates otherwise: "Act" shall mean Texas Local Government Code, Chapter 271, Subchapter C, as amended. "Attorney General" shall mean the Attorney General of the State of Texas. "Bond Insurer" shall mean "Certificate" or "Certificates" shall mean any or all of the City of La Porte, Texas, Certificates of Obligation, Series 2007, authorized by this Ordinance. "City" shall mean the City of La Porte, 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 fund by that name created pursuant to Section 5.2 hereof. "Fiscal Year" shall mean the City's then designated fiscal year, which currently is the twelve-month period beginning on the first day of October of a calendar year and ending on the last day of September of the next succeeding calendar year and each such period may be designated with the number of the calendar year in which such period ends. "Interest Payment Date," when used in connection with any Certificate, shall mean March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption of such Certificate. "Issuance Date" shall mean the date on which the Certificates are delivered to and paid for by the Purchaser. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements hereto. "Outstanding," when used with reference to the Certificates, shall mean, as of a particular date, all Certificates theretofore and thereupon delivered pursuant to this Ordinance except: (a) 2 HOU:2690632.2 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 The Bank of New York Trust Company, National Association, and its successors in that capacity. "Purchaser" shall mean the entity or entities specified in Section 6.1 hereof. "Record Date" shall mean the close of business on the fifteenth day of the calendar month immediately preceding the applicable Interest Payment Date. "Register" shall mean the registration books for the Certificates kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts registered to, each Registered Owner of Certificates. "Registered Owner" shall mean the person or entity in whose name any Certificate is registered in the Register. Section 2.2: Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Certificates and the validity of the levy of ad valorem taxes to pay the principal of and interest on the Certificates. ARTICLE III TERMS OF THE CERTIFICATES Section 3.1: Amount, Purpose and Authorization. The Certificates shall be issued in fully registered form, without coupons, under and pursuant to the authority of the Act in the total authorized aggregate principal amount of EIGHT MILLION SEVENTY FIVE THOUSAND AND NO/100 DOLLARS ($8,575,000) 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, and to pay the costs of issuing the Certificates. Section 3.2: Designation, Date and Interest Payment Dates. The Certificates shall be designated as the "City of LaPorte, Texas, Certificates of Obligation, Series 2007," and shall be dated June 1, 2007. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of June 1, 2007, or the most recent Interest Payment Date to which interest has been paid or duly provided for, calculated on the basis of a 360 -day year of twelve 30 -day months, payable on March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption. 3 HOU:2690632.2 If interest on any Certificate is not paid on any Interest Payment Date and continues unpaid for thirty (30) days thereafter, the Paying Agent/Registrar shall establish a new record date for the payment of such interest, to be known as a Special Record Date. The Paying Agent/Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the City. Such Special Record Date shall be fifteen (15) days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first class, postage prepaid, not later than five (5) days prior to the Special Record Date, to each affected Registered Owner as of the close of business on the day prior to mailing of such notice. Section 3.3: Numbers, Denomination, Interest Rates and Maturities. The Certificates shall be initially issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in the following schedule, and may be transferred and exchanged as set out in this Ordinance. The Certificates shall mature on March 15 in each of the years and in the amounts set out in such schedule. Certificates delivered in transfer of or in exchange for other Certificates shall be numbered in order of their authentication by the Paying Agent/Registrar, shall be in the denomination of $5,000 or integral multiples thereof and shall mature on the same date and bear interest at the same rate as the Certificate or Certificates in lieu of which they are delivered. Certificate Year of Principal Interest Number Maturi Amount Rate R-1 2010 $ % R-2 2011 R-3 2012 R-4 2013 R-5 2014 R-6 2015 R-7 2016 R-8 2017 R-9 2018 R-10 2019 R-11 2020 R-12 2021 R-13 2022 R-14 2023 R-15 2024 R-16 2025 R-17 2026 R-18 2027 R-19 2028 R-20 2029 4 HOU:2690632.2 Section 3.4: Redemption Prior to Maturity. (a) The Certificates maturing on and after March 15, 20_, are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 15, 20_, or any date thereafter, at par plus accrued interest to the date fixed for redemption. (b) The Certificates maturing on March 15 in the years 20_, 20 , 20 and 20 (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: Term Certificates Maturing March 15, 20 Term Certificates Maturing March 15, 20_ Term Certificates Maturing March 15, 20_ Term Certificates Maturing March 15, 20 Mandatory Redemption Dates Principal Amounts Mandatory Redemption Dates Principal Amounts Mandatory Redemption Dates Principal Amounts Mandatory Redemption Dates Principal Amounts At least 45 days prior to any mandatory redemption date, the Registrar will select by lot or other customary method of random selection the specific Term Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Term Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or HOU:2690632.2 (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. (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 3.5: Manner of Payment. Characteristics Execution and Authentication. The Paying Agent/Registrar is hereby appointed the paying agent for the Certificates. The Certificates shall be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the manner indicated in the FORM OF CERTIFICATES set forth in Article IV of this Ordinance. If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of the Certificates or before the delivery of the Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the back of the Certificates over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Certificates, but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the validity of the Certificates. Section 3.6: Authentication. Except for the Certificates to be initially issued, which need not be authenticated by the Registrar, only such Certificates as shall bear thereon a certificate of authentication, substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be 6 HOU:2690632.2 entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. Such duly executed certificate of authentication shall be conclusive evidence that the Certificate so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.7: Ownership. The City, the Paying Agent/Registrar and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such Certificate for the purpose of making and receiving payment of the principal thereof and interest thereon and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Certificate in accordance with this Section shall be valid and effective and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.8: Registration, Transfer and Exchange. The Paying Agent/Registrar is hereby appointed the registrar for the Certificates. So long as any Certificate remains Outstanding, the Paying Agent/Registrar shall keep the Register at the City Administrator's office in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of the Certificates in accordance with the terms of this Ordinance. Each Certificate shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Certificate for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Certificate or Certificates, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate as the Certificate or Certificates so presented and surrendered. All Certificates shall be exchangeable upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates, maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Certificate or Certificates presented for exchange. 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 7 HOU:2690632.2 imposed in connection with the transfer or exchange of such Certificate. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Certificate called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Certificate called for redemption in part. Section 3.9: Book -Entry Only System. (a) The definitive Certificates shall be initially issued in the form of a separate single fully registered Certificate for each of the maturities thereof. Upon initial issuance, the ownership of each such Certificate shall be registered in the name of Cede & Co., as nominee of DTC, and except as provided in subsection (b) hereof, all of the Outstanding Certificates shall be registered in the name of Cede & Co., as nominee of DTC. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in this Ordinance with respect to interest checks being mailed to the Owner at the close of business on the Record Date, the word "Cede & Co." in this Ordinance shall refer to such new nominee of DTC. With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Certificates. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (a) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (b) the delivery to any DTC Participant or any other person, other than a holder of the Certificate, as shown on the Register, of any notice with respect to the Certificates, including any notice of redemption or (c) the payment to any DTC Participant or any other person, other than a holder of the Certificate, as shown in the Register of any amount with respect to principal of Certificates, premium, if any, or interest on the Certificates. Except as provided in subsection (c) of this Ordinance, the City and the Paying Agent/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, premium, if any, and interest on 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 Paying Agent/Registrar shall pay all principal of Certificates, premium, if any, and interest on the Certificates only to or upon the order of the respective owners, as shown in the Register as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of principal of, premium, if any, and interest on the Certificates to the extent of the sum or sums so paid. No person other than an owner shall receive a Certificate evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. HOU:2690632.2 (b) Payments and Notices to Cede & Co Notwithstanding any other provision of this Ordinance to the contrary, as long as any Certificates are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, premium, if any, and interest on the Certificates, and all notices with respect to such Certificates shall be made and given, respectively, in the manner provided in the representation letter of the City to DTC. (c) Successor Securities Depository Transfer Outside Book Entry Only System. In the event that the City or the Paying Agent/Registrar determines that DTC is incapable of discharging its responsibilities described herein and in the representation letter of the City to DTC, and that it is in the best interest of the beneficial owners of the Certificates that they be able to obtain certified Certificates, the City or the Paying Agent/Registrar shall (a) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC of the appointment of such successor securities depository and transfer one or more separate Certificates to such successor securities depository or (b) notify DTC of the availability through DTC of Certificates and transfer one or more separate Certificates to DTC Participants having Certificates credited to their DTC accounts. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names holders of the Certificates transferring or exchanging Certificates shall designate, in accordance with the provisions of this Ordinance. 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 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 E HOU:2690632.2 (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. ARTICLE IV FORM OF CERTIFICATES Section 4.1: Form of Certificates. The Certificates, including the Form of Comptroller's Registration Certificate, Form of Paying Agent/Registrar Authentication Certificate, Form of Statement of Insurance, if any, 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 Lew 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. 10 HOU:2690632.2 (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 management system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $1,000, to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. (d) To pay the interest coming due on the Certificates prior to receipt of the taxes levied to pay such interest, there is hereby appropriated from current funds on hand, which are hereby certified to be on hand and available for such purpose, an amount sufficient to pay such interest, and such amount shall be used for no other purpose. Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2007, 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. 11 HOU:2690632.2 ARTICLE VI CONCERNING THE PAYING AGENT/REGISTRAR Section 6.1: Acceptance. The Bank of New York Trust Company, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates pursuant to the terms and provisions of the Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar. The Paying Agent/Registrar Agreement shall be substantially in the form attached hereto as Exhibit B, the terms and provisions of which are hereby approved, and the Mayor is hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest thereto and affix the City's seal. Such initial Paying Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of any fees pursuant to the terms of any contract between the Paying Agent/Registrar and the City and/or the deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. Section 6.2: Trust Funds. All money transferred to the Paying Agent/Registrar in its capacity as Paying Agent/Registrar for the Certificates under this Ordinance (except any sums representing Paying Agent/Registrar's fees) shall be held in trust for the benefit of the City, shall be the property of the City and shall be disbursed in accordance with this Ordinance. Section 6.3: Certificates Presented. Subject to the provisions of Section 6.4, all matured Certificates presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Certificates shall be canceled as provided herein. Section 6.4: Unclaimed Funds Held b the he Paving 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 12 HOU:2690632.2 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: Insurance. The sale of the Certificates to the syndicate of underwriters led by Coastal Securities, Inc. (the "Purchaser") at a price of $ (representing the par value thereof plus a net original issue premium on the Certificates of $ , less an underwriting discount of $ ) plus accrued interest to the date of delivery of the Certificates, is hereby approved in accordance with the terms of the Certificate Purchase Agreement presented to and hereby approved by the City Council, in substantially the form attached hereto as Exhibit D. which price and terms are hereby found and determined to be the most advantageous reasonably obtainable by the City. The Mayor, Mayor Pro -Tem and all other officials, agents and representatives of the City are hereby authorized to do any and all things necessary or desirable to provide for the issuance and delivery of the Certificates. The City hereby acknowledges that the sale of the Certificates pursuant to the Certificate Purchase Agreement is contingent upon the issuance of a policy of municipal bond insurance from the Bond Insurer insuring the timely payment of principal of and interest on the Certificates. The Mayor and other appropriate City officials are hereby authorized and directed to execute such documents and certificates and to do any and all things necessary or desirable to obtain such insurance and the printing on the Certificates of an appropriate legend or statement regarding such insurance is hereby approved. Section 7.2: Approval, Registration and Delivery. The Mayor is hereby authorized to have control and custody of the Certificates and all necessary records and proceedings pertaining thereto pending their delivery, and the Mayor and other officers and employees of the City are hereby authorized and directed to make such certifications and to execute such instruments as may be necessary to accomplish the delivery of the Certificates and to assure the investigation, examination and approval thereof by the Attorney General and the registration of the initial Certificates by the Comptroller. Upon registration of the Certificates, the Comptroller (or the Comptroller's certificates clerk or an assistant certificates clerk lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's Registration Certificates prescribed herein to be attached or affixed to each Certificates initially delivered and the seal of the Comptroller shall be impressed or printed or lithographed thereon. 13 HOU:2690632.2 Section 7.3: Offering Documents: Ratings. The City hereby approves the form and content of the Preliminary Official Statement, attached hereto as Exhibit C, relating to the Certificates, and hereby approves the preparation of the final Official Statement, in substantially the form of the Preliminary Official Statement, with such revisions as are necessary to reflect the terms of the sale of the Certificates, and ratifies and approves the distribution of such Preliminary Official Statement and approves the distribution of the final Official Statement and any addenda, supplement or amendment thereto, in the offer and sale of the Certificates and in the reoffering of the Certificates by the Purchaser, with such changes therein or additions thereto as the officials executing same may deem advisable, such determination to be conclusively evidenced by their execution thereof. The Mayor is hereby authorized and directed to execute, and the City Secretary is hereby authorized and directed to attest, the final Official Statement. It is further hereby officially found, determined and declared that the statements and representations contained in the Official Notice of Sale, Preliminary Official Statement and final Official Statement are true and correct in all material respects, to the best knowledge and belief of the City Council, and that, as of the date thereof, the Preliminary Official Statement was an official statement of the City with respect to the Certificates that was deemed "final" by an authorized official of the City except for the omission of no more than the information permitted by subsection (b)(1) of Rule 15c2-12 of the Securities and Exchange Commission. Further, the City Council hereby ratifies, authorizes and approves the actions of the Mayor, the City's financial advisor and other consultants in seeking ratings on the Certificates from Standard & Poor's Ratings Services, Moody's Investors Service Inc. and Fitch Ratings and such actions are hereby ratified and confirmed. Section 7.4: Application of Proceeds of Certificates,• Appropriation. Proceeds from the sale of the Certificates shall, promptly upon receipt by the City, be applied as follows: (1) Accrued interest shall be deposited into the 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 7.5: 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 interest on the 14 HOU:2690632.2 Certificates to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Certificates for federal income tax purposes. Without limiting the generality of the foregoing, the City shall comply with each of the following covenants: (a) The City will use all of the proceeds of the Certificates to (i) provide funds to pay contractual obligations to be incurred for the purposes set forth in Section 3.1 hereof (the "Project"), which Project will be owned and operated by the City, and (ii) to pay the costs of issuing the Certificates. The City will not use any portion of the proceeds of the Certificates to pay the principal of or interest or redemption premium on, any other obligation of the City or a related person. (b) The City will not directly or indirectly take any action, or omit to take any action, which action or omission would cause the Certificates to constitute "private activity bonds" within the meaning of Section 141(a) of the Code. (c) Principal of and interest on the Certificates will be paid solely from ad valorem taxes and Net Revenues collected by the City, investment earnings on such collections, and as available, proceeds of the Certificates. (d) Based upon all facts and estimates now known or reasonably expected to be in existence on the date the Certificates are delivered, the City reasonably expects that the proceeds of the Certificates will not be used in a manner that would cause the Certificates or any portion thereof to be an "arbitrage bond" within the meaning of Section 148 of the Code. (e) At all times while the Certificates are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Certificates in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Certificates and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Certificates. To the extent necessary to prevent the Certificates from constituting "arbitrage bonds," the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose investments allocable to the Certificates to be less than the yield that is materially higher than the yield on the Certificates. (f) The City will not take any action or knowingly omit to take any action which, if taken or omitted, would cause the Certificates to be treated as "federally guaranteed" obligations for purposes of Section 149(b) of the Code. (g) The City represents that not more than fifty percent (50%) of the proceeds of the Certificates will be invested in nonpurpose investments (as defined in Section 148(f)(6)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 149(g)(3)(A)(ii) of the Code, and the City reasonably expects that at least eighty-five percent (85%) of the spendable proceeds of the Certificates will be used to carry out the governmental purpose of the Certificates within the three-year period beginning on the date of issue of the Certificates. (h) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Certificates, if any, be 15 HOU:2690632.2 rebated to the federal government. Specifically, the City will (i) maintain records regarding the receipt, investment, and expenditure of the gross proceeds of the Certificates as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after the day on which the last outstanding Certificate is discharged, (ii) account for all gross proceeds under a reasonable, consistently applied method of accounting, not employed as an artifice or device to avoid in whole or in part, the requirements of Section 148 of the Code, including any specified method of accounting required by applicable Regulations to be used for all or a portion of any gross proceeds, (iii) calculate, at such times as are required by applicable Regulations, the amount of excess arbitrage profits, if any, earned from the investment of the gross proceeds of the Certificates and (iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it, interest thereon and any penalty. (i) The City will not directly or indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if such arrangement had been at arm's length and had the yield on the Certificates not been relevant to either party. 6) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of the Code with respect to the Certificates on such form and in such place as the Secretary may prescribe. (k) The City will not issue or use the Certificates as part of an "abusive arbitrage device" (as defined in Section 1.14810(a) of the Regulations). Without limiting the foregoing, the Certificates are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations by (i) enabling the City to exploit the difference between tax-exempt and taxable interest rates to gain a material financial advantage, or (ii) increasing the burden on the market for tax-exempt obligations. (1) Proper officers of the City charged with the responsibility for issuing the Certificates are hereby directed to make, execute and deliver certifications as to facts, estimates or circumstances in existence as of the date of issuance of the Certificates and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the date of issuance of the Certificates, the City will take such actions as are necessary and appropriate to assure the continuous accuracy of the representations contained in such certificates. 16 HOU:2690632.2 (m)The covenants and representations made or required by this Section are for the benefit of the Certificate holders and any subsequent Certificate holder, and may be relied upon by the Certificate holders and any subsequent Certificate holder and bond counsel to the City. In complying with 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 of the owners thereof for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance, the City's representations and obligations under the covenants and provisions of this Section 7.5 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 7.6: Qualified Tax -Exempt Obligations. The City hereby designates the Certificates as "qualified tax-exempt obligations" as defined in Section 265(b)(3) of the Code. With respect to such designation, the City represents the following: (a) that during the calendar year 2007, the City (including all entities which issue obligations on behalf of the City), has not designated nor will designate obligations, which when aggregated with the Certificates will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued and (b) that the City has examined its financing needs for the calendar year 2007 and reasonably anticipates that the amount of bonds, leases, loans or other obligations, together with the Certificates and any other tax-exempt obligations heretofore issued by the City (plus those of all entities which issue obligations on behalf of the City) during the calendar year 2007, when the higher of the face amount or the issue price of each such tax-exempt obligation issued for the calendar year 2007 by the City is taken into account, will not exceed $10,000,000. Section 7.7: Related Matters. In order that the City shall satisfy in a timely manner all of its obligations under this Ordinance, the Mayor, the Mayor Pro -Tem, City Secretary and all other appropriate officers, agents, representatives and employees of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance and delivery of the Certificates, including, without limitation, executing and delivering on behalf of the City all certificates, consents, receipts, requests, notices, and other documents as may be reasonably necessary to satisfy the City's obligations under this Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of this Ordinance. ARTICLE VIII CONTINUING DISCLOSURE UNDERTAKING Section 8.1: Annual Reports. The City shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year, financial information and operating data with respect to the City of the general type included in the final Official Statement authorized by Section 7.3 of this Ordinance, being the financial information and operating data described in the Official Statement under the headings "OFFICIAL STATEMENT SUMMARY - Selected Financial Information" "CITY TAX DEBT (except for "Estimated Overlapping 17 HOU:2690632.2 Debt")," "TAX DATA," "SELECTED FINANCIAL DATA," "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY- Current Investments," and in Appendix "B" to the Official Statement. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Appendix B to the Official Statement and (2) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If audited financial statements are not so provided, then the City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID, when and if audited financial statements become available. If the City changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. Section 8.2: Material Event Notices. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: (a) Principal and interest payment delinquencies; (b) Non-payment related defaults; (c) Unscheduled draws on debt service reserves reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers, or their failure to perform; (g) Adverse tax opinions or events affecting the tax-exempt status of the Certificates; (h) Modifications to rights of holders of the Certificates; (i) Certificate calls; 0) Defeasances; (k) Release, substitution, or sale of property securing repayment of the Certificates; and (1) Rating changes. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 8.1 of this Ordinance by the time required by such Section. 18 HOU:2690632.2 Section 8.3: Limitations, Disclaimers and Amendments. The City shall be obligated to observe and perform the covenants specified in this Article for so long as, but only for so long as, the City remains an "obligated person" with respect to the Certificates within the meaning of the Rule, except that the City in any event will give the notice required by Section 8.2 of any Certificate calls and defeasance that cause the City to be no longer such an "obligated person." The provisions of this Article are for the sole benefit of the holders and beneficial owners of the Certificates, and nothing in this Article, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Article or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Certificates at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the City in observing or performing its obligations under this Article shall constitute a breach of or default under the Ordinance for purposes of any other provision of this Ordinance. Nothing in this Article is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. The provisions of this Article may be amended by the City from time to time to adapt the changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, but only if (1) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell the Certificates in the primary offering of the Certificates in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (b) a person that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the holder and beneficial owners of the Certificates. If the City so amends the provisions of this Article, it shall include with any amended financial information or operating data next provided in accordance with Section 8.1 an explanation, in narrative form, of the reasons for the amendment 19 HOU:2690632.2 and of the impact of any change in the type of financial information or operating data so provided. The City may also amend or repeal the provisions of this Article if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City also may amend the provisions of this Article in its discretion in any other manner or circumstance, but in either case only if and to the extent that the provisions of this sentence would not have prevented an underwriter from lawfully purchasing or selling Certificates in the primary offering of the Certificates, giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. Section 8.4: Definitions. As used in this Article, the following terms have the meanings ascribed to such terms below: "MSRB" means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. ARTICLE IX MISCELLANEOUS Section 9.1: Defeasance. The City may defease the provisions of this Ordinance and discharge its obligations to the Registered Owners of any or all of the Certificates to pay the principal of and interest thereon in any manner now or hereafter permitted by law, including by depositing with the Paying Agent/Registrar, a trust company or commercial bank other than the Paying Agent/Registrar, or with the Comptroller of Public Accounts of the State of Texas either: (a) cash in an amount equal to the principal amount of such Certificates and premium, if any, and interest thereon to the date of maturity or redemption; or (b) pursuant to an escrow or trust agreement, cash and/or (i) direct noncallable obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent; or (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a 20 HOU:2690632.2 nationally recognized investment rating firm not less than "AAA" or its equivalent, which, in the case of (i), (ii) or (iii), may be in book -entry form, and the principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, shall be sufficient to provide for the timely payment of the principal of and interest thereon to the date of maturity or earlier redemption; provided, however, that if any of the Certificates are to be redeemed prior to their respective dates of maturity, provision shall have been made for giving notice of redemption as provided in this Ordinance. Upon such deposit, such Certificates shall no longer be regarded to be Outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the City. Section 9.2: Ordinance a Contract - Amendments. This Ordinance shall constitute a contract with the Registered Owners from time to time, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Registered Owners, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Registered Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the consent of Registered Owners who own in the aggregate 51% of the principal amount of the Certificates then Outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Registered Owners of Outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Registered Owners for consent to any such amendment, addition, or rescission. Section 9.3: Legal Holidays. In any case where the date interest accrues and becomes payable on the Certificates or principal of the Certificates matures or the date fixed for redemption of any Certificates or a Record Date shall be in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date shall not occur on such date, but payment may be made or the Record Date shall occur on the next succeeding day which is not in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to 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 9.4: 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 Bond Counsel to the 21 HOU:2690632.2 City, may be necessary or convenient to carry out or assist in carrying out the purposes of this Ordinance, the Preliminary Official Statement, the final Official Statement, 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 9.5: 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 9.6: Further Proceedings. The Mayor, Mayor Pro -Tem, City Secretary and other appropriate officials of the City are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Ordinance. Section 9.7: 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 9.8: Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date, hour, place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all times to the general public at City Hall for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 9.9: Repealer. All orders, resolutions and ordinances, or parts thereof, inconsistent herewith are hereby repealed to the extent of such inconsistency. Section 9.10: Emer ency. It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and the public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Certificates are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its introduction. Section 9.11: 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:2690632.2 DULY PASSED AND APPROVED this the day of May, 2007. Alton E. Porter, Mayor ATTEST: Martha Gillett, City Secretary APPROVED AS TO FORM AND CONTENT: City Attorney S-1 HOU:2690632.2 NUMBER IR - REGISTERED 'INTEREST RATE: REGISTERED OWNER: PRINCIPAL AMOUNT: EXHIBIT A FORM OF CERTIFICATE UNITED STATES OF AMERICA STATE OF TEXAS CITY OF LA PORTE, TEXAS CERTIFICATE OF OBLIGATION SERIES 2007 DATED DATE: 'MATURITY DATE: June 1, 2007 March 15, DENOMINATION REGISTERED 'CUSIP: DOLLARS 'THE CITY OF LA PORTE, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on the Maturity Date specified above (or on earlier redemption as herein provided), upon presentation and surrender of this Certificate at the principal corporate trust office of The Bank of New York Trust Company, National Association, or its successor (the "Paying Agent/Registrar"), the principal amount identified above (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360 -day year composed of twelve 30 -day months, from the later of the Dated Date identified above or the most recent interest payment Initial Certificate shall be numbered T-1. 2 Omitted from initial Certificate. 3 The first sentence of the initial Certificate shall read as follows: THE CITY OF LA PORTE, 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 15 of each of the years and in the principal amounts set forth in the following schedule: [Insert information regarding years of maturity, principal amounts and interest rates from Section 3.3 of the Ordinance.] (or on earlier redemption as herein provided), upon presentation and surrender of this Certificate at the principal corporate trust office of The Bank of New York Trust Company, National Association, or its successor (the "Paying Agent/Registrar"), the principal amounts identified above (or so much thereof as shall not have been paid or deemed to have bee paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360 -day year composed of twelve 30 -day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. A-1 HOU:2690632.2 date to which interest has been paid or duly provided for. Interest on this Certificate is payable on March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption of this Certificate, by check sent by United States mail, first class, postage prepaid, by the Paying Agent/Registrar to the Registered Owner of record as of the close of business on the fifteenth day of the calendar month immediately preceding the applicable interest payment date, as shown on the registration books kept by the Paying Agent/Registrar. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Certificate at the principal corporate trust office of the Paying Agent/Registrar. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the "Certificates") in the aggregate principal amount of $8,575,000 issued pursuant to an ordinance adopted by the City Council of the City on May 21, 2007 (the "Ordinance") for the purpose of providing all or part of the funds to pay for (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course, including replacement of cart paths, tunnel and restrooms, (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure to be located South of Fairmont Parkway and East of Willow Spring Bayou, and (iv) professional services rendered in connection with the above listed projects. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. 4REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS CERTIFICATE SET FORTH ON THE REVERSE HEREOF, WHICH PROVISIONS SHALL HAVE THE SAME FORCE AND EFFECT AS IF SET FORTH AT THIS PLACE. 'THIS CERTIFICATE shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this Certificate is authenticated by the Paying Agent/Registrar by due execution of the authentication certificate endorsed hereon. 4 This paragraph shall be omitted from the initial Certificate and any other Certificate for which text does not appear on the back of a printed certificate. s In the initial Certificate, this paragraph shall read: "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:2690632.2 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. (SEAL) CITY OF LA PORTE, TEXAS Mayor COUNTERSIGNED: City Secretary [REVERSE OF CERTIFICATE] THE CITY RESERVES THE RIGHT, at its option, to redeem, prior to their maturity, Certificates maturing on and after March 15, 20 , in whole or in part, on March 15, 20_, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES MATURING ON March 15 in the years 20_, 20_, 20 and 20 (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 15, 20 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 15, 20 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 15, 20_ A-3 HOU:2690632.2 Mandatory Redemption Dates Principal Amounts Term Certificates Maturing March 15, 20_ AT LEAST 45 DAYS PRIOR TO any mandatory redemption date, the Registrar will select by lot or other customary method of random selection the specific Term Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Term Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. THE 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. A-4 HOU:2690632.2 THIS CERTIFICATE IS TRANSFERABLE only upon presentation and surrender at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or its authorized representative, subject to the terms and conditions of the Ordinance. THIS CERTIFICATE IS EXCHANGEABLE at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in the principal amount of $5,000 or any integral multiple thereof, subject to the terms and conditions of the Ordinance. THE PAYING AGENT/REGISTRAR is not required to accept for transfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the 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 $1,000, 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. A-5 HOU:2690632.2 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. A-6 HOU:2690632.2 FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE The following form of Comptroller's Registration Certificate shall be attached or affixed to each of the Certificates initially delivered: THE STATE OF TEXAS REGISTER NO. OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this certificate has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this Comptroller of Public Accounts of the State of Texas [SEAL] A-7 HOU:2690632.2 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. Lo Authorized Signature Date of Authentication: FORM OF STATEMENT OF INSURANCE [TO COME] A-8 HOU:2690632.2 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 certificate and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer such certificate 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 certificate in every particular, without any alteration, enlargement or change whatsoever. A-9 HOU:2690632.2 EXHIBIT B PAYING AGENT/REGISTRAR AGREEMENT im HOU:2690632.2 EXHIBIT C PRELIMINARY OFFICIAL STATEMENT C-1 HOU:2690632.2 EXHIBIT D CERTIFICATE PURCHASE AGREEMENT D-1 HOU:2690632.2 ORDINANCE AUTHORIZING ISSUANCE OF CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007 Dated May 21, 2007 HOU:2690632.3 RESOLUTION NO. 2007 - RESOLUTION AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CERTIFICATES OF OBLIGATION FOR THE ACQUISITION, CONSTRUCTION AND IMPROVEMENT OF CERTAIN PUBLIC WORKS; AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH CERTIFICATES; AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO STATE OF TEXAS § COUNTY OF HARRIS § CITY OF LA PORTE § WHEREAS, the City Council (the "City Council") of the City of LaPorte, Texas (the "City"), is authorized to issue certificates of obligation to pay contractual obligations to be incurred for the construction of public works, for the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes, and for the payment of contractual obligations for professional services pursuant to Subchapter C of Chapter 271, Texas Local Government Code, as amended; WHEREAS, the City Council has determined that it is in the best interests of the City and otherwise desirable to issue certificates of obligation in a principal amount not to exceed $8.7 million styled "City of LaPorte, Texas, Certificates of Obligation, Series 2007" (the "Certificates") for the design, engineering, acquisition and construction of certain public works and the purchase of certain equipment for authorized needs and purposes and for the payment of contractual obligations for professional services; WHEREAS, in connection with the Certificates, the City Council intends to publish notice of its intent to issue the Certificates (the "Notice") in a newspaper of general circulation in the City; WHEREAS, for purposes of providing for the sale of the Certificates, the City Council intends to authorize the preparation of a Preliminary Official Statement (the "Preliminary Official Statement") to be used in the public offering of the Certificates; and WHEREAS, the City Council has been presented with and has examined the proposed form of Notice and finds that the form and substance thereof are satisfactory. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LA PORTE, TEXAS: Section 1. Preamble. The facts and recitations contained in the preamble of this Resolution are hereby found and declared to be true and correct. HOU:2677771.1 Section 2. Authorization of Notice. The City Secretary is hereby authorized and directed to deliver the Notice, in the form set forth in Exhibit A hereto, and to publish such Notice on behalf of the City once a week for two (2) consecutive weeks in a newspaper which is of general circulation in the City, the date of the first publication to be at least fifteen (15) days before the date tentatively set in the Notice for the passage of the ordinance authorizing the issuance of the Certificates. Notwithstanding any other provision of this Resolution, the Mayor and Interim City Manager are each hereby authorized to make or approve such revisions, additions, deletions, and variations to the Notice as, in the judgment of the Mayor and/or Interim City Manager and in the opinion of Bond Counsel to the City, may be necessary or convenient to carry out or assist in carrying out the purposes of this Resolution, or as may be required for approval of the Certificates by the Attorney General of Texas; provided, however, that any change to the Notice resulting in material substantive amendments shall be subject to the prior approval of City Council. Section 3. Authorization of a Preliminary Oficial Statement. This City Council hereby approves the preparation and distribution by the City's financial advisor to prospective purchasers of the Certificates of the Preliminary Official Statement, as the same may be completed, modified, or supplemented with the approval of the Mayor or other authorized officers and agents of the City. Section 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 its 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. 2 HOU:2677771.1 EXHIBIT A NOTICE OF INTENTION TO ISSUE CERTIFICATES NOTICE IS HEREBY GIVEN that the City Council of the City of La Porte, Texas (the "City") will meet at its regular meeting place at City Council Chambers, City Hall, 604 West Fairmont Parkway, LaPorte, Texas at 6:00 p.m. on May 21, 2007, which is the time and place tentatively set for the passage of an ordinance and such other action as may be deemed necessary to authorize the issuance of the City's certificates of obligation, payable from ad valorem taxation and a limited (in an amount not to exceed $1,000) subordinate pledge of certain revenues of the water and sewer system of the City, in the maximum aggregate principal amount of $8.7 million, 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, the purchase of materials, supplies, equipment, machinery, buildings, land and rights-of-way for authorized needs and purposes, to wit (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course, including replacement of cart paths, tunnel and restrooms, (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure to be located South of Fairmont Parkway and East of Willow Spring Bayou, and (iv) professional services rendered in connection with the above listed projects. HOU:2677771.1 CITY OF LA PORTE 604 West Fairmont Parkway LaPorte, Texas 77571 May 21, 2007 The Attorney General of Texas Texas State Comptroller of Public Accounts Public Finance Section Cash and Securities Management Division William P. Clements Building Thomas Jefferson Rusk Building 300 West 15`h Street, 9`" Floor 208 East 10th Street, 4th Floor, Room 448 Austin, Texas 78701 Austin, Texas 78701-2407 Re: City of La Porte, Texas, Certificates of Obligation, Series 2007 (the "Certificates") Ladies and Gentlemen: The captioned Certificates are being sent to the Office of the Attorney General, and it is requested that such office examine and approve the Certificates in accordance with law. After such approval, it is requested that the Attorney General deliver the Certificates to the Comptroller of Public Accounts for registration. Enclosed with the Certificates is a signed but undated copy of the SIGNATURE IDENTIFICATION AND NO -LITIGATION CERTIFICATE (the "Certificate") relating to the Certificates. The Attorney General is hereby authorized and directed to date the Certificate concurrently with the date of approval of the Certificates. If any litigation or contest should develop pertaining to the Certificates or any other matters covered by said Certificate, the undersigned will notify the Attorney General thereof immediately by telephone. With this assurance the Attorney General can rely on the absence of any such litigation or contest, and on the veracity and currency of said Certificate, at the time the Attorney General approves the Certificates unless the Attorney General is notified otherwise as aforesaid. The Comptroller is hereby requested to register the Certificates as required by law and the proceedings authorizing the Certificates. After such registration, the Comptroller is hereby authorized and directed to deliver the Certificates, together with three copies of each of the Attorney General's Approving Opinion and Comptroller's Bond for the Bonds, to Margo White, Andrews Kurth LLP, 600 Travis Street, Suite 4200, Houston, Texas 77002. CITY OF LA PORTE By:.�- ►'� Mayor, City of La Porte HOU:2691624.1 J CERTIFICATE FOR RESOLUTION THE STATE OF TEXAS COUNTY OF HARRIS CITY OF LA PORTE We, the undersigned officers of the City of LaPorte, Texas (the "City"), hereby certify as follows: 1. The City Council of the City convened in a regular meeting on April 23, 2007, at the regular meeting place thereof, within the City, and the roll was called of the duly constituted officers and members of the City Council, to wit: Alton E. Porter Mayor Tommy C. Moser Mayor Pro Tem Barry Beasley Council Member Mike Clausen Council Member Howard Ebow Council Member Chuck Engelken Council Member Mike Mosteit Council Member Louis Rigby Council Member Vacant Council Member and all of such persons were present except i_ ire✓ t r 1_ C , 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 FOR THE ACQUISITION, CONSTRUCTION AND IMPROVEMENT OF CERTAIN PUBLIC WORKS; AUTHORIZING DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT RELATING TO SUCH CERTIFICATES; AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO (the "Resolution") was duly introduced for the consideration of the City Council. It was then duly moved and seconded that the Resolution be adopted on first reading pursuant to Section 3.09 of the City Charter; and, after due discussion, such motion, carrying with it the adoption of the Resolution, prevailed and carried by the following vote: AYES: NAYS: ABSTENTIONS: 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 HOU:2693903.1 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. SIGNED AND SEALED this �I 01W , 2007. ��N tinil�' edZI-VI City Se retary City of LaPorte, Texas (SEAL) S-1 HOU:2693903.1 E SE/ CERTIFICATE PURCHASE AGREEMENT $8,075,000 CITY OF LA PORTE, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007 May 21, 2007 City of LaPorte, Texas 604 West Fairmont Parkway LaPorte, Texas 77571 Attention: Mayor and City Council The undersigned, Coastal Securities Inc. and First Southwest Company (collectively, the "Underwriters"), offer to enter into the following agreement (this "Agreement") with the City of La Porte, Texas (the "Issuer") which, upon the Issuer's written acceptance of this offer, will be binding upon the Issuer and upon the Underwriters. This offer is made subject to the Issuer's written acceptance hereof on or before 10:30 p.m. Central Daylight Time on May 21, 2007 and, if not so accepted, will be subject to withdrawal by the Underwriters upon notice delivered to the Issuer at any time prior to the acceptance hereof by the Issuer. Capitalized terms not otherwise defined in this Agreement shall have the same meanings set forth in the Ordinance (as defined herein) or in the Official Statement (as defined herein). Furthermore, the Underwriters and the Issuer anticipate entering concurrently into a bond purchase agreement regarding the purchase and sale of the Issuer's General Obligation Bonds, Series 2007 (the "Additional Agreement"). 1. Purchase and Sale of the Certificates. Subject to the terms and conditions and in reliance upon the representations, warranties and agreements set forth herein, the Underwriters hereby agree to purchase from the Issuer, and the Issuer hereby agrees to sell and deliver to the Underwriter, all, but not less than all, of the Issuer's $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates"). Inasmuch as this purchase and sale represents a negotiated transaction, the Issuer understands, and hereby confirms, that the Underwriters are not acting as fiduciaries of the Issuer, but rather are acting solely in their capacity as Underwriters for their own account. Coastal Securities Inc. has been duly authorized by the Underwriters to execute this Agreement on their behalf and to act hereunder. The principal amount of the Certificates to be issued, the dated date therefor, the maturities, redemption provisions and interest rates per annum are set forth in Schedule I hereto. The Certificates shall be as described in, and shall be issued and secured under and pursuant to the provisions of an ordinance adopted by the Issuer on May 21, 2007 (the "Ordinance") authorizing the issuance of the Certificates. The purchase price (the "Purchase Price") for the Certificates shall be $8,053,203.30 (representing the par amount of the Certificates, plus a net original issue premium of $37,571.55, less an Underwriters' discount of $59,368.25), plus accrued interest from June 1, 2007 to the Closing Date (as defined herein). 2. Public Offering. The Underwriters agree to make a bona fide public offering of all of the Certificates at prices not to exceed the public offering prices set forth on the inside cover of the Official Statement and may subsequently change such offering price without any requirement of prior notice. The Houston 3255277v.4 Schedule I to Certificate Purchase Agreement $8,075,000 City of LaPorte, Texas Certificates of Obligation, Series 2007 Maturity and Pricing Information Maturity Date Principal Interest (March 15) Amount Rate Yield 2008 $ 140,000 4.000% 3.640% 2009 $ 150,000 4.000% 3.650% 2010 $ 160,000 4.000% 3.660% 2011 $ 170,000 4.000% 3.670% 2012 $ 200,000 4.000% 3.690% 2013 $ 275,000 4.000% 3.710% 2014 $ 315,000 4.000% 3.730% 2015 $ 330,000 4.000% 3.760% 2016 $ 340,000 4.000% 3.800% 2017 $ 355,000 4.000% 3.850% 2018 $ 370,000 4.000% 3.910% 2019 $ 385,000 4.000% 3.950% 2020 $ 400,000 4.250% 4.000% 2021 $ 420,000 4.250% 4.020% 2022 $ 440,000 4.250% 4.060% 2023 $ 455,000 4.250% 4.100% 2024 $ 475,000 4.250% 4.120% $1,010,000 4.125% Term Certificates due March 15, 2026, Yield 4.200%, Price 99.028%(a)(b) $1,685,000 4.200% Term Certificates due March 15, 2029, Yield 4.270%, Price 99.009%(a)(b) (a) The Issuer reserves the right, at its option, to redeem the Certificates having stated maturities on an dafter March 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on March 15, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. (b) Term Certificates are subject to mandatory sinking fund redemption as described in the Certificate Ordinance. Schedule I - Page 1 HOUSTON 3255277v.3 Underwriters may offer and sell Certificates to certain dealers (including dealers depositing Certificates into investment trusts) and others at prices lower than the public offering price stated on the cover of the Official Statement. 3. The Official Statement. (a) The Issuer has prepared a Preliminary Official Statement dated May 7, 2007 (the "Preliminary Official Statement") relating to the Certificates and will prepare a final official statement as of the date of this Agreement (the "Official Statement"). (b) The Preliminary Official Statement has been prepared for use by the Underwriters in connection with the public offering, sale and distribution of the Certificates. The Issuer hereby represents and warrants that the Preliminary Official Statement was deemed final by the Issuer as of its date, except for the omission of such information which is dependent upon the final pricing of the Certificates for completion, all as permitted to be excluded by Section (b)(1) of Rule 15c(2)-12 under the Securities Exchange Act of 1934, as amended (the "Rule"). (c) The Issuer hereby authorizes the Official Statement and the information therein contained to be used by the Underwriters in connection with the public offering and the sale of the Certificates. The Issuer consents to the use by the Underwriters prior to the date hereof of the Preliminary Official Statement in connection with the public offering of the Certificates. The Issuer shall provide, or cause to be provided, to the Underwriters as soon as practicable after the date of the Issuer's acceptance of this Agreement (but, in any event, not later than within seven business days after the Issuer's acceptance of this Agreement and in sufficient time to accompany any confirmation that requests payment from any customer) copies of the Official Statement which is complete as of the date of its delivery to the Underwriters in such quantity as the Underwriters shall request in order for the Underwriters to comply with Section (b)(4) of the Rule and the rules of the Municipal Securities Rulemaking Board. (d) If, after the date of this Agreement to and including the date the Underwriters are no longer required to provide an Official Statement to potential customers who request the same pursuant to the Rule (the earlier of (i) 90 days from the "end of the underwriting period" (as defined in the Rule) and (ii) the time when the Official Statement is available to any person from a nationally recognized municipal securities information repository, but in no case less than 25 days after the "end of the underwriting period" for the Certificates), the Issuer becomes aware of any fact or event which might or would cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary to amend or supplement the Official Statement to comply with law, the Issuer will notify the Underwriters (and for the purposes of this clause provide the Underwriters with such information as it may from time to time request), and if, in the opinion of the Underwriters, such fact or event requires preparation and publication of a supplement or amendment to the Official Statement, the Issuer will forthwith prepare and furnish, at the Issuer's own expense (in a form and manner approved by the Underwriters), a reasonable number of copies of either amendments or supplements to the Official Statement so that the statements in the Official Statement as so amended and supplemented will 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 not misleading or so that the Official Statement will comply with law. If such notification shall be subsequent to the Closing, the Issuer shall furnish such legal opinions, certificates, instruments and other documents as the Underwriters may deem necessary to evidence the truth and accuracy of such supplement or amendment to the Official Statement. (e) The Underwriters hereby agree to timely file the Official Statement with a nationally recognized municipal securities information repository. Unless otherwise notified in writing by the Underwriters, the Issuer can assume that the "end of the underwriting period" for purposes of the Rule is the Closing Date. -2- Houston 3255277v.3 4. Representations, Warranties, and Covenants of the Issuer. The Issuer hereby represents and warrants to and covenants with the Underwriters that: (a) The Issuer is a political subdivision and municipal corporation of the State of Texas (the "State") and has full legal right, power and authority under the laws of the State, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended (the "Act"), and at the Closing Date will have full legal right, power and authority under the Act and the Ordinance (i) to enter into, execute and deliver this Agreement, the Ordinance and all documents required hereunder and thereunder to be executed and delivered by the Issuer (this Agreement, the Ordinance and the other documents referred to in this clause (i) are hereinafter referred to as the "Issuer Documents"), (ii) to sell, issue and deliver the Certificates to the Underwriters as provided herein, and (iii) to carry out and consummate the transactions described by the Issuer Documents and the Official Statement, and the Issuer has complied, and will at the Closing be in compliance in all respects, with the terms of the Act and the Issuer Documents as they pertain to such transactions; (b) By all necessary official action of the Issuer prior to or concurrently with the acceptance hereof, the Issuer has duly authorized all necessary action to be taken by it for (i) the adoption of the Ordinance, and the issuance and sale of the Certificates, (ii) the approval, execution and delivery of, and the performance by the Issuer of the obligations on its part contained in, the Certificates and the Issuer Documents and (iii) the consummation by it of all other transactions described by the Official Statement and the Issuer Documents and any and all such other agreements and documents as may be required to be executed, delivered and/or received by the Issuer in order to carry out, give effect to, and consummate the transactions described herein and in the Official Statement; (c) The Issuer Documents constitute legal, valid and binding obligations of the Issuer, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors' rights; the Certificates, when issued, delivered and paid for, in accordance with the Ordinance and this Agreement, will constitute legal, valid and binding obligations of the Issuer entitled to the benefits of the Ordinance and enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors' rights; upon the issuance, authentication and delivery of the Certificates as aforesaid, the Ordinance will provide, for the benefit of the holders, from time to time, of the Certificates, the legally valid and binding pledge of and lien it purports to create as set forth in the Ordinance; (d) The Issuer is not in breach of or default in any material respect under any applicable constitutional provision, law or administrative regulation of the State of Texas or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is or any of its property or assets are otherwise subject, and no event has occurred and is continuing which constitutes or with the passage of time or the giving of notice, or both, would constitute a material default or material event of default by the Issuer under any of the foregoing; and the execution and delivery of the Certificates and the Issuer Documents, and the adoption of the Ordinance and compliance with the provisions on the Issuer's part contained therein, will not conflict with or constitute a breach of or default under any constitutional provision, law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is or to which any of its property or assets are otherwise subject, or under the terms of any such law, regulation or instrument, except as provided by the Certificates and the Ordinance; (e) Except for the approval of the Certificates by the Attorney General of the State of Texas and the registration thereof by the Comptroller of Public Accounts of the State of Texas, all -3- Houston 32552770 authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matters which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely affect the due performance by the Issuer of its obligations under the Issuer Documents, have been duly obtained or will be obtained prior to the Closing, except for such approvals, consents and orders as may be required under the Blue Sky or securities laws of any jurisdiction in connection with the offering and sale of the Certificates; (f) The Certificates and the Ordinance conform to the descriptions thereof contained in the Official Statement under the caption "THE OBLIGATIONS" and the proceeds of the sale of the Certificates will be applied generally as described in the Official Statement under the captions "THE OBLIGATIONS — Use of Proceeds" and the information relating to the Issuer (including the financial information relating to the Issuer contained in the Official Statement) is accurate and complete in all material respects; (g) There is no litigation, action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending or, to the best knowledge of the Issuer after due inquiry, threatened against the Issuer, affecting the existence of the Issuer or the titles of its officers to their respective offices, or affecting or seeking to prohibit, restrain or enjoin the sale, issuance or delivery of the Certificates, or the collection of taxes pledged to the payment of principal of and interest on the Certificates, or in any way contesting or affecting the validity or enforceability of the Certificates, the Issuer Documents, or contesting the exclusion from gross income of interest on the Certificates for federal income tax purposes, or contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto, or contesting the powers of the Issuer or any authority for the issuance of the Certificates, the adoption of the Ordinance or the execution and delivery of the Issuer Documents, nor, to the best knowledge of the Issuer, is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Certificates or the Issuer Documents; (h) The Preliminary Official Statement (as of its date) did not and the Official Statement (as of its date and as of the Closing Date) will 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; (i) At the time of the Issuer's acceptance hereof and (unless the Official Statement is amended or supplemented pursuant to paragraph (d) of Section 3 of this Agreement) at all times subsequent thereto during the period up to and including twenty five days subsequent to the "end of the underwriting period," the Official Statement does not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 0) If the Official Statement is supplemented or amended pursuant to paragraph (d) of Section 3 of this Agreement, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto during the period up to and including twenty five days subsequent to the "end of the underwriting period," the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (k) The Issuer will apply, or cause to be applied, the proceeds from the sale of the Certificates as provided in and subject to all of the terms and provisions of the Ordinance and will not M Houston 3255277v.3 take or omit to take any action which action or omission will adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Certificates; (1) The Issuer, at the Underwriters' expense, will furnish such information and execute such instruments and take such action in cooperation with the Underwriters as the Underwriters may reasonably request (i) to qualify the Certificates for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions in the United States as the Underwriter may designate and (ii) to determine the eligibility of the Certificates for investment under the laws of such states and other jurisdictions and (iii) to continue such qualifications in effect so long as required for the distribution of the Certificates (provided, however, that the Issuer will not be required to qualify as a foreign corporation or to file any general or special consents to service of process under the laws of any jurisdiction) and will advise the Underwriters immediately of receipt by the Issuer of any written notification with respect to the suspension of the qualification of the Certificates for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; (m) The financial statements of and other financial information regarding the Issuer included in the Official Statement fairly present the financial position and results of operations and condition of the Issuer as of the dates and for the periods therein set forth. Prior to the Closing, there will be no adverse change of a material nature in such financial position, or condition, financial or otherwise, of the Issuer. The Issuer is not a party to any litigation or other proceeding pending or, to its knowledge, threatened which, if decided adversely to the Issuer, would have a materially adverse effect on the financial condition of the Issuer; (n) Prior to the Closing the Issuer will not offer or issue any bonds, notes or other obligations for borrowed money or incur any material liabilities, direct or contingent, payable from or secured by any of the revenues or ad valorem taxes which will secure the Certificates, without the prior approval of the Underwriters; (o) Any certificate, signed by any official of the Issuer authorized to do so in connection with the transactions described in this Agreement, shall be deemed a representation and warranty by the Issuer to the Underwriters as to the statements made therein; and (p) The Issuer covenants that between the date hereof and the Closing Date, it will take no action within its control which will cause the representations and warranties made in this section to be untrue as of the Closing. By delivering the final Official Statement to the Underwriters, the Issuer shall be deemed to have reaffirmed, with respect to the Official Statement, the representations, warranties and covenants set forth above with respect to the Preliminary Official Statement. 5. Closin . (a) At 10:00 a.m. Central Daylight Time, on June 19, 2007, or at such other time and date as shall have been mutually agreed upon by the Issuer and the Underwriters (the "Closing Date"), the Issuer will, subject to the terms and conditions hereof, deliver the Certificates to the Underwriters duly executed and authenticated, together with the other documents hereinafter mentioned, and the Underwriters will, subject to the terms and conditions hereof, accept such delivery and pay the Purchase Price of the Certificates as set forth in Section 1 of this Agreement by wire transfer payable in immediately available funds to the order of the Issuer (such transactions on the Closing Date between the Issuer and the Underwriters are referred to herein as the "Closing"). Payment for the Certificates as aforesaid shall be made at the offices of Andrews Kurth LLP, Houston, Texas, Bond Counsel, or such other place as shall have been mutually agreed upon by the Issuer and the Underwriters. (b) Delivery of the Certificates in definitive form shall be made to The Depository Trust Company ("DTC"), or to the Paying Agent/Registrar pursuant to DTC's FAST System. The Certificates shall be prepared and delivered as fully registered bonds in authorized denominations thereof, 512 Houston 3255277v.3 shall be registered in the name of Cede & Co., all as provided in the Ordinance, and shall be made available to the Underwriters at least one business day before Closing for purpose of inspection. 6. Closing Conditions. The Underwriters have entered into this Agreement in reliance upon the representations, warranties and agreements of the Issuer contained herein, and in reliance upon the representations, warranties and agreements to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the Issuer of its obligations hereunder, both as of the date hereof and as of the Closing Date. Accordingly, the Underwriters' obligations under this Agreement to purchase, to accept delivery of and to pay for the Certificates shall be conditioned upon the performance by the Issuer of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing, and shall also be subject to the following additional conditions, including the delivery by the Issuer of such documents as are enumerated herein, in form and substance reasonably satisfactory to the Underwriters: (a) The representations and warranties of the Issuer contained herein shall be true, complete and correct on the date hereof and on and as of the Closing Date, as if made on the Closing Date; (b) The Issuer shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing; (c) At the time of the Closing, (i) the Issuer Documents and the Certificates shall be in full force and effect in the form heretofore approved by the Underwriters and shall not have been amended, modified or supplemented, and the Official Statement shall not have been supplemented or amended, except in any such case as may have been agreed to by the Underwriters, and (ii) all actions of the Issuer required to be taken by the Issuer shall be performed in order for Bond Counsel and Counsel to the Underwriters to deliver their respective opinions referred to hereafter; (d) At the time of the Closing, all official action of the Issuer relating to the Certificates and the Issuer Documents shall be in full force and effect and shall not have been amended, modified or supplemented, except as may have been agreed to in writing by the Underwriters; (e) At or prior to the Closing, the Ordinance shall have been duly executed and delivered by the Issuer and the Issuer shall have duly executed and delivered and the Paying Agent/Registrar shall have duly authenticated the Certificates; (f) At the time of the Closing, there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, from that set forth in the Official Statement that in the reasonable judgment of the Underwriters is material and adverse and that makes it, in the reasonable judgment of the Underwriters, impracticable to market the Certificates on the terms and in the manner described in the Official Statement; (g) The Issuer shall not have failed to pay principal or interest when due on any of its outstanding obligations for borrowed money; (h) All steps to be taken and all instruments and other documents to be executed, and all other legal matters in connection with the transactions described in this Agreement shall be reasonably satisfactory in legal form and effect to the Underwriters; (i) At or prior to the Closing, the Underwriters shall have received copies of each of the following documents: M Houston 3255277v.3 (1) The Official Statement, and each supplement or amendment thereto, if any; (2) The Ordinance with such supplements or amendments as may have been agreed to by the Underwriters, which Ordinance will include an agreement by the Issuer to provide certain periodic information and notices of material events in accordance with the Rule as described in the Official Statement under "CONTINUING DISCLOSURE OF INFORMATION;" (3) The approving opinion of Bond Counsel with respect to the Certificates, in substantially the form attached to the Official Statement; (4) a supplemental opinion of Bond Counsel addressed to the Underwriters, substantially to the effect that: (i) the Ordinance has been duly adopted and is in full force and effect; (ii) the Certificates are exempted securities under the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") and it is not necessary, in connection with the offering and sale of the Certificates, to register the Certificates under the 1933 Act or to qualify the Ordinance under the Trust Indenture Act; and (iii) the information appearing in the Oficial Statement under the captions or subcaptions "THE OBLIGATIONS" (except under the subcaptions "Use of Proceeds," "Book -Entry -Only System," ," "Use of Certain Terms in Other Sections of this Official Statement" and "Future Debt") "TAX EXEMPTION," "TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM OBLIGATIONS," "QUALIFIED TAX-EXEMPT OBLIGATIONS," "CONTINUING DISCLOSURE OF INFORMATION," (except for the subcaption "Compliance with Prior Undertakings"), and "LEGAL MATTERS — Legal Opinions" (as it relates to the opinion of Bond Counsel) fairly summarizes the procedures and documents referred to therein and is correct as to matters of law. (5) An opinion, dated the Closing Date and addressed to the Underwriters, of counsel for the Underwriters, to the effect that: (i) the Certificates are exempt securities under the 1933 Act and the Trust Indenture Act and it is not necessary, in connection with the offering and sale of the Certificates, to register the Certificates under the 1933 Act and the Ordinance need not be qualified under the Trust Indenture Act; and (ii) based upon their participation in the preparation of the Official Statement as counsel for the Underwriters and their participation at conferences at which the Oficial Statement was discussed, but without having undertaken to determine independently the accuracy, completeness or fairness of the statements contained in the Official Statement, such counsel has no reason to believe that the Official Statement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical statements and data included in the -7- Houston 3255277v.3 Official Statement and in Appendices A and B thereto, the information regarding DTC and its book -entry -only system, and the information regarding the municipal bond insurance policy, as to which no view need be expressed); (6) A certificate, dated the Closing Date, of the Issuer to the effect that (i) the representations and warranties of the Issuer contained herein are true and correct in all material respects on and as of the Closing Date as if made on the Closing Date; (ii) no litigation or proceeding or tax challenge against it is pending or, to its knowledge, threatened in any court or administrative body nor is there a basis for litigation which would (a) contest the right of the council members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Certificates or the Issuer Documents or (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and collecting water and sewer revenues, or assessing, levying or collecting the taxes pledged or to be pledged to pay the principal of and interest on the Certificates, or the pledge thereof; (iii) the Ordinance has been duly adopted by the Issuer, is in full force and effect and has not been modified, amended or repealed (except as may have been agreed to by the Underwriters), (iv) to the best of its knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which they were made, not misleading in any material respect as of the Closing Date, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Oficial Statement did not, and as of the Closing Date 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 made therein, in the light of the circumstances under which they were made, not misleading; and (v) there has not been any material adverse change in the financial condition of the Issuer since September 30, 2005, the latest date as of which audited financial information is available; (7) A certificate of the Issuer in form and substance satisfactory to Bond Counsel and counsel to the Underwriters (a) setting forth the facts, estimates and circumstances in existence on the Closing Date, which establish that it is not expected that the proceeds of the Certificates will be used in a manner that would cause the Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"), and any applicable regulations (whether final, temporary or proposed), issued pursuant to the Code, and (b) certifying that to the best of the knowledge and belief of the Issuer there are no other facts, estimates or circumstances that would materially change the conclusions, representations and expectations contained in such certificate; (8) Any other certificates and opinions required by the Ordinance for the issuance thereunder of the Certificates; (9) The approving opinion of the Attorney General of the State of Texas with respect to the Certificates; (10) The registration certificate of the Comptroller of the State of Texas with respect to the Certificates; -8- Houston 3255277v.3 (11) A copy of the municipal bond insurance policy issued by MBIA Insurance Corporation (the "Bond Insurer"), together with an opinion of counsel to the Bond Insurer, in form and substance satisfactory to the Underwriters; (12) A certificate of the Bond Insurer with respect to the accuracy of statements contained in the Official Statement regarding the municipal bond insurance policy and the due authorization, execution, issuance and delivery of the municipal bond insurance policy; (13) Evidence satisfactory to the Underwriters that the Certificates have been rated "Aaa" by Moody's Investors Service, Inc., "AAA" by Standard & Poor's Rating Group and "AAA" by Fitch Ratings based upon the issuance of a municipal bond insurance policy by the Bond Insurer for the Certificates and that such ratings are in effect as of the Closing Date; and (14) Such additional legal opinions, certificates, instruments and other documents as the Underwriters or counsel to the Underwriters may reasonably request to evidence the truth and accuracy, as of the date hereof and as of the Closing Date, of the Issuer's representations and warranties contained herein and of the statements and information contained in the Official Statement and the due performance or satisfaction by the Issuer on or prior to the Closing Date of all the respective agreements then to be performed and conditions then to be satisfied by the Issuer. All of the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof if, but only if, they are in form and substance reasonably satisfactory to the Underwriters. If the Issuer shall be unable to satisfy the conditions to the obligations of the Underwriters to purchase, to accept delivery of and to pay for the Certificates contained in this Agreement, or if the obligations of the Underwriters to purchase, to accept delivery of and to pay for the Certificates shall be terminated for any reason permitted by this Agreement, this Agreement shall terminate and neither the Underwriters nor the Issuer shall be under any further obligation hereunder, except that the respective obligations of the Issuer and the Underwriters set forth in Section 4 hereof shall continue in full force and effect. 7. Termination. The Underwriters shall have the right to cancel its obligation to purchase the Certificates if, between the date of this Agreement and the Closing, the market price or marketability of the Certificates shall be materially adversely affected, in the sole judgment of the Underwriters, by the occurrence of any of the following: (a) legislation shall be enacted by or introduced in the Congress of the United States or recommended to the Congress for passage by the President of the United States, or the Treasury Department of the United States or the Internal Revenue Service or any member of the Congress or favorably reported for passage to either House of the Congress by any committee of such House to which such legislation has been referred for consideration, a decision by a court of the United States or of the State of Texas or the United States Tax Court shall be rendered, or an order, ruling, regulation (final, temporary or proposed), press release, statement or other form of notice by or on behalf of the Treasury Department of the United States, the Internal Revenue Service or other governmental agency shall be made or proposed, the effect of any or all of which would be to impose, directly or indirectly, federal income taxation upon revenues or other income of the general character to be derived by the Issuer pursuant to the Ordinance, or upon interest received on obligations of the general character of the Certificates as described in the Official Statement, or other action or events shall have transpired which -9- Houston 32552770 may have the purpose or effect, directly or indirectly, of changing the federal income tax consequences of any of the transactions described herein; (b) legislation introduced in or enacted by the Congress or an order, decree, or injunction issued by any court of competent jurisdiction, or an order, ruling, regulation (final, temporary, or proposed), press release or other form of notice issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter, to the effect that obligations of the general character of the Certificates, including any or all underlying arrangements, are not exempt from registration under or other requirements of the 1933 Act, or that the Ordinance is not exempt from qualification under or other requirements of the Trust Indenture Act, or that the issuance, offering, or sale of obligations of the general character of the Certificates, including any or all underlying arrangements, as described herein or in the Official Statement or otherwise, is or would be in violation of the federal securities law as amended and then in effect; (c) any state blue sky or securities commission or other governmental agency or body shall have withheld registration, exemption or clearance of the offering of the Certificates as described herein, or issued a stop order or similar ruling relating thereto; (d) a general suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange, the establishment of minimum prices on either such exchange, the establishment of material restrictions (not in force as of the date hereof) upon trading securities generally by any governmental authority or any national securities exchange, or a general banking moratorium declared by federal, State of New York, or State officials authorized to do so; (e) the New York Stock Exchange or other national securities exchange or any governmental authority, shall impose, as to the Certificates or as to obligations of the general character of the Certificates, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by, or the charge to the net capital requirements of, the Underwriters; (f) any amendment to the federal or state Constitution or action by any federal or state court, legislative body, regulatory body, or other authority materially adversely affecting the tax status of the Issuer, its property, income securities (or interest thereon), or the validity or enforceability of the assessment, levy or collection of taxes pledged to pay principal of and interest on the Certificates; (g) any event occurring, or information becoming known which, in the reasonable judgment of the Underwriters, makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of material fact or omits 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; (h) there shall have occurred since the date of this Agreement any materially adverse change in the affairs or financial condition of the Issuer; (i) the United States shall have become engaged in hostilities which have resulted in a declaration of war or a national emergency or there shall have occurred any other outbreak or escalation of hostilities or a national or international calamity or crisis, financial or otherwise, the effect of such outbreak, escalation, calamity or crisis on the financial markets of the United States being such as, in the reasonable opinion of the Underwriters, would materially and adversely affect the ability of the Underwriters to market the Certificates; -10- Houston 3255277v.3 (j) any fact or event shall exist or have existed that, in the Underwriters' reasonable judgment, requires or has required an amendment of or supplement to the Official Statement; (k) there shall have occurred any downgrading, or any notice shall have been given of any intended or potential downgrading in (i) the underlying rating accorded any of the Issuer's obligations or (ii) the underlying or insured rating on the Certificates; (1) the purchase of and payment for the Certificates by the Underwriters, or the resale of the Certificates by the Underwriters, on the terms and conditions herein provided shall be prohibited by any applicable law, governmental authority, board, agency or commission, unless such prohibition is due to the action or inaction of the Underwriters; and (m) there shall have occurred a notice of an Internal Revenue Service audit relating to any outstanding obligations of the Issuer. 8. Expenses. (a) The Underwriters shall be under no obligation to pay, and the Issuer shall pay, any expenses incident to the performance of the Issuer's obligations hereunder, including, but not limited to (i) the cost of preparation and printing of the Certificates and the Issuer Documents, (ii) the fees and disbursements of Bond Counsel, the Financial Advisor to the Issuer, any engineers, accountants, and other experts, consultants or advisers retained by the Issuer; (iii) the costs of preparing, printing, and mailing the Preliminary Official Statement and the Final Official Statement; (iv) the Attorney General review fee; (v) the fees for ratings and payment for bond insurance; (vi) the fees and expenses of the Paying Agent/Registrar; (vii) advertising expenses (except any advertising expenses of the Underwriters as set forth below; (viii) the out-of-pocket miscellaneous closing expenses, including the costs of travel, of the officers and representatives of the Issuer; and (ix) any other expenses or Closing costs which are not the responsibility of the Underwriters as provided in subparagraph (b) below. (b) The Underwriters shall pay (i) the cost of preparation and printing of this Agreement, Agreement Among Underwriters, the Blue Sky Survey, if any; (ii) all advertising expenses incurred by them in connection with the public offering of the Certificates; and (iii) all other expenses incurred by them in connection with the public offering of the Certificates, including the fees and disbursements of Counsel to the Underwriters. 9. Notices. Any notice or other communication to be given to the Issuer under this Agreement may be given by delivering the same in writing at City of La Porte, Texas, 604 West Fairmont Parkway, La Porte, Texas 77571, Attention: City Manager, and any notice or other communication to be given to the Underwriters under this Agreement may be given by delivering the same in writing to Coastal Securities Inc., 5555 San Felipe, Suite 2200, Houston, Texas 77056, Attention: James Gilley. 10. Parties in Interest. This Agreement as heretofore specified shall constitute the entire agreement between us and is made solely for the benefit of the Issuer and the Underwriters (including successors or assigns of the Underwriters) and no other person shall acquire or have any right hereunder or by virtue hereof. This Agreement may not be assigned by the Issuer. All of the Issuer's representations, warranties and agreements contained in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigations made by or on behalf of any of the Underwriters; (ii) delivery of and payment for the Certificates pursuant to this Agreement; and (iii) any termination of this Agreement. 11. Effectiveness. This Agreement shall become effective upon the acceptance hereof by the Issuer and shall be valid and enforceable at the time of such acceptance. -11- Houston 3255277v.3 12. Choice of Law. This Agreement shall be governed by and construed in accordance with the law of the State of Texas. 13. Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provision of any Constitution, statute, rule of public policy, or any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions of this Agreement invalid, inoperative or unenforceable to any extent whatever. 14. Business Day. For purposes of this Agreement, "business day" means any day on which the New York Stock Exchange is open for trading. 15. Section Headings. Section headings have been inserted in this Agreement as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Agreement and will not be used in the interpretation of any provisions of this Agreement. 16. Counterparts. This Agreement may be executed in several counterparts each of which shall be regarded as an original (with the same effect as if the signatures thereto and hereto were upon the same document) and all of which shall constitute one and the same document. -12- Houston 3255277v.3 If you agree with the foregoing, please sign the enclosed counterpart of this Agreement and return it to the Underwriters. This Agreement shall become a binding agreement between you and the Underwriters when at least the counterpart of this Agreement shall have been signed by or on behalf of each of the parties hereto. Very truly yours, COASTAL SECURITIES INC. FIRST SOUTHWEST COMPANY By: COASTAL SECURITIES INC. By: Title:ging Director Acpepted and agreed to this day of May, 2007. CITY OF LA PORTE, TEXAS JA By: Name: A 1 A n tY-)e lr Title: SIGNATURE PAGE OF CERTIFICATE PURCHASE AGREEMENT HOUSTON 3255277v.I SIGNATURE IDENTIFICATION AND NO -LITIGATION CERTIFICATE THE STATE OF TEXAS § COUNTY OF HARRIS § CITY OF LA PORTE § We, the undersigned officers of the City of La Porte, 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 LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007, dated June 1, 2007 (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 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 May 21, 2007, 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,_ or contesting in any way the accuracy, completeness or fairness of the Official Statement. We further certify that the seal that has been impressed, or placed in facsimile, upon each of the Certificates is the legally adopted, proper and only official seal of the City, such official seal being impressed upon this certificate. We further certify that the information and data contained in the General Certificate dated May 21, 2007, remain true and correct as of this date. HOU:2691607 A J WITNESS OUR HANDS AND THE SEAL OF THE CITY this , 2007. SIGNATURES ems - (CITY SEAL) TITLE OF OFFICE Mayor City of La Porte, Texas City Secretary City of La Porte, Texas Before me, on this day personally appeared the foregoing individuals, known to me to be the persons whose names are subscribed to the foregoing instrument. Given under my hand and seal of office this v (Notary Seal) N tary Public Typed or- Printed Name: Vfl i�► �1 e. 6Ur ns' b r� My Commission Expires: 2 HOU:2691607.1 E-- SE) CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS § COUNTY OF HARRIS § CITY OF LA PORTE § We, the undersigned officers of the City of La Porte, Texas (the "City"), hereby certify as follows: 1. The City Council of the City convened in a regular meeting on May 21, 2007, at the regular meeting place thereof, within the City, and the roll was called of the duly constituted officers and members of the City Council, to wit: Alton E. Porter Mayor Tommy C. Moser Mayor Pro Tem Barry Beasley Council Member Mike Clausen Council Member Howard Ebow Council Member Chuck Engelken Council Member Mike Mosteit Council Member Louis Rigby Council Member Vacant Council Member and all of such persons were present except fh)ka thus constituting a quorum. Whereupon, among other business, the following was transacted at said meeting: a written ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007; AND CONTAINING OTHER MATTERS INCIDENT THERETO (the "Ordinance") was duly introduced for the consideration of the City Council. It was then duly moved and seconded that the Ordinance be adopted on first reading pursuant to Section 3.09 of the City Charter; and, after due discussion, such motion, carrying with it the adoption of the Ordinance, prevailed and carried by the following vote: AYES: -1) NAYS: c?" ABSTENTIONS: 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 HOU:2693212.1 subject of the aforesaid meeting, and that the Ordinance would be introduced and considered for adoption at such meeting, and each of such officers and members consented, in advance, to the holding of such meeting for such purpose; that such meeting was open to the public as required by law; and that public notice of the date, hour, place and subject of such meeting was given as required by the Open Meetings Law, Chapter 551, Texas Government Code. SIGNED AND SEALED this 5 —'P .2007. City Secretary City of La Porte, Texas (SEAL) S-1 1:1418RI PIRRi <-- SEA IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ATTEST: City Secretary (SEAL) S-1 HOU:2691612.1 CITY OF LA PORTE, By: Mayor TEXAS ADDRESS: 604 Fairmont Parkway LaPorte, Texas 77571 <-- S EA THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION By:_ Title: ADDRESS: 2001 Bryan Street, 8th Floor Dallas, Texas 75201 Attention: Global Corporate Trust Department S-2 HOU2691612.1 SCHEDULE A HOU:2691612.1 GENERAL CERTIFICATE STATE OF TEXAS § COUNTY OF HARRIS § CITY OF LA PORTE § We, the undersigned officers of the City of LaPorte, 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 of La Porte, Texas, Certificates of Obligation, Series 2007, dated June 1, 2007 (the "Certificates"), now in the process of issuance. We certify as follows: (1) The City is a home rule municipality operating under its own charter, which has not been amended since the issuance of the City of La Porte, Texas, General Obligation Bonds, Series 2006, the last obligations issued by the City and approved by the Texas Attorney General. (2) From April 23, 2007, to the date hereof, the following individuals have been the duly elected and qualified Mayor and City Council of the City holding the offices opposite their names: Alton E. Porter Mayor Tommy C. Moser Mayor Pro Tem Barry Beasley Council Member Mike Clausen Council Member Howard Ebow Council Member Chuck Engelken Council Member Mike Mosteit Council Member Louis Rigby Council Member Vacant Council Member (3) From April 23, 2007, to the date hereof, Martha Gillett has been the duly appointed and qualified City Secretary of the City. (4) Attached as Exhibit A is a true, full and correct debt service schedule for the Certificates. Attached as Exhibit B 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, including the Certificates, is $43,347,500. (5) 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 2006, 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 $1,748,687,118. HOU:2691627.1 (6) The following is a true, full and current schedule of the City's water and sewer system revenues remaining after the payment of all operation and maintenance expenses thereof ("Net Revenues") for the past three completed fiscal years: 2004 2005 2006 ($581,632) (442,833) True and correct copies of the City's resolutions establishing the City's current rate schedule for its solid waste management system are attached hereto as Exhibit C. Such rate schedule has not been amended, supplemented or altered since adoption of the resolutions on [date]. (7) Neither the revenues nor the properties of the City's water and sewer system are in any way pledged or hypothecated other than the pledge of Net Revenues to the Certificates now in process of issuance and the City's Water and Sewer System Revenue Bonds, Series 1998, Certificates of Obligation, Series 2000, Certificates of Obligation, Series 2004, Certificates of Obligation, Series 2005, and Certificates of Obligation, Series 2006 (together, the "Outstanding Obligations"). (8) The City is not in default as to any covenant, condition or obligation with respect to the Outstanding Obligations. [Signature Page Follows] A) HOU:2691627.1 J EXHIBIT A DEBT SERVICE SCHEDULE FOR THE CERTIFICATES HOU:2691627.1 EXHIBIT B DEBT SERVICE SCHEDULE FOR TAX -SUPPORTED DEBT HOU:2691627.1 EXHIBIT C RATE RESOLUTION HOU:2691627.1 ) SIGNED AND SEALED this May 21, 2007. CITY OF LA PORTE, TEXAS :-City Secretary Mayor (CITY SEAL) S-1 HOU:2691627.1 J SIGNED AND SEALED this May 21, 2007. 4 •:City ecr tart' (CITY SEAL) HOU:2691627.1 CITY OF LA PORTE, Mayor S-1 J TEXAS SES CLOSING CERTIFICATE CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007 STATE OF TEXAS § COUNTY OF HARRIS § CITY OF LA PORTE § In accordance with Section 6(i)(6) of the Certificate Purchase Agreement (the "Agreement") entered into by the Underwriters referred to therein and the City of LaPorte, Texas (the "Issuer") in connection with the sale of the Issuer's Certificates of Obligation, Series 2007 (the "Certificates"), I, the undersigned, Mayor of the Issuer, acting solely in my official capacity, hereby certify, as follows: the representations and warranties of the Issuer contained in the Agreement are true and correct in all material respects on and as of the Closing Date as if made on the Closing Date; 2. no litigation or proceeding or tax challenge against the Issuer is pending or, to my. knowledge, threatened in any court or administrative body nor is there a basis for litigation which would (a) contest the right of the council members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Certificates or the Issuer Documents or (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and collecting water and sewer revenues, or assessing, levying or collecting the taxes pledged or to be pledged to, pay the principal of and interest on the Certificates, or the pledge thereof; the Ordinance has been duly adopted by the Issuer, is in full force and effect and has not been modified, amended or repealed (except as may have been agreed to by the Underwriters), 4. to the best of my knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which they were made, not misleading in any material respect as of the Closing Date, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the Closing Date 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 made therein, in the light of the circumstances under which they were made, not misleading; and HOU:2693908.1 there has not been any material adverse change in the financial condition of the Issuer since September 30, 2005, the latest date as of which audited financial information is available. [Signature page follows.] F? HOU:2693908.1 EXECUTED ON BEHALF OF THE ISSUER as of June 19, 2007. City of LaPorte, Texas Name: Alton E. Porter Title: Mayor S-1 HOU:2693908.1 j J CITY OF LA PORTE, TEXAS Note: PLEASE USE BLACK INK. PLEASE DO NOT LET YOUR SIGNATURE TOUCH THE PRINT ON THIS PAGE. DO NOT PUT THE SEAL OVER ANY PRINT ON THIS PAGE. SIGNATURES: Mayor —+ City Secretary -� �lL �py/# SEAL � HOU:2691605.1 MBIA COMMITMENT TO ISSUE A FINANCIAL GUARANTY INSURANCE POLICY Application No.: 2007-003558-001 Sale Date: May, 2007 (T) Program Type: Negotiated DP Re: $8,075,000 (Est.) City of LaPorte, Texas, Certificates of Obligation, Series 2007 (the "Obligations") This commitment to issue a financial guaranty insurance policy (the "Commitment") dated May 18, 2007, constitutes an agreement between CITY OF LA PORTE, TEXAS (the "Applicant") and MBIA Insurance Corporation (the "Insurer"), a stock insurance company incorporated under the laws of the State of New York. Based on an approved application dated May 16, 2007, the Insurer agrees, upon satisfaction of the conditions herein, to issue on the earlier of (i) 120 days of said approval date or (ii) on the date of delivery of and payment for the Obligations, a financial guaranty insurance policy (the "Policy") for the Obligations, insuring the payment of principal of and interest on the Obligations when due. The issuance of the Policy shall be subject to the following terms and conditions: 1. Payment by the Applicant, or by the Trustee on behalf of the Applicant, on the date of delivery of and payment for the Obligations, of a nonrefundable premium in the amount of .194% of total debt service, premium rounded to the nearest hundred. The premium set out in this paragraph shall be the total premium required to be paid on the Policy issued pursuant to this Commitment. 2. The Obligations shall have received the unqualified opinion of bond counsel with respect to the tax-exempt status of interest on the Obligations. 3. There shall have been no material adverse change in the Obligations or the Resolution, Bond Ordinance, Trust Indenture or other official document authorizing the issuance of the Obligations or in the final official statement or other similar document, including the financial statements included therein. 4. There shall have been no material adverse change in any information submitted to the Insurer as a part of the application or subsequently submitted to be a part of the application to the Insurer. 5. No event shall have occurred which would allow any underwriter or any other purchaser of the Obligations not to be required to purchase the Obligations at closing. 6. A Statement of Insurance satisfactory to the Insurer shall be printed on the Obligations. 7. Prior to the delivery of and payment for the Obligations, none of the information or documents submitted as a part of the application to the Insurer shall be determined to contain any untrue or misleading statement of a material fact or fail to state a material fact required to be stated therein or necessary in order to make the statements contained therein not misleading. 8. No material adverse change affecting any security for the Obligations shall have occurred prior to the delivery of and payment for the Obligations. A0181A 9. The Insurer's "Payments Under the Policy/Other Required Provisions" (see attached) shall be included in the authorizing document. 10. The Applicant agrees not to use the Insurer's name in any public document including, without limitation, a press release or presentation, announcement or forum without the Insurer's prior consent; provided however, such prohibition on the use of the Insurer's name shall not relate to the use of the Insurer's standard approved form of disclosure in public documents issued in connection with the current Obligations to be issued in accordance with the terms of the Commitment; and provided further such prohibition shall not apply to the use of the Insurer's name in order to comply with public notice, public meeting or public reporting requirements. 11. This Commitment may be signed in counterpart by the parties hereto. Dated this 18th day of May, 2007. z MBIA r or, r By Assistant Secretary CITY OF LA PORTE, TEXAS By E"1 ��I�l i'0/4w Title: �" t TABLE OF CONTENTS Page ARTICLE I FINDINGS AND DETERMINATIONS.................................................................... 1 Section 1.1: Findings and Determinations.............................................................................. 1 ARTICLE II DEFINITIONS AND INTERPRETATIONS........................................................... 2 Section2.1: Definitions........................................................................................................... 2 ARTICLE III TERMS OF THE CERTIFICATES......................................................................... 3 Section 3.1: Amount, Purpose and Authorization ............................... Section 3.2: Designation, Date and Interest Payment Dates ................................................... 3 Section 3.3: Numbers, Denomination, Interest Rates and Maturities ..................................... 4 Section 3.4: Redemption Prior to Maturity............................................................................. 5 Section 3.5: Manner of Payment, Characteristics, Execution and Authentication ................. 6 Section3.6: Authentication..................................................................................................... 6 Section3.7: Ownership........................................................................................................... 6 Section 3.8: Reizistration, Transfer and Exchange.................................................................. 7 Section 3.9: Book -Entry Only System.................................................................................... 7 Section 3.10: Replacement Certificates................................................................................ 9 Section 3.11: Cancellation.................................................................................................. 10 ARTICLE IV FORM OF CERTIFICATES................................................................................. 10 Section 4.1: Form of Certificates.......................................................................................... 10 ARTICLE V SECURITY FOR THE CERTIFICATES............................................................... 10 Section 5.1: Pledge and Levy of Taxes and Revenues......................................................... 10 Section 5.2: Debt Service Fund............................................................................................. 11 Section 5.3: Further ProceediM .......................................................................................... 11 ARTICLE VI CONCERNING THE PAYING AGENT/REGISTRAR...................................... 11 Section 6.1: Acceptance........................................................................................................ 11 Section6.2: Trust Funds....................................................................................................... 12 Section 6.3: Certificates Presented........................................................................................ 12 Section 6.4: Unclaimed Funds Held by the Paying Agent/Re'strar.................................... 12 Section 6.5: Pang Agent/Registrar May Own Certificates ................................................ 12 Section 6.6: Successor Pang Agents/Registrars.............................................. ARTICLE VII PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OFCERTIFICATES..................................................................................................................... 13 Section 7.1: Sale of Certificates, Insurance ................ Section 7.2: Approval, Registration and Delivery_...... Section 7.3: Offering Documents; Ratings ................. i 061901.1-MIT-M&I ....................................................... 13 ....................................................... 13 ....................................................... 13 Section 7.4: Application of Proceeds of Certificates; Appropriation ................................... 14 Section7.5: Tax Exemption.................................................................................................. 14 Section 7.6: Qualified Tax -Exempt Obligations ................................................................... 17 Section 7.7: Related Matters................................................................................................. 17 ARTICLE VIII CONTINUING DISCLOSURE UNDERTAKING ............................................ 17 Section 8.1: Annual Reports................................................................................................. 17 Section 8.2: Material Event Notices..................................................................................... 18 Section 8.3: Limitations, Disclaimers and Amendments...................................................... 18 Section8.4: Definitions......................................................................................................... 19 ARTICLE IX MISCELLANEOUS.............................................................................................. 20 Section 9.1: Defeasance........................................................................................................ 20 Section 9.2: Ordinance a Contract - Amendments................................................................ 21 Section9.3: Leizal Holidays .................................................................................................. 21 Section 9.4: Power to Revise Form of Documents............................................................... 21 Section 9.5: No Recourse Against City Officials................................................................. 21 Section 9.6: Further Proceedings.......................................................................................... 22 Section 9.7: Severability....................................................................................................... 22 Section9.8: Open Meeting.................................................................................................... 22 Section9.9: Repealer............................................................................................................ 22 Section9.10: Emer ency.................................................................................................... 22 Section 9.11: Effective Date............................................................................................... 22 ii HOU:2690632.3 ORDINANCE NO. -2007 ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007; AND CONTAINING OTHER MATTERS INCIDENT THERETO BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF LA PORTE, TEXAS: ARTICLE I FINDINGS AND DETERMINATI Section 1.1: Findings and Determinations. The City Council hereby officially finds and determines that: (a) The City of La Porte, 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) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course, including replacement of cart paths, tunnel and restrooms, (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure to be located South of Fairmont Parkway and East of Willow Spring Bayou, and (iv) professional services rendered in connection with the above listed projects. (b) The City Council authorized the publication of a notice of intention to issue City of La Porte, Texas, Certificates of Obligation, Series 2007 (the "Certificates") to the effect that the City Council was tentatively scheduled to meet at 6:00 p.m. on May 21, 2007, at its regular meeting place to adopt an ordinance authorizing the issuance of the Certificates to be payable from (i) an ad valorem tax levied, within the limits prescribed by law, on the taxable property located within the City, and (ii) the revenues to be derived from the City's water and sewer system (the "System") after the payment of all operation and maintenance expenses thereof (the "Net Revenues") in an amount not to exceed $1,000, to the extent that ad valorem taxes are ever insufficient or unavailable for such purposes, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. (c) Such notice was published at the times and in the manner required by the Act. (d) No petition signed by at least five percent (5%) of the qualified voters of the City has been filed with or presented to any official of the City protesting the issuance of such Certificates on or before the date of passage of this Ordinance. 1 HOU:2690632.3 (e) The City has determined that it is in the best interests of the City and that it is otherwise desirable to issue the Certificates to provide all or part of the funds to pay contractual obligations to be incurred for the purposes authorized by the Act. ARTICLE II DEFINITIONS AND INTERPRETATIONS Section 2.1: Definitions. As used herein, the following terms shall have the meanings specified, unless the context clearly indicates otherwise: "Act" shall mean Texas Local Government Code, Chapter 271, Subchapter C, as amended. "Attorney General" shall mean the Attorney General of the State of Texas. "Bond Insurer" shall mean MBIA Insurance Corporation. "Certificate" or "Certificates" shall mean any or all of the City of La Porte, Texas, Certificates of Obligation, Series 2007, authorized by this Ordinance. "City" shall mean the City of La Porte, 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 fund by that name created pursuant to Section 5.2 hereof. "Fiscal Year" shall mean the City's then designated fiscal year, which currently is the twelve-month period beginning on the first day of October of a calendar year and ending on the last day of September of the next succeeding calendar year and each such period may be designated with the number of the calendar year in which such period ends. "Interest Payment Date," when used in connection with any Certificate, shall mean March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption of such Certificate. "Issuance Date" shall mean the date on which the Certificates are delivered to and paid for by the Purchaser. "Ordinance" shall mean this Ordinance and all amendments hereof and supplements hereto. "Outstanding," when used with reference to the Certificates, shall mean, as of a particular date, all Certificates theretofore and thereupon delivered pursuant to this Ordinance except: (a) 2 HOU:2690632.3 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 The Bank of New York Trust Company, National Association, and its successors in that capacity. "Purchaser" shall mean the entity or entities specified in Section 6.1 hereof. "Record Date" shall mean the close of business on the fifteenth day of the calendar month immediately preceding the applicable Interest Payment Date. "Register" shall mean the registration books for the Certificates kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts registered to, each Registered Owner of Certificates. "Registered Owner" shall mean the person or entity in whose name any Certificate is registered in the Register. Section 2.2: Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Certificates and the validity of the levy of ad valorem taxes to pay the principal of and interest on the Certificates. ARTICLE III TERMS OF THE CERTIFICATES Section 3.1: Amount, Purpose and Authorization. The Certificates shall be issued in fully registered form, without coupons, under and pursuant to the authority of the Act in the total authorized aggregate principal amount of EIGHT MILLION SEVENTY FIVE THOUSAND AND NO/100 DOLLARS ($8,075,000) 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, and to pay the costs of issuing the Certificates. Section 3.2: Designation, Date and Interest Payment Dates. The Certificates shall be designated as the "City of La Porte, Texas, Certificates of Obligation, Series 2007," and shall be dated June 1, 2007. The Certificates shall bear interest at the rates set forth in Section 3.3 below, from the later of June 1, 2007, or the most recent Interest Payment Date to which interest has been paid or duly provided for, calculated on the basis of a 360 -day year of twelve 30 -day months, payable on March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption. 3 HOU:2690632.3 If interest on any Certificate is not paid on any Interest Payment Date and continues unpaid for thirty (30) days thereafter, the Paying Agent/Registrar shall establish a new record date for the payment of such interest, to be known as a Special Record Date. The Paying Agent/Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the City. Such Special Record Date shall be fifteen (15) days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first class, postage prepaid, not later than five (5) days prior to the Special Record Date, to each affected Registered Owner as of the close of business on the day prior to mailing of such notice. Section 3.3: Numbers Denomination, Interest Rates and Maturities. The Certificates shall be initially issued bearing the numbers, in the principal amounts and bearing interest at the rates set forth in the following schedule, and may be transferred and exchanged as set out in this Ordinance. The Certificates shall mature on March 15 in each of the years and in the amounts set out in such schedule. Certificates delivered in transfer of or in exchange for other Certificates shall be numbered in order of their authentication by the Paying Agent/Registrar, shall be in the denomination of $5,000 or integral multiples thereof and shall mature on the same date and bear interest at the same rate as the Certificate or Certificates in lieu of which they are delivered. Certificate Year of Principal Interest Number Maturity Amount Rate R-1 2008 $140,000 4.000% R-2 2009 150,000 4.000 R-3 2010 160,000 4.000 R-4 2011 170,000 4.000 R-5 2012 200,000 4.000 R-6 2013 275,000 4.000 R-7 2014 315,000 4.000 R-8 2015 330,000 4.000 R-9 2016 340,000 4.000 R-10 2017 355,000 4.000 R-11 2018 370,000 4.000 R-12 2019 385,000 4.000 R-13 2020 400,000 4.250 R-14 2021 420,000 4.250 R-15 2022 440,000 4.250 R-16 2023 455,000 4.250 R-17 2024 475,000 4.250 R-18 2026 1,010,000 4.125 R-19 2029 1,685,000 4.200 El HOU:2690632.3 Section 3.4: Redemption Prior to Maturity. (a) The Certificates maturing on and after March 15, 2017, are subject to redemption prior to maturity, at the option of the City, in whole or in part, on March 15, 2016, or any date thereafter, at par plus accrued interest to the date fixed for redemption. (b) The Certificates maturing on March 15 in the years 2026, and 2029 (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: Term Certificates Maturing March 15, 2026 Term Certificates Maturing March 15, 2029 Mandatory Redemption Dates Principal Amounts 3/15/2025 $495,000 3/15/2026 (Maturity) 515,000 Mandatory Redemption Dates Principal Amounts 3/15/2027 $540,000 3/15/2028 560,000 3/15/2029 (Maturity) 585,000 At least 45 days prior to any mandatory redemption date, the Registrar will select by lot or other customary method of random selection the specific Term Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Term Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. (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, 5 HOU:2690632.3 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 3.5: Manner of Payment, Characteristics, Execution and Authentication. The Paying Agent/Registrar is hereby appointed the paying agent for the Certificates. The Certificates shall be payable, shall have the characteristics and shall be executed, sealed, registered and authenticated, all as provided and in the manner indicated in the FORM OF CERTIFICATES set forth in Article IV of this Ordinance. If any officer of the City whose manual or facsimile signature shall appear on the Certificates shall cease to be such officer before the authentication of the Certificates or before the delivery of the Certificates, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the back of the Certificates over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Certificates, but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the validity of the Certificates. Section 3.6: Authentication. Except for the Certificates to be initially issued, which need not be authenticated by the Registrar, only such Certificates as shall bear thereon a certificate of authentication, substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. Such duly executed certificate of authentication shall be conclusive evidence that the Certificate so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.7: Ownership. The City, the Paying Agent/Registrar and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such Certificate for the purpose of making and receiving payment of the principal thereof and interest thereon and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Certificate in I$ HOU:2690632.3 accordance with this Section shall be valid and effective and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.8: Registration Transfer and Exchange. The Paying Agent/Registrar is hereby appointed the registrar for the Certificates. So long as any Certificate remains Outstanding, the Paying Agent/Registrar shall keep the Register at the City Administrator's office in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of the Certificates in accordance with the terms of this Ordinance. Each Certificate shall be transferable only upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Certificate for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Certificate or Certificates, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate as the Certificate or Certificates so presented and surrendered. All Certificates shall be exchangeable upon the presentation and surrender thereof at the principal corporate trust office of the Paying Agent/Registrar for a Certificate or Certificates, maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Certificate or Certificates presented for exchange. The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver exchange Certificates in accordance with the provisions of this Section. Each Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such Certificate is delivered. All Certificates issued in transfer or exchange shall be delivered to the Registered Owners thereof at the principal corporate trust office of the Paying Agent/Registrar or sent by United States mail, first class, postage prepaid. The City or the Paying Agent/Registrar may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Certificate. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Certificate called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Certificate called for redemption in part. Section 3.9: Book -Entry Only System. (a) The definitive Certificates shall be initially issued in the form of a separate single fully registered Certificate for each of the maturities 7 HOU:2690632.3 thereof. Upon initial issuance, the ownership of each such Certificate shall be registered in the name of Cede & Co., as nominee of DTC, and except as provided in subsection (b) hereof, all of the Outstanding Certificates shall be registered in the name of Cede & Co., as nominee of DTC. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in this Ordinance with respect to interest checks being mailed to the Owner at the close of business on the Record Date, the word "Cede & Co." in this Ordinance shall refer to such new nominee of DTC. With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Certificates. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (a) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (b) the delivery to any DTC Participant or any other person, other than a holder of the Certificate, as shown on the Register, of any notice with respect to the Certificates, including any notice of redemption or (c) the payment to any DTC Participant or any other person, other than a holder of the Certificate, as shown in the Register of any amount with respect to principal of Certificates, premium, if any, or interest on the Certificates. Except as provided in subsection (c) of this Ordinance, the City and the Paying Agent/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, premium, if any, and interest on 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 Paying Agent/Registrar shall pay all principal of Certificates, premium, if any, and interest on the Certificates only to or upon the order of the respective owners, as shown in the Register as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of principal of, premium, if any, and interest on the Certificates to the extent of the sum or sums so paid. No person other than an owner shall receive a Certificate evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. (b) Payments and Notices to Cede & Co. Notwithstanding any other provision of this Ordinance to the contrary, as long as any Certificates are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, premium, if any, and interest on the Certificates, and all notices with respect to such Certificates shall be made and given, respectively, in the manner provided in the representation letter of the City to DTC. (c) Successor Securities Depository; Transfer Outside Book -Entry Only System. In the event that the City or the Paying Agent/Registrar determines that DTC is incapable of discharging its responsibilities described herein and in the representation letter of the City to DTC, and that it is in the best interest of the beneficial owners of the Certificates that they be able to obtain certified Certificates, the City or the Paying Agent/Registrar shall (a) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and n. HOU:2690632.3 Exchange Act of 1934, as amended, notify DTC of the appointment of such successor securities depository and transfer one or more separate Certificates to such successor securities depository or (b) notify DTC of the availability through DTC of Certificates and transfer one or more separate Certificates to DTC Participants having Certificates credited to their DTC accounts. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names holders of the Certificates transferring or exchanging Certificates shall designate, in accordance with the provisions of this Ordinance. 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 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. I HOU:2690632.3 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. ARTICLE IV FORM OF CERTIFICATES Section 4.1: Form of Certificates. The Certificates, including the Form of Comptroller's Registration Certificate, Form of Paying Agent/Registrar Authentication Certificate, Form of Statement of Insurance, if any, 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 10 HOU:2690632.3 sewer management system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $1,000, to the payment of the principal of and interest on the Certificates, provided that the pledge of Net Revenues is and shall be junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates. The City also reserves the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind, secured in whole or in part by a pledge of Net Revenues, that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. (d) To pay the interest coming due on the Certificates prior to receipt of the taxes levied to pay such interest, there is hereby appropriated from current funds on hand, which are hereby certified to be on hand and available for such purpose, an amount sufficient to pay such interest, and such amount shall be used for no other purpose. Section 5.2: Debt Service Fund. The Certificates of Obligation, Series 2007, 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. The Bank of New York Trust Company, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates pursuant to the terms and provisions of the Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar. The Paying Agent/Registrar Agreement shall be substantially in the form attached hereto as Exhibit B, the terms and provisions of which are hereby approved, and the Mayor is hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest thereto and affix the City's seal. Such initial Paying 11 HOU:2690632.3 Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of any fees pursuant to the terms of any contract between the Paying Agent/Registrar and the City and/or the deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. Section 6.2: Trust Funds. All money transferred to the Paying Agent/Registrar in its capacity as Paying Agent/Registrar for the Certificates under this Ordinance (except any sums representing Paying Agent/Registrar's fees) shall be held in trust for the benefit of the City, shall be the property of the City and shall be disbursed in accordance with this Ordinance. Section 6.3: Certificates Presented. Subject to the provisions of Section 6.4, all matured Certificates presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Certificates shall be canceled as provided herein. Section 6.4: Unclaimed Funds Held by the Pamg 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/Re 'sig trars. 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. 12 HOU:2690632.3 ARTICLE VII PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF CERTIFICATES Section 7.1: Sale of Certificates; Insurance. The sale of the Certificates to the syndicate of underwriters led by Coastal Securities, Inc. (the "Purchaser") at a price of $8,053,203.30 (representing the par value thereof plus a net original issue premium on the Certificates of $37,571.55, less an underwriting discount of $59,368.25) plus accrued interest to the date of delivery of the Certificates, is hereby approved in accordance with the terms of the Certificate Purchase Agreement presented to and hereby approved by the City Council, in substantially the form attached hereto as Exhibit D, which price and terms are hereby found and determined to be the most advantageous reasonably obtainable by the City. The Mayor, Mayor Pro -Tem and all other officials, agents and representatives of the City are hereby authorized to do any and all things necessary or desirable to provide for the issuance and delivery of the Certificates. The City hereby acknowledges that the sale of the Certificates pursuant to the Certificate Purchase Agreement is contingent upon the issuance of a policy of municipal bond insurance from the Bond Insurer insuring the timely payment of principal of and interest on the Certificates. The Mayor and other appropriate City officials are hereby authorized and directed to execute such documents and certificates and to do any and all things necessary or desirable to obtain such insurance and the printing on the Certificates of an appropriate legend or statement regarding such insurance is hereby approved. Section 7.2: Approval, Registration and Delivery. The Mayor is hereby authorized to have control and custody of the Certificates and all necessary records and proceedings pertaining thereto pending their delivery, and the Mayor and other officers and employees of the City are hereby authorized and directed to make such certifications and to execute such instruments as may be necessary to accomplish the delivery of the Certificates and to assure the investigation, examination and approval thereof by the Attorney General and the registration of the initial Certificates by the Comptroller. Upon registration of the Certificates, the Comptroller (or the Comptroller's certificates clerk or an assistant certificates clerk lawfully designated in writing to act for the Comptroller) shall manually sign the Comptroller's Registration Certificates prescribed herein to be attached or affixed to each Certificates initially delivered and the seal of the Comptroller shall be impressed or printed or lithographed thereon. Section 7.3: Offering Documents; Ratings. The City hereby approves the form and content of the Preliminary Official Statement, attached hereto as Exhibit C, relating to the Certificates, and hereby approves the preparation of the final Official Statement, in substantially the form of the Preliminary Official Statement, with such revisions as are necessary to reflect the terms of the sale of the Certificates, and ratifies and approves the distribution of such Preliminary Official Statement and approves the distribution of the final Official Statement and any addenda, supplement or amendment thereto, in the offer and sale of the Certificates and in the reoffering of the Certificates by the Purchaser, with such changes therein or additions thereto as the officials executing same may deem advisable, such determination to be conclusively evidenced by their execution thereof. The Mayor is hereby authorized and directed to execute, and the City 13 HOU:2690632.3 Secretary is hereby authorized and directed to attest, the final Official Statement. It is further hereby officially found, determined and declared that the statements and representations contained in the Official Notice of Sale, Preliminary Official Statement and final Official Statement are true and correct in all material respects, to the best knowledge and belief of the City Council, and that, as of the date thereof, the Preliminary Official Statement was an official statement of the City with respect to the Certificates that was deemed "final" by an authorized official of the City except for the omission of no more than the information permitted by subsection (b)(1) of Rule 15c2-12 of the Securities and Exchange Commission. Further, the City Council hereby ratifies, authorizes and approves the actions of the Mayor, the City's financial advisor and other consultants in seeking ratings on the Certificates from Standard & Poor's Ratings Services, Moody's Investors Service Inc. and Fitch Ratings and such actions are hereby ratified and confirmed. Section 7.4: Application of Proceeds of Certificates; Appropriation. Proceeds from the sale of the Certificates shall, promptly upon receipt by the City, be applied as follows: (1) Accrued interest shall be deposited into the 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 7.5: 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 interest on the Certificates to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Certificates for federal income tax purposes. Without limiting the generality of the foregoing, the City shall comply with each of the following covenants: (a) The City will use all of the proceeds of the Certificates to (i) provide funds to pay contractual obligations to be incurred for the purposes set forth in Section 3.1 hereof (the "Project"), which Project will be owned and operated by the City, and (ii) to pay the costs of issuing the Certificates. The City will not use any portion of the proceeds of the Certificates to pay the principal of or interest or redemption premium on, any other obligation of the City or a related person. 14 HOU:2690632.3 (b) The City will not directly or indirectly take any action, or omit to take any action, which action or omission would cause the Certificates to constitute "private activity bonds" within the meaning of Section 141(a) of the Code. (c) Principal of and interest on the Certificates will be paid solely from ad valorem taxes and Net Revenues collected by the City, investment earnings on such collections, and as available, proceeds of the Certificates. (d) Based upon all facts and estimates now known or reasonably expected to be in existence on the date the Certificates are delivered, the City reasonably expects that the proceeds of the Certificates will not be used in a manner that would cause the Certificates or any portion thereof to be an "arbitrage bond" within the meaning of Section 148 of the Code. (e) At all times while the Certificates are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Certificates in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Certificates and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Certificates. To the extent necessary to prevent the Certificates from constituting "arbitrage bonds," the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose investments allocable to the Certificates to be less than the yield that is materially higher than the yield on the Certificates. (f) The City will not take any action or knowingly omit to take any action which, if taken or omitted, would cause the Certificates to be treated as "federally guaranteed" obligations for purposes of Section 149(b) of the Code. (g) The City represents that not more than fifty percent (50%) of the proceeds of the Certificates will be invested in nonpurpose investments (as defined in Section 148(f)(6)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 149(g)(3)(A)(ii) of the Code, and the City reasonably expects that at least eighty-five percent (85%) of the spendable proceeds of the Certificates will be used to carry out the governmental purpose of the Certificates within the three-year period beginning on the date of issue of the Certificates. (h) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Certificates, if any, be rebated to the federal government. Specifically, the City will (i) maintain records regarding the receipt, investment, and expenditure of the gross proceeds of the Certificates as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after the day on which the last outstanding Certificate is discharged, (ii) account for all gross proceeds under a reasonable, consistently applied method of accounting, not employed as an artifice or device to avoid in whole or in part, the requirements of Section 148 of the Code, including any specified method of accounting required by applicable Regulations to be used for all or a portion of any gross proceeds, (iii) calculate, at such times as are required by applicable 15 HOU:2690632.3 Regulations, the amount of excess arbitrage profits, if any, earned from the investment of the gross proceeds of the Certificates and (iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it, interest thereon and any penalty. (i) The City will not directly or indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if such arrangement had been at arm's length and had the yield on the Certificates not been relevant to either party. 0) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of the Code with respect to the Certificates on such form and in such place as the Secretary may prescribe. (k) The City will not issue or use the Certificates as part of an "abusive arbitrage device" (as defined in Section 1.14810(a) of the Regulations). Without limiting the foregoing, the Certificates are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations by (i) enabling the City to exploit the difference between tax-exempt and taxable interest rates to gain a material financial advantage, or (ii) increasing the burden on the market for tax-exempt obligations. (1) Proper officers of the City charged with the responsibility for issuing the Certificates are hereby directed to make, execute and deliver certifications as to facts, estimates or circumstances in existence as of the date of issuance of the Certificates and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the date of issuance of the Certificates, the City -will take such actions as are necessary and appropriate to assure the continuous accuracy of the representations contained in such certificates. (m)The covenants and representations made or required by this Section are for the benefit of the Certificate holders and any subsequent Certificate holder, and may be relied upon by the Certificate holders and any subsequent Certificate holder and bond counsel to the City. In complying with the foregoing covenants, the City may rely upon an unqualified opinion issued to the City by nationally recognized bond counsel that any action by the City or reliance upon any interpretation of the Code or Regulations contained in such opinion will not cause interest on the Certificates to be includable in gross income of the owners thereof for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance, the City's representations and obligations under the covenants and provisions of this Section 7.5 shall survive the defeasance 16 HOU:2690632.3 and discharge of the Certificates for as long as such matters are relevant to the exclusion of interest on the Certificates from the gross income of the owners for federal income tax purposes. Section 7.6: Qualified Tax -Exempt Obligations. The City hereby designates the Certificates as "qualified tax-exempt obligations" as defined in Section 265(b)(3) of the Code. With respect to such designation, the City represents the following: (a) that during the calendar year 2007, the City (including all entities which issue obligations on behalf of the City), has not designated nor will designate obligations, which when aggregated with the Certificates will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued and (b) that the City has examined its financing needs for the calendar year 2007 and reasonably anticipates that the amount of bonds, leases, loans or other obligations, together with the Certificates and any other tax-exempt obligations heretofore issued by the City (plus those of all entities which issue obligations on behalf of the City) during the calendar year 2007, when the higher of the face amount or the issue price of each such tax-exempt obligation issued for the calendar year 2007 by the City is taken into account, will not exceed $10,000,000. Section 7.7: Related Matters. In order that the City shall satisfy in a timely manner all of its obligations under this Ordinance, the Mayor, the Mayor Pro -Tem, City Secretary and all other appropriate officers, agents, representatives and employees of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance and delivery of the Certificates, including, without limitation, executing and delivering on behalf of the City all certificates, consents, receipts, requests, notices, and other documents as may be reasonably necessary to satisfy the City's obligations under this Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of this Ordinance. ARTICLE VIII CONTINUING DISCLOSURE UNDERTAKING Section 8.1: Annual Reports. The City shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year, financial information and operating data with respect to the City of the general type included in the final Official Statement authorized by Section 7.3 of this Ordinance, being the financial information and operating data described in the Official Statement under the headings "OFFICIAL STATEMENT SUMMARY - Selected Financial Information" "CITY TAX DEBT (except for "Estimated Overlapping Debt")," "TAX DATA," "SELECTED FINANCIAL DATA," "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY- Current Investments," and in Appendix "B" to the Official Statement. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Appendix B to the Official Statement and (2) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If audited financial statements are not so provided, then the City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID, when and if audited financial statements become available. If the City changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. 17 HOU:2690632.3 The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. Section 8.2: Material Event Notices. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: (a) Principal and interest payment delinquencies; (b) Non-payment related defaults; (c) Unscheduled draws on debt service reserves reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers, or their failure to perform; (g) Adverse tax opinions or events affecting the tax-exempt status of the Certificates; (h) Modifications to rights of holders of the Certificates; (i) Certificate calls; 0) Defeasances; (k) Release, substitution, or sale of property securing repayment of the Certificates; and (1) Rating changes. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 8.1 of this Ordinance by the time required by such Section. Section 8.3: Limitations, Disclaimers and Amendments. The City shall be obligated to observe and perform the covenants specified in this Article for so long as, but only for so long as, the City remains an "obligated person" with respect to the Certificates within the meaning of the Rule, except that the City in any event will give the notice required by Section 8.2 of any Certificate calls and defeasance that cause the City to be no longer such an "obligated person." The provisions of this Article are for the sole benefit of the holders and beneficial owners of the Certificates, and nothing in this Article, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results, condition, or prospects or hereby undertake to update any information provided IVI HOU:2690632.3 in accordance with this Article or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Certificates at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the City in observing or performing its obligations under this Article shall constitute a breach of or default under the Ordinance for purposes of any other provision of this Ordinance. Nothing in this Article is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. The provisions of this Article may be amended by the City from time to time to adapt the changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, but only if (1) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell the Certificates in the primary offering of the Certificates in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (b) a person that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the holder and beneficial owners of the Certificates. If the City so amends the provisions of this Article, it shall include with any amended financial information or operating data next provided in accordance with Section 8.1 an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided. The City may also amend or repeal the provisions of this Article if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City also may amend the provisions of this Article in its discretion in any other manner or circumstance, but in either case only if and to the extent that the provisions of this sentence would not have prevented an underwriter from lawfully purchasing or selling Certificates in the primary offering of the Certificates, giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. Section 8.4: Definitions. As used in this Article, the following terms have the meanings ascribed to such terms below: 19 HOU:2690632.3 J "MSRB" means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. ARTICLE IX MISCELLANEOUS Section 9.1: Defeasance. The City may defease the provisions of this Ordinance and discharge its obligations to the Registered Owners of any or all of the Certificates to pay the principal of and interest thereon in any manner now or hereafter permitted by law, including by depositing with the Paying Agent/Registrar, a trust company or commercial bank other than the Paying Agent/Registrar, or with the Comptroller of Public Accounts of the State of Texas either: (a) cash in an amount equal to the principal amount of such Certificates and premium, if any, and interest thereon to the date of maturity or redemption; or (b) pursuant to an escrow or trust agreement, cash and/or (i) direct noncallable obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent; or (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, which, in the case of (i), (ii) or (iii), may be in book -entry form, and the principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, shall be sufficient to provide for the timely payment of the principal of and interest thereon to the date of maturity or earlier redemption; provided, however, that if any of the Certificates are to be redeemed prior to their respective dates of maturity, provision shall have been made for giving notice of redemption as provided in this Ordinance. Upon such deposit, such Certificates shall no longer be regarded to be Outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the City. 20 HOU:2690632.3 J Section 9.2: Ordinance a Contract - Amendments. This Ordinance shall constitute a contract with the Registered Owners from time to time, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Registered Owners, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Registered Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the consent of Registered Owners who own in the aggregate 51% of the principal amount of the Certificates then Outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Registered Owners of Outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Registered Owners for consent to any such amendment, addition, or rescission. Section 9.3: Legal Holidays. In any case where the date interest accrues and becomes payable on the Certificates or principal of the Certificates matures or the date fixed for redemption of any Certificates or a Record Date shall be in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date shall not occur on such date, but payment may be made or the Record Date shall occur on the next succeeding day which is not in the City a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to 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 9.4: 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 Bond Counsel to the City, may be necessary or convenient to carry out or assist in carrying out the purposes of this Ordinance, the Preliminary Official Statement, the final Official Statement, 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 9.5: 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. 21 HOU:2690632.3 Section 9.6: Further Proceedings. The Mayor, Mayor Pro -Tem, City Secretary and other appropriate officials of the City are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Ordinance. Section 9.7: 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 9.8: Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date, hour, place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all times to the general public at City Hall for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 9.9: Repealer. All orders, resolutions and ordinances, or parts thereof, inconsistent herewith are hereby repealed to the extent of such inconsistency. Section 9.10: Emergency. It is hereby officially found and determined that this Ordinance relates to an immediate public emergency affecting life, health, property and the public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Certificates are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its introduction. Section 9.11: 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:2690632.3 DULY PASSED AND APPROVED this the �/ day of May, 2J007. Alton E. Porter, Mayor ATTEST: Martha Gillett, City Secretary APPROVED AS TO FORM AND CONTENT: City Attorney S-1 HOU:2690632.2 NUMBER IR - REGISTERED 2INTEREST RATE REGISTERED OWNER: PRINCIPAL AMOUNT: EXHIBIT A FORM OF CERTIFICATE UNITED STATES OF AMERICA STATE OF TEXAS CITY OF LA PORTE, TEXAS CERTIFICATE OF OBLIGATION SERIES 2007 DATED DATE: June 1, 2007 2MATURITY DATE March 15, DENOMINATION REGISTERED 2CUSIP: DOLLARS 3THE CITY OF LA PORTE, TEXAS, a municipal corporation of the State of Texas (the "City"), for value received, hereby promises to pay to the Registered Owner identified above or its registered assigns, on the Maturity Date specified above (or on earlier redemption as herein provided), upon presentation and surrender of this Certificate at the principal corporate trust office of The Bank of New York Trust Company, National Association, or its successor (the "Paying Agent/Registrar"), the principal amount identified above (or so much thereof as shall not have been paid or deemed to have been paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360 -day year composed 'of twelve 30 -day months, from the later of the Dated Date identified -above or the most recent interest payment 1 Initial Certificate shall be numbered T-1. 2 Omitted from initial Certificate. 3 The first sentence of the initial Certificate shall read as follows: THE CITY OF LA PORTE, 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 15 of each of the years and in the principal amounts set forth in the following schedule: [Insert information regarding years of maturity, principal amounts and interest rates from Section 3.3 of the Ordinance.] (or on earlier redemption as herein provided), upon presentation and surrender of this Certificate at the principal corporate trust office of The Bank of New York Trust Company, National Association, or its successor (the "Paying Agent/Registrar"), the principal amounts identified above (or so much thereof as shall not have been paid or deemed to have bee paid upon prior redemption) payable in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due to the United States of America, and to pay interest thereon at the rate shown above, calculated on a basis of a 360 -day year composed of twelve 30 -day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. A-1 HOU:2690632.3 date to which interest has been paid or duly provided for. Interest on this Certificate is payable on March 15, 2008, and each March 15 and September 15 thereafter until maturity or earlier redemption of this Certificate, by check sent by United States mail, first class, postage prepaid, by the Paying Agent/Registrar to the Registered Owner of record as of the close of business on the fifteenth day of the calendar month immediately preceding the applicable interest payment date, as shown on the registration books kept by the Paying Agent/Registrar. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Certificate at the principal corporate trust office of the Paying Agent/Registrar. THIS CERTIFICATE IS ONE OF A DULY AUTHORIZED SERIES OF CERTIFICATES (the "Certificates") in the aggregate principal amount of $8,075,000 issued pursuant to an ordinance adopted by the City Council of the City on May 21, 2007 (the "Ordinance") for the purpose of providing all or part of the funds to pay for (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course, including replacement of cart paths, tunnel and restrooms, (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure to be located South of Fairmont Parkway and East of Willow Spring Bayou, and (iv) professional services rendered in connection with the above listed projects. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. 4REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS CERTIFICATE SET FORTH ON THE REVERSE HEREOF, WHICH PROVISIONS SHALL HAVE THE SAME FORCE AND EFFECT AS IF SET FORTH AT THIS PLACE. 5THIS 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. 4 This paragraph shall be omitted from the initial Certificate and any other Certificate for which text does not appear on the back of a printed certificate. 5 In the initial Certificate, this paragraph shall read: "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:2690632.3 IN WITNESS WHEREOF, the City has caused its corporate seal toy 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. (SEAL) CITY OF LA PORTE, TEXAS Mayor COUNTERSIGNED: City Secretary [REVERSE OF CERTIFICATE] THE CITY RESERVES THE RIGHT, at its option, to redeem, prior to their maturity, Certificates maturing on and after March 15, 2017, in whole or in part, on March 15, 2016, or any date thereafter, at par plus accrued interest to the date fixed for redemption. THE CERTIFICATES MATURING ON March 15 in the years 2026 and 2029 (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: Term Certificates Maturing March 15, 2026 Term Certificates Maturing March 15, 2029 Mandatory Redemption Dates Principal Amounts 3/15/2025 $495,000 3/15/2026 (Maturity) 515,000 Mandatory Redemption Dates Principal Amounts 3/15/2027 $540,000 3/15/2028 560,000 3/15/2029 (Maturity) 585,000 AT LEAST 45 DAYS PRIOR TO any mandatory redemption date, the Registrar will select by lot or other customary method of random selection the specific Term Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Term A-3 HOU:2690632.3 Certificates required to be redeemed on any redemption date pursuant to, the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. THE 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. A-4 HOU:2690632.3 THE PAYING AGENT/REGISTRAR is not required to accept for tr4nsfer or exchange any Certificate called for redemption, in whole or in part, during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that such limitation shall not apply to the transfer or exchange by the Registered Owner of an unredeemed portion of a Certificate called for redemption in part. THE CITY OR PAYING AGENT/REGISTRAR may require the Registered Owner of any Certificate to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of a Certificate. Any fee or charge of the Paying Agent/Registrar for a transfer or exchange shall be paid by the City. THE REGISTERED OWNER of this Certificate by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. IT IS HEREBY DECLARED AND REPRESENTED that this Certificate has been duly and validly issued and delivered; that all acts, conditions and things required or proper to be performed, exist and to be done precedent to or in the issuance and delivery of this Certificate have been performed, exist and have been done in accordance with law; that the Certificates do not exceed any constitutional or statutory limitation; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and such principal matures, have been levied and ordered to be levied, within the limits prescribed by law, against all taxable property in the City and have been irrevocably pledged for such payment. IT IS FURTHER DECLARED AND REPRESENTED that the revenues to be derived from the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), in an amount not to exceed $1,000, 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. A-5 HOU:2690632.3 FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE The following form of Comptroller's Registration Certificate shall be attached or affixed to each of the Certificates initially delivered: THE STATE OF TEXAS REGISTER NO. OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS I hereby certify that this certificate has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this certificate has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this Comptroller of Public Accounts of the State of Texas [SEAL] e HOU:2690632.3 I 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. Authorized Signature Date of Authentication: FORM OF STATEMENT OF INSURANCE STATEMENT OF INSURANCE MBIA Insurance Corporation (the "Insurer") has issued a policy containing the following provisions, such policy being on file at The Bank of New York Trust,, Company, National Association, Dallas, Texas. The Insurer, in consideration of the payment of the premium and subject to the terms of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the City to The Bank of New York Trust Company, National Association, Dallas, Texas or its successor (the "Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within A-7 HOU:2690632.3 the meaning of any applicable bankruptcy law. The amounts referred to in cl4uses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "I'nsured Amounts." "Obligations" shall mean: $8,075,000 CITY OF LA PORTE, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007 Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners or the Paying Agent payment of the Insured Amounts due on such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the City, or any designee of the City for such purpose. The term owner shall not include the City or any party whose agreement with the City constitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its -offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding. This policy is non -cancellable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. DISCLOSURE OF GUARANTY FUND NONPARTICIPATION: In the event the Insurer is unable to fulfill its contractual obligation under this policy or contract or application or certificate or evidence of coverage, the policyholder or certificateholder is not protected by an insurance guaranty fund or other solvency protection arrangement. MR HOU2690632.3 MBIA INSURANCE CORPORATION 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 certificate and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer such certificate 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:2690632.3 Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this certificate in every particular, without any alteration, enlargement or change whatsoever. EXHIBIT B PAYING AGENT/REGISTRAR AGREEMENT In HOU:2690632.3 EXHIBIT C PRELIMINARY OFFICIAL STATEMENT C-1 HOU:2690632.3 EXHIBIT D CERTIFICATE PURCHASE AGREEMENT D-1 HOU:2690632.3 J PRELIMINARY OFFICIAL STATEMENT DATED MAY 7, 2007 o This Preliminary Official Statement is subject to completion and amendment. Upon sale of the Certificates, the final Official Statement will be completed and to delivered to the Underwriters (defined herein). Prospective purchasers must read the entire Preliminary Official Statement to make an informed investment decision. In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the G matters described under "TAX EXEMPTION" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX EXEMPTION" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. 5, U The Certificates have been designated as "Qualified Tax -Exempt Obligations "for financial institutions. NEW ISSUES: BOOK -ENTRY ONLY o o. 7 0 � Dated: June 1, 2007 o � RATINGS: Moody's Investors Service Inc ...................................................... Standard & Poor's Ratings Services.................... FitchInvestors Service.................................................................. $8,075,000 CITY OF LA PORTE, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007 Due: March 15, as shown on inside cover o Principal of and interest on the $8,075,000 City of La Porte, Texas, Certificates of Obligation, Series 2007 (the "Certificates") are payable by The Bank of New York Trust Company, National Association, Dallas, Texas (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 r s N ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be C4 I 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" o herein. Interest on the Certificates will accrue from June 1, 2007, and is payable on March 15 and September 15 of each year, commencing March 15, v ° 2008, until maturity or earlier redemption, to the registered owners (initially Cede & Co.) appearing on the registration books of the Paying Agent/Registrar on the last day of the month preceding each interest payment date (the "Record Date"). See "THE CERTIFICATES — Description of the I Certificates." o Proceeds from the sale of the Certificates will be used for the (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course and (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure within the City. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the 2 'o Certificates. See "THE CERTIFICATES - Use of Proceeds." The scheduled payment of principal of and interest on the Certificates when due will be guaranteed under an insurance policy to be issued concurrently L with the delivery of the Certificates by See "MUNICIPAL BOND INSURANCE" herein for information relating to the o Bond Insurer. MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND INITIAL REOFFERING YIELDS (Due March 15) s CUSIP s Maturity Initial CUSIP 2010 3 2011 y 2012 L 2013 L o 2014 = .CZ 2015 % % 2016 r . V 2017 (c) 260,000 2018 (c) 2021 (c) 2019 (c) � c C L 270,000 MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND INITIAL REOFFERING YIELDS ° = (a) The initial yields will be established by and are the sole responsibility of the Underwriters, and may subsequently be changed. — : (b) CUSIP numbers have been assigned to the Certificates by Standard and Poor's CUSIP Service Bureau, A Division of the McGraw-Hill Companies, Inc., and _ are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor nor the Underwriters arc •= = responsible for the selection or correctness of the CUSIP numbers set forth herein. uE (c) The Certificates maturing on March 15, 2017 and thereafter are subject to redemption, at the option of the City, at the par value thereof plus accrued interest •c on March 15, 2016, or any date thereafter. See "THE CERTIFICATES - Redemption Provisions." ^ J 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 ' C Andrews Kurth LLP, Houston, Texas, Bond Counsel for the Ci � ty, as to the validity of the issuance of the Certificates under the Constitution and laws of the State of Texas. Certain legal matters will be passed upon for the Underwriters named below (the "Underwriters") by their counsel, Vinson & Elkins a LLP., Houston, Texas. See "LEGAL MATTERS." Delivery of the Certificates through The Depository Trust Company is expected to be on or about r .= June 19, 2007. J Coastal Securities Inc. First Southwest Company (Due March 15) Initial CUSIP Initial CUSIP Principal Interest Reoffering Nos. Principal Interest Reoffering Nos. Amount Rate Yield (a) (b) Maturity Amount Rate Yield (a) (b) i 250,000 % % 2020 (c) $400,000 % % 260,000 2021 (c) 420,000 270,000 2022 (c) 440,000 285,000 2023 (c) 460,000 300,000 2024 (c) 485,000 315,000 2025 (c) 505,000 330,000 2026 (c) 530,000 345,000 2027 (c) 555,000 360,000 2028 (c) 580,000 380,000 2029 (c) 605,000 ° = (a) The initial yields will be established by and are the sole responsibility of the Underwriters, and may subsequently be changed. — : (b) CUSIP numbers have been assigned to the Certificates by Standard and Poor's CUSIP Service Bureau, A Division of the McGraw-Hill Companies, Inc., and _ are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor nor the Underwriters arc •= = responsible for the selection or correctness of the CUSIP numbers set forth herein. uE (c) The Certificates maturing on March 15, 2017 and thereafter are subject to redemption, at the option of the City, at the par value thereof plus accrued interest •c on March 15, 2016, or any date thereafter. See "THE CERTIFICATES - Redemption Provisions." ^ J 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 ' C Andrews Kurth LLP, Houston, Texas, Bond Counsel for the Ci � ty, as to the validity of the issuance of the Certificates under the Constitution and laws of the State of Texas. Certain legal matters will be passed upon for the Underwriters named below (the "Underwriters") by their counsel, Vinson & Elkins a LLP., Houston, Texas. See "LEGAL MATTERS." Delivery of the Certificates through The Depository Trust Company is expected to be on or about r .= June 19, 2007. J Coastal Securities Inc. First Southwest Company CITY OF LA PORTE, TEXAS ELECTED OFFICIALS CITY COUNCIL Council Member Vacant 2007 Council Member kap %.vuucu ivrcnioer ror i o years pnor [o neeommg mayor. CERTAIN APPOINTED OFFICIALS Name Position John Joems Michael Dolby Martha Gillett Shelley Wolny Interim City Manager Interim Finance Director City Secretary Budget/Investment Officer 11 Length of Service to City 26 years 7 years 9 years 8 years Length Term Expires Name of Service (May) Occupation Alton Porter (a) 2 Years 2009 President, Special Gas Concepts Mayor (division of BMS, Inc.) Barry Beasley 4 Years 2008 Director, SBC Council Member Mike Clausen 2 Years 2008 Independent Contractor, La Porte ISD Council Member Michael Mosteit 4 Years 2008 Electrical Worker Council Member Chuck Engelken 9 Years 2009 Route Design Specialist, Reliant Energy Council Member HL&P/Entex Howard Ebow 10 Years 2009 Technician, Linde Gas Inc. Council Member Tommy Moser 2 Years 2007 Electrical Company Owner Mayor Pro Tem Louis Rigby 2 Years 2007 Human Resources Executive Council Member Vacant 2007 Council Member kap %.vuucu ivrcnioer ror i o years pnor [o neeommg mayor. CERTAIN APPOINTED OFFICIALS Name Position John Joems Michael Dolby Martha Gillett Shelley Wolny Interim City Manager Interim Finance Director City Secretary Budget/Investment Officer 11 Length of Service to City 26 years 7 years 9 years 8 years CONSULTANTS AND ADVISORS BondCounsel........................................................................................................................ IndependentAuditor.................................................................................................. FinancialAdvisor.................................................................................................................. For Additional Information Please Contact: Mr. John Joems Interim City Manager City of LaPorte, Texas 604 West Fairmont Parkway LaPorte, Texas 77571 (281) 471-5020 (Phone) (281) 842-1259 (Fax) ii Andrews Kurth LLP Houston, Texas Null-Lairson, CPA, PC Houston, Texas RBC Capital Markets Houston, Texas Mr. Ryan O'Hara Director RBC Capital Markets 1001 Fannin Street, Suite 1200 Houston, Texas 77002 (713) 853-0830 (Phone) (713) 651-3347 (Fax) USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized by the City to give any information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the condition of the City or other matters described herein since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. NEITHER THE CITY, FINANCIAL ADVISOR, THE UNDERWRITERS NOR BOND COUNSEL MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS PRELIMINARY OFFICIAL STATEMENT REGARDING DTC OR ITS BOOK -ENTRY -ONLY SYSTEM. THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND ISNOT 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. IN TABLE OF CONTENTS Page USE OF INFORMATION IN OFFICIAL STATEMENT...................................................... iii INTRODUCTORY STATEMENT ............................. 1 SALE AND DISTRIBUTION OF THE CERTIFICATES.................................................. 1 Prices and Marketability ......................................... 1 Securities Laws ....................................................... 1 Municipal Bond Insurance ..................................... 1 Municipal Bond Ratings ........................................ 1 PRELIMINARY OFFICIAL STATEMENT SUMMARY........................................................... 2 INTRODUCTION......................................................... 4 THE CERTIFICATES ................................................. 4 Description of the Certificates ............................... 4 Optional Redemption ............................................. 4 Mandatory Redemption .......................................... 5 Selection of Certificates for Redemption ............... 5 Notice of Redemption ............................................ 5 Book -Entry -Only System ....................................... 6 Use of Certain Terms in Other Sections of this Official Statement .......................................... 7 Paying Agent/Registrar.......................................... 7 Source of Payment for the Certificates .................. 8 Authority for Issuance for the Certificates ............. 8 Use of Proceeds...................................................... 8 Legal Investments in Texas .................................... 8 Remedies in the Event of Default .......................... 9 INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY...................................................................... 9 Legal Investments................................................... 9 Investment Policies ............................................... 10 Current Investments ............................................. 11 Additional Provisions ........................................... 11 CITY TAX DEBT.......................................................11 Tax Supported Debt Statement ............................ 11 Bonded Indebtedness Payable from Ad Valorem Taxes............................................................ 11 Pro -Forma Tax Supported Debt Service Schedule 12 Estimated Overlapping Debt ................................ 13 DebtRatios........................................................... 13 Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas .............. 13 TAXDATA.................................................................. 13 Property Tax Code and County -Wide Appraisal Page District......................................................... 13 Tax Rate Limitations ............................................ 14 Property Subject to Taxation by the City ............. 14 Notice, Hearing and Repeal Procedures .............. 15 Levy and Collection of Taxes .............................. 15 Collection of Delinquent Taxes ........................... 15 Historical Analysis of Tax Collection .................. 16 Analysis of Tax Base (a) ...................................... 17 Municipal Sales Tax History ................................ 18 Industrial District Contracts ................................. 18 SELECTED FINANCIAL DATA ............................. 21 Historical Operations of the City ......................... 21 PensionFund ........................................................ 22 Financial Statements ............................................. 22 ADMINISTRATION OF THE CITY ....................... 22 Mayor and City Council ....................................... 22 LEGAL MATTERS .................................................... 22 Legal Opinions ..................................................... 22 No -Litigation Certificate ...................................... 23 No Material Adverse Change ............................... 23 TAX EXEMPTION..................................................... 23 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES ................................................ 24 Discount Certificates ............................................ 24 Premium Certificates ............................................ 25 QUALIFIED TAX-EXEMPT OBLIGATIONS...... 25 CONTINUING DISCLOSURE OF INFORMATION ................................................ 26 Annual Reports ..................................................... 26 Material Event Notices ......................................... 26 Availability of Information From NRMSIRs and SID............................................................... 26 Limitations and Amendments .............................. 27 Compliance With Prior Undertakings .................. 27 BOND INSURANCE .................................................. 28 UNDERWRITING...................................................... 28 FINANCIAL ADVISOR ............................................ 28 GENERAL CONSIDERATIONS ............................. 28 Sources and Compilation of Information ............. 28 Certification as to Official Statement ................... 28 Updating of Official Statement ............................ 29 CONCLUDING STATEMENT ................................ 29 APPENDIX A — Economic and Demographic Characteristics APPENDIX B — Excerpts from Comprehensive Annual Financial Report APPENDIX C — Form of Bond Counsel Opinion ry INTRODUCTORY STATEMENT Information contained in this Official Statement, including Appendix B, has been obtained from the City of La Porte, Texas (the "City") in connection with the offering by the City of its $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates") identified on the cover page hereof. All financial and other information presented in this Preliminary 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 Prices and Marketability The delivery of the Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Underwriters on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is a bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. Securities Laws No registration statement relating to the Certificates has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Certificates have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been registered or qualified under the securities acts of any jurisdiction. The City assumes no responsibility for registration or qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such jurisdictions. For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission ("Rule 15c2-12"), this document, as may be supplemented or corrected by the City from time to time, may be treated as an Official Statement with respect to the Certificates described herein "deemed final" by the City as of the date hereof (or of any such supplement or correction) except for the omission of certain information referred to in the succeeding sentence. This document, when further supplemented by adding information specifying the interest rates and certain other information relating to the Certificates, shall constitute a "Final Official Statement" of the City with respect to the Certificates, as such term is defined in Rule 15c2-12. Municipal Bond Insurance The scheduled payment of principal of and interest on the Certificates when due will be insurance policy to be issued concurrently with the delivery of the Certificates by "MUNICIPAL BOND INSURANCE" herein for information relating to the Bond Insurer. Municipal Bond Ratings guaranteed under an See In connection with the sale of the Certificates, the City has made application to Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch Ratings ("Fitch") for ratings and the ratings of "_," "_" and "_", respectively, have been assigned to the Certificates based upon the issuance of a bond insurance policy by . In addition, Moody's, S&P and Fitch have assigned underlying ratings of "_," " " and "_" respectively on the Certificates. An explanation of the significance of such ratings may be obtained from Moody's, S&P and Fitch. The ratings reflect only the views of Moody's, S&P and Fitch, respectively, and the City makes no representation as to the appropriateness of such ratings. There is no assurance that such ratings will continue for any period of time or that they will not be revised downward or withdrawn entirely by Moody's, S&P and/or Fitch, if, in the judgment of Moody's, S&P and Fitch, circumstances so warrant. Any such downward revision or withdrawal of any of the ratings may have an adverse effect on the market price of the Certificates. PRELIMINARY 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 Preliminary Official Statement. The reader should refer particularly to sections that are indicated for more complete information. The Issuer ...................................................... The City of La Porte is a home rule city and municipal corporation of the State of Texas, located in Harris County, Texas. The City covers approximately 19 square miles. See "INTRODUCTION." The Certificates ............................................. $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates"), are dated June 1, 2007 and mature March 15, 2008 through and including March 15, 2029. Interest on the Certificates accrues from June 1, 2007, and is payable initially on March 15, 2008, and on each September 15 and March 15 thereafter until the earlier of maturity or prior redemption. See "THE CERTIFICATES — Description of the Certificates." Other Characteristics ..................................... The Certificates are issued in fully registered form in integral multiples of $5,000. The Certificates maturing on and after March 15, 2017, are subject to optional redemption at the par value thereof plus accrued interest beginning on March 15, 2016 or any date thereafter. See "THE CERTIFICATES - Redemption Provisions." Paying Agent/Registrar.................................. The initial paying agent/registrar is The Bank of New York Trust Company, National Association, Dallas, Texas. The City intends to use the book -entry -only system of The Depository Trust Company ("DTC"), but reserves the right on its behalf or on behalf of the DTC to discontinue such system. (See "THE CERTIFICATES - Book -Entry - Only System.") Source of Payment ......................................... Principal of and interest on the Certificates are payable 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 also secured by a limited subordinate pledge (not to exceed $1,000) of the net revenues of the City's water and sewer system. See "THE CERTIFICATES - Source of Payment for the Certificates." Use of Proceeds ............................................. Proceeds from the sale of the Certificates will be used for the (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course and (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure within the City. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds." Qualified Tax Exempt Certificates ................ The City will designate the Certificates as "Qualified Tax -Exempt Obligations" for financial institutions (see "QUALIFIED TAX- EXEMPT OBLIGATIONS"). Ratings...........................................................Moody's Investors Service, Inc ................................................... Standard & Poor's Ratings Services ........................................... " FitchRatings............................................................................... Population...................................................... 34,825 (2007 Estimated Population) Payment Record ........................................... The City has never defaulted on the timely payment of principal of and interest on its obligations. - Selected Financial Information - (Unaudited) 2006 Certified Assessed Valuation (100% of estimated market value) ................................ Direct Debt: Outstanding Debt (as of April 1, 2007).................................................................. TheCertificates...................................................................................................... TotalDirect Debt............................................................................................. EstimatedOverlapping Debt................................................................................................. Direct and Estimated Overlapping Debt............................................................................... Debt Service Fund Balance (as of April 1, 2007)................................................................. % of 2006 Per Assessed Capita Valuation (34,825) Debt Ratios: Direct Tax Supported Debt ................ 2.48% $1,245 Direct Tax Supported and Estimated Overlapping Debt ...................... 6.01% $3,017 2006 Tax Rate (per $100 of Assessed Valuation) Maintenanceand Operation................................................................................... DebtService......................................................................................................... Total................................................................................................................. Estimated Annual Debt Service Requirements: Tax -Supported Average Annual Requirement (Fiscal Years 2008-2025) ............. Tax -Supported Maximum Annual Requirement (2010) ........................................ Tax Collections: Arithmetic Average, Tax Years (2000-2006) - Current Years ............................... - Current and Prior Years ............... $1,748,687,118 (a) $35,272,500 (b) 8,075,000 $43,347,500 $ 61,720,345 $105,067,845 1.911.280 $ 0.6120 0.0980 $ 0.7100 $2,388,818 $2,642,595 97.54% 99.16% (a) Certified by the Harris County Appraisal District (the "Appraisal District") and net of exemptions. Such value is subject to change as additions, corrections and deletions are made to the tax roll. See "TAX DATA." (b) Includes revenue -supported debt. 3 INTRODUCTION This Official Statement and the Appendices hereto provide certain information with respect to the issuance by the City of La Porte, Texas (the "City") of its $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates"). The Certificates are issued pursuant to the Texas Constitution, the general laws of the State of Texas, including particularly Chapter 271, Subchapter C, Texas Local Government Code, as amended, and an ordinance to be adopted by the City Council on May 14, 2007 (the "Ordinance"). 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 of the Certificates The Certificates are dated June 1, 2007, and bear interest from such date at the stated interest rates indicated under "MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND YIELDS" on the inside cover page hereof, which interest is payable commencing March 15, 2008, and each September 15 and March 15 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 The Bank of New York Trust Company, National Association, Dallas, Texas (the "Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede & Co., the nominee of The Depository Trust Company pursuant to the Book - Entry -Only System described below. In the event the Book -Entry -Only -System is discontinued, the Certificates may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer, but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date (the "Record Date") for the interest payable on any interest payment date is the last business day of the month next preceding such interest payment date. The Ordinance requires 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. Optional Redemption The Certificates maturing on or after March 15, 2017 are subject to optional redemption, at the option of the City, prior to maturity, in whole or, from time to time, in part, on March 15, 2016, or on any date thereafter, at par plus accrued interest to the date fixed for redemption. 4 Mandatory Redemption The Certificates maturing on March 15, 20_ (the "Term Certificates") are being issued as term certificates and are subject to mandatory sinking fund redemption prior to their scheduled maturity, and will be redeemed by the City at a redemption price equal to the principal amount thereof, plus interest accrued thereon to the date of redemption, on the dates and in the amounts shown in the following schedule: Term Certificates Due March 15, 20 Mandatory Sinking Fund Mandatory Sinking Fund Redemption Date (March 15) Redemption Amount Selection of Certificates for Redemption If less than all of the Certificates are optionally redeemed at any time, the City shall determine the maturity or maturities and the amounts thereof to be redeemed, in integral multiples of $5,000 of principal amount, and if less than all of the Certificates of a particular maturity are to be optionally redeemed, the Paying Agent/Registrar shall select by lot or other customary method of random selection the Certificates within such maturity to be redeemed. The Paying Agent/Registrar will select by lot or other customary method of random selection the specific Term Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Term Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. 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. The registered owner of any Certificate, all or a portion of which has been called for redemption, will be required to present same to the Paying Agent/Registrar for payment of the redemption price on the portion of the Certificate so called for redemption. Upon presentation and 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 Redemption Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH CERTIFCATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. Book -Entry -Only System This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC'), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book -Entry -Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), or redemption or 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 (referred to in this section as the "Securities"). The Securities will be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered Security certificate will be issued for each maturity of the Securities, in the aggregate principal amount thereof, and will be deposited with DTC. DTC, the world's largest depository, is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non -U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at ,%AN,w.dtcc.com and www.dtc.org. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security (`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 Securities 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 Securities, except in the event that use of the book -entry system for the Securities is discontinued. To facilitate subsequent transfers, all Securities 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 Securities with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities 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 Participantsto 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 Securities may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Securities 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 such other DTC nominee) will consent or vote with respect to the Securities unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with 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 (nor its nominee), the Paying Agent/Registrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or 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. DTC may discontinue providing its services as securities depository with respect to the Securities at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Security certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book -entry -only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. 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 no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book -Entry -Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book -Entry -Only System, and, (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Paying Agent/Registrar The initial Paying Agent/Registrar for the Certificates is The Bank of New York Trust Company, N.A., Dallas, Texas. In the Ordinances, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Certificates are duly paid and any successor Paying Agent/Registrar shall be a bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Certificates. 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. Source of Payment for the Certificates The Certificates are payable as to principal and interest from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding, it will levy, assess and undertake to collect such tax. The Certificates are also secured by a limited subordinate pledge (not to exceed $1,000) of the net revenues of the City's water and sewer system. See "TAX DATA - Tax Rate Limitations" and "THE CERTIFICATES — Remedies in the Event of Default." Authority for Issuance for the Certificates The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapter 271, Subchapter C, Texas Local Government Code, as amended, and the Certificate Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Certificate Ordinance is hereby made. Use of Proceeds Proceeds from the sale of the Certificates will be used for the (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course and (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure within the City. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds." Future Debt The following table illustrates the amount of permanent improvement tax bonds authorized by purpose and type and the remaining authorized but unissued tax bonds. Also, the City may issue up to $3,000,000 in Bonds for various projects in 2008. Date of Original Previously Remaining Authorization Purpose Authorization Issued Authorization 5/15/1971 Fire Station $100,000 $0 $100,000 (a) 6/15/1985 Sanitary Land Fill 4,000,000 2,500,000 1,500,000 (a) 6/15/1985 Street Improvements 2,500,000 2,000,000 500,000 (a) 2/2/2002 Police Station 7,700,000 7,700,000 0 2/2/2002 Baseball Complex & Park Improvements 3,200,000 1,200,000 2,000,000 Total $17,500,000 $13,400,000 $4,100,000 (a) The City does not intend to issue the remainder of this authorization Legal Investments in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201, Texas Government Code, as amended, the Certificates, whether rated or unrated, are (a) legal investments for insurance companies, fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, and such political subdivisions may impose a requirement consistent with such act that the Certificates have a rating of not less than "A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than "A" or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws, rules, regulations or investment criteria that might affect the 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 provide for the appointment of a trustee to represent the interests of the Certificate holders upon any failure of the City to perform in accordance with the terms of the Ordinance or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinance does not establish specific events of default with respect to the Certificates and, under State law, there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates; however, such judgment could not be satisfied by execution against any property of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect ad valorem taxes sufficient to pay principal of and interest on the Certificates as it becomes due or perform other material terms and covenants contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Certificates are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Certificate holders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Mayor and Council of the City. Both state law and the City's investment policies are subject to change. Legal Investments Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) (a) certificates of deposit and share certificates issued by a depository institution that has its main office or a branch office in the State of Texas, that are (i) guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund or their respective successors, or are secured as to principal by obligations described in clauses (1) through (6) above or in any other manner and amount provided by law for City deposits, and (b) certificates of deposit or share certificates issued by a depository institution that has its main office or a branch office in the State of Texas that participate in the Certificate of Deposit Account Registry Service; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas; (9) 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 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. Bond proceeds may be additionally invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. A political subdivision such as the City may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State 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 AAA -m or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in the market index. Investment Policies Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar -weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made "with judgment and care, under prevailing circumstances, that person or prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly, the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City; (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value for each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it related to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the Mayor and Council of the City. 10 The City's policies require investments in accordance with applicable state law. The City' Statement of Investment does not exclude any investments allowable under State law described above under "Legal Investments." The City generally invests in obligations of the United States or its Agencies and instrumentalities. Current Investments State law and City ordinances authorize the City to invest in direct obligations of the U.S. Treasury with maturity dates of three years or less, obligations of agencies of the U.S. Government with maturity dates of two years or less, and certain investment pools. The City's investment balances on April 1, 2007 were as follows: Book Market Principal Value Investment Pools $43,106,640 $43,106,640 Agency Securities 13,988,496 13,978,445 Total Portfolio $57,095,136 57.085.085 Additional Provisions Under Texas law, the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers with person business relationships or relatives with funis seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Mayor and Council; (3) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform and annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict the investment in mutual funds in the aggregate to no more than 80% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in non -money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to not more than 15% of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to confirm to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. Bonded Indebtedness Payable from Ad Valorem Taxes 2006 Assessed Valuation (100% of estimated market value) ................................. $1,748,687,118 (a) Direct Debt: Outstanding Debt (as of April 1, 2007) ....................................................... $35,272,500 (b) The Certificates........................................................................................... 8,075,000 Total Direct Debt......................................................................................... &4aa47.500 Debt Service Fund Balance (as of April 1, 2007) ................................................... 1.911.280 (a) Certified by the Harris County Appraisal District (the "Appraisal District") and net of exemptions. Such value is subject to change as additions, connections, and deletions are made to the tax roll. See "TAX DATA." (b) Includes revenue -supported debt. 11 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 estimated principal and estimated interest on the Certificates. Less: Revenue The Certificates Total Year End Outstanding Supported Tax -Supported Principal Tax -Supported 9/30 Debt Service Debt Service Debt Service (Due March 15) Interest (a) Total Debt Service 2007 $ 3,154,058 $ 1,190,048 $ 1,964,010 $ - $ - $ - $ 1,964,010 2008 3,256,688 1,196,934 2,059,754 - 496,093 496,093 2,555,848 2009 3,207,389 1,180,875 2,026,515 - 384,900 384,900 2,411,415 2010 3,179,403 1,166,083 2,013,320 250,000 379,275 629,275 2,642,595 2011 3,161,171 1,154,443 2,006,729 260,000 367,800 627,800 2,634,529 2012 3,120,333 1,140,345 1,979,988 270,000 355,200 625,200 2,605,188 2013 3,087,768 1,129,622 1,958,146 285,000 341,325 626,325 2,584,471 2014 3,042,311 1,113,986 1,928,325 300,000 326,700 626,700 2,555,025 2015 3,013,434 1,105,770 1,907,665 315,000 311,325 626,325 2,533,990 2016 2,977,096 1,095,504 1,881,592 330,000 295,200 625,200 2,506,792 2017 2,680,474 820,163 1,860,311 345,000 278,325 623,325 2,483,636 2018 2,653,086 819,491 1,833,595 360,000 260,700 620,700 2,454,295 2019 2,627,378 820,839 1,806,538 380,000 242,200 622,200 2,428,738 2020 2,475,858 817,270 1,658,588 400,000 222,700 622,700 2,281,288 2021 2,138,628 669,848 1,468,780 420,000 202,200 622,200 2,090,980 2022 2,137,789 676,041 1,461,748 440,000 180,700 620,700 2,082,448 2023 2,127,889 684,011 1,443,877 460,000 158,200 618,200 2,062,077 2024 2,118,745 686,795 1,431,950 485,000 135,788 620,788 2,052,737 2025 2,105,291 691,129 1,414,162 505,000 113,513 618,513 2,032,675 2026 - - - 530,000 90,225 620,225 620,225 2027 - - - 555,000 65,813 620,813 620,813 2028 - - - 580,000 40,275 620,275 620,275 2029 - - - 605,000 13,613 618,613 618,613 52,264,788 18,159,195 34,105,593 8,075,000 5,262,068 13,337,068 47,442,661 (a) Preliminary, subject to change. Interest rate of 4.75% used for purpose of illustration. Estimated Tax -Supported Average Annual Requirements (2008-2025) .............................. $2,388,818 Estimated Tax -Supported Maximum Annual Requirement (2010) ...................................... $2,642,595 Estimated Tax Rate of $0.1591 per $100 assessed valuation against the 2006 Certified Assessed Valuation, at 95% collection produces .................................. $2,643,053 Estimated Tax -Supported Debt Service Payout.................................................................... 25.73% in 5 years 52.68% in 10 years 77.43% in 15 years 96.08% in 20 years 12 Estimated Overlapping Debt The following table indicates the indebtedness, defined as outstanding bonds 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. The information is based upon data secured from individual jurisdictions and/or the Texas Municipal Reports published by the Municipal Advisory Council of Texas. Such figures do not indicate the tax burden levied by the applicable taxing jurisdictions for operation and maintenance or for other purposes. Taxing Body Harris County Harris County Flood Control District Port of Houston Authority La Porte Independent School District San Jacinto College District TOTAL ESTIMATED OVERLAPPING DEBT LaPorte, City of TOTAL DIRECT & OVERLAPPING DEBT Debt Ratios Per 2005 Taxable Assessed Valuation ($1,690,264,218) Per 2006 Taxable Assessed Valuation ($1,748,687,118) Per Capita (34,825) Debt As Of Overlapping Direct Tax 4/1/2007 Percent Amount $1,810,711,590 0.84% $15,209,977 38,859,985 0.84% 326,424 314,705,000 0.84% 2,643,522 107,985,000 36.47% 39,382,130 69,770,000 5.96% 4,158,292 $61,720,345 $43,347,500 (a) $105,067,845 Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas (a) Preliminary, subject to change. Includes the Certificates and revenue -supported debt. TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments on tax supported debt is the receipts from ad valorem taxation. See "SELECTED FINANCIAL DATA - Historical Operations of the City." 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 June 1 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 June 1, 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 13 Direct Tax Supported Direct Tax and Estimated Supported Debt Overlapping Debt 2.56% 6.22% 2.48% 6.01% $1,245 $3,017 Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas (a) Preliminary, subject to change. Includes the Certificates and revenue -supported debt. TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments on tax supported debt is the receipts from ad valorem taxation. See "SELECTED FINANCIAL DATA - Historical Operations of the City." 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 June 1 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 June 1, 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 13 property was not on the appraisal roll the preceding year or whose property was reappraised in the current tax year. Notice must also be given if ownership of the property changed during the preceding year. The appraisal review board has the ultimate responsibility for determining the value of all taxable property within the City; however, any property owner who has timely filed notice with the appraisal review board may appeal a final determination by the appraisal review board by filing suit in a Texas district court. Prior to such appeal or any tax delinquency date, however, the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event, the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units, such as the City are entitled to challenge certain matters before the appraisal review board, including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption. A taxing unit may not, however, challenge the valuation of individual properties. Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies of the county and all cities, towns, school districts and, if entitled to vote, the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years. It is not known what frequency of reappraisals will be utilized by the Harris County Appraisal District or whether reappraisals will be conducted on a zone or county -wide basis. Tax Rate Limitations Article XI, Section 5 of the Texas Constitution, provides for an overall limitation for Home Rule Cities (more than 5,000 population), such as the City, of $2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy, with respect to Home Rule Cities, such as the City, 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 tax rate of $1.50 at a 90% collection rate. 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 is subject to taxation by the City; however, no effort is expected to be made by the Harris County Appraisal District to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions, property used for public purposes, property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind -powered energy devices; most individually -owned automobiles; and property of disabled veterans (maximum exemption 12,000). In addition, taxpayers who are over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of $60,000. Such combined exemptions amounted to $400,386,113 from the City's 2006 tax roll. Voters of the State of Texas cast ballots on November 3, 1981, approving a state constitutional amendment which permits local governments the option of granting homestead exemptions of up to 20% of market value thereafter. The City has elected to grant a 20% homestead exemption which was approved in 1999. In addition, legislation passed by the Texas Legislature during the 2003 legislative session authorizes cities to refrain from increasing the total ad valorem tax (except for increase attributable to certain improvements) on the residence homestead of the disabled or persons 65 years of age or older and their spouses above the amount of tax imposed on the later of (1) the year such residence qualified for an exemption based on the disability or age of the owner or (2) the year the City chose to establish the above -referenced limitation. The City has not implemented such property tax freeze. An eligible owner of agricultural and timberland may apply to have such properties which meet certain requirements appraised on the basis of productivity value or market value, whichever is less. The City has no such property based on productivity value. 14 On November 7, 1989, voters of the State of Texas approved an amendment to the constitution of the State of Texas which authorizes a property tax exemption for certain business personal property. The City Council has the option to take official action to override the exemption and to continue taxing the property exempted by the amendment. The City Council took such official action to tax the property and to disallow the exemption for 1995 and all future years. The City Council may elect to allow the exemption in subsequent years which could result in a reduction of the City's tax base. Notice, Hearing and Repeal 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. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City, the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations (the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the City held upon petition of 10% of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the "effective tax rate" until it has held two public hearings 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. The City does not permit such payments, except for those property owners who are over the age of 65 as provided in the Property Tax Code. Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property 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 15 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, or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. Historical Analysis of Tax Collection Taxes are due October 1 and become delinquent after January 31. No split payments or discounts are allowed. Penalties and Interest: (a) a delinquent tax incurs a penalty of six percent of the amount of the tax for the first calendar month it is delinquent plus one percent for each additional month or portion of a month the tax remains unpaid prior to July 1 of the year in which it becomes delinquent. However, a tax delinquent on July 1 incurs a total penalty of twelve percent of the amount of the delinquent tax without regard to the number of months the tax has been delinquent; (b) a delinquent tax accrues interest at a rate of one percent for each month or portion of a month the tax remains unpaid; and an additional penalty up to a maximum of 20% of taxes, penalty and interest may be imposed to defray costs of collection for taxes delinquent after July 1. All percentage of collections set forth below exclude penalties and interest. - Collection Ratios In addition to the legal procedures and penalties described under "Levy and Collection of Taxes," the City Attorney, acting as delinquent tax attorney, will file suit to collect delinquent taxes due the City. 16 Taxable FYE Tax Assessed Adjusted Current Collections Total Collections 9/30 Year Valuation Tax Rate Tax Levy Amount % Amount % 2001 2000 $ 1,337,247,230 $ 0.7100 $10,026,472 $9,780,571 97.55% $9,994,507 99.68% 2002 2001 1,427,988,490 0.7100 10,734,711 10,463,515 97.47% 10,701,103 99.69% 2003 2002 1,432,858,080 0.7100 10,771,175 10,491,257 97.40% 10,710,693 99.44% 2004 2003 1,487,400,050 0.7100 11,108,701 10,829,202 97.48% 11,037,171 99.36% 2005 2004 1,635,532,140 0.7100 11,603,414 11,334,572 97.68% 11,499,125 99.10% 2006 2005 1,690,264,218 0.7100 12,035,686 11,755,121 97.67% 11,755,121 97.67% 2007 2006 1,702,150,610 0.7100 (In Process of Collections) Source: Harris County Appraisal District, State Comptroller's Office, Property Tax Division, and information supplied by the Issuer. - Tax Rate Distribution - Tax Year 2006 2005 2004 2003 2002 Maintenance and Operations Tax $0.6120 $0.6120 $0.6120 $0.5750 $0.5750 Debt Service 0.0980 0.0980 0.0980 0.1350 0.1350 Total Tax $0.7100 0.7100 $0.7100 $0.7100 $0.7100 - Delinquent Tax Collection Procedures - In addition to the legal procedures and penalties described under "Levy and Collection of Taxes," the City Attorney, acting as delinquent tax attorney, will file suit to collect delinquent taxes due the City. 16 Analysis of Tax Base (a) - Tax Base Distribution - 2006 2005 2004 Amount % Amount % Amount % Commercial & Industrial 655,437,555 31.17% 635,882,179 30.45% 487,362,260 29.62% Residential 1,101,120,061 52.37% 1,069,770,145 51.23% 951,701,240 57.84% Utility & Pipelines 47,517,771 2.26% 54,803,505 2.62% 113,554,210 6.90% Commercial & Industrial Acreage 14,116,983 0.67% 14,991,149 0.72% 14,402,450 0.88% Residential Acreage 36,576,007 1.74% 31,482,540 1.51% 30,075,030 1.83% Personal Property 247,768,346 11.78% 281,426,890 13.48% 48,364,910 2.94% Total Appraised Value Before Exemptions 2,102,536,723 100.00% 2,088,356,408 100.00% 1,645,460,100 100.00% Less: Total Exemptions/Reductions (400,386,113) (398,092,214) (239,318,600) Taxable Assessed Value 1,702,150,610 1,690,264,194 11406,141,500 2003 2002 2001 Amount % Amount % Amount % Commercial & Industrial 515,992,110 29.81% 530,863,840 31.77% 496,919,160 30.31% Residential 907,810,080 52.44% 871,011,470 52.12% 801,106,090 48.87% Utility & Pipelines 49,644,140 2.87% 48,612,340 2.91% 72,1485570 4.40% Commercial & Industrial Acreage 14,972,590 0.86% 11,791,200 0.71% 12,684,110 0.77% Residential Acreage 30,164,340 1.74% 29,040,740 1.74% 34,090,580 2.08% Personal Property 212,436,710 12.27% 179,778,790 10.76% 2225254,840 13.56% Total Appraised Value Before Exemptions 1,731,019,970 100.00% 1,671,098,380 100.00% 1,639,203,350 100.00% Less: Total Exemptions/Reductions (243,619,920) (238,240,300) (211,214,860) Taxable Assessed Value 1,487,400,050 1,432,858,080 11427,988,490 (a) These values may differ from those shown elsewhere in this document due to subsequent additions, deletions and adjustments to the tax roll. - Principal Taxpayers - 2006 2005 Taxpayer Type of Property Value % Value % Conoco Phillips Inc. Real & Personal 54,702,820 3.13% 54,702,820 3.24% Oxy Vinyls, L.P. Real 49,177,149 2.81% 49,1775149 2.91% Equistar Chemicals LP Real 45,219,482 2.59% 45,2195482 2.68% BP Solvay Polyethylene Real 37,068,510 2.12% 37,068,510 2.19% PPG Industries Inc. Real & Personal 32,016,935 1.83% 46,659,985 2.76% Dupont Dow Elastomers LLC Personal 25,986,060 1.49% 25,986,060 1.54% CenterPoint Energy Inc. Real & Personal 24,651,811 1.41% 24,651,811 1.46% Dow Chemcial Co. Real & Personal 20,576,356 1.18% 20,576,356 1.22% Atofma Petrochemicals Real & Personal 20,215,323 1.16% 20,215,323 1.20% PPG Industries Inc. Real & Personal 14,643,050 0.84% (a) - Rohm & Haas Bayport Inc. Real (a) - 11,611,100 0.69% Top Ten Assessed Values: 269,554,676 281,165,776 Percentage of Assessed Value: 18.54% 19.87% Source: City of La Porte, Tax Department. (a) Not a Top Ten principal taxpayer in that year. 17 Municipal Sales Tax History The City has adopted the Municipal Sales and Use Tax Act, Texas Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Certificates. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. The voters of the City approved the imposition of an additional sales and use tax of one-half of the percent ('h% of 1%) for economic development and collection of the additional tax went into effect in September 1999. The sales tax for economic development is collected solely for the benefit of City of La Porte Economic Development Corporation (the "Corporation"), and may be pledged to secure payment of sales tax revenue bonds issued by the Corporation. The voters of the City also approved the imposition of an additional sales and use tax of one-half of the percent ('/z% of 1%) for street maintenance and collection of the additional tax went into effect in October 2006. (a) Based on population estimates by the City. Industrial District Contracts The City has created within its extraterritorial jurisdiction, but outside the City limits, two areas wherein the City agrees with taxpayers to not annex the entire area in return for payments in lieu of taxes (the "Industrial Districts"), the Battleground Industrial District and the Bayport Industrial District. The City has annexed a portion of each industry located within the Industrial Districts, and has entered contracts with each such industry. The contracts specify payments to be made to the City in lieu of ad valorem taxes and thereby protect the industries from further annexation by the City during the term of the seven year contract. These payments are computed as follows: The following industries pay taxes on the portion of each industry within the City limits and an in -lieu payment of the remaining total value which constitutes the protected Industrial District. These annual in -lieu payments, when added to the full City taxes on the annexed portion are an amount equal to the sum of 53% of the amount of ad valorem taxes which would be payable to the City if all the Industry land and improvements were with in the City. On January 1, 2001, the City and the industries renewed the contracts for an additional seven year period through December 31, 2007. The contracts also contain a new construction incentive clause that allows new construction in the industrial area to be assessed in lieu of taxes at a 30% rate, instead of the 53% rate. Listed below is a schedule of the payments received in 2005 and 2006: Industry Air Liquide (Air Plant) Air Liquide (Alphagaz) Air Products Mfg. Corp. Celanese H2 Purification Facility Hyco I, II, II1 2006 In Lieu Payments 14,706 2,428 129,954 City Taxes 22,506 14,706 18 1,506 4,530 14,589 2005 In Lieu Payments 17,437 2,064 127,016 City Taxes 22,165 12,399 1,506 4,530 14,589 % of Equivalent of FYE Tax Total Ad Valorem Ad Valorem Per 9/30 Year Collected Tax Levy Tax Rate Capita (a) 2001 2000 $2,866,496 28.59% $ 0.2144 $ 88.59 2002 2001 2,862,391 26.66% 0.2004 86.98 2003 2002 2,764,876 25.67% 0.1930 81.83 2004 2003 2,993,480 26.95% 0.2013 88.80 2005 2004 3,166,900 27.29% 0.1936 93.73 2006 2005 3,741,321 31.09% 0.2213 107.43 (a) Based on population estimates by the City. Industrial District Contracts The City has created within its extraterritorial jurisdiction, but outside the City limits, two areas wherein the City agrees with taxpayers to not annex the entire area in return for payments in lieu of taxes (the "Industrial Districts"), the Battleground Industrial District and the Bayport Industrial District. The City has annexed a portion of each industry located within the Industrial Districts, and has entered contracts with each such industry. The contracts specify payments to be made to the City in lieu of ad valorem taxes and thereby protect the industries from further annexation by the City during the term of the seven year contract. These payments are computed as follows: The following industries pay taxes on the portion of each industry within the City limits and an in -lieu payment of the remaining total value which constitutes the protected Industrial District. These annual in -lieu payments, when added to the full City taxes on the annexed portion are an amount equal to the sum of 53% of the amount of ad valorem taxes which would be payable to the City if all the Industry land and improvements were with in the City. On January 1, 2001, the City and the industries renewed the contracts for an additional seven year period through December 31, 2007. The contracts also contain a new construction incentive clause that allows new construction in the industrial area to be assessed in lieu of taxes at a 30% rate, instead of the 53% rate. Listed below is a schedule of the payments received in 2005 and 2006: Industry Air Liquide (Air Plant) Air Liquide (Alphagaz) Air Products Mfg. Corp. Celanese H2 Purification Facility Hyco I, II, II1 2006 In Lieu Payments 14,706 2,428 129,954 City Taxes 22,506 14,706 18 1,506 4,530 14,589 2005 In Lieu Payments 17,437 2,064 127,016 City Taxes 22,165 12,399 1,506 4,530 14,589 19 2006 2005 Industry In Lieu Payments City Taxes In Lieu Pa ments City Taxes Backup 1,543 2,U33 1,410 2,033 Syngas 35,115 33,890 34,299 33,890 Trans. & Distribution 3,992 695 3,816 695 Ex Tex LaPorte, LP 29,958 - 31,587 - Akzo Nobel, Inc (Alkyls) 107,023 51,478 177,229 21,618 Great Lakes Chemical Corp. 11,759 - 14,720 - Albemarle Catalysts LLC 419,932 11,871 414,630 32,426 Akzo Nobel Polymer Chemical LLC 107,023 51,478 116,919 49,291 Inventory @ Southern Warehouse 3,941 - - - Inventory @ Heller 1,938 - 2,157 - Acro Midcon LLC 12,060 1,761 11,382 1,761 Aristech Chemical Corp. 326,151 74,489 344,953 71,159 Total Petrochemicals (Atofina) 645,461 145,115 605,959 143,529 Inventory @ Heller 6,195 - 3,032 - Baker Petrolite Corp. 63,330 39,441 47,216 39,441 Battleground Water Co. 1,784 - 1,054 668 Bayport North Industrial Park LP 13,958 - 23,944 - Tuffli Company 1,552 - 1,345 - Ruhrpumpen Inc 2,382 - - - BNIP New Dec Venture Ltd 4,639 - - - Vantade Dev 38 inc 11,376 - - - D & M Tuffli Family Trust 4,365 - - - Bayshore Industrial Inc. 88,471 - 86,506 - Ineos USA LLC (BP PAO) 50,651 6,612 40,650 6,612 BP Solvay Polethlene NA 413,975 270,190 440,537 263,186 BP Amoco Polymers Inc. 298,719 - 303,729 - Bryan Logistics Whse 5,332 - 5,332 - CBSL Transportation 5,977 - 5,494 - Quality Carriers - - - - Superior Carriers 11,889 - 6,150 - Chusei (USA), Inc. 36,583 - 29,419 - Copelco Capital 2,616 - 5,727 - Mitsui Leasing - - - - Ronald Dana (formerly Dunn) 492 1,137 523 1,137 Dana Tank Container, Inc. 4,392 - 7,451 - DN CN, LLC 475 - 437 - Dolima Properties LP 20,371 - 18,697 - Dow Chemical U.S.A. 236,164 144,274 187,809 144,274 Inventory @ Heller - - 873 - SNPE Chemicals Inc - - - - Inventory @ Heller - - - - Drago Supply Company 7,941 1,952 8,066 1,952 DSI Transports, Inc (Formerly Arco Pipeline) 4,350 - 4,356 - E.I. DuPont 157,996 345,215 133,579 324,261 DB Western, Inc - Texas 20,731 - 19,174 - La Porte Properties LLC 1,281 - 1,280 - Sentinal Transportation 2,115 - 2,225 - Invista, Inc. 168,320 - 157,085 - Inventory @ Heller - - - - Inventory @ Southern Warehouse - - - - Equistar Chemicals 228,048 316,307 154,213 316,307 Olefins Joint Venture LP 1,039,435 - 1,022,949 - Eurecat U.S., Inc. 16,420 3,646 16,705 - Fairmont Supply - - - - Goodyear Tire & Rubber Co. 10,943 19,536 22,933 16,052 Greif Containers 42,413 940 43,123 940 Greif Brothers 10,753 7,159 10,581 7,159 GSL Constructors, Ltd 6,203 - 634 - GSL Investments Inc 6,203 - 6,169 - Tyco Flow Control 21,180 - 19,383 - Harcros Chemicals 6,226 - 6,468 - GSL Partners Sub Four LP 1,771 - 1,701 - GSL Partners Sub Four LP 2,048 - 2,048 - Jontun Paints Inc 1,578 - 1,519 - 19 20 2006 2005 Industry In Lieu Payments City Taxes In Lieu Payments City Taxes GSL Partners Sub Seven LP 2,445 - 2,444 - Sulzer Chemtech USA 710 - 2,616 - GSL Partners Sub Seven LP 2,400 - 2,380 - United Environmentals 2,818 - 2,813 - GSL Partners Sub Seven LP - - - - Gulbrandsen technologies 7,528 2,461 7,042 2,461 Houston Polymers Terminal 18,485 - 18,747 - Strang Ventures LLC 2,205 455 596 693 Jacobson Warehouse Co 2,546 - 1,591 - Katoen Natie Gulf Coast Inc 83,961 - 83,134 - Kaver Limited Partnership 10,738 1,024 10,349 683 Laidlaw Environmental - - - - La Porte Methonal 37,885 - 26,998 - Linde Gas (split from La Porte Meth) 76,515 41,443 90,314 41,443 Lubrizol Corporation 80,671 59,626 65,940 59,626 Lyondell Chemical Co. 1,774 - 1,774 - Matheson Tri -Gas Inc. (Acetyl) - 2,050 - 2,050 Matheson Tri -Gas Inc. (Air Sep) 14,492 5,325 10,860 5,325 Basell USA Inc 6,440 - 8,970 - Millenium Petrochemical 351,277 - 392,159 - Port Central LTD 7,332 - 3,003 - NOCS Northwest, Inc. 6,392 4,192 6,499 4,192 Nissian Chemical, Inc. 34,270 - 34,111 - Noltex L.L.C. 145,097 - 144,957 - Oakwood Capital, LP 7,880 - 7,776 - Unitor Ships Service Inc 20,213 - 14,082 - Ohmstede Machine Works 2,920 4,581 2,987 4,041 Oxy Vinyls LLP - Electrochemical 58,558 224,895 39,561 215,469 Oxy Vinyls LP 364,912 133,689 354,463 133,689 Inventory @ Southern Warehouse - - - - Phyto -Source 27,020 - 29,142 - Praxair, Inc. 108,019 48,859 108,815 48,784 South Central 4,118 - 1,679 2,623 Texas Genco LP 66,870 - 67,198 - Centerpoint Energy 49,534 - - 43,564 Rohm & Haas 24,071 82,439 44,118 82,439 Inventory @ Heller 22,989 - 24,779 - Schutz Containers 1,646 - 1,743 - Solvay Interox, Inc. 74,856 69,078 81,811 69,078 Inventory @ Heller 1,070 - 3,682 - South Coast Terminals 3,758 - 4,246 - Southern Ionics, Inc. 27,167 - 26,328 - Houston Chemical Services - - - - Texas Electric Company 3,231 1,264 3,225 M.R. Tom, Inc (Ragsdale) - - - - Tuffli Company, Inc (Rexene) 14,006 651 14,006 651 Don & Martha Tuffli Trust 2,560 - 2,589 - Don & Martha Tuffli Trust 4,622 - 4,442 - Aluma Systems USA - - 110 - Calpine Corporation 587,043 - - - Turbine Maintenance 587,043 - 294,090 - Turbo Storage Services 2,146 - 2,243 - UCISCO - - - - United Rentals 482 30 304 - Total -2,250,393 20 Historical Operations of the City SELECTED FINANCIAL DATA - 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 Ordinances and the Net Revenue pledge to the Certificates, are pledged to pay principal and interest on the Certificates and the City's Outstanding Tax Supported Debt. (a) Source: Comprehensive Annual Financial Report of the City of LaPorte. 21 Fiscal Year Ended September 30 2006 (a) 2005 (a) 2004 (a) 2003 (a) 2002 (a) REVENUES Property taxes 10,454,157 10,109,435 9,101,667 8,824,439 8,721,564 Franchise taxes 1,986,698 1,805,800 1,718,875 1,682,849 1,650,349 Sales taxes 2,495,547 2,108,192 1,995,654 1,843,251 1,908,261 Industrial payments 7,470,700 6,991,926 6,896,112 7,093,854 6,701,082 Other taxes 69,310 49,900 37,955 38,068 41,322 Licenses and permits 683,284 531,091 320,405 199,970 238,535 Fines and forfeits 848,232 678,205 554,559 847,250 614,534 Charges for services 3,852,570 3,233,453 2,948,580 2,275,333 2,108,739 Intergovernmental 8,489 11,940 7,586 302,912 385,722 Interest 652,700 268,419 149,347 211,241 301,538 Miscellaneous 24,778 37,185 32,605 88,970 143,668 Total 28,546,465 25,825,546 23,763,345 23,408,137 22,815,314 EXPENDITURES General Government 6,047,422 5,593,929 5,606,562 5,412,412 5,149,173 Public Safety 11,071,829 10,532,857 10,414,544 10,477,080 10,165,683 Public Works 2,360,073 2,430,322 2,361,192 2,556,011 4,187,428 Health & Sanitation 1,813,812 1,808,313 1,758,964 1,823,462 - Culture & Recreation 3,010,725 3,067,815 3,245,144 3,475,888 3,297,865 Total 24,303,861 23,433,236 23,386,406 23,744,853 22,800,149 Excess (Deficiency) of Revenues Over Expenditures 4,242,604 2,392,310 376,939 (336,716) 15,165 OTHER FINANCING SOURCES (USES): Transfers In 647,449 394,338 1,393,757 1,300,821 1,350,000 Transfers Out (3,045,803) (1,097,526) (1,162,766) (1,250,000) (1,904,664) Proceeds from Sale of Assets 90,083 42,250 Total (2,308,271) (660,938) 230,991 50,821 (554,664) Net Change in Fund Balance 1,934,333 1,731,372 607,930 (285,895) (539,499) Fund Balance - Beginning 9,181,327 7,449,955 6,842,025 7,127,920 7,667,419 Ending Fund Balance 11,115,660 9,181,327 7,449,955 6,842,025 7,127,920 (a) Source: Comprehensive Annual Financial Report of the City of LaPorte. 21 Pension Fund The City participates in the Texas Municipal Retirement System ("TMRS"), an agency operated by the State of Texas. Employees of municipal governmental entities who participate in TMRS contribute a fixed percentage, currently 7% of their gross pay, and the City currently contributes 13.09% of such employee's gross pay to TMRS. As employees leave municipal employment other than through retirement, they may withdraw from TMRS those funds they contributed, but forfeit the City's contributions. The City's requirements for current contributions are offset by the amounts of such forfeitures. All full-time employees are covered by TMRS and both the City and the covered employees made the required contributions for the year ended December 31, 2004. The City had an accrued liability for prior service benefits in the amount of approximately 10,386,612 as of December 31, 2005. The liability for prior service benefits will be amortized over a period of twenty-five years or less by contributions from the City which are a level percentage of payroll. For more detailed information regarding the City's employee retirement systems, pension plans and other post -employment benefits, see Note 6 to the City's Comprehensive Annual Financial Statement. Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2006 is attached hereto in APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. ADMINISTRATION OF THE CITY Mayor and City Council All powers of the City and the determination of all matters of policy shall be vested in the City Council of La Porte, Texas (the "Council"). Council shall execute the laws and administer the government of the City. The mayor and the two councilpersons-at-large shall be elected by a majority vote of the City at large. The City shall be divided into six districts, Districts 1, 2, 3, 4, 5 and 6, and one councilperson shall be elected from each district by majority vote of the resident voters of such district. The mayor and councilpersons shall each hold their respective offices for a term of three years and until their successors shall have been elected and duly qualified. LEGAL MATTERS Legal Opinions The City will furnish the Underwriters a transcript of certain certified proceedings prepared incident to the authorization and issuance of the Certificates, including a certified copy of the unqualified approving opinion of the Attorney General of Texas, as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The City also will furnish the approving legal opinion of Andrews Kurth LLP, Bond Counsel, to the effect that, based upon an examination of such transcript, the Certificates are valid and binding obligations of the City under the Constitution and laws of the State of Texas. In its capacity as Bond Counsel, Andrews Kurth LLP has reviewed the information appearing in this Official Statement under the headings "CONTINUING DISCLOSURE OF INFORMATION (except "Compliance With Prior Undertakings)", "THE CERTIFICATES (except "Book -Entry -Only System", "Use of Certain Terms in Other Remedies in the Event of Default," "Use of Proceeds," "Future Debt" and "Remedies in the Event of Default"), "TAX DATA - Tax Rate Limitations," "LEGAL MATTERS - Legal Opinions," "TAX EXEMPTION," "TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES" and "QUALIFIED TAX- EXEMPT OBLIGATIONS" to determine whether such information fairly summarizes the documents referred to therein and is correct as to matters of law. Such firm has not, however, independently verified any of the factual information contained in this Official Statement nor have they conducted an investigation of the affairs of the City for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon such firm's limited participation as an assumption of responsibility for, or an expression of opinion of any kind with regard to, the accuracy or completeness of any of the information contained herein. The fee of Bond Counsel for its services with respect to the Certificates is contingent upon the sale and delivery of the Certificates. 22 No -Litigation Certificate The City will furnish to the Underwriters 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 Underwriters 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 (1) is excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), from gross income of the owners thereof for federal income tax purposes and (2) is not includable in the alternative minimum taxable income of individuals or corporations, except as described below. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the Ordinance and has relied on representations by the City with respect to matters solely within the knowledge of the City, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Certificate proceeds and any facilities financed therewith, the source of repayment of the Certificates, the investment of Certificate proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Certificate proceeds and certain other amounts be paid periodically to the United States and that the City file an information report with the Internal Revenue Service (the "Service"). If the City should fail to comply with the covenants in the Ordinance, or if its representations relating to the Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. Interest on all tax-exempt obligations, such as the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. 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. 23 Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. If a tax-exempt obligation, such as the Certificates, was acquired at a "market discount' and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue, the Code provides ordinary income tax treatment of gain recognized upon the disposition of such "market discount bond." A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., a market discount). Such treatment applies to "market discount bonds" to the extent the gain from the disposition thereof exceeds the accrued market discount of such bonds unless a statutory de minimis rule applies. The "accrued market discount' is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of the Certificates. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates may be offered at initial offering prices which are less than the stated redemption prices at maturity of such Certificates. If the initial offering prices of the Certificates are lower than the stated redemption price payable at maturity, the Certificates of that maturity (the "Discount Certificates") will be considered to have "original issue discount" for federal income tax purposes. An initial owner who purchases a Discount Certificate in the initial public offering of the Certificates at such an initial offering price will acquire such Discount Certificate with original issue discount equal to the difference between (a) the stated redemption price payable at the maturity of such Discount 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 Qertificates 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. 24 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 initial offering prices which exceed the stated redemption prices payable at the maturity of such Certificates. If any of the Certificates of such maturities are sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or organizations acting in the capacity of wholesalers or underwriters) at such initial offering prices, each of the Certificates of such maturities ("Premium Certificates") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Certificate by the amount of amortizable bond premium. This reduction in basis will 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. The amount of bond premium on a Premium Certificate which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Certificate) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Certificates of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Certificates. QUALIFIED TAX-EXEMPT OBLIGATIONS Section 265 of the Code provides, in general, that interest expenses incurred to acquire or carry tax-exempt obligations are not deductible from the gross income of the holder. For certain holders that are "financial institutions" within the meaning of such section, complete disallowance of such expense would apply to taxable years beginning after December 31, 1986, with respect to tax-exempt obligations acquired after August 7, 1986. Section 265(b) of the Code provides an exception to this rule for interest expense incurred by financial institutions to carry tax-exempt obligations (other than private activity bonds which are designated by an issuer as "qualified tax- exempt obligations"). An issuer may only designate an issue as an issue of "qualified tax-exempt obligations" where less than $10 million of tax-exempt obligations are issued by the issuer during the calendar year in which the issue so designated is issued. The City will designate the Certificates as "qualified tax-exempt obligations." Further, the City will represent that it has or will take such action necessary for the Certificates to constitute "qualified tax-exempt obligations." Notwithstanding the designation of the Certificates as "qualified tax-exempt obligations," financial institutions acquiring the Certificates will be subject to a twenty percent (20%) disallowance of interest expenses allocable to the Certificates. 25 CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "OFFICIAL STATEMENT SUMMARY — Selected Financial Information," "CITY TAX DEBT (except for "Estimated Overlapping Debt"), "TAX DATA," "SELECTED FINANCIAL DATA," "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY - Current Investments," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to the Texas Municipal Advisory Council, the state information depository ("SID") designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the "SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12, as amended and in effect from time to time (the "Rule"). The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not commissioned or are not available by the required time, the City will provide unaudited financial statements and audited financial statements when and if they become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix "B" or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 st each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and the SID of the change. Material Event Notices The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (7) modifications to rights of holders of the Certificates; (8) calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates; and (11) rating changes. Neither the Certificates nor the Ordinance makes any provision for debt service reserves or liquidity enhancement. In addition, the City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board (the "MSRB"). Availability of Information From NRMSIRs and SID The City has agreed to provide the foregoing information only to NRMSIRs, the MSRB and the SID. The information will be available to holders of and beneficial owners of the Certificates only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council of Texas is 600 West 81' Street, P.O. Box 2177, Austin, Texas 78768-2177, and its telephone number is (512) 476-6947. The MAC has also received SEC approval to operate and has begun to operate, a "central post office" for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post 26 office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.disclosureUSA.org ("DisclosureUSA"). The City may utilize DisclosureUSA for the filing of information relating to the Certificates. Limitations and Amendments The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Certificates at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement. Holders or beneficial owners of Certificates may seek as their sole remedy a writ of mandamus to compel the City to comply with its agreement. No default by the City with respect to its continuing disclosure agreement shall constitute a breach of or default under the Ordinance for purposes of any other provision of the Ordinance. Nothing in this paragraph is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. The City's undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions. The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status or type of operations of the City if, but only if (i) the agreement, as so amended, would have permitted an Underwriters to purchase or sell the 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 agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid, but only to the extent that its right to do so would not prevent an Underwriters from purchasing the Certificates in the initial primary offering in compliance with the Rule. If the City amends the agreement, it has agreed to include with any financial information or operating data next provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Compliance With Prior Undertakings The City has complied in all material respects with its prior continuing disclosure agreements made in accordance with SEC Rule 15c2-12, except as described in this paragraph. The City became obligated to make annual disclosure of certain financial information by filing with the state information depository ("SID") and each nationally recognized municipal securities information repository ("NRMSIR") in an offering that took place in 1998. Due to an administrative oversight, the fiscal years ending 2000 through 2003 audited financial statements were not timely filed with the SID and each NRMSIR. Certain required financial information was not timely filed for fiscal years ending 2000, 2002, and 2003. The City issued official statements for its bond issuances in 2000 and 2002, and incorrectly stated that it was in compliance with prior continuing disclosure undertakings. The required financial information was filed in 2004. The City has filed all missing financial information. The City filed a material event notice regarding such failures in October 2004. In addition, for the filing due for fiscal year 2004, the City's submission to the SID and each NRMSIR did not include a schedule of principal employers required as part of its continuing disclosure undertaking made in connection with the City's issuance of certain water and sewer revenue obligations of the City. For the filing due for fiscal year 2005, not all of the required information was timely filed. The required financial information was filed in 2006. 27 BONDINSURANCE The scheduled payment of principal of and interest on the Certificates when due will insurance policy to be issued concurrently with the delivery of the Certificates by "MUNICIPAL BOND INSURANCE" herein for information relating to the Bond Insurer. UNDERWRITING be guaranteed under an . See A syndicate led by Coastal Securities Inc. (the "Underwriters") has agreed to purchase the Certificates, subject to certain conditions, and has agreed to pay a purchase price reflecting the par amount of the Certificates, plus a net original issue premium of $ , less an Underwriters' discount of $ , plus accrued interest. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Underwriters after such Certificates are released for sale, and the Certificates may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Certificates into investment accounts. FINANCIAL ADVISOR RBC Capital Markets (the "Financial Advisor") is employed by the City in connection with the issuance of the Certificates and in such capacity, has assisted the City in compiling documents related thereto. Although the Financial Advisor assisted in drafting this Official Statement, the Financial Advisor has not independently verified all of the data contained in it or conducted a detailed investigation of the affairs of the City to determine the accuracy or completeness of this Official Statement. No person should presume that the limited participation of the Financial Advisor means that the Financial Advisor assume any responsibility for the accuracy or completeness of any of the information contained in the Official Statement. The fee of the Financial Advisor for services rendered is contingent upon the issuance and sale of the Certificates. The Financial Advisor has reviewed the information in this Official Statement in accordance with their responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. RBC Capital Markets is the name under which RBC Dain Rauscher Inc., a broker-dealer, conducts its investment banking business. 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 descriptions herein of the Certificates and the Ordinance do not purport to be complete and all such descriptions or references thereto are qualified in their entirety by reference to the complete forni of the Ordinance. Statements made herein involving estimates or projections, whether or not expressly identified as such, should not be construed to be statements of fact or as representations that such estimates or projections will ever be attained or will approximate actual results. Any summaries or excerpts of constitutional provisions, statutes, ordinances or other documents do not purport to be complete statements of same and are made subject to all of the provisions thereof. Reference should be made to such original sources in all respects. Certification as to Official Statement At the time of payment for and delivery of the Certificates, the City will furnish the Underwriters a certificate, executed by the City Secretary and Mayor, acting in their official capacities, to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in this Official Statement, on the date thereof and on the date of delivery were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, this Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary to make the statements herein, in the light of the circumstances under which they were made, not misleading; and (c) insofar as the descriptions and statements, including financial data contained in this Official Statement, of or pertaining to entities other than the City and their activities are concerned, such statements and data have been obtained from sources which the City believes to be reliable and that the City has no reason to believe that they are untrue in any material respect. 28 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 twenty-five days subsequent to the delivery of the Certificates. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the City's undertaking to provide ongoing secondary market disclosure. CONCLUDING STATEMENT To the extent that any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty and no representation is made that any of these statements have been or will be realized. Information in this Official Statement has been derived by the City from official and other sources and is believed by the City to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City and its accuracy is not guaranteed. Neither this Preliminary Official Statement nor any statement that may have been made orally or in writing is to be construed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. ATTEST: /s/ Martha Gillett City Secretary City of LaPorte, Texas /s/ Alton E. Porter Mayor City of LaPorte, Texas 29 APPENDIX A Economic and Demographic Characteristics The following information has been derived from various sources, including the Texas Municipal Reports, U.S. Census data, "Sales Management Survey of Buying Power", Texas Almanac 2004, and City officials. While such sources are believed to be reliable, no representation is made as to the accuracy thereof. - City Economics - The City of La Porte (the "City"), located in Harris County, encompasses 19 square miles. The City is located approximately 25 miles east of the City of Houston central business district and a portion of the City lies along the Houston Ship Channel. Incorporated in 1892, the City operates under a Mayor -Council form of government with a mayor and eight council members responsible for enacting legislation, adopting budgets and determining the policies of the City. The City, had 2000 census population of 31,880, and an estimated 2006 population of $34,825. The largest taxpayers of the City include Oxy Vinyls L.P., Conoco Phillips Inc., and Equistar Chemicals LP - Transportation — Transportation is provided by State Highway 225, which provides access to the City to the north and connects to the west with the Sam Houston Parkway and Interstate 610, each of which are multi -lane limited access freeways which encircle the City of Houston. Access to the City from the south is provided by State Highway 146, which extends into Northeast Texas, allows access from the south through the City. Houston's Bush Intercontinental Airport provides most of the air cargo and air passenger service to the Houston region. Hobby Airport, to the south of downtown Houston, provides passenger service and some cargo capabilities. The City -owned La Porte Municipal Airport provides private and chartered air transportation through a fully approved FAA facility. - Recreation - The City offers over 140 acres of park space, four public pools, and a number of major recreational amenities. Sylvan Beach Park, a historical landmark, provides beach front access to Galveston Bay, The City's municipal golf course is considered one of the finest municipal golf courses in Texas and is often the site for regional and statewide tournaments. - The Port of Houston Authority - The Port of Houston, the world's 3`d largest port, is a 25 -mile long (40 -kilometer) complex of diversified public and private facilities just a few hours' sailing time from the Gulf of Mexico. The Houston's location makes it an ideal gateway between interior U.S. markets and foreign countries throughout the world. The port ranks first in the United States in foreign waterborne commerce and second in total tonnage. The Port of Houston Authority owns and operates the public facilities along the Houston Ship Channel and is the channel's official sponsor. The Authority is an autonomous political subdivision of the State of Texas and is governed by a board of seven commissioners. The Houston Ship Channel has long been a catalyst for the growth of Harris County. The findings of the latest economic impact study are a strong confirmation of the important and critical role the Port of Houston plays both locally and regionally. The Port Authority's staff is continuously working to attract more cargo and new services which will benefit the community. Since the 1994 study, annual tonnage figures at the Port have risen by 26 million. Such an exceptional increase in trade signifies Houston has maintained its position as a world class port and a leader in the United States maritime industry. The following is a ten year history of construction activity within the City: This is a ten year history of construction activity within the City: Fiscal Year Units Value 1995 177 $ 18,914,208 1996 202 21,610,120 1997 251 27,099,213 1998 282 42,898,974 1999 328 54,686,224 2000 315 26,147,091 2001 186 29,717,688 2002 177 28,371,626 2003 185 25,415,559 2004 134 19,188,048 2005 149 37,442,205 2006 134 59,330,779 APPENDIX B CITY OF LA PORTE, TEXAS Excerpts from Comprehensive Financial Report for the Year Ended September 30, 2006 CITY OF LA PORTE, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT For the fiscal year ended September 30, 2006 Prepared by: Department of Finance INTRODUCTORY SECTION January 5, 2007 City of La Porte Established 1892 To the Honorable Mayor, Members of the Governing Council and Citizens of the City of La Porte, Texas: The Finance Department and City Manager's Office are pleased to submit the Comprehensive Annual Financial Report for the City of La Porte, Texas for the fiscal year ended September 30, 2006. This report is published to provide the City Council, City staff, our citizens, our bondholders and other interested parties with detailed information concerning the financial condition and activities of the City government. This report consists of management's representations concerning the finances of the City of La Porte. Consequently, management assumes full responsibility for the completeness and reliability of all of the information presented in this report. To provide a reasonable basis for making these representations, management of the City has established a comprehensive internal control framework that is designed both to protect the government's assets from loss, theft or misuse and to compile sufficient reliable information for the preparation of the City of La Porte's financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the City of La Porte's comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The City of La Porte's financial statements have been audited by Null-Lairson, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City of La Porte for the fiscal year ended September 30, 2006 are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amount and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the City of La Porte's financial statements for fiscal year ended September 30, 2006, are fairly presented in conformity with GAAP. The independent auditor's report is presented as a component of the financial section of this report. The independent audit of the financial statements of the City of La Porte included a federally mandated "Single Audit" designed to meet the special needs of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the audited government's internal controls and compliance with legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the City of La Porte's separately issued Single Audit Report. GAAP requires that management provide a narrative introduction, overview and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The City of La Porte's MD&A can be found immediately following the report of the independent auditors. Profile of the City The City of La Porte, incorporated in 1892, is located in the southeast quadrant of Harris County and is bounded on the north by the Houston ship channel, on the east by Galveston Bay and the south by the Bayport channel. The City of La Porte currently encompasses 19 square miles and serves a population of 34,825. The City is a home rule city operating under the Council -Manager form of government. Policy- making and legislative authority are vested in a governing council consisting of the mayor and eight other members. The city council is responsible, among other things, for passing ordinances, adopting the budget, appointing committees and hiring both the City Manager and Attorney. The City Manager is responsible for carrying out the policies and ordinances of the City Council, for overseeing the day-to-day operations of the City and for appointing the heads of various departments. The Council is elected on a non-partisan basis. The Mayor and Council members serve three-year staggered terms. Six of the council members are elected by district. The Mayor and the two remaining council members are elected at large. The City of La Porte provides a full range of services, including police and fire protection, the construction and maintenance of streets and other infrastructure and recreational activities and cultural events. Certain services are provided through a legally separate Water Authority, which functions, as a blended component unit and in essence, is a department of the City of La Porte, and, therefore, has been included as an integral part of the City of La Porte's financial statements. Additional information on the Water Authority and other blended component units can be found in Note 1.B. of the notes to the financial statements. The City's accounting records for general governmental operations are maintained on a modified accrual basis, with the revenues being recorded when available and measurable and expenditures being recorded when the services or goods are received and the liabilities are incurred. Accounting records for the City's utilities and other proprietary activities are maintained on the accrual basis. The annual budget serves as the foundation for the City of La Porte's financial planning and control. Budgetary control has been established at the individual department level. All agencies of the City of La Porte are required to submit requests for appropriation to the City Manager on or before May 26 of each year. The City Manager uses these requests as the starting point 0 for developing a proposed budget. The City Manager then presents this proposed budget to council for review prior to August. The council is required to hold a public hearing on the proposed budget and to adopt a final budget by no later than August. The appropriated budget is prepared by fund, function (e.g., public safety) and department (e.g., police). The City Manager must approve transfers of appropriations within a department. Transfers of appropriations between funds, however require the special approval of the city council. Budget -to -actual comparisons are provided in financial reports for each individual governmental fund for which an appropriated annual budget has been adopted. For the general fund, this comparison is presented on page 76 as part of the required supplementary information. For governmental funds, other than the general fund, with appropriated annual budgets, this comparison is presented in the governmental fund subsection of this report, which starts on page 81. Factors Affecting Financial Condition The information presented in the financial statements is perhaps best understood when it is considered from the broader perspective of the specific environment within which the City of La Porte operates. Local economy. The City of La Porte is located in the southeast quadrant of Harris County, which is a 1,723 square mile county is a leading oil, gas and petrochemical areas. It has more than 3,200 manufacturing plants, the nation's largest concentration of petrochemical plants, the third largest United States seaport and is a corporation management center. A significant part of the County's major employers, manufacturers, education and financial institutions are located in Houston, the County seat. The Texas Medical Center, located in Harris County, is one of the nation's largest, providing medical care and educational opportunities. The county's 64 hospitals have over 17,000 beds of which 4,600 are in the Texas Medical Center. Higher education facilities includes: University of Houston, Rice University, Texas Southern University, St. Thomas University and Houston Baptist College, all offering full four-year as well as postgraduate programs. The Lyndon B. Johnson Space Center is also located here. Located some 20 miles southeast of Houston on Galveston Bay in Harris County are the three communities that make up the La Porte Bayshore Area: La Porte, Morgan's Point and Shoreacres. The area has a combined population of approximately 40,000. Though much of the image of this area is industrial, the La Porte-Bayshore area is still characterized by an expanse of resort homes. Because of this, and the metropolitan advantages of Houston, La Porte is one of the few communities in the Gulf Coast area that offers this favorable combination. Future planning. The La Porte 2020 Comprehensive Plan is a 20 -year master plan adopted by the City Council to guide policy decisions relating to the physical and economic development of the community. In general, the plan indicates how the community desires to develop and redevelop over the course of the next twenty years. The comprehensive plan is a physical plan; it is long- range, comprehensive and states the goals, objectives and policies of the local government. The comprehensive plan provides clear direction through specific statements of action to achieve the desired results envisioned by citizens and the leadership of the community. The essential objectives of the comprehensive plan are as follows: ❖ It is a plan to guide the future physical development and redevelopment of the community; ❖ The time frame is long, extending over a twenty-year horizon; ❖ It encompasses a large geographic area including the corporate limits and ETJ of the community; ❖ It is general in nature, allowing some issues to be resolved and many decisions to be made; ❖ It articulates ideas in a framework of goals and objectives, policies and actions, and plans and projects; ❖ It is intended foremost, to serve as a continuing guide to decision-making, to provide a common direction and to provide stability as issues are addressed and future decisions are made. Residential Development. Neighborhoods are one of La Porte's greatest assets as they form a foundation for a sound quality of life. The City is made up of several distinct neighborhood areas, each with somewhat different physical characteristics such as the age of housing, street configuration, and the sizes of structures and lots. Much of the City's overall image and identity is due to the unique character of its neighborhoods and these distinguishing features should, therefore, be preserved. Neighborhoods that are safe, well maintained and have character will maintain property values and thus maintain a sound neighborhood environment and a stable residential tax base. The attractive appearance and environmental quality of existing and future low-density residential neighborhoods should be protected and improvements made where necessary to maintain the value of properties and enhance the quality of life. As the city continues to develop it is important that the integrity of the neighborhoods is preserved and the value and enjoyment of property is maintained and enhanced. Goals for residential development: ❖ Consider programs to revitalize and rehabilitate existing housing where needed. ❖ Meet the future housing needs by providing for a variety of housing options. ❖ Encourage the rehabilitation or replacement of substandard housing. ❖ Promote a standard of home ownership encouraging well-maintained residential properties. ❖ Preserve the integrity of existing neighborhoods and create livable and safe neighborhood environments. ❖ Protect the attractive appearance and environmental quality of existing neighborhoods and make necessary improvements to maintain the value of properties and enhance the quality of life. Beautification and Conservation. Citizens have expressed great interest for enhancing the visual appearance of La Porte and the redevelopment and reinvestment in Downtown, along major corridors and in nonresidential areas. Through public involvement it is apparent that citizens visualize attractive shopping centers, livable neighborhoods, landscaped roadways, pleasant places to walk and an enhanced quality of life. They want successful shopping areas that appeal to shoppers. They see the opportunities in downtown to create a destination that combines a lively entertainment district in a historically significant area, retail stores interspersed with restaurants and professional offices and a blend of residential units as well. n Goals for Beautification: ❖ Improve the community character to make it a more desirable place to live, work and visit. ❖ Improve the aesthetic visual environment through enhancement of site design, signage, roadways, parking areas, open space and landscaping. ❖ Invest in Downtown to establish a vibrant mix of places to work, live and visit, with shops, restaurants, entertainment and a variety of dwelling units. Redevelopment Strategy. Urban redevelopment efforts require cooperative action to encourage new and sustained private investment and to provide supporting rehabilitation of public infrastructure. A key part of the process is determining what strategic actions the community should take to achieve its redevelopment goals and objectives. Successful redevelopment will often require cooperation and coordination between agencies at different levels of government as well as non-profit community organizations. This should include coordination of physical improvements with social service programs, which aim to enhance the health and economic capacity of residents in targeted neighborhoods. Redevelopment Goals: ❖ Stabilize and improve the quality of neighborhoods and other areas in decline by attracting renewed private investment activity. ❖ Revitalize the City's historic downtown area. Cash management policies and practices. Cash temporarily idle during the year was invested in demand deposits and obligations of the U.S. Treasury. The maturities of the investments range from 30 days to 2 years, with an average maturity of 4.5 months. The average yield on investments was 3.67% for the government. Investment income includes appreciation in the fair value of investments. Increases in fair value during the current year, however, do not necessarily represent trends that will continue; nor is it always possible to realize such amounts, especially in the case of temporary changes in the fair value of investments that the City intends to hold to maturity. Pension and other post employment benefits. The City of La Porte sponsors a single -employer defined benefit pension plan for its emergency services employees. Each year, an independent actuary engaged by the pension plan calculates the amount of the annual contribution that the City of La Porte must make to the pension plan to ensure that the plan will be able to fully meet its obligations to retired employees on a timely basis. The City of La Porte also provides pension benefits for its non emergency services employees. These benefits are provided through a state-wide plan managed by Texas Municipal Retirement System (TMRS). The City of La Porte has no obligation in connection with employee benefits offered through this plan beyond its annual contractual payment to TMRS. The City of La Porte also provides postretirement health and dental care benefits for certain retirees and their dependents. As of the end of the current fiscal year, there were 57 retired employees receiving these benefits. Additional information on the City of La Porte's pension arrangements and post employment benefits can be found in Notes 6 and 10 in the notes to the financial statements. 7 Awards and Acknowledgements The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for its comprehensive annual financial report for the fiscal year ended September 30, 2005. This was the twenty-fifth consecutive year that the City has received this prestigious award. In order to be awarded a Certificate of Achievement, the City published an easily readable and efficiently organized comprehensive annual financial report. This report satisfied both generally accepted accounting 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 the GFOA to determine its eligibility for another certificate. In addition, the government also received the GFOA's Distinguished Budget Award for its annual budget document. In order to qualify for the Distinguished Budget Presentation Award, the government's budget document was judged to be proficient in several categories, including as a policy document, a financial plan, an operations guide and a communications device. The preparation of this report would not have been possible without the efficient and dedicated services of the entire staff of the finance and administration department. We would like to express our appreciation to all members of the department who assisted and contributed to the preparation of this report. Credit also must be given to the mayor and city council for their unfailing support for maintaining the highest standards of professionalism in the management of the City of La Porte's finances. ohn Joern M chael G. Dolby, CPA Interim C' Manager Interim Director of f=inance : Fire/EMS Fire Prevention Fire Suppression Emergency Medical Services CITY OF LA PORTE ORGANIZATIONAL CHART Citizens Mayor & City City Secretary Council City Manager Assistant City Manager Police ow Finance Public Works 'i Parks & Recreation Police Public Works Administration Accounting Administration Parks Maintenance Patrol Tax Streets Recreation Criminal Utility Billing Residential Special Services Investi ation g Solid Waste Support Services Human Resources Commercial Solid Parks Waste Administration Purchasing EEoduction MIS Water Distribution Waste Water Collection Wastewater Treatment Plans Certificate of Achievement for Excellence in Financial Reporting Presented to City of LaPorte, Texas For its Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2004 A Certificate ofAchievernent for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to gacernment units and public employee retirement systems whose compreheussive annual financial reports (CAFRs) achravc the highest standards in government accounting and financial reporting. President Execrative Director 10 CITY OF LA PORTS LIST OF ELECTED OFFICIALS ALTON PORTER MAYOR PETER GRIFFITHS BARRY BEASLEY COUNCIL PERSON COUNCIL PERSON AT LARGE A AT LARGE B MICHAEL MOSTEIT CHUCK ENGELKEN COUNCIL PERSON` COUNCIL PERSON DISTRICT 1 DISTRICT 2 HOWARD EBOW TOMMY MOSER COUNCIL PERSON MAYOR PRO TEM DISTRICT 3 DISTRICT 4 LOUIS RIGBY COUNCIL PERSON DISTRICT 5 11 MIKE CLAUSEN COUNCIL PERSON DISTRICT 6 12 FINANCIAL SECTION 13 14 I 1 Greenway Plaza, Suite 1515 Houston, TX 77046 (713)621-1515 Fax: (713) 621-1570 NuIllairson CERT IFIED VU13I.IC ACCOUNTANTS S 1'RO ESSION/ I_ CORPORNI ION Independent Auditors' Report To the Honorable Mayor and Members of the City Council City of LaPorte, Texas 2117 Post Office Street Galveston, TX 77550 (409) 762.8380 Fax: (409) 762-1749 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 La Porte, Texas (the "City"), as of and for the year ended September 30, 2006, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of LaPorte, Texas, as of September 30, 2006, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. M .. __ tip,: 3"!`t f„ JY ("F;L !<'Al'L (i,AtgA;S. ;of,3._K' A( :.'�;-5. f �>,A...:.i ..30111i.... i ~..,Milli„)J }<<'...e... x l..; t. .� 'a _ f)I ['R,-1, 15 To the Honorable Mayor and Members of the City Council City of LaPorte, Texas Page 2 of 2 In accordance with Government Auditing Standards, we have issued our report dated February 1, 2007, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions or laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report, which has been issued separately from this document, is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management's Discussion and Analysis on pages 17 through 23, budgetary comparison information on pages 76 through 78 and Required Pension System Supplementary Information on page 75 are not required parts of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section, combining and individual fund statements and schedules and statistical tables are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical tables have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. February 1, 2007 Houston, Texas 16 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 As management of the City of La Porte, we offer readers of the City's financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, 2006. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages 3-8 of this report. FINANCIAL HIGHLIGHTS • The assets of the City of La Porte exceeded its liabilities at the close of the most recent fiscal year by $89,995,863 (net assets). Of this amount $22,380,404 (unrestricted net assets) may be used to meet the government's ongoing obligations to citizens and creditors in accordance with the City's fund designation and fiscal policies and working capital requirements. • The government's total net assets increased by $3,789,092. • As of the close of the current fiscal year, the City of La Porte's governmental funds reported combined ending fund balances of $37,296,933. Of this amount, $34,885,752 (94%) is unreserved and available for use within the City's designation and policies and working capital requirements. • At the end of the current fiscal year, unreserved fund balance for the general fund was $10,970,885 approximately (45%) of the total general fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction of the City's basic financial statements. The City's basic financial statements are comprised of three components: 1) government -wide financial statements, 2) fund financial statements and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government -wide financial statements — The government -wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private -sector business. The Statement of Net Assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities presents information showing how the City's net assets changed during the fiscal year. All changes in net assets are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused compensated absences). Both of the government -wide financial statements report 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 include general government, public safety, public works, health and sanitation and culture and recreation. The business -type activities of the City include the Water and Sewer Utilities, Airport, La Porte Area Water Authority, Sylvan Beach Convention Center and Bay Forest Golf Course operations. The government -wide financial statements can be found on pages 27-31 of this report 17 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 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 of the 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 balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains 18 governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General, 2005 General Obligation Bond and Section 4B Sales Tax Fund, all of which are considered to be major funds. Data from the other 15 governmental funds are combined into a single, aggregated presentation called non -major. Individual fund data for each of these non -major governmental funds is provided in the form of combining statements elsewhere in this report. The basic governmental fund financial statements can be found on pages 27-36 of this report. Proprietary funds - The City maintains two types of proprietary funds. Proprietary funds are used to report the same functions presented as business -type activities in the government -wide financial statements. The City uses proprietary funds to account for its utilities, airport, water authority, convention center and golf course. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses its internal service funds to account for its motor pool services, technology services and Insurance Fund. Because these services predominantly benefit governmental rather than business -type functions, they have been included within governmental activities in the government -wide financial statements. Proprietary funds provide the same type of information as the government -wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Utility and La Porte Area Water Authority, Airport, Bay Forest Golf Course and Sylvan Beach Convention. All internal service funds are combined into a single aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages 38-43 of this report. Notes to the Financial Statements - The notes provide additional information that is essential to a full understanding of the data provided in the government -wide and fund financial statements. The notes to the financial statements can be found on pages 45-74 of this report. I: CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Other Information - In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning the City's progress in funding its obligation to provide pension benefits to its employees. Required supplementary information can be found on pages 75-78 of this report. The combining statements referred to earlier in connection with nonmajor governmental funds and internal service funds are presented immediately following the required supplementary information for the general fund. Combining fund statements and schedules can be found on pages 84-104 of this report. GOVERNMENT -WIDE FINANCIAL ANALYSIS As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the City of La Porte, assets exceeded liabilities by $89,995,863 at the close of the fiscal year. By far the largest portion of the City's net assets (65%) reflects its investment in capital assets (e.g., land, buildings, machinery, equipment, improvements, construction in progress and infrastructure), less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. City of La Porte's Net Assets Governmental Business -Type Activities Activities Total 2006 2005 2006 2005 2006 2005 Current and other assets $ 51,344,644 $ 73,543,568 $ 7,429,428 $ 7,559,518 $ 58,774,072 $ 51,103,086 Capital assets 45,856,003 46,416,520 38,595,964 33,734,685 84,451,967 80,151,205 Total Assets 97,200,647 89,960,088 46,025,392 41,294,203 143,226,039 131,254,291 Long term liabilities Other liabilities Total Liabilities Net Assets: Invested in capital assets, 36,883,566 31,157,332 9,444,485 7,498,569 46,328,051 38,655,901 5,545,896 3,857,929 1,356,227 2,533,691 6,902,123 6,391,620 42,429,462 35,015,261 10,800,712 10,032,260 53,230,174 45,047,521 net of related debt 28,424,345 28,933,050 29,642,136 26,589,684 58,066,481 55,522,734 Restricted 7,363,187 6,642,077 2,185,791 3,407,445 9,548,978 10,049,522 Unrestricted 18,983,653 19,369,700 3,396,751 1,264,814 22,380,404 20,634,514 Total Net Assets $ 54,771,185 $ 54,944,827 $ 35,224,678 $ 31,261,943 $ 89,995,863 $ 86,206,770 An additional portion of the City's net assets $9,548,978 (11%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets of $22,380,404 (25%) may be used to meet the government's ongoing obligations to citizens and creditors. As of September 30, 2006, the City is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate categories - governmental and business -type activities. 19 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Analysis of the City's Operations — the following table provides a summary of the City's operations for the year ended September 30, 2006, with comparative totals for year ended September 30, 2005. Governmental activities decreased the City of La Porte's net assets by $173,642. Business -type activities increased the City's net assets by $3,962,734. City of La Porte's Changes in Net Assets 20 Governmental Business -Type Activities Activities Total 2006 2005 2006 2005 2006 2005 Revenues: Program Revenues: Charges for Services $ 4,535,854 $ 4,083,297 $ 9,435,426 $ 8,254,116 $ 13,971,280 $ 12,337,413 Operating grants and contributions 1,106,596 2,639,934 - - 1,106,596 2,639,934 General revenues: Property taxes, levied for general purposes 10,535,316 10,192,599 10,535,316 10,192,599 Property taxes, levied for debt service 1,661,801 1,623,095 1,661,801 1,623,095 Industrial payments 7,659,591 6,991,926 7,659,591 6,991,926 Franchise taxes 1,986,698 1,885,801 1,986,698 1,885,801 Sales tax 4,067,767 3,459,979 4,067,767 3,459,979 Unrestricted investment earnings 1,874,828 720,137 300,099 165,162 2,174,927 885,299 Miscellaneous 1,137,928 753,595 694,507 827,183 1,832,435 1,580,778 Gain (loss) on sale/retirement of capital assets - 103,594 (16,083) - (16,083) 103,594 Total revenues $ 34,566,379 32,453,957 10,413,949 9,246,461 44,980,328 41,700,418 Expenses: General Government 7,348,812 7,411,122 - - 7,348,812 7,411,122 Public Safety 11,602,951 10,367,759 11,602,951 10,367,759 Public Works 5,209,686 5,164,855 5,209,686 5,164,855 Health and Sanitation 1,862,368 1,887,204 1,862,368 1,887,204 Culture and Recreation 3,579,917 3,717,791 3,579,917 3,717,791 Interest on Long-term debt 1,226,231 863,818 1,226,231 863,818 Water Services - - 6,844,635 6,477,962 6,844,635 6,477,962 Sewer Services 1,894,415 1,819,756 1,894,415 1,819,756 Airport 122,548 157,186 122,548 157,186 Bay Forest Golf Course 1,285,121 1,242,613 1,285,121 1,242,613 Sylvan Beach Convention Center 214,552 211,682 214,552 211,682 Total Expenses 30,829,965 29,412,549 10,361,271 9,909,199 41,191,236 39,321,748 Change in net assets before transfers 3,736,415 3,041,408 52,678 (662,738) 3,789,092 2,378,670 Transfers (3,910,056) 381,625 3,910,056 (381,625) - - Change in net assets (173,642) 3,423,033 3,962,734 (1,044,363) 3,789,092 2,378,670 Net assets - beginning 54,944,827 51,521,794 31,261,944 32,306,306 86,206,771 83,828,100 Netassets- ending $ 54,771,185 $ 54,944,827 $ 35,224,678 $ 31,261,943 $ 89,995,863 $ 86,206,770 20 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS Governmental funds — The focus of the City of La Porte's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the City of La Porte's governmental funds reported combined ending fund balances of $37,296,933. Approximately 95% of this total amount ($34,885,752) constitutes unreserved fund balance. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1) to pay for encumbrances ($74,649), 2) to provide for inventories ($70,126), 3) to pay for debt service ($1,813,887), 4) to provide for municipal court building security ($106,652), 5) to provide for municipal court technology ($73,724), 6) to provide for park zone ($153,006) and 7) to provide for confiscated funds ($119,137). In the general fund, the City budgeted for a decrease in the fund balance of $213,070. Due to actual expenses being less than budgeted, the actual fund balance increase for fiscal year 2006 was $1,934,333. The Section 4B Sales Tax Fund balance increased by $627,110 due to additional revenues. The 2005 General Obligation Fund balance decreased by $604,347 due to the expenditure of bond proceeds. Other Governmental fund balances increased in 2006 by $3,353,361 due to increased revenues and other sources of financing. Proprietary funds — The City's proprietary fund statements provide the same type of information found in the government -wide financial statements, but in more detail. Unrestricted net assets of the respective proprietary funds are Utility - $1,993,041, Airport $338,580, La Porte Area Water Authority - $1,338,767, Sylvan Beach Convention Center -$134,358 and Bay Forest Golf Course — $(306,821)The change (decrease) in net assets of the proprietary funds in 2006 was as follows: Utility - $4,076,332, Airport -$(74,748), La Porte Area Water Authority - $123,645, Sylvan Beach Convention Center - $(14,539), and Bay Forest Golf Course -$(147,958). General Fund Budgetary Highlights — The City made revisions to the original appropriations approved by the City Council. Overall these changes resulted in an increase from the original budget of 1 % or $210,076. Variances noted in the general fund are due to City Council appropriating additional capital projects, increased spending for public safety projects and salary savings. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - The City of La Porte's investment in capital assets for its governmental and business -type activities as of September 30, 2006 amounts to $84,451,940 (net of accumulated depreciation). This investment in capital assets includes land, building, equipment, improvements, infrastructure and construction in progress. Major capital asset events during the current fiscal year included the following: • Construction in progress Fire Station Number 2 $1.2 million. • Construction in progress Police Station $3.1 million. • Automated Meter Reading $2.3 million. 21 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Capital Assets at Year-end Net of Accumulated Depreciation Additional information of the City of La Porte's capital assets can be found in Note 4 on pages 58-60 of this report. Debt Administration — At the end of the current fiscal year, the City of La Porte had bonded debt payable of $43,200,000 . Of this amount, $34,145,000 comprises bonded debt backed by the full faith and credit of the government and $9,055,000 represents bonds secured solely by water and sewer revenues. Outstanding Debt at Year End Bonds Payable Governmental Business -type Activities Activities 2006 2006 Totals General Obligations $ 17,740,000 $ - $ 17,740,000 Revenue Bonds Payable - 6,430,000 6,430,000 Certificate of Obligations 16,405,000 2,625,000 19,030,000 Total $ 34,145,000 $ 9,055,000 $ 43,200,000 The City of La Porte maintains an "Aa3", "A+", "AA" by Moody's, Standard and Poor's and Fitch respectively for general obligation debt. The revenue bonds have been rated "A" by all three of these rating agencies. Additional information on the City of La Porte's long-term debt can be found in Note 5 on pages 61-65 of this report. 22 Governmental Business -type Activities Activities 2006 2006 Total Land $ 7,685,517 $ 2,350,478 $ 10,035,995 Buildings 7,776,721 409,248 8,185,969 Equipment 5,217,519 69,905 5,287,424 Improvements 2,915,006 33,127,343 36,042,349 Infrastructure 12,277,269 - 12,277,269 Construction in Progress 9,983,973 2,638,961 12,622,934 Total $ 45,856,005 $ 38,595,935 $ 84,451,940 Additional information of the City of La Porte's capital assets can be found in Note 4 on pages 58-60 of this report. Debt Administration — At the end of the current fiscal year, the City of La Porte had bonded debt payable of $43,200,000 . Of this amount, $34,145,000 comprises bonded debt backed by the full faith and credit of the government and $9,055,000 represents bonds secured solely by water and sewer revenues. Outstanding Debt at Year End Bonds Payable Governmental Business -type Activities Activities 2006 2006 Totals General Obligations $ 17,740,000 $ - $ 17,740,000 Revenue Bonds Payable - 6,430,000 6,430,000 Certificate of Obligations 16,405,000 2,625,000 19,030,000 Total $ 34,145,000 $ 9,055,000 $ 43,200,000 The City of La Porte maintains an "Aa3", "A+", "AA" by Moody's, Standard and Poor's and Fitch respectively for general obligation debt. The revenue bonds have been rated "A" by all three of these rating agencies. Additional information on the City of La Porte's long-term debt can be found in Note 5 on pages 61-65 of this report. 22 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 ECONOMIC FACTS AND NEXT YEAR'S BUDGETS AND RATES The unemployment rate for the Houston metropolitan area is currently 4.5 percent, which is a decrease from a rate of 6.1 percent a year ago. This compares identical to the state's average unemployment rate of 4.7 percent which is comparable to the national average rate of 4.4 percent. The City's budgets for all funds have benefited from a strong and expanding economy from the past several years, which is anticipated to continue in the upcoming Fiscal Year. The City is projected to benefit from growth in the tax base due to increased valuations and new construction. Total assessed property value for all residential and commercial property in the City of La Porte exceeded $2.1 billion for fiscal year 2006 which is 10 percent higher than last year. The trend for total assessed property values has been steadily increasing each year with an average annual increase of 16 percent over the past 5 years. Sales tax receipts have grown 16% this fiscal year due to an increase in economic activity. This revenue source is the most volatile and subject to decline if an economic slowdown occurs. Assessed Property Valuations Sales Tax Collections (in billions) (in millions) 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 REQUEST FOR INFORMATION This financial report is designed to provide our citizens, customers and creditors a general overview of the City's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Interim Director of Finance, 604 West Fairmont Parkway, La Porte, Texas, 77571. 23 24 BASIC FINANCIAL STATEMENTS 25 26 CITY OF LA PORTE, TEXAS Statement of Net Assets September 30, 2006 See accompanying notes to financial statements 27 Primary Government Governmental Business -type Activities Activities Total ASSETS Cash and cash equivalents $ 16,759,498 $ 1,821,041 $ 18,580,539 Investments 27,196,952 4,455,769 31,652,721 Receivables, net of allowance for uncollectibles Accounts receivable 4,485,118 1,156,952 5,642,070 Taxes receivable 761,592 - 761,592 Due from other governments 4,716 - 4,716 Accrued interest receivable 183,367 26,289 209,656 Deferred Issuance Costs 346,635 - 346,635 Internal Balances 1,490,460 (1,490,460) - Materials and supplies inventories at cost 116,306 4,540 120,846 Cash and cash equivalents restricted for customer service deposits - 505,287 505,287 Investments restricted for debt service - 125,000 125,000 Other - 825,010 825,010 Capital assets: Land 7,685,517 2,350,478 10,035,995 Buildings and improvements 17,732,228 1,166,840 18,899,068 Improvements other than buildings 7,687,857 69,188,355 76,876,212 Infrastructure 26,873,816 - 26,873,816 Machinery and equipment 13,319,881 422,213 13,742,094 Construction in progress 9,983,973 2,638,961 12,622,934 Accumulated depreciation (37,427,269) (37,170,883) (74,598,152) Total assets 97,200,647 46,025,392 143,226,039 LIABILITIES Accounts payable 4,762,818 607,062 5,369,880 Accrued salaries payable 296,234 52,100 348,334 Interest payable 88,945 - 88,945 Due to others 5,226 5,226 Unearned revenue 86,557 87,150 173,707 Other current liabilities - 5,930 5,930 Premium on Issuance 293,388 - 293,388 Accrued interest payable 12,728 76,330 89,058 Customer deposits - 527,655 527,655 Noncurrent liabilities Due within one year 1,384,000 877,500 2,261,500 Due in more than one year 35,499,566 8,566,985 44,066,551 Total liabilities 42,429,462 10,800,712 53,230,174 NET ASSETS Invested in capital assets, net of related debt 28,424,345 29,642,136 58,066,481 Restricted for: Debt service 1,838,370 2,185,791 4,024,161 Grants and state programs 5,524,817 - 5,524,817 Unrestricted 18,983,653 3,396,751 22,380,404 Total net assets $ 54,771,185 $ 35,224,678 $ 89,995,863 See accompanying notes to financial statements 27 CITY OF LA PORTE, TEXAS Statement of Activities For The Year Ended September 30, 2006 Business -type activities: Water Services 6,844,635 Program Revenues Sewer Services 1,894,415 Fees, Fines and Operating 122,548 35,624 - Charges for Grants and Program Activities Expenses Services Contributions Governmental activities: 10,361,271 9,435,426 - Total government General Government $ 7,348,812 $ 1,002,267 $ - Public Safety 11,602,951 1,333,005 935,588 Public Works 5,209,686 - - Health & Sanitation 1,862,368 1,770,611 - Culture and recreation 3,579,917 429,971 95,820 Interest on Long Term Debt 1,226,231 - - Total governmental activities 30,829,965 4,535,854 1,031,408 Business -type activities: Water Services 6,844,635 5,438,932 - Sewer Services 1,894,415 2,842,495 - Airport 122,548 35,624 - Golf Course 1,285,121 955,867 - Sylvan Beach Convention Ctr 214,552 162,508 - Total business -type activities 10,361,271 9,435,426 - Total government $ 41,191,236 $ 13,971,280 $ 1,031,408 General revenues: Taxes: Property taxes, levied for general purposes Property taxes, levied for debt service Industrial payments Franchise taxes Public service taxes Grants not specified for specific program Investment earnings Miscellaneous Gain (Loss) on sale of assets Transfers Total general revenues and transfers Change in net assets Net assets—beginning Net assets—ending Net (Expenses) Revenues and Changes in Net Assets Governmental Activities $ (6,346,545) (9,334,358) (5,209,686) (91,757) (3,054,126) (1,226,231) (25,262,703) Business -type Activities (1,405,703) 948,080 (86,924) (329,254) (52,044) (925,845) Total $ (6,346,545) (9,334,358) (5,209,686) (91,757) (3,054,126) (1,226,231) (25,262,703) (1,405,703) 948,080 (86,924) (329,254) (52,044) (925,845) $ (25,262,703) $ (925,845) $ (26,188,548) 10,535,316 1,661,801 7,659,591 1,986,698 4,067,767 75,188 1,874,828 1,137,928 (3,910,056) 25,089,061 (173,642) 54,944,827 $ 54,771,185 300,099 694,507 (16,083) 3,910,056 4,888,579 3,962,734 31,261, 944 $ 35,224,678 10,535,316 1,661,801 7,659,591 1,986,698 4,067,767 75,188 2,174,927 1,832,435 (16,083) 29,977,640 3,789,092 86,206,771 $ 89,995,863 29 CITY OF LA PORTE, TEXAS Balance Sheet Governmental Funds September 30, 2006 ASSETS Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles: Accounts receivable Taxes receivable Due from other funds Grant receivable Other accounts receivables Accrued interest receivable Materials and supplies inventories, at cost Total assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Accrued salaries payable Due to other funds Retainage payable Deferred revenue Accrued employee separation pay Total liabilities Fund balances: Reserved for: Inventories Encumbrances Municipal Court Building Security Municipal Court Technology Fee Park Zone Confiscated funds Debt service Unreserved, Designated for capital projects Unreserved/Undesignated Unreserved, reported in nonmajor: Special revenue funds Capital projects funds Total fund balances Total liabilities and fund balances General $ 5,415,959 5,287,784 4,126,733 647,980 2,091,346 74,781 70,126 17,714,709 2,679,812 280,320 3,538,917 100,000 6,599,049 70,126 74,649 51,084 10,919,801 11,115,660 $ 17,714,709 See accompanying notes to basic financial statements. W Section 4B Sales Tax $ 1,830,686 1,772,321 229,385 21,223 3,853,615 3,853,615 3,853,615 $ 3,853,615 2005 General Obligation Bonds $ 97,152 7,598,390 918 572 7,697,032 651,832 651,832 7,045,200 7,045,200 $ 7,697,032 Other Governmental Funds — $ 5,754,307 10,960,558 108,386 4,716 46,286 56,056 16,930,309 881,195 2,319 600,886 168 163,282 1,647,85-0- 106,652 73,724 153,006 119,137 1,813,887 1,247,380 11,768,672 15,282,458 Total Governmental Funds $ 13,098,104 25,619,053 4,126,733 756,366 2,091,346 4,716 276,589 152,632 70,126 46,195,665 4,212,839 282,639 600,886 168 3,702,199 100,000 8,898,731 70,126 74,649 106,652 73,724 153,006 119,137 1,813,887 51,084 21,818,616 1,247,380 11,768,672 37,296,933 $ 16,930,308 46,195,664 31 32 CITY OF LA PORTE, TEXAS Reconciliation of the Governmental Funds Balance Sheet to Statement of Net Assets September 30, 2006 Amounts reported for governmental activities in the statement of net assets are different because: Total fund balances - total governmental funds $ 37,296,933 Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in this fund financial statement, but are reported in the governmental activities of the statement of net assets. 41,427,153 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds Unearned Revenues 3,617,756 Interest payable on long-term debt does not require current financial resources. Therefore, interest payable is not recorded as a liability in governmental funds balance sheets. (88,945) The assets and liabilities of certain internal service funds are not included in the fund financial statement, but are included in the governmental activities of the statement of net assets. 9,127,242 Some liabilities, (such as notes payable, capital lease contract payable, long-term compensated absences and bonds payable), are not due and payable in the current period and are not included in the fund financial statement, but are included in the governmental activities of the statement of net assets: Bonds Payable (34,294,000) Premium on Issuance (293,388) Compensated Absences Payable (2,368,201) Bond Issuance Costs 346,635 Net assets of governmental activities $ 54,771,185 See accompanying notes to basic financial statements. 33 CITY OF LA PORTE, TEXAS Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For The Year Ended September 30, 2006 REVENUES Property taxes Franchise taxes Sales taxes Donations Industrial payments Harris County Joint Venture Other taxes Licenses and permits Fines and forfeits Charges for services Intergovernmental Interest Miscellaneous Total revenues EXPENDITURES Current: General Government Public Safety Public Works Health and Sanitation Culture and Recreation Debt service: Principal retirements Interest and fiscal charges Capital outlay Total expenditures Excess (deficiency) of revenues over expenditures 24,303,861 3,707,975 3,707,975 4,242,604 1,367,170 (3,404,347) OTHER FINANCING SOURCES (USES) 2,800,000 2005 General _ Section 4B Obligation General Sales Tax Bonds $ 10,454,157 $ - $ _ 1,986,698 - _ 2,495,547 1,245,774 - 7,470,700 $ 11,115,660 69,310 - _ 683,284 - - 848,232 - - 3,852,570 - - 8,489 -- 652,700 121,396 303,628 24,778 - - 28,546,465 1,367,170 303,628 6,047,422 - _ 11,071,829 - _ 2,360,073 - _ 1,813,812 - - 3,010,725 - _ 24,303,861 3,707,975 3,707,975 4,242,604 1,367,170 (3,404,347) OTHER FINANCING SOURCES (USES) 2,800,000 Issuance of debt _ Premium on bonds - Transfers in 647,449 Transfers out (3,045,803) Proceeds from sale of Assets 90,083 Total other financing sources (uses) (2,308,271) Net change in fund balances 1,934,333 Fund balances—beginning 9,181,327 Fund balances—ending $ 11,115,660 See accompanying notes to basic financial statements 34 - 2,800,000 (740,060) - (740,060) 2,800,000 627,110 (604,347) 3,226,505 7,649,547 $ 3,853,615 $ 7,045,200 Other Total Governmental Governmental Funds Funds $ 1,708,484 257,194 35,000 1,165,892 631,439 138,602 3,936,611 1,189,343 1,195,000 1,374,314 2,842,334 6,600,991 $ 12,162,641 1,986,698 3,741,321 7,470,700 326,504 683,284 848,232 3,887,570 1,174,381 1,709,163 163,380 34,153,874 7,236,765 11,071,829 2,360,073 1,813,812 3,010,725 1,195,000 1,374,314 6,550,309 34,612,827 (2,664,380) (458,953) 6,965,000 191,055 2,608,425 (3,746,739) 6,017,741 3,353,361 11,929,098 $ 15,282,459 6,965,000 191,055 6,055,874 (7,532,602) 90,083 5,769,410 5,310,457 31,986,477 $ 37,296,934 35 CITY OF LA PORTE, TEXAS Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities For The Year Ended September 30, 2006 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances—total governmental funds: $ 5,310,457 Governmental funds report outlays for capital assets as expenditures because such outlays use current financial resources. In contrast, the statement of activities reports only a portion of the outlay as expense. The outlay is allocated over the assets' estimated useful lives as depreciation expense for the period. This is the amount by which capital outlays $7,150,012 exceeded depreciation $6,088,751 and losses from the disposition of capital assets in the current period. (1,061,261) Governmental funds do not present revenues that are not available to pay current obligations. In contrast, such revenues are reported in the statement of activities when earned. 246,841 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. (5,768,649) Some expenses reported in the statement of activities do not require the use of current financial resources and these are not reported as expenditures in governmental funds: Accrued interest not reflected in governmental funds (38,129) Additional compensated absences not reflected in governmental funds 59,199 Internal service funds are used by management to charge the costs of certain activities, such as fleet maintenance and information technology, to individual funds. The net revenue (expense) of the internal service funds is reported with governmental activities. 1,077,900 Change in net assets of governmental activities $ (173,642) See accompanying notes to basic financial statements. 36 37 CITY OF LA PORTE, TEXAS Statement of Net Assets Proprietary Funds September 30, 2006 ASSETS Current assets: Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Accrued interest receivable Miscellaneous receivables Material and supplies inventories, at cost Restricted cash and cash equivalents for: Customer service deposits Current debt service Investments restricted for: Current debt service Total current assets Noncurrent assets: Capital assets: Land Buildings and improvements Improvements other than buildings Vehicles and equipment Construction in progress Less accumulated depreciation Total noncurrent assets Total assets LIABILITIES Current liabilities: Accounts payable Accrued salaries payable Due to other funds Unearned Revenue Other current liabilities Accrued interest payable Payable from restricted assets: Current portion of revenue bonds Customer deposits Total current liabilities Noncurrent liabilities: Revenue bonds, net of current portion Accrued separation pay Total noncurrent liabilities Total liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Unrestricted (deficit) Total net assets Business -type Activities - Enterprise Funds - 2,084,469 51,730 Other 1,115,110 La Porte Area Proprietary 14,719,440 Utility Water Authority Funds $ 685,800 $ 833,596 $ 301,645 3,803,599 407,428 244,742 934,103 169,605 53,244 10,458 12,351 3,480 4,540 - - 459,426 - 45,861 125,000 - - 825,010 - 6,022,926 2,247,990 648,972 266,009 - 2,084,469 51,730 - 1,115,110 47,884,819 14,719,440 6,584,096 319,777 6,130 96,306 2,519,056 - 119,905 (26,895,821) (5,420,933) (4,854,129) 24,145,570 9,304,637 5,145,757 30,168,496 11,552,627 5,794,729 432,410 148,523 26,130 36,711 - 15,388 1,362,358 - 128,102 - - 87,150 - - 5,930 63,250 13,080 - 637,500 460,000 - 459,526 - 68,129 2,991,755 621,603 330,829 2,362,500 5,595,000 - 237,459 - 152,026 2,599,959 5,595,000 152,026 5,591,714 6,216,603 482,855 21,145,570 3,249,637 5,145,757 1,438,171 747,620 - 1,993,041 1,338,767 166,117 $ 24,576,782 $ 5,336,024 $ 5,311,874 See accompanying notes to basic financial statements. W. Governmental Activities — Internal Totals Service Funds $ 1,821,041 4,455,769 1,156,952 26,289 4,540 505,287 125,000 $ 3,078,666 2,160,627 30,730 81,792 46,180 825,010 - 8,919,888 5,397,995 2,350,478 1,166,840 69,188,355 422,213 2,638,961 37,170,883 38, 595, 964 47, 515, 852 607,063 52,099 1,490,460 87,150 5,930 76,330 1,097,500 527,655 3,944,187 7,957,500 389,485 8,346,985 12, 291,172 29, 540, 964 2,185,791 11,740,018 (7,311,172) 4,428,846 9,826,841 560,225 15,903 2,106 578,234 121,365 121,365 699,599 4,428,846 3,497,925 4,698,396 $ 35,224,680 $ 9,127,242 39 CITY OF LA PORTE, TEXAS Statement of Revenues, Expenses and Changes in Fund Net Assets Proprietary Funds For The Year Ended September 30, 2006 Operating revenues: User fees Operating expenses: Personal services Supplies Other services and charges Depreciation Total operating expenses Operating income (loss) Nonoperating revenues (expenses): Business -type Activities – Enterprise Funds Other La Porte Area Proprietary Utility Water Authority Funds $ 7,207,376 $ 1,079,126 $ 1,160,634 2,369,805 - 944,256 200,153 42 135,702 2,819,825 1,033,491 271,404 1,548,168 441,913 270,859 6,937,951 1,475,446 1,622,221 269,425 (396,320) (461,587) Interest income 230,640 44,081 25,378 Interest expense and fiscal charges (175,495) (325,653) - Gain (loss) on sale of equipment (7,279) - (8,804) Total nonoperating revenue (expenses) 47,866 (281,572) 16,574 Income (loss) before contributions and transfers 317,291 (677,892) (445,013) Capital contributions 4,179,571 858,292 - Transfers in 3,084,361 - 241,000 Transfers out (3,504,891) (56,755) (33,232) Change in net assets 4,076,332 123,645 (237,245) Total net assets—beginning 20,500,450 5,212,379 5,549,119 Total net assets—ending $ 24,576,782 $ 5,336,024 $ 5,311,874 See accompanying notes to basic financial statements. .O Totals Governmental Activities — Internal Service Funds $ 9,447,136 $ 5,868,224 3,314,061 1,361,286 335,897 320,961 4,124,720 4,100,247 2,260,940 869,740 10,035,618 6,652,234 (588,482) (784,010) 300,099 165,671 (501,148) - (16,083) (50,006) (217,132) 115,665 (805,614) (668,345) 5,037,863 - 3,325,361 1,949,442 (3,594,878) (203,197) 3,962,732 31,261,948 1,077,900 8,049,342 $ 35,224,680 $ 9,127,242 41 CITY OF LA PORTE, TEXAS Statement of Cash Flows Proprietary Funds For The Year Ended September 30, 2006 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from user fees Cash payments to suppliers Cash payments for personal services Net cash provided by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from other funds Transfers to other funds Net cash from noncapital financing activies CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments received from participants for debt service Payments received from participants for capital recovery Payments for capital acquisitions Proceeds from sale of assets Issuance of debt Principal payments on revenue bonds Interest paid on debt Net cash (used) by capital and related financing activies CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments Net Investments (purchased) sold Net cash provided by investing activities Net increase (decrease) in cash and cash equivalents Balances -beginning of the year Balances -end of the year Reconciliation of operating income (loss) to net cash provided (used) by operating activities: Operating income (loss) Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation expense (Increase) decrease in accounts receivable (Increase) decrease in inventories Increase (decrease) in accrued salaries payable Increase (decrease) in accounts payable Increase (decrease) in other current liabilities Increase (decrease) in due to other funds Increase (decrease) in customer utility deposits Increase (decrease) in accrued employee separation Total adjustments Net cash provided by operating activities Reconciliation of total cash and cash investments: Current Assets - cash and cash equivalents Restricted Assets - cash and cash equivalents: Customer Deposits Current Debt Service Total cash and cash equivalents 42 Business -type Activities - Enterprise Funds Other La Porte Area Proprietary Utility Water Authority Funds $ 6,932,518 (395,562) (2,349,415) 4,187,541 $ 1,073,420 (962,716) 110,704 $ 1,184,726 (419,041) (933,806) (168,121) 3,084,361 - 241,000 (3,504,891) (56,755) (33,232) (420,530) (56,755) 207,768 771,718 - 86,574 (5,627,847) - 2,625,000 (270,000) (445,000) (113,461) (326,719) (3,386,308) 86,573 - 242,466 38,943 23,920 (59,511) 1,022,404 53,579 182,955 1,061,347 77,499 563,658 1,201,869 117,146 706,568 456,737 230,360 $ 1,270,226 $ 1,658,606 $ 347,506 $ 269,425 $ (396,320) $ (461,587) 1,548,168 (297,816) (5,195) 1,262,058 1,362,358 22,958 25,585 3,918,116 $ 4,187,541 441,913 (5,706) 70,817 507,024 $ 110,704 $ 685,800 $ 459,426 125,000 $ 1,270,226 833,596 825,010 $ 1,658,606 270,859 49,125 120 (127,080) (60,361) 128,102 22,370 10,331 293,466 $ (168,121) $ 301,645 45,861 $ 347,506 3,325,361 1,948,753 (3,594,878) (202,508) (269,517) 1,746,245 771,718 - 86,574 (5,627,847) (1,432,709) - 12,217 2,625,000 (715,000) - (440,180) (3,299,735) (1,420,492) Governmental Activities — Internal Totals Service Funds $ 9,190,664 $ 5,868,249 (1,777,319) (4,261,959) (3,283,221) (1,345,904) 4,130,124 260,386 3,325,361 1,948,753 (3,594,878) (202,508) (269,517) 1,746,245 771,718 - 86,574 (5,627,847) (1,432,709) - 12,217 2,625,000 (715,000) - (440,180) (3,299,735) (1,420,492) 43 305,329 152,095 1,016,472 373,094 1,321,801 525,189 1,882,673 1,111,328 1,393,665 1,967,338 $ 3,276,338 $ 3,078,666 $ (588,482) $ (784,010) 2,260,940 869,740 (254,397) (705) (1,649) (5,075) (51) 1,205,795 160,898 (60,361) - 1,490,460 45,328 - 35,916 15,433 4,718,606 1,043,666 $ 4,130,124 $ 259,656 $ 1,821,041 $ 3,078,666 825,010 459,426 - 170,861 - $ 3,276,338 $ 3,078,666 43 El CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies A. General Statement The City of La Porte, Texas (the "City"), was incorporated on August 10, 1892, and operates under a "Council — Manager" form of government and provides the following services as authorized by its charter: public safety, development services, public health and welfare, culture and recreation and waterworks. The accounting and reporting policies of the City relating to the funds included in the accompanying basic financial statements conform to U.S. Generally Accepted Accounting Principles (GAAP) applicable to state and local governments which include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants and the Financial Accounting Standards Board. The more significant accounting policies of the City are described below. B. Financial Reporting Entity The City's basic financial statements include the accounts of all City operations. The City, with its elected governing body of mayor and eight council members, is considered a primary government. As required by generally accepted accounting principles, the basic financial statements include the City and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the government's operations. All component units have been included as blended component units because of the significance of their operational and financial relationships with the City. The La Porte Area Water Authority (the "Authority") is governed by a five -member board appointed by the City Council. Although it is a legally separate entity, the Authority provides services almost exclusively for the City's water operations, and is in substance a part of the City's primary operations. The Authority was created by the City to finance the operations involved in obtaining surface water supplies and converting these supplies to potable water. This water is sold primarily to the City of La Porte (86%) with the remainder being sold to other neighboring political subdivisions. The operations of the Authority are reported as a proprietary fund type. The Tax Increment Reinvestment Zone One (the "Zone") is governed by a nine -member board appointed by the City Council. The Zone provides benefits exclusively for the City through reinvestment financing of ad valorem taxes, which are utilized for capital improvements for the City of La Porte. The Zone is presented as a governmental fund type. The Section 4B Sales Tax corporation provides services that exclusively benefit the City of La Porte and is governed by a seven -member board appointed by City Council. The Section 4B Sales Tax Corporation is presented as a governmental fund type. Complete financial statements for each of the individual component units may be obtained through the City of La Porte. C. Basis of Presentation Government Wide Statements: The government -wide financial statements (i.e. the statement of net assets and the statement activities) report information on all of the nonfiduciary activities of the City, including the component units. The effect of interfund activity has been removed from these statements. Governmental activities, which are normally supported by taxes and intergovernmental revenues, are reported separately from business -type activities, which rely significantly on fees and charges for support. 45 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued The statement of activities demonstrates the degree to which the direct expenses of a given program or function is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program or function. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given program or function and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program or function. Taxes and other items not properly included among program revenues are reported instead as general revenues. 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. Government resources are allocated to and accounted for in individual funds based on the purposes for which they are to be spent and the means by which spending activities are controlled. Individual funds and account groups summarized in the accompanying financial statements are classified below. Fund Financial Statements: The City segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. Separate statements are presented for governmental and proprietary activities. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Governmental funds are those through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The City has presented the following major governmental funds: (a) General Fund — is the main operating fund of the City. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. (b) Section 4B Sales Tax Fund — This fund is used to account for funds received from the 1/2 cent sales tax dedicated to certain economic and infrastructure projects. (c) 2005 General Obligation Bond Fund — This fund is used to fund projects that benefit the City in general. A specific project from this issue is the construction of the Police Facility. M CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued Proprietary Funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. The accounting objectives are determinations of net income, financial position and cash flow. All assets and liabilities are included on the Statement of Net Assets. Proprietary funds distinguish operating revenues and expenses from non-operating 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. Operating expenses for the proprietary funds include the cost of personal and contractual services, supplies and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The City reports the following major proprietary funds: (a) Utility Fund — is used to account for the provision of water and sewer services to the residents of the City. All activities necessary to provide such services are accounted for in this fund, including, but not limited to administration, operations and maintenance of the water and sewer system and billing and collection activities. The fund also accounts for the accumulation of resources for, and the payment of, long-term debt principal and interest for water and sewer debt. All costs are financed through charges to utility customers with rates reviewed regularly and adjusted if necessary to ensure integrity of the fund. (b) La Porte Area Water Authority Fund — is used to account for revenues and expenses related to obtaining raw surface water and converting it to potable water to be sold to La Porte and neighboring cities. Additionally, the City reports the Internal Service Funds which are used to account for the Motor Pool, Technology and Insurance services provided to other departments of the City on a cost reimbursement basis. D. Measurement Focus and Basis of Accountin Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government -wide financial statements and fund financial statements for proprietary funds are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets. The operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when they are earned. Expenses are recognized at the time the liability is incurred. Unbilled water and wastewater utility service receivables are accrued as revenues and reflected in the financial statements. FIE CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the current fiscal period. Most revenue sources are recorded as revenues when received in cash because they are generally not measurable until actually received. The revenues susceptible to accrual are property and sales taxes, franchise fees, interest income and intergovernmental revenues. A one-year availability period is used for recognition of all other Governmental Fund revenues. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures, as well as expenditures related to compensated absences are recorded only when payment is due. E. Budgetary Information Annual budgets are adopted on a basis consistent with generally accepted accounting principles. Annual appropriated budgets are adopted for the general, special revenue funds and debt service funds. All annual appropriations lapse at fiscal year-end. Project length financial plans are adopted for all capital projects funds. The City uses the following procedures in establishing the budgets reflected in the financial statements: 1. Prior to August, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing on the following October 1. The operating budget includes proposed expenditures and the means of financing them. 2. A public hearing is conducted to obtain taxpayer comments. 3. Prior to September 30, the budget is legally enacted through passage of an ordinance. 4. The City Manager must approve changes within a fund, which is the legal level of control. City Council approves changes between departments as well as amendments to the budget during the year as may be required. 5. Formal budgetary integration is employed as a management control device during the year for the General Fund and Proprietary Funds. Formal budgetary integration is not employed for the Debt Service Fund and Capital Projects Funds because effective budgetary control is alternatively achieved through bond indenture provisions and legally binding construction contracts, respectively. 6. The budget for the General Fund and Special Revenue Funds are adopted on a basis consistent with GAAP. Budgets for the Proprietary Funds are utilized for planning, control and evaluation purposes. They are adopted on a basis consistent with GAAP except that bond principal payments and fixed asset acquisitions are treated as expenditures. 7. Budgeted amounts are amended by the City Council during the year. Individual amendments were not material in relation to the original appropriations, which were amended. Encumbrances represent commitments related to unperformed contracts for goods or services. Encumbrance accounting — under which purchase orders, contracts and other commitments for the expenditure of resources are recorded to reserve that portion of the applicable appropriation — is utilized in the governmental funds throughout the year. Encumbered amounts lapse at year-end. However, encumbrances generally are reappropriated as part of the following year's budget. M CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued F. Cash and Investments Cash includes amounts in demand deposits, short-term investments, which mature within ninety days of the fiscal year end, and various petty cash funds. The short-term investments are stated at cost or amortized cost, which approximate fair value. The short-term investments consist of U.S. Treasury Bills and deposits in the Texas Local Government Investment Pool (TexPool), the Local Government Investment Cooperative (LOGIC) and Texas Short Term Asset Reserve Program (TexStar) all of which have the general characteristics of a demand deposit account. For purpose of the statement of cash flows, Proprietary Fund types consider temporary investments with a maturity of three months or less when purchased to be cash equivalents. In accordance with Statement No. 31, the City reports all investments at fair value, except for "money market investments" and "2a7 -like pools". Money market investments, which are short-term highly liquid debt instruments that may include U.S. Treasury and agency obligations, are reported at amortized costs. Investment positions in external investment pools that are operated in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940, such as TexPool, LOGIC and TexStar are reported using the pools' share price. G. Prepaid Items Prepaid balances are for payments made by the City in the current year to provide services occurring in the subsequent fiscal year, and the reserve for prepaid items has been recognized to signify that a portion of fund balance is not available for other subsequent expenditures. H. Receivables Receivables as of year-end of the government's individual major and non -major funds and internal service funds, including the applicable allowances for uncollectible accounts, are as follows: 19 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies - Continued Fund General Section 4b Sales Tax Debt Service Grant Community Investment Hotel/Motel Tax T.I.R.Z. One Capital Improvements Transportation 1998 G.O. Bonds 2000 C.O. Bonds 2000 G.O. Bonds 2002 G.O. Bonds 2004 C.O. Bonds 2005 C.O. Bonds 2005 G.O. Bonds 2006 C.O. Bonds 2006 G.O. Bonds Utility Water Authority Airport Sylvan Beach Golf Course Motorpool Technology Insurance Gross Receivables Less: allowance for uncollectibles Net total receivables Taxes Grant Interest $1,222,893 $ - $ 74,781 - - 21,224 321,954 - 10,438 - - 2,643 - - 3,864 - - 3,610 - - 1,046 - 4,716 8,745 - - 6,505 - - 6,546 - - 157 - - 6,543 - - 2,550 - - 3,150 - - 572 - - 103 - - 158 - - 10,458 - - 12,351 - - 1,972 - - 1,508 - - 13,980 - - 5,643 - - 11,107 1,544,847 4,716 209,654 Other Accounts Total $ - $ 6,179,258 $ 7,476,932 229,385 - 250,609 - - 332,392 41,981 - 44,624 - - 3,864 - - 3,610 - - 1,046 - - 13,461 - - 6,505 - - 6,546 - - 157 - - 6,543 - - 2,550 2,157 - 5,307 2,152 2,152 918 - 1,490 - - 103 - - 158 - 968,734 979,192 - 169,605 181,956 - 2,771 4,743 - - 1,508 - 50,473 50,473 - 79,711 93,691 - - 5,643 - 2,081 13,188 276,593 7,452,633 9,488,443 (788,481) - - - (2,087,157) (2,875,638) $ 756,366 $ 4,716 $ 209,654 $ 276,593 $ 5,365,476 $ 6,612,805 50 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued Governmental funds reported unearned revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Revenue recognition is also deferred in connection with resources that have been received, but not yet earned in the proprietary funds. At the end of the current fiscal year, the various components of deferred revenue and unearned revenue reported in the governmental and proprietary funds were as follows: Delinquent property taxes receivable Charges for services and customer deposits Grant Revenues Total deferred / unearned revenue I. Use of Estimates Unavailable Unearned Grant General $ 647,980 2,890,937 Debt Service Proprietary Revenue $ 113,612 $ - $ - 87,151 - - 49,670 $ 3,538,917 $ 113,612 $ 87,151 $ 49,670 Total $ 761,592 2,978,088 49,670 $ 3,789,350 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenditures, and expenses during the reporting period. Actual results may differ from those estimates. J. Indirect Expense Allocations It is the policy of the City not to allocate indirect expenses to various functions in the Government -wide Statement of Activities. K. Restricted Assets The City applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. L. Inventories Inventories consist of material and supplies and are valued at cost (first -in, first -out). Inventories for all funds consist of expendable supplies held for consumption and the cost thereof is recorded as an expenditure at the time individual inventory items are issued. Reported inventories in the Governmental Funds are offset by a fund balance reserve, which indicates they are unavailable for appropriation even though they are a component of net current assets. M. Interfund Transactions Transactions Between Funds Transactions between funds that would be treated as revenues, expenditures or expenses if they involved organizations external to the governmental unit are accounted for as revenues, expenditures or expenses in the funds involved. Transactions, which constitute reimbursement to a fund for expenditures or expenses initially made from that fund, which are properly attributable to another fund, are recorded as expenditures or expenses in the reimbursing fund and as reductions of the expenditure or expense in the fund that is reimbursed. Nonrecurring or nonroutine transfers of equity between funds are reported as additions to, or reductions of, the fund balance of Governmental Funds. All other legally authorized transfers are treated as transfers and are included in the results of operations of both Governmental and Proprietary Funds. 51 1. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 Summary of significant accounting policies — Continued N. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets, are reported in the applicable governmental or business -type activities columns in the government -wide financial statements and in the fund financial statements for proprietary funds. Capital assets are defined by the government as assets with an initial unit cost of $5,000 or more and an estimated useful life exceeding two years. Such assets are recorded at historical cost or estimated historical cost if actual historical cost is not available. Donated capital assets are recorded at their fair market value on the date donated. Repairs and maintenance that do not add to the value of the asset or extend assets lives are recorded as expenses. Interest cost during construction is capitalized when the effect of capitalization materially impact the financial statements. During the year ended September 30, 2006, no interest costs were capitalized. Property, plant and equipment of the primary government, as well as the component units, are depreciated using the straight line method over the following estimated useful lives: Buildings 20 years Water and Sewer System 20 — 40 years Infrastructure 20 — 30 years Machinery and Equipment 4 — 10 years Improvements 20 years O. Compensated Absences The City's employees earn vacation and sick leave, which may either be taken or accumulated, up to certain amounts, until paid upon termination or retirement. For all funds, this liability reflects amounts attributable to cumulative employee services already rendered, where the payment is probable and can be reasonably estimated. The current and long-term portions of the governmental fund type liabilities are recorded in the Government -Wide Statement of Net Assets. The proprietary fund type liability is recorded as a liability in the individual proprietary funds since payment of this liability will be made from resources of these funds. Also, for the governmental activities, compensated absences are generally liquidated by the general fund. Policies relating to the accrual and payment of these benefits are as follows: • Vacation — Employees earn from 10 to 25 days of vacation per year. Upon separation, employees are paid for all accumulated vacation leave (up to one and one half times their annual accrual rate). ■ Sick Leave — Employees earn an average of 10 sick hours per month of service. Non -civil service employees hired after November 19, 1991 and who have completed 10 consecutive years of service with the City, are paid for accumulated sick leave, subject to a limit of 480 hours. Civil service employees are subject to a limit of 720 hours. The liability for compensated absences at September 30, 2006 is comprised of the following: Governmental Business Type Total Vacation $ 675,505 $ 124,553 $ 800,058 Sick Leave 1,595,279 198,404 1,793,683 Total All Funds $ 2,270,784 $ 322,957 $ 2,593,741 52 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued P. Lona -term Obliaations In the government -wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business -type activities or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Q. Reservations of Fund Balances The fund balance reserves for revenue bond retirement and construction, prepaid items, inventory and debt service are discussed in Notes 5, 1(G), 1(L) and 1(C), respectively. Other reserves of funds are for the Municipal Court Building Security Fees and Municipal Court Technology Fees, park zone and confiscated funds. R. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciations, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the city or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. 2. Cash, Cash Equivalents and Investments Cash and Cash Equivalents The City reports cash and cash equivalents in the City's statement of cash flows for Proprietary Fund Types and in all other financial statements of financial position. The City considers cash and cash equivalents to be cash on hand, demand deposits, certificates of deposit, balances in privately managed public funds investment pools and money market mutual funds. Investments Investments consist of balances in privately managed public funds investment pools, money market mutual funds and investments in United States (US) Agency securities. The City reports all investments at fair value based on quoted market prices at year-end date. 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. Statutes and the depository contract require full security for all funds in the depository institution through federal depository insurance or a combination of federal depository insurance and acceptable collateral securities and/or an acceptable surety bond. The City requires the depository to place the collateral securities with an independent trustee institution. The depository is required to deliver the 53 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued safekeeping receipts to the City. In accordance with Texas statutes, the safekeeping receipts are in the name of the depository with proper indication of pledge of the collateral securities by the depository to secure funds of the City. The City must approve all collateral securities pledged and also must approve in writing any changes to the pledged collateral securities. The City has adopted a written investment policy regarding the investment of its funds as defined by the PFIA. The PFIA also requires the City to have independent auditors perform test procedures related to investment practices as provided by the Act. The City complies with the requirements of the Act and with local policies. The City's investment policy permits investment of City funds in only the following investment types, consistent with the strategies and maturities defined in the policy: ➢ Obligations of the U.S., its agencies and instrumentalities. ➢ Direct obligations of the State of Texas or its agencies. ➢ 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. ➢ Other obligations, the principal and interest on which are unconditionally guaranteed or insured by, or backed by full faith and credit of the State of Texas or the United States or their agencies and instrumentalities. ➢ Obligations of states, agencies, counties, cities and other political subdivisions of any state having been rated as to the investment quality by a nationally recognized investment firm and having received a rating of not less than A or its equivalent. ➢ Certificates of Deposit issued by state and national banks or savings and on associations domiciled in this state that are: a. guaranteed or insured by the Federal Deposit Insurance Corporation; or b. secured by obligations that are described in 1-5 above, which are intended to include all direct federal agency or instrumentality issued mortgage backed securities that have a market value of not less than the principal amount of the certificates or in any other manner and amount provided by law for deposit of the investing entities. ➢ Certificates of Deposit and share certificates issued by a state or federal credit union domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in 1 through 5 above in any other manner and amount provided by law for the City deposits. ➢ Fully collateralized repurchase agreements having a defined termination date, secured by obligations of the United States, its agencies or instrumentalities, pledged with a third party selected or approved by the political entity, and placed through a primary government securities dealer, as by the Federal Reserve or through a financial institution domiciled in the State of Texas. ➢ Prime domestic banker's acceptances, defined as a banker's acceptance with a 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 equivalent by at least one nationally recognized credit rating agency. ➢ Commercial paper that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit 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. ➢ SEC -registered no-load money market mutual fund (MMMF), with a dollar weighted average portfolio maturity of 90 days or less, includes in their investment objectives the maintenance of a stable net asset value of $1 for each share. ➢ SEC -registered, no-load money market mutual funds (MMMF) that have an average weighted maturity of less than two years, invests exclusively in obligations described above and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of no less than "AAA" or its equivalent. ➢ Authorized government investment pools that invest solely in obligations of any of the above investments provided that the pools are rated no lower than "Aaa" or "AAA" or an equivalent by at least one nationally recognized rating service. 54 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued Deposit and Investment Amounts At year-end, the City recorded cash on hand, demand deposits, certificates of deposit, balances in privately managed public funds investment pools, money market mutual funds, and investments stated at fair value of $51,688,558. The following schedule shows the City's recorded cash and investments at year-end: General Debt Service Capital Projects Special Revenue Funds Total Governmental Funds Internal Service Funds Total Governmental Activities Enterprise Total Cash Bank Deposits Pooled Funds Investments Total $ 905,549 $ 4,510,411 $ 5,287,784 $ 10,703,744 178,690 890,030 752,683 1,821,403 585,744 17,616,871 2,467,282 20,669,897 496,420 2,472,598 2,553,096 5,522,114 2,166,403 25,489,910 11,060,845 38,717,158 514,753 2,563,913 2,160,627 5,239,293 2,681,156 28,053,823 13,221,472 43,956,451 304,478 5,686,214 1,741,415 7,732,107 $ 2,985,633 $ 33,740,038 $ 14,962,887 $ 51,688,558 Quoted market prices are the basis of the fair value for US Agency securities and commercial paper. The amount of increase or decrease in the fair value of investments during the current year is included in the City's investment income as follows: Interest Income $ 2,122,366 Net Increase (Decrease) in Fair Value of Investments 50,053 Total Investment Income $ 2,172,419 Investment Risks At year-end, the City had the following investments, shown below for all funds by investment type: Investment Type Fair Value Public funds investment pools $ 33,740,038 US Agency securities 14,962,887 Total $ 48,702,925 55 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued Interest Rate Risk At year-end, the City had the following investments subject to interest rate risk disclosure, under U.S. generally accepted accounting principles, by fund: Fair Weighted Average Value Maturity (Months) Federal Home Loan Bank (FHLB) $9,965,937 4.42 Federal Home Loan Mortgage Corporation (FHLMC) 1,997,580 1.69 Federal National Mortgage Association (FNMA) 2,999,370 0.78 Total fair value $14,962,887 Portfolio weighted average maturity 9.42 The City's investment policy specifies the maximum stated maturity, from the date of purchase; for any individual investment may not exceed 5 years and the maximum dollar -weighted average maturity for the pooled fund group (investment portfolio) may not exceed 2 years. Concentration of Credit Risk The policy does require investments to be staggered in a way that protects interest income from the volatility of interest rates. The policy has not established limitations on percentages of total portfolio that may be invested in securities other than repurchase agreements, Treasury bills and notes or insured and collateralized Certificates of Deposits. Credit Risk At year-end balances in TexPool, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, balances in TexStar, a privately managed public funds investment pool was rated AAAm by Standard & Poor's and balances in Logic, a privately managed public funds investment pool was rated Aaa/MR1+ by Standard and Poor's. Federal Home Loan Bank (FHLB) agency notes, Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) agency notes were rated AAA by Standard & Poor's, AAA by Fitch Ratings and Aaa by Moody's Investors Service. All credit ratings met acceptable levels required by legal guidelines prescribed in both the PFIA and the City's investment policy. Legal guidelines require an Al rating by Standard & Poor's and a P-1 rating by Moody's Investors Service for investments in commercial paper. 56 Percentage of Total Investment Type Fair Value Portfolio Agency Notes $ 14,962,887 48% Investment Pools 33,740,038 52% $ 48,702,925 100% Credit Risk At year-end balances in TexPool, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, balances in TexStar, a privately managed public funds investment pool was rated AAAm by Standard & Poor's and balances in Logic, a privately managed public funds investment pool was rated Aaa/MR1+ by Standard and Poor's. Federal Home Loan Bank (FHLB) agency notes, Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) agency notes were rated AAA by Standard & Poor's, AAA by Fitch Ratings and Aaa by Moody's Investors Service. All credit ratings met acceptable levels required by legal guidelines prescribed in both the PFIA and the City's investment policy. Legal guidelines require an Al rating by Standard & Poor's and a P-1 rating by Moody's Investors Service for investments in commercial paper. 56 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 3. Property tax The appraisal of property within the City is the responsibility of the Harris County Appraisal District (the "Appraisal District"). The Appraisal District is required under the Property Tax Code to appraise all property within the county on the basis of 100% of its market value. The value of real property within the Appraisal District must be reviewed every five years; however, the City may, at its own expense, require annual reviews of appraised values. The City may challenge appraised values established by the Appraisal District through various appeals and, if necessary, take legal action. Under this legislation, the City continues to set tax rates on City property. However, if the effective tax rate, excluding tax rates for repayment of general obligation bonds and other contractual obligations, adjusted for new improvements, exceeds the rate for the previous year by more than 8 percent, qualified voters of the City may petition for an election to determine whether to limit the tax rate to no more than 8 percent above the effective tax rate. The City's property taxes are levied annually in October on the basis of the Appraisal District's assessed values as of January 1 of that calendar year. Appraised values are established by the Appraisal District at market value, assessed at 100% of appraised value and certified by the Harris County Appraisal District Board of Review. The City's property taxes are billed and collected by the City's Tax Assessor/Collector. Such taxes are applicable to the fiscal year in which they are levied and become delinquent with an enforceable lien on property on January 1 of the current calendar year. The City is permitted, by Article XI, Section 5, of the State of Texas Constitution and the City Charter, to levy property taxes up to $2.50 per $100 of assessed valuation for general governmental services. Within the $2.50 maximum levy, there is no legal limit upon the amount of property taxes, which can be levied for debt service. The property tax rates to finance general governmental services and debt service for the 2005-06 tax year were $0.613 and $0.097, respectively, per $100 of assessed valuation. The 2005 assessed value and total tax levy as adjusted through September 30, 2006 were $1,695,166,598 and $12,035,686 respectively. The City has enacted an ordinance providing for the exemption of twenty percent (20%) of the assessed value of residential homesteads plus and additional $60,000 for persons 65 years of age or older for property taxes. An exemption of $60,000 is allowed for disabled persons on homesteads and up to $12,000 is allowed for disabled veterans on any one piece of property. Additionally, the market value of agricultural land is reduced to agricultural value for purposes of the City's tax levy calculation. 57 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets Capital asset activity for the year ended September 30, 2006 was as follows: Governmental activities: Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated Capital assets, being depreciated: Buildings and improvements Improvements other than buildings Infrastructure Machinery and equipment Total capital assets being depreciated Less accumulated depreciation for: Buildings Improvements other than buildings Machinery and equipment Infrastructure Total accumulated depreciation Total capital assets, being depreciated, net Governmental activities capital assets, net Beginning Ending Balance Retirements & Balance 10/01/05 Additions Adjustments 09/30/06 $ 7,682,585 $ 2,932 9,431,427 4,518,754 17,114,012 4,521,686 17,925,224 20,659 10,476,050 103,503 23,482,106 854,597 12,236,506 1,663,337 64,119,886 2,642,096 9,227,792 736,872 4,512,020 300,019 7,572,159 1,008,556 13,505,407 1,090,389 34,817,378 3,135,836 (3,966,207) (3,966,207) $ 7,685,517 9,983,974 17,669,491 (213,655) 17,732,228 (2,891,695) 7,687,858 2,537,113 26,873,816 (579,962) 13,319,881 (1,148,199) 65,613,783 (9,157) 9,955,507 (39,186) 4,772,853 (478,353) 8,102,362 751 14,596,547 (525,945) 37,427,269 29,302,508 (493,740) (622,254) 28,186,514 $ 46,416,520 $ 4,027,946 $ (4,588,461) $ 45,856,005 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets — Continued Business -type activities: Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated Capital assets, being depreciated Beginning Ending Balance Retirements & Balance 10/01/05 Additions Adjustments 09/30/06 $ 2,350,478 $ - $ - $ 2,350,478 1,184,241 2,371,664 (916,944) 2,638,961 3,534,719 2,371,664 (916,944) 4,989,439 Buildings and improvements 1,166,840 - - 1,166,840 Improvements other than buildings 63,504,133 580,706 5,096,516 69,181,355 Machinery and equipment 453,644 6,330 (30,790) 429,184 Total capital assets, being depreciated 65,124,617 587,036 5,065,726 70,777,379 Less accumulated depreciation for: Buildings and improvements Improvements other than buildings Machinery and equipment Total accumulated depreciation Total capital assets, being depreciated net Business -type activities capital assets, net 706,880 50,102 - 756,982 33,871,842 2,189,521 - 36,061,363 345,929 21,317 (14,708) 352,538 34,924,651 2,260,940 (14,708) 37,170,883 30,199,966 (1,673,902) 5,080,434 33,606,500 $ 33,734,685 $ 697,761 $ 4,163,489 $ 38,595,935 WE CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets — Continued Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities: General government Public safety Public works Culture and Recreation Capital assets held by the government's internal service funds are charged to the various functions based on their usage of the assets Total depreciation expense - governmental activities Business -type activities: Water & Sewer Services Airport Golf Course Sylvan Beach Pavillion Total depreciation expense - business -type activities $ 298,938 307,965 1,167, 845 491,459 869,628 $ 3,135,835 $ 1,990,081 108,772 147,215 14,872 7_2,260,940_ The City has active construction projects as of September 30, 2006. Total accumulated commitments for ongoing capital projects are composed of the following: Utility Capital Projects Fund Sylvan Beach Fund Airport Fund Hotel/Motel Occupancy Tax Fund TIRZ Fund General CIP S1998 General Obligation Bonds S2000 General Obligation Bonds S2002 General Obligation Bonds S2004 Cert. of Obligation Bonds S2005 General Obligation Bonds Construction In Progress $ 2,519,056 34,905 85,000 52,316 21,057 557,584 558,210 822,486 1,514,308 3,460,479 2,997,534 Remaining Contract Balance $ 19,545 19,545 645,255 21,716 7,120,597 Total $ 12,622,935 $ 7,826,658 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities At September 30, 2006 bonds payable consisted of the following individual issues: Governmental Business -type 1998 General Obligation Serial Bonds; due in annual installments of $125,000 through March 15, 2019; interest at 4.25% to 6.25% $ 1,625,000 1998 Waterworks and Sewer System Revenue Bonds due in annual installments of $125,000 through March 15, 2009; interest at 4.35% to 6.2% 375,000 1999 La Porte Area Water Authority Contract Revenue Refunding Bonds due in annual payments through March 15, 2017; interest at 7% to 7.5% 6,055,000 2000 General Obligation Serial Bonds due in annual installments of $150,000 through March 15, 2010, changing to $175,000 through March 15, 2020; interest at 5% to 7% 2,350,000 2000 Certificates of Obligation due in annual installments of $150,000 through March 15, 2020; interest at 5% to 7% 2,100,000 2002 Limited Tax Bonds due in annual installments of $270,000 through March 15, 2025; interest at 4.25% to 5% 5,130,000 2004 Certificates of Obligation 6,800,000 due in annual payments through March 15, 2025; interest at 3.6% to 4.45% 2005 General Obligation Serial Bonds 7,435,000 due in annual payments through March 15, 2025; interest at 3.75% to 4.25% 2005 Certificates of Obligation 1,740,000 due in annual payments through March 15, 2015; interest at 2.8% to 3.8% 2006 Public Property Finance Contractual Obligation 2,625,000 due in annual payments through January 25, 2016; interest at 3.74% 2006General Obligation Serial Bonds 1,200,000 due in annual payments through March 15, 2005; interest at 3.625% to 4.25% 2006 Certificate of Obligation 5,765,000 due in annual payments through March 15, 2025; interest at 3.75% to 4.3% Total Bonds Payable $ 34,145,000 $ 9,055,000 61 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities — Continued Changes in Outstanding Debt — Transactions for the year ended September 30, 2006 are summarized as follows: Governmental Type Activities General Obligation Bonds Certificates of Obligation Compensated Absences Total governmental fund types Business Type Activities Revenue Bonds Payable Public Property Finance Contractual Obligation Compensated absences Total business fund types Total of all fund types Balance Issues October 1, or 2005 Additions Balance Payments or September 30, Due within Expenditures 2006 one year $ 17,325,000 $ 1,200,000 $ 785,000 $ 17,740,000 $ 810,000 11,050,000 5,765,000 410,000 16,405,000 425,000 2,602,839 151,420 237,058 2,517,201 149,000 30,977,839 7,116,420 1,432,058 36,662,201 1,384,000 7,145, 000 715,000 6,430,000 585,000 - 2,625,000 - 2,625,000 262,500 459,500 63,387 12,037 510,850 30,000 7,604,500 2,688,387 727,037 9,565,850 877,500 $ 38,582,339 $ 9,804,807 $ 2,159,095 $ 46,228,051 $ 2,261,500 General Obligation Bonds and Certificates of Obligation — General Obligation Bonds are direct obligations issued on a pledge of the general taxing power for the payment of the debt obligations of the City. General Obligations Bonds and Certificates of Obligation require the City to compute, at the time other taxes are levied, the rate of tax required to provide (in each years bonds are outstanding) a fund to pay interest and principal at maturity. The City is in compliance with this requirement. Arbitrage provisions of the Internal Revenue Tax Act of 1986 require the City to rebate excess arbitrage earnings from bond proceeds to the federal government. As provided for by the bond indentures, this amount has been recorded as a liability in the General Fund for the benefit of the federal government and will be paid as required by applicable regulations. Certain General Obligation Bonds and Certificate of Obligations Bonds are to be repaid by revenues of the proprietary funds. Also, for the governmental activities, compensated absences are generally liquidated by the general fund and for business type, compensated absences are paid from the utility fund. 62 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 Long Term Liabilities - Continued Revenue Bonds - Water and Sewer Revenue Bonds constitute special obligations of the City solely secured by a lien on and pledge of the net revenues of the water and sewer system. The Revenue Bonds are collateralized by the revenue of the water and sewer system and the various special funds established by the bond ordinances. The ordinances provide that the revenue of the system is to be used first to pay operating and maintenance expenses of the system and second to establish and maintain the Revenue Bond funds. Remaining revenues may then be used for any lawful purpose. The ordinances also contain provisions, which, among other items, restrict the issuance of additional Revenue Bonds unless the special funds noted above contain the required amounts and certain financial ratios are met. The City is in compliance with all significant financial requirements as of September 30, 2006. Below is a reconciliation of the various restricted cash and cash investments: Current Maturities of Revenue Bonds $ 950,010 Customer Deposits Payable 505,287 Total Restricted Cash and Cash Investments as of September 30, 2006 $ 1,455,297 63 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities - Continued Annual Requirements to Retire Debt Obligations - The annual aggregate maturities for each bond type for the years subsequent to September 30, 2006, are as follows: General Obligation Bonds Governmental Activities Year Ending September 30 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 Total Principal Interest $ 810,000 $ 782,479 865,000 724,726 875,000 684,138 895,000 644,779 930,000 605,335 4,890,000 2,398,341 4,960,000 1,289,372 3,515,000 315,505 Business -type Activities Principal Interest Total $ - $ - $ 1,592,479 - 1,589,726 - 1,559,138 - 1,539,779 - 1,535,335 - 7,288,341 - 6,249,372 - 3,830,505 $ 17,740,000 $ 7,444,676 $ - $ - $ 25,184,676 Certificate of Obligations Governmental Activities Year Ending September 30 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 Total Revenue Bonds Year Ending September 30 2007 2008 2009 2010 2011 2012-2016 2017-2021 Total Principal Interest $ 425,000 $ 780,813 650,000 671,014 670,000 642,120 700,000 613,310 725,000 584,340 4,080,000 2,437,383 4,875,000 1,451,051 4,280,000 379,209 Business -type Activities Principal Interest Total $ 262,500 $ 93,266 $ 1,561,579 262,500 83,449 1,666,963 262,500 73,631 1,648,251 262,500 63,814 1,639,624 262,500 53,996 1,625,836 1,312,500 122,719 7,952,601 - - 6,326,051 - - 4,659,209 $ 16,405,000 $ 7,559,240 $ 2,625,000 $ 490,875 $ 27,080,115 Governmental Activities Business -type Activities Principal Interest Principal Interest Total $ - $ - $ 585,000 $ 314,263 $ 899,263 - 610,000 281,688 891,688 - 630,000 247,788 877,788 - 525,000 215,456 740,456 - 550,000 185,513 735,513 - - 3,210,000 474,706 3,684,706 - 320,000 7,600 327,600 0 $ 6,430,000 $ 1,727,014 $ 8,157,014 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities — Continued Bonds Authorized and Unissued — At September 30, 2006, the City had $4,100,000 in Certificate of Obligations Bonds which were authorized and unissued. Defeased Bonds Outstanding — In 1994, the City defeased certain general obligation and revenue bonds by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the City's financial statements. On October 6, 1999, the La Porte Area Water Authority issued $8.08 million in Contract Revenue Refunding Bonds, Series 1999, with an average interest rate of 5.159 percent to refund $8.08 million in outstanding Water Supply Contract Revenue Bonds, Series I and 11, 1998 with an average interest rate of 6.94 percent. The Authority completed the current refunding to reduce its total debt service payments over the next 18 years by $1.476 million and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $1.048 million. The bonds are payable from the net revenues of the Authority. The bonds are in $5,000 denominations. The Authority is in compliance with all significant requirements and restrictions contained in the bond resolution. As of September 30, 2006, $2,025,000 of the refunded bonds have been paid and $6,055,000 remain outstanding. 6. Pension Benefits Plan Descriptions The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan (the "Plan") in the statewide Texas Municipal Retirement System (TMRS), one of 811 administered by TMRS, an agent multiple -employer public employee retirement system. A copy of the 2005 TMRS Comprehensive Annual Financial Report may be obtained by writing to P.O. Box 149153, Austin, Texas 78714. In addition, the city provides pension benefits to its volunteer firemen through the Texas Statewide Emergency Services Personnel Retirement Fund, one of 150 administered by the Fire Fighters' Pension Commissioner, a cost sharing multiple employer pension system. That report may be obtained by writing to Firefighters Pension Commission, P.O. Box 12577, Austin, Texas 78711. Both Plans are more fully described below. Texas Municipal Retirement System Benefits depend upon the sum of the employee's contributions to the Plan, with interest, and the City financed monetary credits, with interest. At the date the Plan began, the city granted monetary credits for service rendered before the Plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to the establishment of the Plan. Monetary credits for service since the Plan began are a percentage (100%, 150% or 200%) of the employee's accumulated contributions. In addition, the City can grant 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's contributions accumulated with interest if the employee's contribution rate and City's matching percentage had always been in existence and if the employee's salary had always been the average of his salary in the last three years and 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 -finance monetary credits with interest were used to purchase an annuity. 65 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits — Continued Members can retire at ages 60 and above with 10 or more years of service or with 20 years of service regardless of age. The Plan also provides death and disability benefits. A member is vested after 10 years. The Plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing the TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for employees is 7 percent and the City's matching ratio is currently 2 to 1, both as adopted by the governing body of the City. 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 percentage of payroll from year to year. The normal cost contribution rate financing the currently accruing monetary credits is due to the City's matching percentage, which is 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 percentage of payroll necessary to satisfy the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfounded (over funded) actuarial liability (asset) over the Plan's 25 -year amortization period. When the City periodically adopts updated service credits and increases in annuities, in effect, the increased unfounded actuarial liability is to be amortized over a new 25 -year period. Currently, the unfounded actuarial liability is being amortized over the 25 -year period, which began January 1998. The unit credit actuarial cost method is used for determining the City's contribution rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, 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. A summary of actuarial assumptions is presented below: Actuarial Valuation Date Actuarial Cost Method Amortization Method Remaining Amortization Period Asset Valuation Method Investment Rate of Return Projected Salary Increases Inflation Rate Cost of Living Adjustment December 30, 2005 Unit Credit Level Percent of Payroll 25 Years — Open Period Amortized Cost 7% None 3.5% None Percentage of APC Net Pension Contribution Obligation 100% - 100% - 100% - Additional supplementary three-year trend information may be found on page 73. s Annual Fiscal Pension Year Cost (APC) 2003 $ 1,743,041 2004 2,037,218 2005 1,984,770 December 30, 2005 Unit Credit Level Percent of Payroll 25 Years — Open Period Amortized Cost 7% None 3.5% None Percentage of APC Net Pension Contribution Obligation 100% - 100% - 100% - Additional supplementary three-year trend information may be found on page 73. s CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits — Continued Texas Statewide Emergency Services Personnel Retirement Fund Summary of Significant Accounting Policies and Plan Asset Matters The Texas Statewide Emergency Services Personnel Retirement Fund financial statements are prepared using the accrual basis of accounting. The Fund's fiscal year is from September 1 through the following August 31. Contributions are recognized as revenues in the period in which they are due to the Fund. No contributions applicable to the H.B. 258 Texas Local Fire Fighters Retirement Act (TLFFRA) are included herein. The Texas Statewide Emergency Services Personnel Retirement Fund investments are reported at a smoothed market -related value. Plan Description The Fire Fighters' Pension Commission is the administrator of the Texas Statewide Emergency Services Personnel Retirement Fund, a cost sharing multiple employer pension system established and administered by the State of Texas to provide pension benefits for emergency services personnel who serve without monetary remuneration. The Texas Statewide Emergency Services Personnel Retirement Fund is considered a component unit of the State of Texas financial reporting entity and is included in the State's financial reports as a pension trust fund. At August 31, 2006 there were 181 member departments participating in the pension system. The following table summarizes the pension system membership as of August 31, 2006: Retirees and beneficiaries currently receiving benefits 1,766 Terminated members entitled to benefits but not yet receiving those 1,815 Current active members (vested and non -vested) 4,480 The pension system was created by Senate Bill 411, 65`h Legislature, Regular Session (1977). Benefit provisions include retirement benefits as well and death and disability benefits. Members are vested at the beginning of the fifth year of service, at 5 percent per year of service for the first ten years and 10 percent for each of the next five years of service. Upon reaching age 55, a vested member may retire and receive a monthly pension equal to his vested percentage multiplied by six times the governing body's average monthly contribution over the member's years of qualified service. For years of service in excess of 15 years, this monthly benefit is increased at the rate of 6.2 percent compounded annually. Death and disability benefits are dependent on whether or not the member was engaged in the performance of duties at the time of death or disability. Death benefits include a lump -sum amount and continuing monthly payments to a member's surviving spouse and/or dependents. Contribution requirements were established by S.B. 411, 65th Legislative, Regular Session (1977) and no contributions are required by members. As of September 1, 2006, the governing bodies of participating department members are required to contribute at least $16 per month for each member. Additional contributions may be necessary to pay for unfunded prior service costs and "buybacks" of vested benefits. The State may also be required to make a limited amount of annual contributions to make the fund actuarially sound. 67 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits - Continued Contributions Required and Contributions Made As previously stated the required contribution of at least $16 per member per month is not actuarially determined. The 2005 Legislative Session gave the Board of Trustees of the Texas Emergency Services Retirement System (TESRS) the authority to establish vesting periods, contribution levels, benefit formulas and eligibility requirements under Title 8, Government Code, Subtitle H. The minimum monthly contribution rate per member is increasing from $12 to $36 in $4 annual increments beginning September 1, 2006 and becoming $36 September 1, 2011. For the fiscal year ending August 31, 2006, contributions totaling $2,077,728 for dues and prior service were paid into the fund by the governing bodies sponsoring the member participating departments. The contributions made were equal to the contributions required. City Percentage of Fiscal Annual Required Year Contributions Contributions 2004 13,392 100% 2005 13,104 100% 2006 10,360 100% The purpose for the biennial actuarial valuations is to test the adequacy of the monthly contributions and determine if they are adequate to fund the benefits that are promised. The total contributions expected from the governing bodies sponsoring the members for the fiscal year ending August 31, 2006 are $546,780 less than the minimum required contributions for that fiscal year, based on amortizing the unfunded actuarial accrued liability over 30 years. 7. Interfund Receivables, Payables and Transfers Interfund transfers during the year ended September 30, 2006 were as follows: Transfer In: Capital Debt Special Internal General Project Service Revenue Enterprise Service Transfer out: Fund Funds Fund Funds Fund Funds Totals General Fund 1,368,365 $ 500,000 $ 1,177,438 $ 3,045,803 Capital Project Funds 2,800,000 - - 636,925 3,436,925 Debt Service Fund _ Special Revenue Funds 249,814 - 740,060 60,000 - 1,049,874 Enterprise Funds 343,000 - 3,084,361 112,882 3,540,243 Internal Service Funds - 181,000 22,197 203,197 Total $ 592,814 $ 4,168,365 $ 740,060 $ 500,000 $ 3,325,361 $ 1,949,442 $ 11,276,042 Transfers are used to 1) for general and administrative transfer from Utility Fund to the General Fund, 2) transfer to the Insurance Fund for liability insurance and worker's compensation, 3) annual transfers to fund capital projects, 4) annual transfers fro debt service, 5) transfer from General Fund to La Porte Area Water Authority for an operator's agreement, 6) transfers to fund an employee incentive program and 7) transfer from Hotel/Motel to the Golf Fund for advertising expenditures. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 7. Interfund Receivables, Payables and Transfers - Continued In the year September 30, 2006, the government made the following one-time transfers: A transfer of $500,000 from the General Fund to the Insurance Fund for additional funding for health insurance to offset potential increases to the employee's contributions. A transfer of $714,450 from the General Fund to the Capital Projects Fund for additional funding for general CIP projects. The Capital Projects Fund does not have an alternative source of revenue so additional amounts were sent over since expenditures were higher than anticipated. A transfer of $500,000 from the General Fund to the Community Development Fund to fund future economic development. A transfer of $500,000 from the General Fund to the 2000 General Obligation Bond Fund to cover project overruns for Fire Station #3. A transfer of $153,915 from the General Fund to the 2002 General Obligation Bond Fund to cover project overruns for the EMS remodel project. A transfer of $130,000 was made from the Vehicle Replacement to the Golf Fund to purchase Golf Carts. A transfer of $51,000 from the Insurance Fund to the Golf Fund for repairs due to storm damage. The composition of interfund balances as of September 30, 2006 is as follows: Due to/from other funds: Receivable Fund Payable Fund General Utility Fund $ 1,362,358 Golf Fund 128,102 2005 Certificates of Obligation Bond Fund 600,886 $ 2,091,346 The outstanding balances result from overdraws of the pooled cash. 8. Risk Management The City is exposed to various risks related to torts: theft, damage to and destruction of assets; errors and omissions; and natural disasters. The City's risk management program encompasses various means of protecting the City against loss by obtaining property, casualty and liability coverage from participation in a risk pool. The participation of the City in the risk pool is limited to the payment of premiums. Further information regarding the pool is provided below. Settled claims have not exceeded insurance coverage in any of the previous three fiscal years. There has not been any significant reduction in insurance coverage from that of the previous year. Health Insurance Benefits The City self -insures a portion of health insurance benefits provided to employees. The City records revenues and expenses for providing employee health coverage in an Internal Service Fund and accrues the estimated incurred but not reported claims. Charges are assessed to various City divisions based on their full-time employee count. Z, CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 8. Risk Management - Continued Activity during the year included: Revenues: Charges to divisions Charges to employees Charges to retirees Charges to COBRA participants Total revenues Expenses: Personnel expenses Other expenses Claims administration Claims incurred Re -insurance premiums Total health services expenses $ 2,539,214 446,593 80,443 3,066,250 408,278 396,213 136,222 2,750,136 188,684 $ 3,879,533 Included in the claims paid amount is $406,650 for incurred but not reported claims. Settled claims have not exceeded insurance coverage in any of the previous four fiscal years. Estimates of claims payable and of claims incurred but not reported at September 30, 2006 are reflected as liabilities of the Internal Service Fund. Because actual claims liabilities depend on such complex factors as inflation, changes in legal requirements and damage awards, the process used in computing claims liability is an estimate based on historical claims. Analysis of claims liability for the fiscal years 2004, 2005 and 2006 are as follows: Fiscal Year 2004 Fiscal Year 2005 Fiscal Year 2006 Risk Pool Beginning Current of Year Year Accrual Estimates $163,452 $ 3,304,198 226,387 2,992,671 304,387 2,750,136 Payment End of for Year Claims Accrual $ 3,241,263 $ 226,387 2,914,671 304,387 2,647,873 406,650 The City is a member of the Texas Municipal League Intergovernmental Risk Pool, an unincorporated association of 1,860 political subdivisions of the State of Texas. The Pool contracts with a third party administrator for administration, investigation and adjustment services in the handling of claims. All loss contingencies, including claims incurred but not reported, if any, are recorded and accounted for by the Pool. 70 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 9. Commitments and Contingent Liabilities From time to time, the City is a defendant in legal proceedings relating to its operations as a municipality. In the best judgment of the City's management, the outcome of any pending legal proceedings will not have an adverse effect on the accompanying general purpose financial statements. The City participates in certain federal and state assisted grant programs. These programs are subject to program compliance audits by the grantors or their representatives. Any liability for reimbursement which may arise as the result of these audits is not believed to be material. 10. Post -Employment Benefits In addition to pension benefits described in Note 6, employees who retire from the City and are eligible for pension benefits shall be provided medical coverage by the City to the extent and subject to the conditions of such coverage that is provided to current employees of the City. This coverage for retired employees is provided at the option of City council through adoption of the annual budget. The City funds these premiums in the same manner as it funds similar premiums for current employees. Employees, who retired from the City before October 1, 1992, have 100% of their coverage paid for by the City. Employees who retired from the City in 1993 and up to December 31, 1999, with 20 or more years of service have 100% of their coverage paid for by the City. Prior to January 1, 2000, employees who have 15 years but less than 20 years of service are required to pay for 10% of the cost and employees who have 10 years but less than 15 years of service are required to pay for 20% of their costs. For employees who retire after January 1, 2000 the following applies: Years of Service with City Retiree Cost City Cost At least 10 but less than 15 years 55% 45% At least 15 but less than 20 years 25% 75% At least 20 years 0% 100% 71 Retiree Cost Per Year $3,300 1,500 0 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 10. Post -Employment Benefits -Continued Employees who retire after January 1, 2006 and who have a combination of years of service with the City of La Porte plus age totaling 80 and who retire as a qualified annuitant under the Texas Municipal Retirement System; who retire in accordance with the City of La Porte Employee Policies Handbook; who complete at least 20 years of service with the City of La Porte are currently employed by the City of La Porte at the time of their retirement. The total premium cost is the total annual dollar allocated by budget as approved by City Council for the City of La Porte for health insurance for each employee, including employee and employer contributions. The cost allocation shall be as follows: Years of Service Retiree City with City Cost Cost at least 20 years 60% + dependent premiums 40% 21 years 55% + dependent premiums 45% 22 years 50% + dependent premiums 50% 23 years 45% + dependent premiums 55% 24 years 40% + dependent premiums 60% 25 years 35% + dependent premiums 65% 26 years 30% + dependent premiums 70% 27 years 25% + dependent premiums 75% 28 years 20% + dependent premiums 80% 29 years 15% + dependent premiums 85% 30 years 10% + dependent premiums 90% The costs of providing these benefits and number of retired employees are as follows: Number of Total Cost City's Cost Retiree Cost Retired Employees $480,182 $376,202 $103,980 57 Retirees who are entitled to receive retirement benefits under the City's retirement plan may purchase continued health benefits for the retiree and the retiree's dependents. The person must inform the City no later than the day on which the person retires that the person elects to continue coverage. If the retiree elects to continue coverage for himself and/or his dependents, once he decides to drop either type of coverage, the person and/or his dependents become eligible for coverage at the next open enrollment period. The level of coverage provided is the same level of coverage provided to current employees. The City's coverage is secondary to Medicare when the person becomes eligible for those benefits. Payment for dependent coverage will be at the same rate as payments for current employees. 72 APPENDIX C FORM OF BOND COUNSEL OPINION ANDREWS ATTORNEYS K U R T H LLP , 2007 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 La Porte, Texas (the "City"), in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007, dated June 1, 2007, in the aggregate principal amount of $ , maturing on March 15 in each year from 20_ through and including 20_. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof (or in an amount equal to an authorized denomination, as the case may be), bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1. 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. 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 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 (not to exceed $1,000) to be derived from the operation of the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), are pledged to the payment of the principal of and interest on the Certificates, to the extent that ad valorem taxes may ever be insufficient or unavailable for said purpose; provided, however, that such pledge is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. OFFICIAL STATEMENT DATED MAY 21, 2007 In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX EXEMPTION" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX EXEMPTION" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. The City has designated the Certificates as qualified tax-exempt obligations. See "QUALIFIED TAX-EXEMPT OBLIGATIONS." The Certificates ha ve been designated as "Qualified Tax -Exempt Obligations "for financial institutions. NEW ISSUE: BOOK -ENTRY ONLY RATINGS: Moody's Investors Service Inc ...................................... "Aaa" Standard & Poor's Ratings Services ............................ "AAA" FitchInvestors Service ................................................... "AAA" $8,075,000 CITY OF LA PORTE, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2007 Dated: June 1, 2007 Due: March 15, as shown below Principal of and interest on the $8,075,000 City of La Porte, Texas, Certificates of Obligation, Series 2007 (the "Certificates") are payable by The Bank of New York Trust Company, National Association, Dallas, Texas (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 June 1, 2007, and is payable on March 15 and September 15 of each year, commencing March 15, 2008, until maturity or earlier redemption, to the registered owners (initially Cede & Co.) appearing on the registration books of the Paying Agent/Registrar on the last day of the month preceding each interest payment date (the "Record Date"). See "THE CERTIFICATES — Description of the Certificates." Proceeds from the sale of the Certificates will be used for the (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course and (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure within the City. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds." Payment of the principal of and interest on the Certificates when due will be insured by a municipal bond insurance A4BL4 policy to be issued by MBIA Insurance Corporation simultaneously with the delivery of the Certificates. See "BOND INSURANCE" herein. MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND INITIAL REOFFERING YIELDS (Due March 15) Initial Interest Offering Rate Yield (a) 4.00% 3.850% 4.00% 4.00% 4.25% 4.25% 4.25% 4.25% 4.25% 3.910% CUSIP Nos. (b) 504084UF9 504084UG7 3.950% 504084UH5 4.000% hvtial 4.020% 504084UK8 4.0600/4 504084UL6 Maturity Principal Interest Offering CUSIP Maturity Principal (3/15) Amount Rate Yield (a) Nos. (b) (3/15) Arnount 2008 7140,000 4.00% 3.640% 504084TW4 2017 (c) $355,000 2009 150,000 4.00% 3.650% 504084TX2 2018 (c) 370,000 2010 160,000 4.00% 3.660% 504084TYO 2019 (c) 385,000 2011 170,000 4.00% 3.670% 504084TZ7 2020 (c) 400,000 2012 200,000 4.00% 3.690% 504084UAO 2021 (c) 420,000 2013 275,000 4.00% 3.710% 504084UB8 2022 (c) 440,000 2014 315,000 4.00% 3.730% 504084UC6 2023 (c) 455,000 2015 330,000 4.00% 3.760% 504084UD4 2024 (c) 475,000 2016 340,000 4.00% 3.800% 504084UE2 Initial Interest Offering Rate Yield (a) 4.00% 3.850% 4.00% 4.00% 4.25% 4.25% 4.25% 4.25% 4.25% 3.910% CUSIP Nos. (b) 504084UF9 504084UG7 3.950% 504084UH5 4.000% 504084UJ l 4.020% 504084UK8 4.0600/4 504084UL6 4.100% 504084UW 4.120% 504084UN2 $1,010,000 Term Certificates Due March 15, 2026 Interest Rate 4.125% (Yield 4.200%) CUSIP No. 504084UP7 (a)(b)(c)(d) $1,685,000 Term Certificates Due March 15, 2029 Interest Rate 4.200% (Yield 4.270%) CUSIP No. 504084UQ5 (a)(b)(c)(d) (a) The initial yields will be established by and are the sole responsibility of the Underwriters, and may subsequently be changed. (b) CUSIP numbers have been assigned to the Certificates by Standard and Poor's CUSIP Service Bureau, A Division of the McGraw-Hill Companies, Inc., and are included solely for the convenience of the registered owners of the Certificates. Neither the City, the Financial Advisor, nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Certificates maturing on March 15, 2017 and thereafter, are subject to redemption, at the option of the City, at par value thereof plus accrued interest on March 15, 2016 or any date thereafter. See "THE CERTIFICATES - Optional Redemption." (d) The Tenn Certificates are subject to mandatory redemption by lot or other customary random selection method on March 15 in the years and in the amounts set forth herein under the caption "THE CERTIFICATES - 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. Certain legal matters will be passed upon for the Underwriters named below (the "Underwriters") by their counsel, Vinson & Elkins LLP, Houston, Texas. See "LEGAL MATTERS." Delivery of the Certificates through The Depository Trust Company is expected to be on or about June 19, 2007. Coastal Securities Inc. First Southwest Company (a) Council Member for 16 years prior to becoming Mayor. (b) An election was held on May 12, 2007 to fill the vacant seat. However, no candidate received a majority of votes. A runoff election is scheduled for June 16, 2007. CERTAIN APPOINTED OFFICIALS Length of Name Position Service to City John Joems Michael Dolby Martha Gillett Shelley Wolny Interim City Manager Interim Finance Director City Secretary Budget/Investment Officer 9 26 years 7 years 9 years 8 years CITY OF LA PORTE, TEXAS ELECTED OFFICIALS CITY COUNCIL Length Term Expires Name of Service (May) Occupation Alton Porter (a) 2 Years 2009 President, Special Gas Concepts Mayor (division of BMS, Inc.) Barry Beasley 4 Years 2008 Director, SBC Council Member Mike Clausen 2 Years 2008 Independent Contractor, La Porte ISD Council Member Michael Mosteit 4 Years 2008 Electrical Worker Council Member Chuck Engelken 9 Years 2009 Route Design Specialist, Reliant Energy Council Member HL&P/Entex Howard Ebow 10 Years 2009 Technician, Linde Gas Inc. Council Member Tommy Moser 2 Years 2007 Electrical Company Owner Mayor Pro Tem Louis Rigby 2 Years 2007 Human Resources Executive Council Member Vacant (b) 2007 Council Member (a) Council Member for 16 years prior to becoming Mayor. (b) An election was held on May 12, 2007 to fill the vacant seat. However, no candidate received a majority of votes. A runoff election is scheduled for June 16, 2007. CERTAIN APPOINTED OFFICIALS Length of Name Position Service to City John Joems Michael Dolby Martha Gillett Shelley Wolny Interim City Manager Interim Finance Director City Secretary Budget/Investment Officer 9 26 years 7 years 9 years 8 years CONSULTANTS AND ADVISORS BondCounsel........................................................................................................................ IndependentAuditor................................................................................................... FinancialAdvisor.................................................................................................................. For Additional Information Please Contact: Mr. John Joems Interim City Manager City of LaPorte, Texas 604 West Fairmont Parkway LaPorte, Texas 77571 (281) 471-5020 (Phone) (281) 842-1259 (Fax) Andrews Kurth LLP Houston, Texas Null-Lairson, CPA, PC Houston, Texas RBC Capital Markets Houston, Texas Mr. Ryan O'Hara Director RBC Capital Markets 1001 Fannin Street, Suite 1200 Houston, Texas 77002 (713) 853-0830 (Phone) (713) 651-3347 (Fax) USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized by the City to give any information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the condition of the City or other matters described herein since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. NEITHER THE CITY, FINANCIAL ADVISOR, THE UNDERWRITERS 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. MBIA does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Policy and MBIA set forth under the heading "BOND INSURANCE." Additionally, MBIA makes no representation regarding the Certificates or the advisability of investing in the Certificates. TABLE OF CONTENTS Page USE OF INFORMATION IN OFFICIAL STATEMENT ...................................................... ui INTRODUCTORY STATEMENT ............................. 1 SALE AND DISTRIBUTION OF THE Analysis of Tax Base (a) ...................................... CERTIFICATES.................................................. 1 Prices and Marketability ......................................... 1 SecuritiesLaws ....................................................... 1 Municipal Bond Insurance ..................................... 1 Municipal Bond Ratings ........................................ 1 OFFICIAL STATEMENT SUMMARY .................... 2 INTRODUCTION......................................................... 4 THE CERTIFICATES ................................................. 4 Description of the Certificates ............................... 4 Optional Redemption ............................................. 4 Mandatory Redemption .......................................... 5 Selection of Certificates for Redemption ............... 5 Notice of Redemption ............................................ 6 Book -Entry -Only System ....................................... 6 Use of Certain Terms in Other Sections of this 23 Official Statement .......................................... 8 Paying Agent/Registrar.......................................... 8 Source of Payment for the Certificates .................. 8 Authority for Issuance for the Certificates ............. 8 Use of Proceeds...................................................... 8 Legal Investments in Texas .................................... 9 Remedies in the Event of Default .......................... 9 INVESTMENT AUTHORITY AND DISCOUNT AND PREMIUM INVESTMENT OBJECTIVES OF THE CERTIFICATES ................................................ CITY.................................................................... 10 Legal Investments ................................................. 10 Investment Policies ............................................... 11 Current Investments ............................................. 11 Additional Provisions ........................................... 11 CITY TAX DEBT.......................................................12 Annual Reports ..................................................... Tax Supported Debt Statement ............................ 12 Bonded Indebtedness Payable from Ad Valorem Availability of Information From NRMSIRs and Taxes............................................................ 12 Tax Supported Debt Service Schedule ................ 13 Estimated Overlapping Debt ................................ 14 DebtRatios........................................................... 14 TAXDATA.................................................................. 14 Property Tax Code and County -Wide Appraisal 29 District......................................................... 14 Tax Rate Limitations ............................................ 15 Property Subject to Taxation by the City ............. 15 Notice, Hearing and Repeal Procedures .............. 16 Levy and Collection of Taxes .............................. 16 Page Collection of Delinquent Taxes ........................... 16 Historical Analysis of Tax Collection .................. 17 Analysis of Tax Base (a) ...................................... 18 Municipal Sales Tax History ................................ 19 Industrial District Contracts ................................. 19 SELECTED FINANCIAL DATA ............................. 22 Historical Operations of the City ......................... 22 Pension Fund ........................................................ 23 Financial Statements ............................................. 23 ADMINISTRATION OF THE CITY ....................... 23 Mayor and City Council ....................................... 23 LEGAL MATTERS .................................................... 23 Legal Opinions ..................................................... 23 No -Litigation Certificate ...................................... 24 No Material Adverse Change ............................... 24 TAX EXEMPTION..................................................... 24 TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES ................................................ 25 Discount Certificates ........................ :................... 25 Premium Certificates ............................................ 26 QUALIFIED TAX-EXEMPT OBLIGATIONS...... 26 CONTINUING DISCLOSURE OF INFORMATION ................................................. 27 Annual Reports ..................................................... 27 Material Event Notices .......................................... 27 Availability of Information From NRMSIRs and SID............................................................... 27 Limitations and Amendments .............................. 28 Compliance With Prior Undertakings .................. 28 BOND INSURANCE .................................................. 29 The MBIA Insurance Corporation Insurance Policy........................................................... 29 MBIAInsurance Corporation .............................. 29 Regulation............................................................. 30 Financial Strength Ratings of MBIA ................... 30 MBIA Financial Information ............................... 30 Incorporation of Certain Documents by Reference..................................................... 30 UNDERWRITING...................................................... 31 FINANCIAL ADVISOR ............................................ 31 GENERAL CONSIDERATIONS ............................. 31 Sources and Compilation of Information ............. 31 Certification as to Official Statement ................... 32 Updating of Official Statement ............................ 32 CONCLUDING STATEMENT................................32 APPENDIX A — Economic and Demographic Characteristics APPENDIX B — Excerpts from Comprehensive Annual Financial Report APPENDIX C — Form of Bond Counsel Opinion APPENDIX D — Specimen of Municipal Bond Insurance Policy IV INTRODUCTORY STATEMENT Information contained in this Official Statement, including Appendix B, has been obtained from the City of La Porte, Texas (the "City") in connection with the offering by the City of its $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates") identified on the cover page hereof All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. SALE AND DISTRIBUTION OF THE CERTIFICATES Prices and Marketability The delivery of the Certificates is conditioned upon the receipt by the City of a certificate executed and delivered by the Underwriters on or before the date of delivery of the Certificates stating the prices at which a substantial amount of the Certificates of each maturity have been sold to the public. For this purpose, the term "public" shall not include any person who is a bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. 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. Municipal Bond Insurance The scheduled payment of principal of and interest on the Certificates when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Certificates by MBIA Insurance Corporation. See "BOND INSURANCE" herein for information relating to the Bond Insurer. Municipal Bond Ratings In connection with the sale of the Certificates, the City has made application to Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch Ratings ("Fitch") for ratings and the ratings of "Aaa," "AAA" and "AAA" respectively, have been assigned to the Certificates based upon the issuance of a bond insurance policy by MBIA Insurance Corporation. In addition, Moody's, S&P and Fitch have assigned underlying ratings of "Aa3," "A+" and "A+" respectively on the Certificates. An explanation of the significance of such ratings may be obtained from Moody's, S&P and Fitch. The ratings reflect only the views of Moody's, S&P and Fitch, respectively, and the City makes no representation as to the appropriateness of such ratings. There is no assurance that such ratings will continue for any period of time or that they will not be revised downward or withdrawn entirely by Moody's, S&P and/or Fitch, if, in the judgment of Moody's, S&P and Fitch, circumstances so warrant. Any such downward revision or withdrawal of any of the ratings may have an adverse effect on the market price of the Certificates. OFFICIAL STATEMENT SUMMARY The following material is a summary of certain information contained herein and is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement. The reader should refer particularly to sections that are indicated for more complete information. The Issuer ...................................................... The City of La Porte is a home rule city and municipal corporation of the State of Texas, located in Harris County, Texas. The City covers approximately 19 square miles. See "INTRODUCTION." The Certificates ............................................. $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates"), are dated June 1, 2007 and mature March 15, 2008 through and including March 15, 2024 and in the years 2026 and 2029. Interest on the Certificates accrues from June 1, 2007, and is payable initially on March 15, 2008, and on each September 15 and March 15 thereafter until the earlier of maturity or prior redemption. See "THE CERTIFICATES — Description of the Certificates." Other Characteristics ..................................... The Certificates are issued in ftilly registered form in integral multiples of $5,000. The Certificates maturing on and after March 15, 2017, are subject to optional redemption at the par value thereof plus accrued interest beginning on March 15, 2016 or any date thereafter. See "THE CERTIFICATES — Optional Redemption." Additionally, the Term Certificates are subject to mandatory redemption as provided herein. See "THE CERTIFICATES — Mandatory Redemption." Paying Agent/Registrar.................................. The initial paying agent/registrar is The Bank of New York Trust Company, National Association, Dallas, Texas. The City intends to use the book -entry -only system of The Depository Trust Company ("DTC"), but reserves the right on its behalf or on behalf of the DTC to discontinue such system. (See "THE CERTIFICATES - Book -Entry - Only System.") Source of Payment ......................................... Principal of and interest on the Certificates are payable 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 also secured by a limited subordinate pledge (not to exceed $1,000) of the net revenues of the City's water and sewer system. See "THE CERTIFICATES - Source of Payment for the Certificates." Use of Proceeds ............................................. Proceeds from the sale of the Certificates will be used for the (i) construction of an addition to and upgrading of the City's wastewater treatment plant, (ii) improvements to the City's Bay Forest Golf Course and (iii) construction of a sports complex consisting of amateur ball fields and related infrastructure within the City. In addition, a portion of the proceeds from the sale of the Certificates will be used to pay the costs of issuance of the Certificates. See "THE CERTIFICATES - Use of Proceeds." Qualified Tax Exempt Certificates ................ The City has designated the Certificates as "Qualified Tax -Exempt Obligations" for financial institutions (see "QUALIFIED TAX- EXEMPT OBLIGATIONS"). Ratings........................................................... Moody's Investors Service, Inc................................................... "Aaa" Standard & Poor's Ratings Services ........................................... "AAA" FitchRatings............................................................................... "AAA" Population...................................................... 34,825 (2007 Estimated Population) Payment Record ........................................... The City has never defaulted on the timely payment of principal of and interest on its obligations. - Selected Financial Information - (Unaudited) 2006 Certified Assessed Valuation (100% of estimated market value) ................................ $1,748,687,118 (a) Direct Debt: Outstanding Debt (as of April 1, 2007).................................................................. $35,272,500 (b) TheCertificates...................................................................................................... 8,075.000 TotalDirect Debt............................................................................................. $43,347,500 EstimatedOverlapping Debt................................................................................................. $ 61,720,345 Direct and Estimated Overlapping Debt............................................................................... $105,067,845 Debt Service Fund Balance (as of April 1, 2007)................................................................. $ 1.911.280 % of 2006 Per Assessed Capita Valuation (34,825) Debt Ratios: Direct Tax Supported Debt ................ 2.48% $1,245 Direct Tax Supported and Estimated Overlapping Debt ...................... 6.01% $3,017 2006 Tax Rate (per $100 of Assessed Valuation) Maintenance and Operation.................................................................................... $ 0.6120 DebtService.......................................................................................................... 0.0980 Total.................................................................................................................. $ 0.7100 Annual Debt Service Requirements: Tax -Supported Average Annual Requirement (Fiscal Years 2008-2025) .............. $2,355,324 Tax -Supported Maximum Annual Requirement (2010) ......................................... $2,626,293 Tax Collections: Arithmetic Average, Tax Years (2000-2006)- Current Years ................................ 97.54% - Current and Prior Years ................ 99.16% (a) Certified by the Harris County Appraisal District (the "Appraisal District') and net of exemptions. Such value is subject to change as additions, corrections and deletions are made to the tax roll. See "TAX DATA." (b) Includes revenue -supported debt. INTRODUCTION This Oficial Statement and the Appendices hereto provide certain information with respect to the issuance by the City of LaPorte, Texas (the "City") of its $8,075,000 Certificates of Obligation, Series 2007 (the "Certificates"). The Certificates are issued pursuant to the Texas Constitution, the general laws of the State of Texas, including particularly Chapter 271, Subchapter C, Texas Local Government Code, as amended, and an ordinance adopted by the City Council on May 21, 2007 (the "Ordinance"). 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 of the Certificates The Certificates are dated June 1, 2007, and bear interest from such date at the stated interest rates indicated under "MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND INITIAL REOFFERING YIELDS" on the cover page hereof, which interest is payable commencing March 15, 2008, and each September 15 and March 15 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 The Bank of New York Trust Company, National Association, Dallas, Texas (the 'Paying Agent/Registrar"). Interest on the Certificates will be payable by check, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar. The Certificates initially will be registered only to Cede & Co., the nominee of The Depository Trust Company pursuant to the Book -Entry -Only System described below. In the event the Book -Entry -Only -System is discontinued, the Certificates may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Certificates are exchangeable for an equal principal amount of Certificates of the same maturity in any authorized denomination upon surrender of the Certificates to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer, but the City may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The record date (the 'Record Date") for the interest payable on any interest payment date is the last business day of the month next preceding such interest payment date. The Ordinance requires 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. Optional Redemption The Certificates maturing on or after March 15, 2017 are subject to optional redemption, at the option of the City, prior to maturity, in whole or, from time to time, in part, on March 15, 2016, or on any date thereafter, at par plus accrued interest to the date fixed for redemption. 4 Mandatory Redemption The certificates maturing on March 15, 2026 and March 15, 2029 (the "Term Certificates") are subject to mandatory redemption prior to maturity in the following amounts (subject to reduction as hereinafter provided), on the following dates ("Mandatory Redemption Dates"), at a price equal to the principal amount redeemed plus accrued interest to each Mandatory Redemption Date, subject to the conditions set forth below: $1,010,000 TERM CERTIFICATES DUE MARCH 15 2026 Mandatory Redemption Date Principal Amount March 15, 2025 $495,000 March 15, 2026 (Maturity) 515,000 $1,685,000 TERM CERTIFICATES DUE MARCH I S 2029 Mandatory Redemption Date March 15, 2027 March 15, 2028 March 15, 2029 (Maturity) Principal Amount $540,000 560,000 585,000 On or before 30 days prior to each Mandatory Redemption Date set forth above, the Registrar shall (i) determine the principal amount of such Term Certificates that must be mandatorily redeemed on such Mandatory Redemption Date, after taking into account deliveries for cancellation and optional redemptions as more fully provided for above, (ii) select, by lot or other customary random method, the Term Certificates or portions of Term Certificates of such maturity to be mandatorily redeemed on such Mandatory Redemption Date, and (iii) give notice of such redemption as provided in the Ordinance. The principal amount of any Term Certificate to be mandatorily redeemed on such Mandatory Redemption Date shall be reduced by the principal amount of such Term Certificates which, by the 45`h day prior to such Mandatory Redemption Date, either has been purchased in the open market and delivered or tendered for cancellation by or on behalf of the City to the Registrar or optionally redeemed and which, in either case, has not previously been made the basis for a reduction under this sentence. Selection of Certificates for Redemption If less than all of the Certificates are optionally redeemed at any time, the City shall determine the maturity or maturities and the amounts thereof to be redeemed, in integral multiples of $5,000 of principal amount, and if less than all of the Certificates of a particular maturity are to be optionally redeemed, the Paying Agent/Registrar shall select by lot or other customary method of random selection the Certificates within such maturity to be redeemed. The Paying Agent/Registrar will select by lot or other customary method of random selection the specific Tenn Certificates (or with respect to Term Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Tenn Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Certificates having the same maturity which have been purchased or redeemed by the City as follows, at least 45 days prior to the mandatory redemption date: (i) if the City directs the Paying Agent to purchase such Certificates with money in the debt service fund for such Certificates (at a price not greater than par plus accrued interest to the date of purchase), then a credit of 100% of the principal amount of such Certificates purchased will be made against the next mandatory redemption installment due, or (ii) if the City purchases or redeems such Certificates with other available moneys, then the principal amount of such Certificates will be credited against future mandatory redemption installments in any order, and in any annual amount, that the City may direct. 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. The registered owner of any Certificate, all or a portion of which has been called for redemption, will be required to present same to the Paying Agent/Registrar for payment of the redemption price on the portion of the Certificate so called for redemption. Upon presentation and 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 Redemption Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH CERTIFCATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. Book -Entry -Only System This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC"), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book -Entry -Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), or redemption or 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 Of 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 (referred to in this section as the "Securities"). The Securities will be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered Security certificate will be issued for each maturity of the Securities, in the aggregate principal amount thereof, and will be deposited with DTC. DTC, the world's largest depository, is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security (`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 Securities 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 Securities, except in the event that use of the book -entry system for the Securities is discontinued. To facilitate subsequent transfers, all Securities 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 Securities with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities 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 Securities may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Securities 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 such other DTC nominee) will consent or vote with respect to the Securities unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with 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 (nor its nominee), the Paying Agent/Registrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or 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. DTC may discontinue providing its services as securities depository with respect to the Securities at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Security certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book -entry -only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. 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 no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Certificates are in the Book -Entry -Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book -Entry -Only System, and, (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Paying Agent/Registrar The initial Paying Agent/Registrar for the Certificates is The Bank of New York Trust Company, National Association, Dallas, Texas. In the Ordinance, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Certificates are duly paid and any successor Paying Agent/Registrar shall be a bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Certificates. 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. Source of Payment for the Certificates The Certificates are payable as to principal and interest from, and secured by, the proceeds of a continuing, direct annual ad valorem tax, levied within the limits prescribed by law, against taxable property within the City. In the Ordinance the City covenants that while the Certificates are outstanding, it will levy, assess and undertake to collect such tax. The Certificates are also secured by a limited subordinate pledge (not to exceed $1,000) of the net revenues of the City's water and sewer system. See "TAX DATA - Tax Rate Limitations" and "THE CERTIFICATES — Remedies in the Event of Default." Authority for Issuance for the Certificates The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapter 271, Subchapter C, Texas Local Government Code, as amended, and the Ordinance, which specifically authorizes the sale and issuance of the Certificates. Further reference to the Ordinance is hereby made. Use of Proceeds Proceeds from the sale of the Certificates are expected to be expended as follows: Sources of Funds: Principal Amount of Certificates............................................................................ $8,075,000.00 Net Original Issue Premium................................................................................... 37,571.55 AccruedInterest..................................................................................................... 16,655.38 Total Sources of Funds...................................................................................... $8 129 226.93 Uses f Funds: Deposit to Construction Fund................................................................................. $7,900,000.00 AccruedInterest..................................................................................................... 16,655.38 Expenses: Underwriter's Discount......................................................................................... 59,368.25 Cost of Issuance (Includes Bond Insurance Premium) ........................................... 149,500.00 Contingency........................................................................................................... 3,703.30 Total Uses of Funds........................................................................................... $8.129.226.93 Future Debt The following table illustrates the amount of permanent improvement tax bonds authorized by purpose and type and the remaining authorized but unissued tax bonds. In addition to the remaining authorization, the City may issue up to $3,000,000 in future obligations for various projects in 2008. Date of Original Previously Remaining Authorization Purpose Authorization Issued Authorization 5/15/1971 Fire Station $100,000 $0 $100,000 (a) 6/15/1985 Sanitary Land Fill 4,000,000 2,500,000 1,500,000 (a) 6/15/1985 Street Improvements 2,500,000 2,000,000 500,000 (a) 2/2/2002 Police Station 7,700,000 7,700,000 0 2/2/2002 Baseball Complex & Park Improvements 3,200,000 1,200,000 2,000,000 Total $17,500,000 $13,400,000 $4,100,000 (a) The City does not intend to issue the remainder of this authorization. Legal Investments in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201, Texas Government Code, as amended, the Certificates, whether rated or unrated, are (a) legal investments for insurance companies, fiduciaries and trustees and (b) legal investments for the sinking funds of political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, and such political subdivisions may impose a requirement consistent with such act that the Certificates have a rating of not less than "A" or its equivalent to be legal investments for such entity's funds. The Certificates are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, as amended, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Certificates have a rating of not less than "A" or its equivalent to be eligible to serve as collateral for their funds. The City has not made any investigations of any other laws, rules, regulations or investment criteria that might affect the 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 provide for the appointment of a trustee to represent the interests of the Certificate holders upon any failure of the City to perform in accordance with the terms of the Ordinance or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinance does not establish specific events of default with respect to the Certificates and, under State law, there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Certificates could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates; however, such judgment could not be satisfied by execution against any property of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect ad valorem taxes sufficient to pay principal of and interest on the Certificates as it becomes due or perform other material terms and covenants contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Certificates are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Certificate holders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Mayor and Council of the City. Both state law and the City's investment policies are subject to change. Legal Investments Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) (a) certificates of deposit and share certificates issued by a depository institution that has its main office or a branch office in the State of Texas, that are (i) guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund or their respective successors, or are secured as to principal by obligations described in clauses (1) through (6) above or in any other manner and amount provided by law for City deposits, and (b) certificates of deposit or share certificates issued by a depository institution that has its main office or a branch office in the State of Texas that participate in the Certificate of Deposit Account Registry Service; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas; (9) 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 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. Bond proceeds may be additionally invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. A political subdivision such as the City may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's naive 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. IN The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than Aaa or AAA -m or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in the market index. Investment Policies Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar -weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made "with judgment and care, under prevailing circumstances, that person or prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly, the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City; (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value for each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it related to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the Mayor and Council of the City. The City's policies require investments in accordance with applicable state law. The City' Statement of Investment does not exclude any investments allowable under State law described above under "Legal Investments." The City generally invests in obligations of the United States or its Agencies and instrumentalities. Current Investments State law and City ordinances authorize the City to invest in direct obligations of the U.S. Treasury with maturity dates of three years or less, obligations of agencies of the U.S. Government with maturity dates of two years or less, and certain investment pools. The City's investment balances on April 1, 2007 were as follows: Book Market Principal Value Investment Pools $43,106,640 $43,106,640 Agency Securities 13,988,496 13,978,445 Total Portfolio $51,095,136 $57,085,085 Additional Provisions Under Texas law, the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers with person business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Mayor and Council; (3) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perforin 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 the investment in I1 mutual funds in the aggregate to no more than 80% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in non -money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to not more than 15% of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to confirm to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. CITY TAX DEBT Tax Supported Debt Statement The following tables and calculations relate to the Certificates and to all other tax supported debt of the City. The City and various other political subdivisions of government which overlap all or a portion of the City are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of property within the City. Bonded Indebtedness Payable from Ad Valorem Taxes 2006 Assessed Valuation (100% of estimated market value) ................................. $1,748,687,118 (a) Direct Debt: Outstanding Debt (as of April 1, 2007) ....................................................... $35,272,500 (b) The Certificates........................................................................................... 8,075,000 Total Direct Debt......................................................................................... 43.347.500 Debt Service Fund Balance (as of April 1, 2007)...................................................&_L911.280 (a) Certified by the Harris County Appraisal District (the "Appraisal District") and net of exemptions. Such value is subject to change as additions, connections, and deletions are made to the tax roll. See "TAX DATA." (b) Includes revenue -supported debt. 12 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. Tax -Supported Average Annual Requirements (2008-2025) ............................................... $2,355,324 Tax -Supported Maximum Annual Requirement (2008) ....................................................... $2,626,293 Tax Rate of $0.1581 per $100 assessed valuation against the 2006 Certified Assessed Valuation, at 95% collection produces .................................. $2,626,441 Tax -Supported Debt Service Payout..................................................................................... 25.82% in 5 years 52.61 % in 10 years 77.47% in 15 years 96.16% in 20 years 13 Less: Debt The Certificates Total Year Fnd Outstanding Supported by Tax -Supported Principal Tax -Supported 9/30 Debt Service Water & Sewer Debt Service (Due March 15) Interest Total Debt Service 2007 $ 3,154,058 $ 1,190,048 $ 1,964,010 $ - $ - $ - $ 1,964,010 2008 3,256,688 1,196,934 2,059,754 140,000 426,539 566,539 2,626,293 2009 3,207,389 1,180,875 2,026,515 150,000 324,508 474,508 2,501,022 2010 3,179,403 1,166,083 2,013,320 160,000 318,308 478,308 2,491,627 2011 3,161,171 1,154,443 2,006,729 170,000 311,708 481,708 2,488,436 2012 3,120,333 1,140,345 1,979,988 200,000 304,308 504,308 2,484,296 2013 3,087,768 1,129,622 1,958,146 275,000 294,808 569,808 2,527,954 2014 3,042,311 1,113,986 1,928,325 315,000 283,008 598,008 2,526,333 2015 3,013,434 1,105,770 1,907,665 330,000 270,108 600,108 2,507,772 2016 2,977,096 1,095,504 1,881,592 340,000 256,708 596,708 2,478,300 2017 2,680,474 820,163 1,860,311 355,000 242,808 597,808 2,458,118 2018 2,653,086 819,491 1,833,595 370,000 228,308 598,308 2,431,903 2019 2,627,378 820,839 1,806,538 385,000 213,208 598,208 2,404,746 2020 2,475,858 817,270 1,658,588 400,000 197,008 597,008 2,255,595 2021 2,138,628 669,848 1,468,780 420,000 179,583 599,583 2,068,362 2022 2,137,789 676,041 1,461,748 440,000 161,308 601,308 2,063,055 2023 2,127,889 684,011 1,443,877 455,000 142,289 597,289 2,041,166 2024 2,118,745 686,795 1,431,950 475,000 122,526 597,526 2,029,476 2025 2,105291 691,129 1,414,162 495,000 102,223 597,223 2,011,385 2026 - - - 515,000 81,392 596,392 596,392 2027 - - - 540,000 59,430 599,430 599,430 2028 - - - 560,000 36,330 596,330 596,330 2029 - - - 585,000 12,285 597,285 597,285 $52,264,788 $18 159,195 $ 34,105,593 $ 8,075,000 $ 4,568,694 $12,643,694 $ 46,749,287 Tax -Supported Average Annual Requirements (2008-2025) ............................................... $2,355,324 Tax -Supported Maximum Annual Requirement (2008) ....................................................... $2,626,293 Tax Rate of $0.1581 per $100 assessed valuation against the 2006 Certified Assessed Valuation, at 95% collection produces .................................. $2,626,441 Tax -Supported Debt Service Payout..................................................................................... 25.82% in 5 years 52.61 % in 10 years 77.47% in 15 years 96.16% in 20 years 13 Estimated Overlapping Debt The following table indicates the indebtedness, defined as outstanding bonds 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. The information is based upon data secured from individual jurisdictions and/or the Texas Municipal Reports published by the Municipal Advisory Council of Texas. Such figures do not indicate the tax burden levied by the applicable taxing jurisdictions for operation and maintenance or for other purposes. Taxing Body Harris County Harris County Flood Control District Port of Houston Authority La Porte Independent School District San Jacinto College District TOTAL ESTIMATED OVERLAPPING DEBT LaPorte, City of TOTAL DIRECT & OVERLAPPING DEBT Debt Ratios Debt As Of 4/l/2007 $1,810,711,590 38,859,985 314,705,000 107,985,000 69,770,000 Overlapping Percent Amount 0.84% $15,209,977 0.84% 326,424 0.84% 2,643,522 36.47% 39,382,130 5.96% 4,158,292 $61,720,345 $43,347,500 (a) $105,067,845 Direct Tax Supported Direct Tax and Estimated Supported Debt Overlapping Debt Per 2005 Taxable Assessed Valuation ($1,690,264,218) 2.56% 6.22% Per 2006 Taxable Assessed Valuation ($1,748,687,118) 2.48% 6.01% Per Capita (34,825) $1,245 $3,017 Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas (a) Includes the Certificates and revenue -supported debt. TAX DATA General One of the City's principal sources of operational revenue and its principal source of funds for debt service payments on tax supported debt is the receipts from ad valorem taxation. See "SELECTED FINANCIAL DATA - Historical Operations of the City." 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 June 1 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 June 1, or as soon thereafter as practicable, to each property owner whose 14 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 fling suit in a Texas district court. Prior to such appeal or any tax delinquency date, however, the property owner must pay the tax due on the value of that portion of the property involved that is not in dispute or the amount of tax imposed in the prior year, whichever is greater, or the amount of tax due under the order from which the appeal is taken. In such event, the value of the property in question will be determined by the court, or by a jury, if requested by any party. In addition taxing units, such as the City are entitled to challenge certain matters before the appraisal review board, including the level of appraisals of a certain category of property, the exclusion of property from the appraisal records or the grant in whole or in part of an exemption. A taxing unit may not, however, challenge the valuation of individual properties. Although the City has the responsibility for establishing tax rates and levying and collecting its taxes each year, under the Property Tax Code the City does not establish appraisal standards or determine the frequency of revaluation or reappraisal. The appraisal district is governed by a board of directors elected by the governing bodies of the county and all cities, towns, school districts and, if entitled to vote, the conservation and reclamation districts that participate in the appraisal district. The Property Tax Code requires each appraisal district to implement a plan for periodic reappraisal of property to update appraised values. Such plan must provide for reappraisal of all real property in the appraisal district at least once every three years. It is not known what frequency of reappraisals will be utilized by the Harris County Appraisal District or whether reappraisals will be conducted on a zone or county -wide basis. Tax Rate Limitations Article XI, Section 5 of the Texas Constitution, provides for an overall limitation for Home Rule Cities (more than 5,000 population), such as the City, of $2.50 per $100 assessed valuation. The Attorney General of Texas follows a policy, with respect to Home Rule Cities, such as the City, 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 tax rate of $1.50 at a 90% collection rate. 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 is subject to taxation by the City; however, no effort is expected to be made by the Harris County Appraisal District to include on the tax roll tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions, property used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producer; certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; solar and wind -powered energy devices; most individually -owned automobiles; and property of disabled veterans (maximum exemption 12,000). In addition, taxpayers who are over 65 years of age are entitled to apply for an additional exemption from market value of their residential homestead of $60,000. Such combined exemptions amounted to $400,386,113 from the City's 2006 tax roll. Voters of the State of Texas cast ballots on November 3, 1981, approving a state constitutional amendment which permits local governments the option of granting homestead exemptions of up to 20% of market value thereafter. The City has elected to grant a 20% homestead exemption which was approved in 1999. In addition, legislation passed by the Texas Legislature during the 2003 legislative session authorizes cities to refrain from increasing the total ad valorem tax (except for increase attributable to certain improvements) on the residence homestead of the disabled or persons 65 years of age or older and their spouses above the amount of tax imposed on the later of (1) the year such residence qualified for an exemption based on the disability or age of the owner or (2) the year the City chose to establish the above -referenced limitation. The City has not implemented such property tax freeze. An eligible owner of agricultural and timberland may apply to have such properties which meet certain requirements appraised on the basis of productivity value or market value, whichever is less. The City has no such property based on productivity value. 15 On November 7, 1989, voters of the State of Texas approved an amendment to the constitution of the State of Texas which authorizes a property tax exemption for certain business personal property. The City Council has the option to take official action to override the exemption and to continue taxing the property exempted by the amendment. The City Council took such official action to tax the property and to disallow the exemption for 1995 and all future years. The City Council may elect to allow the exemption in subsequent years which could result in a reduction of the City's tax base. Notice, Hearing and Repeal 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. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City, the rate of taxation is set by the City Council based upon the valuation of property within the City as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The City Council may under certain circumstances be required to advertise and hold a public hearing within the City on a proposed tax rate before the City Council can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior year's roll, the prior year's total taxes levied for purposes other than debt service and such contractual obligations (the "rollback rate"), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the City held upon petition of 10% of the City's qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. The City is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the "effective tax rate" until it has held two public hearings 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. The City does not permit such payments, except for those property owners who are over the age of 65 as provided in the Property Tax Code. Collection of Delinquent Taxes Taxes levied by the City are a personal obligation of the property 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 L 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 rigp ht to redeem the rope or by bankruptcy proceedings which restrain the collection of a taxpayer's debts. Historical Analysis of Tax Collection Taxes are due October 1 and become delinquent after January 31. No split payments or discounts are allowed. Penalties and Interest: (a) a delinquent tax incurs a penalty of six percent of the amount of the tax for the first calendar month it is delinquent plus one percent for each additional month or portion of a month the tax remains unpaid prior to July 1 of the year in which it becomes delinquent. However, a tax delinquent on July 1 incurs a total penalty of twelve percent of the amount of the delinquent tax without regard to the number of months the tax has been delinquent; (b) a delinquent tax accrues interest at a rate of one percent for each month or portion of a month the tax remains unpaid; and an additional penalty up to a maximum of 20% of taxes, penalty and interest may be imposed to defray costs of collection for taxes delinquent after July 1. All percentage of collections set forth below exclude penalties and interest. Source: - Collection Ratios - Adjusted Taxable FYE Tax Assessed 9/30 Year Valuation 2001 2000 $ 1,337,247,230 2002 2001 1,427,988,490 2003 2002 1,432,858,080 2004 2003 1,487,400,050 2005 2004 1,635,532,140 2006 2005 1,690,264,218 2007 2006 1,702,150,610 Source: - Collection Ratios - Current Collections Adjusted Tax Rate Tax Levy $ 0.7100 $10,026,472 0.7100 10,734,711 0.7100 10,771,175 0.7100 11,108,701 0.7100 11,603,414 0.7100 12,035,686 0.7100 99.44% Current Collections Total Collections Amount % Amount % $9,780,571 97.55% $9,994,507 99.68% 10,463,515 97.47% 10,701,103 99.69% 10,491,257 97.40% 10,710,693 99.44% 10,829,202 97.48% 11,037,171 99.36% 11,334,572 97.68% 11,499,125 99.10% 11,755,121 97.67% 11,755,121 97.67% (In Process of Collections) Harris County Appraisal District, State Comptroller's Office, Property Tax Division, and information supplied by the Issuer. - Tax Rate Distribution - Tax Year 2006 2005 2004 2003 2002 Maintenance and Operations Tax $0.6120 $0.6120 $0.6120 $0.5750 $0.5750 Debt Service 0.0980 0.0980 0.0980 0.1350 0.1350 Total Tax $0.7100 0.7100 $0.7100 $0.7100 $0.7100 - Delinquent Tax Collection Procedures - In addition to the legal procedures and penalties described under "Levy and Collection of Taxes," the City Attorney, acting as delinquent tax attorney, will file suit to collect delinquent taxes due the City. 17 Analysis of Tax Base (a) - Tax Base Distribution - 18 2006 2005 2004 Amount % Amount % Amount % Commercial & Industrial 655,437,555 31.17% 635,882,179 30.45% 487,362,260 29.62% Residential 1,101,120,061 52.37% 1,069,770,145 51.23% 951,701,240 57.84% Utility & Pipelines 47,517,771 2.26% 54,803,505 2.62% 113,554,210 6.90% Commercial & Industrial Acreage 14,116,983 0.67% 14,991,149 0.72% 14,402,450 0.88% Residential Acreage 36,576,007 1.74% 31,482,540 1.51% 30,075,030 1.83% Personal Property 247,768,346 11.78% 281,426,890 13.48% 48,364,910 2.94% Total Appraised Value Before Exemptions 2,102,536,723 100.00% 2,088,356,408 100.00% 1,645,460,100 100.00% Less: Total Exemptions/Reductions (400,386,113) (398,092,214) (239,318,600) Taxable Assessed Value 1,702,150,610 1,690,264,194 1,406,141,500 2003 2002 2001 Amount % Amount % Amount % Commercial & Industrial 515,992,110 29.81% 530,863,840 31.77% 496,919,160 30.31% Residential 907,810,080 52.44% 871,011,470 52.12% 801,106,090 48.87% Utility & Pipelines 49,644,140 2.87% 48,612,340 2.91% 72,148,570 4.40% Commercial & Industrial Acreage 14,972,590 0.86% 11,791,200 0.71% 12,684,110 0.77% Residential Acreage 30,164,340 1.74% 29,040,740 1.74% 34,090,580 2.08% Personal Property 212,436,710 12.27% 179,778,790 10.76% 222,254,840 13.56% Total Appraised Value Before Exemptions 1,731,019,970 100.00% 1,671,098,380 100.00% 1,639,203,350 100.00% Less: Total Exemptions/Reductions (243,619,920) (238,240,300) (211,214,860) Taxable Assessed Value 1,487,400,050 1,432,858,080 1,427,988,490 (a) These values may differ from those shown elsewhere in this document due to subsequent additions, deletions and adjustments to the tax roll. - Principal Taxpayers - 2006 2005 Taxpayer Type of Property Value % Value % Conoco Phillips Inc. Real & Personal 54,702,820 3.13% 54,702,820 Oxy Vinyls, L.P. Real 49,177,149 2.81% 49,177,149 2.91% Equistar Chemicals LP Real 45,219,482 2.59% 45,219,482 2.68% BP Solvay Polyethylene Real 37,068,510 2.12% 37,068,510 2.19% PPG Industries Inc. Real & Personal 32,016,935 1.83% 46,659,985 2.76% Dupont Dow Elastomers LLC Personal 25,986,060 1.49% 25,986,060 1.54% CenterPoint Energy Inc. Real & Personal 24,651,811 1.41% 24,651,811 1.46% Dow Chemcial Co. Real & Personal 20,576,356 1.18% 20,576,356 1.22% Atofina Petrochemicals Real & Personal 20,215,323 1.16% 20,215,323 1.20% PPG Industries Inc. Real & Personal 14,643,050 0.84% (a) - Rohm & Haas Bayport Inc. Real (a) - 11,611,100 0.69% Top Ten Assessed Values: 269,554,676 281,165,776 Percentage of Assessed Value: 18.54% 19.87% Source: City of La Porte, Tax Department. (a) Not a Top Ten principal taxpayer in that year. 18 Municipal Sales Tax History The City has adopted the Municipal Sales and Use Tax Act, Texas Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Certificates. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. The voters of the City approved the imposition of an additional sales and use tax of one-half of the percent ('/z% of 1%) for economic development and collection of the additional tax went into effect in September 1999. The sales tax for economic development is collected solely for the benefit of City of La Porte Economic Development Corporation (the "Corporation"), and may be pledged to secure payment of sales tax revenue bonds issued by the Corporation. The voters of the City also approved the imposition of an additional sales and use tax of one-half of the percent ('/a % of 1%) for street maintenance and collection of the additional tax went into effect in October 2006. (a) Based on population estimates by the City. Industrial District Contracts The City has created within its extraterritorial jurisdiction, but outside the City limits, two areas wherein the City agrees with taxpayers to not annex the entire area in return for payments in lieu of taxes (the "Industrial Districts"), the Battleground Industrial District and the Bayport Industrial District. The City has annexed a portion of each industry located within the Industrial Districts, and has entered contracts with each such industry. The contracts specify payments to be made to the City in lieu of ad valorem taxes and thereby protect the industries from further annexation by the City during the term of the seven year contract. These payments are computed as follows: The following industries pay taxes on the portion of each industry within the City limits and an in -lieu payment of the remaining total value which constitutes the protected Industrial District. These annual in -lieu payments, when added to the full City taxes on the annexed portion are an amount equal to the sum of 53% of the amount of ad valorem taxes which would be payable to the City if all the Industry land and improvements were with in the City. On January 1, 2001, the City and the industries renewed the contracts for an additional seven year period through December 31, 2007. The contracts also contain a new construction incentive clause that allows new construction in the industrial area to be assessed in lieu of taxes at a 30% rate, instead of the 53% rate. Listed below is a schedule of the payments received in 2005 and 2006: 2006 Industry % of Equivalent of - FYE Tax Total Ad Valorem Ad Valorem Per 9/30 Year Collected Tax Levy Tax Rate Capita (a) 2001 2000 $2,866,496 28.59% $ 0.2144 $ 88.59 2002 2001 2,862,391 26.66% 0.2004 86.98 2003 2002 2,764,876 25.67% 0.1930 81.83 2004 2003 2,993,480 26.95% 0.2013 88.80 2005 2004 3,166,900 27.29% 0.1936 93.73 2006 2005 3,741,321 31.09% 0.2213 107.43 (a) Based on population estimates by the City. Industrial District Contracts The City has created within its extraterritorial jurisdiction, but outside the City limits, two areas wherein the City agrees with taxpayers to not annex the entire area in return for payments in lieu of taxes (the "Industrial Districts"), the Battleground Industrial District and the Bayport Industrial District. The City has annexed a portion of each industry located within the Industrial Districts, and has entered contracts with each such industry. The contracts specify payments to be made to the City in lieu of ad valorem taxes and thereby protect the industries from further annexation by the City during the term of the seven year contract. These payments are computed as follows: The following industries pay taxes on the portion of each industry within the City limits and an in -lieu payment of the remaining total value which constitutes the protected Industrial District. These annual in -lieu payments, when added to the full City taxes on the annexed portion are an amount equal to the sum of 53% of the amount of ad valorem taxes which would be payable to the City if all the Industry land and improvements were with in the City. On January 1, 2001, the City and the industries renewed the contracts for an additional seven year period through December 31, 2007. The contracts also contain a new construction incentive clause that allows new construction in the industrial area to be assessed in lieu of taxes at a 30% rate, instead of the 53% rate. Listed below is a schedule of the payments received in 2005 and 2006: 19 2006 Industry In Lieu Payments Air Liquide (Air Plant) - Air Liquide (Alphagaz) 14,706 Air Products Mfg. Corp. - Celanese - H2 Purification Facility 2,428 Hyco 1, II, III 129,954 19 2005 City Taxes In Lieu Payments City Taxes 22,506 - 22,165 14,706 17,437 12,399 1,506 - 1,506 4,530 2,064 4,530 14,589 127,016 14,589 19 20 2006 2005 Industry In Lieu Payments City Taxes In Lieu Payments City Taxes N2 Backup 1,543 2,033X1,4 0 2,033 Syngas 35,115 33,890 34,299 33,890 Trans. & Distribution 3,992 695 3,816 695 Ex Tex La Porte, LP 29,958 - 31,587 - Akzo Nobel, Inc (Alkyls) 107,023 51,478 177,229 21,618 Great Lakes Chemical Corp. 11,759 - 14,720 - Albemarle Catalysts LLC 419,932 11,871 414,630 32,426 Akzo Nobel Polymer Chemical LLC 107,023 51,478 116,919 49,291 Inventory @ Southern Warehouse 3,941 - _ _ Inventory @ Heller 1,938 - 2,157 - Acro Midcon LLC 12,060 1,761 11,382 1,761 Aristech Chemical Corp. 326,151 74,489 344,953 71,159 Total Petrochemicals (Atofina) 645,461 145,115 605,959 143,529 Inventory @ Heller 6,195 - 3,032 - Baker Petrolite Corp. 63,330 39,441 47,216 39,441 Battleground Water Co. 1,784 - 1,054 668 Bayport North Industrial Park LP 13,958 - 23,944 - Tuffli Company 1,552 - 1,345 - Ruhrpumpen Inc 2,382 _ - - BNIP New Dec Venture Ltd 4,639 - - _ Vantade Dev 38 inc 11,376 - - _ D & M Tuffli Family Trust 4,365 - - _ Bayshore Industrial Inc. 88,471 - 86,506 - Ineos USA LLC (BP PAO) 50,651 6,612 40,650 6,612 BP Solvay Polethlene NA 413,975 270,190 440,537 263,186 BP Amoco Polymers Inc. 298,719 - 303,729 - Bryan Logistics Whse 5,332 - 5,332 - CBSL Transportation 5,977 - 5,494 - Quality Carriers _ _ - - Superior Carriers 11,889 - 6,150 - Chusei (USA), Inc. 36,583 - 29,419 - Copelco Capital 2,616 - 5,727 _ Mitsui Leasing _ - - - Ronald Dana (formerly Dunn) 492 1,137 523 1,137 Dana Tank Container, Inc. 4,392 - 7,451 - DN CN, LLC 475 - 437 - Dolima Properties LP 20,371 - 18,697 - Dow Chemical U.S.A. 236,164 144,274 187,809 144,274 Inventory @ Heller _ _ 873 - SNPE Chemicals Inc Inventory @ Heller _ - - _ Drago Supply Company 7,941 1,952 8,066 1,952 DSI Transports, Inc (Formerly Arco Pipeline) 4,350 - 4,356 - E.I. DuPont 157,996 345,215 133,579 324,261 DB Western, Inc - Texas 20,731 - 19,174 - La Porte Properties LLC 1,281 - 1,280 - Sentinal Transportation 2,115 - 2,225 _ Invista, Inc. 168,320 - 157,085 - Inventory @ Heller _ _ - Inventory @ Southern Warehouse _ - - Equistar Chemicals 228,048 316,307 154,213 316,307 Olefins Joint Venture LP 1,039,435 - 1,022,949 - Eurecat U.S., Inc. 16,420 3,646 16,705 - Fairmont Supply - _ _ Goodyear Tire & Rubber Co. 10,943 19,536 22,933 16,052 Greif Containers 42,413 940 43,123 940 Greif Brothers 10,753 7,159 10,581 7,159 GSL Constructors, Ltd 6,203 - 634 GSL Investments Inc 6,203 - 6,169 - Tyco Flow Control 21,180 - 19,383 - Harcros Chemicals 6,226 - 6,468 - GSL Partners Sub Four LP 1,771 - 1,701 - GSL Partners Sub Four LP 2,048 - 2,048 - Jontun Paints Inc 1,578 - 1,519 - 20 21 2006 2005 Industry In Lieu Payments City Taxes In Lieu Payments City Taxes GSL Partners Sub Seven LP 2,445 - 2,444 - Sulzer Chemtech USA 710 - 2,616 - GSL Partners Sub Seven LP 2,400 - 2,380 - United Environmentals 2,818 - 2,813 - GSL Partners Sub Seven LP - - - - Gulbrandsen technologies 7,528 2,461 7,042 2,461 Houston Polymers Terminal 18,485 - 18,747 - Strang Ventures LLC 2,205 455 596 693 Jacobson Warehouse Co 2,546 - 1,591 - Katoen Natie Gulf Coast Inc 83,961 - 83,134 - Kaver Limited Partnership 10,738 1,024 10,349 683 Laidlaw Environmental - - - - La Porte Methonal 37,885 - 26,998 - Linde Gas (split from La Porte Meth) 76,515 41,443 90,314 41,443 Lubrizol Corporation 80,671 59,626 65,940 59,626 Lyondell Chemical Co. 1,774 - 1,774 - Matheson Tri -Gas Inc. (Acetyl) - 2,050 - 2,050 Matheson Tri -Gas Inc. (Air Sep) 14,492 5,325 10,860 5,325 Basell USA Inc 6,440 - 8,970 - Millenium Petrochemical 351,277 - 392,159 - Port Central LTD 7,332 - 3,003 - NOCS Northwest, Inc. 6,392 4,192 6,499 4,192 Nissian Chemical, Inc. 34,270 - 34,111 - Noltex L.L.C. 145,097 - 144,957 - Oakwood Capital, LP 7,880 - 7,776 - Unitor Ships Service Inc 20,213 - 14,082 Ohmstede Machine Works 2,920 4,581 2,987 4,041 Oxy Vinyls LLP - Electrochemical 58,558 224,895 39,561 215,469 Oxy Vinyls LP 364,912 133,689 354,463 133,689 Inventory @ Southern Warehouse - - - - Phyto -Source 27,020 - 29,142 - Praxair, Inc. 108,019 48,859 108,815 48,784 South Central 4,118 - 1,679 2,623 Texas Genco LP 66,870 - 67,198 - Centerpoint Energy 49,534 - - 43,564 Rohm & Haas 24,071 82,439 44,118 82,439 Inventory @ Heller 22,989 - 24,779 - Schutz Containers 1,646 - 1,743 - Solvay Interox, Inc. 74,856 69,078 81,811 69,078 Inventory @ Heller 1,070 - 3,682 - South Coast Terminals 3,758 - 4,246 - Southern Ionics, Inc. 27,167 - 26,328 - Houston Chemical Services - - _ Texas Electric Company 3,231 1,264 3,225 M.R. Tom, Inc (Ragsdale) - - - - Tuffli Company, Inc (Rexene) 14,006 651 14,006 651 Don & Martha Tuffli Trust 2,560 - 2,589 - Don & Martha Tuffli Trust 4,622 - 4,442 - Aluma Systems USA - - 110 - Calpine Corporation 587,043 - - _ Turbine Maintenance 587,043 - 294,090 - Turbo Storage Services 2,146 - 2,243 - UC1SCO - _ United Rentals 482 30 304 - Total 2,269,1 6,806, Z-ZS0-393- 21 Historical Operations of the City SELECTED FINANCIAL DATA - 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 Ordinances and the Net Revenue pledge to the Certificates, are pledged to pay principal and interest on the Certificates and the City's Outstanding Tax Supported Debt. EXPENDITURES General Government 6,047,422 Fiscal Year Ended September 30 5,606,562 5,412,412 2006 (a) 2005 (a) 2004 (a) 2003 (a) 2002 (a) REVENUES 10,165,683 Public Works 2,360,073 2,430,322 2,361,192 Property taxes 10,454,157 10,109,435 9,101,667 8,824,439 8,721,564 Franchise taxes 1,986,698 1,805,800 1,718,875 1,682,849 1,650,349 Sales taxes 2,495,547 2,108,192 1,995,654 1,843,251 1,908,261 Industrial payments 7,470,700 6,991,926 6,896,112 7,093,854 6,701,082 Other taxes 69,310 49,900 37,955 38,068 41,322 Licenses and permits 683,284 531,091 320,405 199,970 238,535 Fines and forfeits 848,232 678,205 554,559 847,250 614,534 Charges for services 3,852,570 3,233,453 2,948,580 2,275,333 2,108,739 Intergovernmental 8,489 11,940 7,586 302,912 385,722 Interest 652,700 268,419 149,347 211,241 301,538 Miscellaneous 24,778 37,185 32,605 88,970 143,668 Total 28,546,465 25,825,546 23,763,345 23,408,137 22,815,314 EXPENDITURES General Government 6,047,422 5,593,929 5,606,562 5,412,412 5,149,173 Public Safety 11,071,829 10,532,857 10,414,544 10,477,080 10,165,683 Public Works 2,360,073 2,430,322 2,361,192 2,556,011 4,187,428 Health & Sanitation 1,813,812 1,808,313 1,758,964 1,823,462 - Culture & Recreation 3,010,725 3,067,815 3,245,144 3,475,888 3,297,865 Total 24,303,861 23,433,236 23,386,406 23,744,853 22,800,149 Excess (Deficiency) of Revenues 11,115,660 9,181,327 7,449,955 6,842,025 7,127,920 Over Expenditures 4,242,604 2,392,310 376,939 (336,716) 15,165 OTHER FINANCING SOURCES (USES): Transfers In 647,449 394,338 1,393,757 1,300,821 1,350,000 Transfers Out (3,045,803) (1,097,526) (1,162,766) (1,250,000) (1,904,664) Proceeds from Sale of Assets 90,083 42,250 Total (2,308,271) (660,938) 230,991 50,821 (554,664) Net Change in Fund Balance 1,934,333 1,731,372 607,930 (285,895) (539,499) Fund Balance - Beginning 9,181,327 7,449,955 6,842,025 7,127,920 7,667,419 Ending Fund Balance 11,115,660 9,181,327 7,449,955 6,842,025 7,127,920 Report of the City of La Porte. (a) Source: Comprehensive Annual Financial 22 Pension Fund The City participates in the Texas Municipal Retirement System ("TMRS"), an agency operated by the State of Texas. Employees of municipal governmental entities who participate in TMRS contribute a fixed percentage, currently 7% of their gross pay, and the City currently contributes 13.09% of such employee's gross pay to TMRS. As employees leave municipal employment other than through retirement, they may withdraw from TMRS those funds they contributed, but forfeit the City's contributions. The City's requirements for current contributions are offset by the amounts of such forfeitures. All full-time employees are covered by TMRS and both the City and the covered employees made the required contributions for the year ended December 31, 2005. The City had an accrued liability for prior service benefits in the amount of approximately $10,386,612 as of December 31, 2005. The liability for prior service benefits will be amortized over a period of twenty-five years or less by contributions from the City which are a level percentage of payroll. For more detailed information regarding the City's employee retirement systems, pension plans and other post -employment benefits, see Note 6 to the City's Comprehensive Annual Financial Statement. Financial Statements A copy of the City's Financial Statements for the fiscal year ended September 30, 2006 is attached hereto in APPENDIX B. Copies of such statements for preceding years are available, for a fee, upon request. ADMINISTRATION OF THE CITY Mayor and City Council All powers of the City and the determination of all matters of policy shall be vested in the City Council of La Porte, Texas (the "Council"). Council shall execute the laws and administer the government of the City. The mayor and the two councilpersons-at-large shall be elected by a majority vote of the City at large. The City shall be divided into six districts, Districts 1, 2, 3, 4, 5 and 6, and one councilperson shall be elected from each district by majority vote of the resident voters of such district. The mayor and councilpersons shall each hold their respective offices for a term of three years and until their successors shall have been elected and duly qualified. LEGAL MATTERS Legal Opinions The City will furnish the Underwriters a transcript of certain certified proceedings prepared incident to the authorization and issuance of the Certificates, including a certified copy of the unqualified approving opinion of the Attorney General of Texas, as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Certificates, which the Attorney General will have examined, are valid and binding obligations of the City under the Constitution and laws of the State of Texas. The City also will furnish the approving legal opinion of Andrews Kurth LLP, Bond Counsel, to the effect that, based upon an examination of such transcript, the Certificates are valid and binding obligations of the City under the Constitution and laws of the State of Texas. In its capacity as Bond Counsel, Andrews Kurth LLP has reviewed the information appearing in this Official Statement under the headings "CONTINUING DISCLOSURE OF INFORMATION" (except "Compliance With Prior Undertakings), "THE CERTIFICATES" (except "Book -Entry -Only System," "Use of Certain Terms in Other Sections of this Official Statement," "Use of Proceeds," "Future Debt" and "Remedies in the Event of Default"), "TAX DATA - Tax Rate Limitations," "LEGAL MATTERS - Legal Opinions," "TAX EXEMPTION," "TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES" and "QUALIFIED TAX- EXEMPT OBLIGATIONS" to determine whether such information fairly summarizes the documents referred to therein and is correct as to matters of law. Such firm has not, however, independently verified any of the factual information contained in this Official Statement nor have they conducted an investigation of the affairs of the City for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon such firm's limited participation as an assumption of responsibility for, or an expression of opinion of any kind with regard to, the accuracy or completeness of any of the information contained herein. The fee of Bond Counsel for its services with respect to the Certificates is contingent upon the sale and delivery of the Certificates. 23 No -Litigation Certificate The City will furnish to the Underwriters 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 Underwriters 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 (1) is excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), from gross income of the owners thereof for federal income tax purposes and (2) is not includable in the alternative minimum taxable income of individuals or corporations, except as described below. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Certificates. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the Ordinance and has relied on representations by the City with respect to matters solely within the knowledge of the City, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Certificate proceeds and any facilities financed therewith, the source of repayment of the Certificates, the investment of Certificate proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Certificate proceeds and certain other amounts be paid periodically to the United States and that the City file an information report with the Internal Revenue Service (the "Service"). If the City should fail to comply with the covenants in the Ordinance, or if its representations relating to the Certificates that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. Interest on all tax-exempt obligations, such as the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. 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. 24 Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. If a tax-exempt obligation, such as the Certificates, was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue, the Code provides ordinary income tax treatment of gain recognized upon the disposition of such "market discount bond." A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., a market discount). Such treatment applies to "market discount bonds" to the extent the gain from the disposition thereof exceeds the accrued market discount of such bonds unless a statutory de minimis rule applies. The "accrued market discount' is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of the Certificates. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. TAX TREATMENT OF ORIGINAL ISSUE DISCOUNT AND PREMIUM CERTIFICATES Discount Certificates Some of the Certificates may be offered at initial offering prices which are less than the stated redemption prices at maturity of such Certificates. If the initial offering prices of the Certificates are lower than the stated redemption price payable at maturity, the Certificates of that maturity (the "Discount Certificates") will be considered to have "original issue discount' for federal income tax purposes. An initial owner who purchases a Discount Certificate in the initial public offering of the Certificates at such an initial offering price will acquire such Discount Certificate with original issue discount equal to the difference between (a) the stated redemption price payable at the maturity of such Discount 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. 25 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 initial offering prices which exceed the stated redemption prices payable at the maturity of such Certificates. If any of the Certificates of such maturities are sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or organizations acting in the capacity of wholesalers or underwriters) at such initial offering prices, each of the Certificates of such maturities ("Premium Certificates") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium Certificate in the hands of an initial purchaser who purchases such Certificate in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Certificate by the amount of amortizable bond premium. This reduction in basis will 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. The amount of bond premium on a Premium Certificate which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Certificate) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Certificate based on the initial purchaser's original basis in such Certificate. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Certificates that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial, offering prices for the Certificates of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Certificates should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Certificates. QUALIFIED TAX-EXEMPT OBLIGATIONS Section 265 of the Code provides, in general, that interest expenses incurred to acquire or carry tax-exempt obligations are not deductible from the gross income of the holder. For certain holders that are "financial institutions" within the meaning of such section, complete disallowance of such expense would apply to taxable years beginning after December 31, 1986, with respect to tax-exempt obligations acquired after August 7, 1986. Section 265(b) of the Code provides an exception to this rule for interest expense incurred by financial institutions to carry tax-exempt obligations (other than private activity bonds which are designated by an issuer as "qualified tax- exempt obligations"). An issuer may only designate an issue as an issue of "qualified tax-exempt obligations" where less than $10 million of tax-exempt obligations are issued by the issuer during the calendar year in which the issue so designated is issued. The City will designate the Certificates as "qualified tax-exempt obligations." Further, the City will represent that it has or will take such action necessary for the Certificates to constitute "qualified tax-exempt obligations." Notwithstanding the designation of the Certificates as "qualified tax-exempt obligations," financial institutions acquiring the Certificates will be subject to a twenty percent (20%) disallowance of interest expenses allocable to the Certificates. 26 CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under the headings "OFFICIAL STATEMENT SUMMARY — Selected Financial Information," "CITY TAX DEBT (except for "Estimated Overlapping Debt"), "TAX DATA," "SELECTED FINANCIAL DATA," "INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE CITY - Current Investments," and in Appendix "B". The City will update and provide this information within six months after the end of each fiscal year. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to the Texas Municipal Advisory Council, the state information depository ("SID") designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the "SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12, as amended and in effect from time to time (the "Rule"). The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not commissioned or are not available by the required time, the City will provide unaudited financial statements and audited financial statements when and if they become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix "B" or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 st each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and the SID of the change. Material Event Notices The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (7) modifications to rights of holders of the Certificates; (8) calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates; and (11) rating changes. Neither the Certificates nor the Ordinance makes any provision for debt service reserves or liquidity enhancement. In addition, the City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board (the "MSRB"). Availability of Information From NRMSIRs and SID The City has agreed to provide the foregoing information only to NRMSIRs, the MSRB and the SID. The information will be available to holders of and beneficial owners of the Certificates only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council of Texas is 600 West 8`n Street, P.O. Box 2177, Austin, Texas 78768-2177, and its telephone number is (512) 476-6947. The MAC has also received SEC approval to operate and has begun to operate, a "central post office" for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post 27 office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.diselosureUSA.org ("DisclosureUSA"). The City may utilize DisclosureUSA for the filing of information relating to the Certificates. Limitations and Amendments The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Certificates at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement. Holders or beneficial owners of Certificates may seek as their sole remedy a writ of mandamus to compel the City to comply with its agreement. No default by the City with respect to its continuing disclosure agreement shall constitute a breach of or default under the Ordinance for purposes of any other provision of the Ordinance. Nothing in this paragraph is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. The City's undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions. The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status or type of operations of the City if, but only if (i) the agreement, as so amended, would have permitted an Underwriters to purchase or sell the 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 agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid, but only to the extent that its right to do so would not prevent an Underwriters from purchasing the Certificates in the initial primary offering in compliance with the Rule. If the City amends the agreement, it has agreed to include with any financial information or operating data next provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Compliance With Prior Undertakings The City has complied in all material respects with its prior continuing disclosure agreements made in accordance with SEC Rule 15c2-12, except as described in this paragraph. The City became obligated to make annual disclosure of certain financial information by filing with the state information depository ("SID") and each nationally recognized municipal securities information repository ("NRMSIR") in an offering that took place in 1998. Due to an administrative oversight, the fiscal years ending 2002 and 2003 audited financial statements were not timely filed with the SID and each NRMSIR. In addition, the City issued official statements for its bond issuances in 2000 and 2002, and incorrectly stated that it was in compliance with prior continuing disclosure undertakings. For the City's General Obligation debt, certain required financial information was not timely filed for fiscal years ending 2002, 2003, 2005 and 2006 with the SID and each NRMSIR. A notice of failure to provide annual financial information as required regarding such failures were filed in October 2004 and May 2007 to correct prior misfiling. For the City's Water and Sewer System debt, certain required financial information was not timely filed for fiscal year 2004 and 2006 with the SID and each NRMSIR. A notice of failure to provide annual financial information as required regarding such failures were filed in October 2004 and May 2007 to correct prior misfiling. The City is implementing corrective measures to ensure timely and accurate filing in the future. 28 BOND INSURANCE The MBIA Insurance Corporation Insurance Policy The following information has been furnished by MBIA Insurance Corporation ("MBIA") for use in this Official Statement. Reference is made to APPENDIX D for a specimen of MBIA's policy (the "Policy"). MBIA does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Policy and MBIA set forth under the heading `BOND INSURANCE". Additionally, MBIA makes no representation regarding the Certificates or the advisability of investing in the Certificates. The MBIA Policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the City to the Paying Agent or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Certificates as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by the MBIA Policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration, unless MBIA elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any Owner of the Certificates pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Owner within the meaning of any applicable bankruptcy law (a "Preference"). MBIA's Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Certificates. MBIA's Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Certificates upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. MBIA's Policy also does not insure against nonpayment of principal of or interest on the Certificates resulting from the insolvency, negligence or any other act or omission of the Paying Agent or any other paying agent for the Certificates. Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by MBIA from the Paying Agent or any owner of a Certificate the payment of an insured amount for which is then due, that such required payment has not been made, MBIA on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Certificates or presentment of such other proof of ownership of the Certificates, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Certificates as are paid by MBIA, and appropriate instruments to effect the appointment of MBIA as agent for such owners of the Certificates in any legal proceeding related to payment of insured amounts on the Certificates, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners or the Paying Agent payment of the insured amounts due on such Certificates, less any amount held by the Paying Agent for the payment of such insured amounts and legally available therefor. MBIA Insurance Corporation MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. MBIA, either directly or through subsidiaries, is licensed to do business in the Republic of France, the United Kingdom and the Kingdom of Spain and is subject to regulation under the laws of those jurisdictions. The principal executive offices of MBIA are located at 113 King Street, Armonk, New York 10504 and the main telephone number at that address is (914) 2734545. 29 Regulation As a financial guaranty insurance company licensed to do business in the State of New York, MBIA is subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for MBIA, limits the classes and concentrations of investments that are made by MBIA and requires the approval of policy rates and forms that are employed by MBIA. State law also regulates the amount of both the aggregate and individual risks that may be insured by MBIA, the payment of dividends by MBIA, changes in control with respect to MBIA and transactions among M 31A and its affiliates. The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. Financial Strength Ratings of MBIA Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa." Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the financial strength of MBIA "AAA." Fitch Ratings rates the financial strength of MBIA "AAA." Each rating of MBIA should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of MBIA and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold the Certificates, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Certificates. MBIA does not guaranty the market price of the Certificates nor does it guaranty that the ratings on the Certificates will not be revised or withdrawn. MBIA Financial Information As of December 31, 2006, MBIA had admitted assets of $10.9 billion (audited), total liabilities of $6.9 billion (audited), and total capital and surplus of $4.0 billion (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of March 31, 2007, MBIA had admitted assets of $11.2 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $4.2 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. For further information concerning MBIA, see the consolidated financial statements of MBIA and its subsidiaries as of December 31, 2006 and December 31, 2005 and for each of the three years in the period ended December 31, 2006, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 and the consolidated financial statements of MBIA and its subsidiaries as of March 31, 2007 and for the three month period ended March 31, 2007 and March 31, 2006 included in the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2007, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof. Copies of the statutory financial statements filed by MBIA with the State of New York Insurance Department are available over the Internet at the Company's web site at http://www.mbia.com and at no cost, upon request to MBIA at its principal executive offices. Incorporation of Certain Documents by Reference The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated by reference into this Official Statement: The Company's Annual Report on Form 10-K for the year ended December 31, 2006; and The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007. Any documents, including any financial statements of MBIA and its subsidiaries that are included therein or attached as exhibits thereto, filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Company's most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K, and prior to the termination of the offering of the Certificates offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents. Any 30 statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement. The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the Company's SEC filings (including (1) the Company's Annual Report on Form 10-K for the year ended December 31, 2006, and (2) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007) are available (i) over the Internet at the SEC's web site at http:/./www.sec.goy; (ii) at the SEC's public reference room in Washington D.C.; (iii) over the Internet at the Company's web site at http://www.mbia.com; and (iv) at no cost, upon request to MBIA at its principal executive offices. DISCLOSURE OF GUARANTY FUND NONPARTICIPATION: In the event the Insurer is unable to fulfill its contractual obligation under this policy or contract or application or certificate or evidence of coverage, the policyholder or certificateholder is not protected by an insurance guaranty fund or other solvency protection arrangement. UNDERWRITING A syndicate led by Coastal Securities Inc. (the "Underwriters") has agreed to purchase the Certificates, subject to certain conditions, and has agreed to pay a purchase price reflecting the par amount of the Certificates, plus a net original issue premium of $37,571.55, less an Underwriters' discount of $59,386.25, plus accrued interest. The prices and other terms respecting the offering and sale of the Certificates may be changed from time to time by the Underwriters after such Certificates are released for sale, and the Certificates may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Certificates into investment accounts. FINANCIAL ADVISOR RBC Capital Markets (the "Financial Advisor") is employed by the City in connection with the issuance of the Certificates and in such capacity, has assisted the City in compiling documents related thereto. Although the Financial Advisor assisted in drafting this Official Statement, the Financial Advisor has not independently verified all of the data contained in it or conducted a detailed investigation of the affairs of the City to determine the accuracy or completeness of this Official Statement. No person should presume that the limitedparticipation of the Financial Advisor means that the Financial Advisor assume any responsibility for the accuracy or completeness of any of the information contained in the Official Statement. The fee of the Financial Advisor for services rendered is contingent upon the issuance and sale of the Certificates. The Financial Advisor has reviewed the information in this Official Statement in accordance with their responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. RBC Capital Markets is the name under which RBC Dain Rauscher Inc., a broker-dealer, conducts its investment banking business. 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 descriptions herein of the Certificates and the Ordinance do not purport to be complete and all such descriptions or references thereto are qualified in their entirety by reference to the complete form of the Ordinance. Statements made herein involving estimates or projections, whether or not expressly identified as such, should not be construed to be statements of fact or as representations that such estimates or projections will ever be attained or will approximate actual results. Any summaries or excerpts of constitutional provisions, statutes, ordinances or other documents do not purport to be complete statements of same and are made subject to all of the provisions thereof. Reference should be made to such original sources in all respects. a Certification as to Official Statement At the time of payment for and delivery of the Certificates, the City will furnish the Underwriters a certificate, executed by the City Secretary and Mayor, acting in their official capacities, to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in this Official Statement, on the date thereof and on the date of delivery were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, this Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary to make the statements herein, in the light of the circumstances under which they were made, not misleading; and (c) insofar as the descriptions and statements, including financial data contained in this Official Statement, of or pertaining to entities other than the City and their activities are concerned, such statements and data have been obtained from sources which the City believes to be reliable and that the City has no reason to believe that they are untrue in any material respect. Updating of Official Statement The City will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the City and, to the extent that information comes to its attention, in the other matters described in the Official Statement, until twenty-five days subsequent to the delivery of the Certificates. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the City's undertaking to provide ongoing secondary market disclosure. CONCLUDING STATEMENT To the extent that any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty and no representation is made that any of these statements have been or will be realized. Information in this Official Statement has been derived by the City from official and other sources and is believed by the City to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City and its accuracy is not guaranteed. Neither this Official Statement nor any statement that may have been made orally or in writing is to be construed as or as part of a contract with the original purchasers or subsequent owners of the Certificates. ATTEST: /s/ Martha Gillett City Secretary City of LaPorte, Texas /s/ Alton E. Porter Mayor City of LaPorte, Texas 32 APPENDIX A Economic and Demographic Characteristics The following information has been derived from various sources, including the Texas Municipal Reports, U.S. Census data, "Sales Management Survey of Buying Power", Texas Almanac 2004, and City officials. While such sources are believed to be reliable, no representation is made as to the accuracy thereof. - City Economics - The City of La Porte (the "City"), located in Harris County, encompasses 19 square miles. The City is located approximately 25 miles east of the City of Houston central business district and a portion of the City lies along the Houston Ship Channel. Incorporated in 1892, the City operates under a Mayor -Council form of government with a mayor and eight council members responsible for enacting legislation, adopting budgets and determining the policies of the City. The City, had 2000 census population of 31,880, and an estimated 2006 population of 34,825. The largest taxpayers of the City include Oxy Vinyls L.P., Conoco Phillips Inc., and Equistar Chemicals LP. - Transportation — Transportation is provided by State Highway 225, which provides access to the City to the north and connects to the west with the Sam Houston Parkway and Interstate 610, each of which are multi -lane limited access freeways which encircle the City of Houston. Access to the City from the south is provided by State Highway 146, which extends into Northeast Texas, allows access from the south through the City. Houston's Bush Intercontinental Airport provides most of the air cargo and air passenger service to the Houston region. Hobby Airport, to the south of downtown Houston, provides passenger service and some cargo capabilities. The City -owned La Porte Municipal Airport provides private and chartered air transportation through a fully approved FAA facility. Recreation The City offers over 140 acres of park space, four public pools, and a number of major recreational amenities. Sylvan Beach Park, a historical landmark, provides beach front access to Galveston Bay. The City's municipal golf course is considered one of the finest municipal golf courses in Texas and is often the site for regional and statewide tournaments. - The Port of Houston Authority - The Port of Houston, the world's 3`d largest port, is a 25 -mile long (40 -kilometer) complex of diversified public and private facilities just a few hours' sailing time from the Gulf of Mexico. The Houston's location makes it an ideal gateway between interior U.S. markets and foreign countries throughout the world. The port ranks first in the United States in foreign waterborne commerce and second in total tonnage. The Port of Houston Authority owns and operates the public facilities along the Houston Ship Channel and is the channel's official sponsor. The Authority is an autonomous political subdivision of the State of Texas and is governed by a board of seven commissioners. The Houston Ship Channel has long been a catalyst for the growth of Harris County. The findings of the latest economic impact study are a strong confirmation of the important and critical role the Port of Houston plays both locally and regionally. The Port Authority's staff is continuously working to attract more cargo and new services which will benefit the community. Since the 1994 study, annual tonnage figures at the Port have risen by 26 million. Such an exceptional increase in trade signifies Houston has maintained its position as a world class port and a leader in the United States maritime industry. The following is a ten year history of construction activity within the City: This is a ten year history of construction activity within the City: Fiscal Year Units 1995 177 1996 202 1997 251 1998 282 1999 328 2000 315 2001 186 2002 177 2003 185 2004 134 2005 149 2006 134 Value 18,914,208 21,610,120 27,099,213 42,898,974 54,686,224 26,147,091 29,717,688 28,371,626 25,415,559 19,188,048 37,442,205 59,330,779 APPENDIX B CITY OF LA PORTE, TEXAS Excerpts from Comprehensive Financial Report for the Year Ended September 30, 2006 CITY OF LA PORTE, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT For the fiscal year ended September 30, 2006 Prepared by: Department of Finance INTRODUCTORY SECTION 6 d04 Y 0, La Established 1891�, a rEXAS January 5, 2007 To the Honorable Mayor, Members of the Governing Council and Citizens of the City of La Porte, Texas: The Finance Department and City Manager's Office are pleased to submit the Comprehensive Annual Financial Report for the City of La Porte, Texas for the fiscal year ended September 30, 2006. This report is published to provide the City Council, City staff, our citizens, our bondholders and other interested parties with detailed information concerning the financial condition and activities of the City government. This report consists of management's representations concerning the finances of the City of La Porte. Consequently, management assumes full responsibility for the completeness and reliability of all of the information presented in this report. To provide a reasonable basis for making these representations, management of the City has established a comprehensive internal control framework that is designed both to protect the government's assets from loss, theft or misuse and to compile sufficient reliable information for the preparation of the City of La Porte's financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the City of La Porte's comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The City of La Porte's financial statements have been audited by Null-Lairson, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City of La Porte for the fiscal year ended September 30, 2006 are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amount and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the City of La Porte's financial statements for fiscal year ended September 30, 2006, are fairly presented in conformity with GAAP. The independent auditor's report is presented as a component of the financial section of this report. The independent audit of the financial statements of the City of La Porte included a federally mandated "Single Audit" designed to meet the special needs of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the audited government's internal controls and compliance with legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the City of La Porte's separately issued Single Audit Report. GAAP requires that management provide a narrative introduction, overview and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The City of La Porte's MD&A can be found immediately following the report of the independent auditors. Profile of the City The City of La Porte, incorporated in 1892, is located in the southeast quadrant of Harris County and is bounded on the north by the Houston ship channel, on the east by Galveston Bay and the south by the Bayport channel. The City of La Porte currently encompasses 19 square miles and serves a population of 34,825. The City is a home rule city operating under the Council -Manager form of government. Policy- making and legislative authority are vested in a governing council consisting of the mayor and eight other members. The city council is responsible, among other things, for passing ordinances, adopting the budget, appointing committees and hiring both the City Manager and Attorney. The City Manager is responsible for carrying out the policies and ordinances of the City Council, for overseeing the day-to-day operations of the City and for appointing the heads of various departments. The Council is elected on a non-partisan basis. The Mayor and Council members serve three-year staggered terms. Six of the council members are elected by district. The Mayor and the two remaining council members are elected at large. The City of La Porte provides a full range of services, including police and fire protection, the construction and maintenance of streets and other infrastructure and recreational activities and cultural events. Certain services are provided through a legally separate Water Authority, which functions, as a blended component unit and in essence, is a department of the City of La Porte, and, therefore, has been included as an integral part of the City of La Porte's financial statements. Additional information on the Water Authority and other blended component units can be found in Note 1.B. of the notes to the financial statements. The City's accounting records for general governmental operations are maintained on a modified accrual basis, with the revenues being recorded when available and measurable and expenditures being recorded when the services or goods are received and the liabilities are incurred. Accounting records for the City's utilities and other proprietary activities are maintained on the accrual basis. The annual budget serves as the foundation for the City of La Porte's financial planning and control. Budgetary control has been established at the individual department level. All agencies of the City of La Porte are required to submit requests for appropriation to the City Manager on or before May 26 of each year. The City Manager uses these requests as the starting point Cl for developing a proposed budget. The City Manager then presents this proposed budget to council for review prior to August. The council is required to hold a public hearing on the proposed budget and to adopt a final budget by no later than August. The appropriated budget is prepared by fund, function (e.g., public safety) and department (e.g., police). The City Manager must approve transfers of appropriations within a department. Transfers of appropriations between funds, however require the special approval of the city council. Budget -to -actual comparisons are provided in financial reports for each individual governmental fund for which an appropriated annual budget has been adopted. For the general fund, this comparison is presented on page 76 as part of the required supplementary information. For governmental funds, other than the general fund, with appropriated annual budgets, this comparison is presented in the governmental fund subsection of this report, which starts on page 81. Factors Affecting Financial Condition The information presented in the financial statements is perhaps best understood when it is considered from the broader perspective of the specific environment within which the City of La Porte operates. Local economy. The City of La Porte is located in the southeast quadrant of Harris County, which is a 1,723 square mile county is a leading oil, gas and petrochemical areas. It has more than 3,200 manufacturing plants, the nation's largest concentration of petrochemical plants, the third largest United States seaport and is a corporation management center. A significant part of the County's major employers, manufacturers, education and financial institutions are located in Houston, the County seat. The Texas Medical Center, located in Harris County, is one of the nation's largest, providing medical care and educational opportunities. The county's 64 hospitals have over 17,000 beds of which 4,600 are in the Texas Medical Center. Higher education facilities includes: University of Houston, Rice University, Texas Southern University, St. Thomas University and Houston Baptist College, all offering full four-year as well as postgraduate programs. The Lyndon B. Johnson Space Center is also located here. Located some 20 miles southeast of Houston on Galveston Bay in Harris County are the three communities that make up the La Porte Bayshore Area: La Porte, Morgan's Point and Shoreacres. The area has a combined population of approximately 40,000. Though much of the image of this area is industrial, the La Porte-Bayshore area is still characterized by an expanse of resort homes. Because of this, and the metropolitan advantages of Houston, La Porte is one of the few communities in the Gulf Coast area that offers this favorable combination. Future planning. The La Porte 2020 Comprehensive Plan is a 20 -year master plan adopted by the City Council to guide policy decisions relating to the physical and economic development of the community. In general, the plan indicates how the community desires to develop and redevelop over the course of the next twenty years. The comprehensive plan is a physical plan; it is long- range, comprehensive and states the goals, objectives and policies of the local government. The comprehensive plan provides clear direction through specific statements of action to achieve the desired results envisioned by citizens and the leadership of the community. 5 The essential objectives of the comprehensive plan are as follows: ❖ It is a plan to guide the future physical development and redevelopment of the community; ❖ The time frame is long, extending over a twenty-year horizon; ❖ It encompasses a large geographic area including the corporate limits and ETJ of the community; ❖ It is general in nature, allowing some issues to be resolved and many decisions to be made; ❖ It articulates ideas in a framework of goals and objectives, policies and actions, and plans and projects; ❖ It is intended foremost, to serve as a continuing guide to decision-making, to provide a common direction and to provide stability as issues are addressed and future decisions are made. Residential Development. Neighborhoods are one of La Porte's greatest assets as they form a foundation for a sound quality of life. The City is made up of several distinct neighborhood areas, each with somewhat different physical characteristics such as the age of housing, street configuration, and the sizes of structures and lots. Much of the City's overall image and identity is due to the unique character of its neighborhoods and these distinguishing features should, therefore, be preserved. Neighborhoods that are safe, well maintained and have character will maintain property values and thus maintain a sound neighborhood environment and a stable residential tax base. The attractive appearance and environmental quality of existing and future low-density residential neighborhoods should be protected and improvements made where necessary to maintain the value of properties and enhance the quality of life. As the city continues to develop it is important that the integrity of the neighborhoods is preserved and the value and enjoyment of property is maintained and enhanced. Goals for residential development: ❖ Consider programs to revitalize and rehabilitate existing housing where needed. ❖ Meet the future housing needs by providing for a variety of housing options. ❖ Encourage the rehabilitation or replacement of substandard housing. ❖ Promote a standard of home ownership encouraging well-maintained residential properties. ❖ Preserve the integrity of existing neighborhoods and create livable and safe neighborhood environments. ❖ Protect the attractive appearance and environmental quality of existing neighborhoods and make necessary improvements to maintain the value of properties and enhance the quality of life. Beautification and Conservation. Citizens have expressed great interest for enhancing the visual appearance of La Porte and the redevelopment and reinvestment in Downtown, along major corridors and in nonresidential areas. Through public involvement it is apparent that citizens visualize attractive shopping centers, livable neighborhoods, landscaped roadways, pleasant places to walk and an enhanced quality of life. They want successful shopping areas that appeal to shoppers. They see the opportunities in downtown to create a destination that combines a lively entertainment district in a historically significant area, retail stores interspersed with restaurants and professional offices and a blend of residential units as well. Goals for Beautification: ❖ Improve the community character to make it a more desirable place to live, work and visit. ❖ Improve the aesthetic visual environment through enhancement of site design, signage, roadways, parking areas, open space and landscaping. ❖ Invest in Downtown to establish a vibrant mix of places to work, live and visit, with shops, restaurants, entertainment and a variety of dwelling units. Redevelopment Strategy. Urban redevelopment efforts require cooperative action to encourage new and sustained private investment and to provide supporting rehabilitation of public infrastructure. A key part of the process is determining what strategic actions the community should take to achieve its redevelopment goals and objectives. Successful redevelopment will often require cooperation and coordination between agencies at different levels of government as well as non-profit community organizations. This should include coordination of physical improvements with social service programs, which aim to enhance the health and economic capacity of residents in targeted neighborhoods. Redevelopment Goals: ❖ Stabilize and improve the quality of neighborhoods and other areas in decline by attracting renewed private investment activity. ❖ Revitalize the City's historic downtown area. Cash management policies and practices. Cash temporarily idle during the year was invested in demand deposits and obligations of the U.S. Treasury. The maturities of the investments range from 30 days to 2 years, with an average maturity of 4.5 months. The average yield on investments was 3.67% for the government. Investment income includes appreciation in the fair value of investments. Increases in fair value during the current year, however, do not necessarily represent trends that will continue; nor is it always possible to realize such amounts, especially in the case of temporary changes in the fair value of investments that the City intends to hold to maturity. Pension and other post employment benefits. The City of La Porte sponsors a single -employer defined benefit pension plan for its emergency services employees. Each year, an independent actuary engaged by the pension plan calculates the amount of the annual contribution that the City of La Porte must make to the pension plan to ensure that the plan will be able to fully meet its obligations to retired employees on a timely basis. The City of La Porte also provides pension benefits for its non emergency services employees. These benefits are provided through a state-wide plan managed by Texas Municipal Retirement System (TMRS). The City of La Porte has no obligation in connection with employee benefits offered through this plan beyond its annual contractual payment to TMRS. The City of La Porte also provides postretirement health and dental care benefits for certain retirees and their dependents. As of the end of the current fiscal year, there were 57 retired employees receiving these benefits. Additional information on the City of La Porte's pension arrangements and post employment benefits can be found in Notes 6 and 10 in the notes to the financial statements. 7 Awards and Acknowledgements The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for its comprehensive annual financial report for the fiscal year ended September 30, 2005. This was the twenty-fifth consecutive year that the City has received this prestigious award. In order to be awarded a Certificate of Achievement, the City published an easily readable and efficiently organized comprehensive annual financial report. This report satisfied both generally accepted accounting 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 the GFOA to determine its eligibility for another certificate. In addition, the government also received the GFOA's Distinguished Budget Award for its annual budget document. In order to qualify for the Distinguished Budget Presentation Award, the government's budget document was judged to be proficient in several categories, including as a policy document, a financial plan, an operations guide and a communications device. The preparation of this report would not have been possible without the efficient and dedicated services of the entire staff of the finance and administration department. We would like to express our appreciation to all members of the department who assisted and contributed to the preparation of this report. Credit also must be given to the mayor and city council for their unfailing support for maintaining the highest standards of professionalism in the management of the City of La Porte's finances. ohn Joem chael G. Dolby, CPA Interim C' Manager Interim Director of Finance a a •� u e bD O .0 C R a a C f Jt u c c d u 3 3 cw U ,Y, a C f Jt u c c u 3 3 cw L y lo 7 E ° 0. u u x C R C Gi Certificate of Achievement .for Excellence in Financial Reporting Presented to City of LaPorte, Texas For its Comprehensive Aimual Financial Report for the Fiscal Ycu Endcd September 30, 2004 A certinwate orAchievement for Exrellrnce in Financial Reporting is presented by the Government Finance Officers Associatim of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) acbicvc the highest standards in government accounting and financial reporting. President auto Executive Director 10 CITY OF LA PORTS LIST OF ELECTED OFFICIALS PETER GRIFFITHS COUNCIL PERSON AT LARGE A MICHAEL MOSTEIT, COUNCIL PERSON " DISTRICT 1 HOWARD EBOW COUNCIL PERSOI DISTRICT 3 LOUIS RIGBY COUNCIL PERSON DISTRICT 5 ALTON PORTER MAYOR 11 BARRY BEASLEY COUNCIL PERSON AT LARGE B UCK ENGELKEN )UNCIL PERSON DISTRICT 2 )MMY MOSER YOR PRO TEM DISTRICT 4 MIKE CLAUSEN COUNCIL PERSON DISTRICT 6 're xAs 12 FINANCIAL SECTION 13 14 11 Greenway Plaza, Suite 1515 Houston, TX 77046 (713)621-1515 Fax: (713) 621-1570 AAL NuRALairson CLRTIF1-D PURI.1CACCOU;%? %,N'T1; Independent Auditors' Report To the Honorable Mayor and Members of the City Council City of LaPorte, Texas 2117 Post Office Street Galveston, TX 77550 (409) 762.8380 Fax: (409) 762-1749 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 La Porte, Texas (the "City"), as of and for the year ended September 30, 2006, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of La Porte, Texas, as of September 30, 2006, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. 15 To the Honorable Mayor and Members of the City Council City of LaPorte, Texas Page 2 of 2 In accordance with Government Auditing Standards, we have issued our report dated February 1, 2007, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions or laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report, which has been issued separately from this document, is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management's Discussion and Analysis on pages 17 through 23, budgetary comparison information on pages 76 through 78 and Required Pension System Supplementary Information on page 75 are not required parts of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section, combining and individual fund statements and schedules and statistical tables are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical tables have not been subjected to the auditing procedures applied in the. audit of the basic financial statements and, accordingly, we express no opinion on them. 4�2� V4 1 141: .1 Ic February 1, 2007 Houston, Texas 16 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 As management of the City of La Porte, we offer readers of the City's financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, 2006. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages 3-8 of this report. FINANCIAL HIGHLIGHTS • The assets of the City of La Porte exceeded its liabilities at the close of the most recent fiscal year by $89,995,863 (net assets). Of this amount $22,380,404 (unrestricted net assets) may be used to meet the government's ongoing obligations to citizens and creditors in accordance with the City's fund designation and fiscal policies and working capital requirements. • The government's total net assets increased by $3,789,092. • As of the close of the current fiscal year, the City of La Porte's governmental funds reported combined ending fund balances of $37,296,933. Of this amount, $34,885,752 (94%) is unreserved and available for use within the City's designation and policies and working capital requirements. • At the end of the current fiscal year, unreserved fund balance for the general fund was $10,970,885 approximately (45%) of the total general fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction of the City's basic financial statements. The City's basic financial statements are comprised of three components: 1) government -wide financial statements, 2) fund financial statements and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government -wide financial statements — The government -wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private -sector business. The Statement of Net Assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities presents information showing how the City's net assets changed during the fiscal year. All changes in net assets are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused compensated absences). Both of the government -wide financial statements report 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 include general government, public safety, public works, health and sanitation and culture and recreation. The business -type activities of the City include the Water and Sewer Utilities, Airport, La Porte Area Water Authority, Sylvan Beach Convention Center and Bay Forest Golf Course operations. The government -wide financial statements can be found on pages 27-31 of this report 17 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 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 of the 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 balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains 18 governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General, 2005 General Obligation Bond and Section 413 Sales Tax Fund, all of which are considered to be major funds. Data from the other 15 governmental funds are combined into a single, aggregated presentation called non -major. Individual fund data for each of these non -major governmental funds is provided in the form of combining statements elsewhere in this report. The basic governmental fund financial statements can be found on pages 27-36 of this report. Proprietary funds - The City maintains two types of proprietary funds. Proprietary funds are used to report the same functions presented as business -type activities in the government -wide financial statements. The City uses proprietary funds to account for its utilities, airport, water authority, convention center and golf course. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses its internal service funds to account for its motor pool services, technology services and Insurance Fund. Because these services predominantly benefit governmental rather than business -type functions, they have been included within governmental activities in the government -wide financial statements. Proprietary funds provide the same type of information as the government -wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Utility and La Porte Area Water Authority, Airport, Bay Forest Golf Course and Sylvan Beach Convention. All internal service funds are combined into a single aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages 38-43 of this report. Notes to the Financial Statements - The notes provide additional information that is essential to a full understanding of the data provided in the government -wide and fund financial statements. The notes to the financial statements can be found on pages 45-74 of this report. V. CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Other Information - In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning the City's progress in funding its obligation to provide pension benefits to its employees. Required supplementary information can be found on pages 75-78 of this report. The combining statements referred to earlier in connection with nonmajor governmental funds and internal service funds are presented immediately following the required supplementary information for the general fund. Combining fund statements and schedules can be found on pages 84-104 of this report. GOVERNMENT -WIDE FINANCIAL ANALYSIS As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the City of La Porte, assets exceeded liabilities by $89,995,863 at the close of the fiscal year. By far the largest portion of the City's net assets (65%) reflects its investment in capital assets (e.g., land, buildings, machinery, equipment, improvements, construction in progress and infrastructure), less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Current and other assets Capital assets Total Assets Long term liabilities Other liabilities Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted Unrestricted Total Net Assets City of La Porte's Net Assets Governmental Activities 2006 2005 $ 51,344,644 $ 43,543,568 45,856,003 46,416,520 97,200,647 89,960,088 36,883,566 31,157,332 Business -Type Activities 2006 2005 $ 7,429,428 $ 7,559,518 Total 2006 2005 $ 58,774,072 $ 51,103,086 38,595,964 33,734,685 84,451,967 80,151,205 46,025,392 41,294,203 143,226,039 131,254,291 9,444,485 7,498,569 46,328,051 38,655,901 5,545,896 3,857,929 1,356,227 2,533,691 6,902,123 6,391,620 42,429,462 35,015,261 10,800,712 10,032,260 53,230,174 45,047,521 28,424,345 28,933,050 29,642,136 26,589,684 58,066,481 55,522,734 7,363,187 6,642,077 2,185,791 3,407,445 9,548,978 10,049,522 18,983,653 19,369,700 3,396,751 1,264,814 22,380,404 20,634,514 $ 54,771,185 $ 54,944,827 $ 35,224,678 $ 31,261,943 $ 89,995,863 $ 86,206,770 An additional portion of the City's net assets $9,548,978 (11%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets of $22,380,404 (25%) may be used to meet the government's ongoing obligations to citizens and creditors. As of September 30, 2006, the City is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate categories - governmental and business -type activities. 19 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Analysis of the City's Operations — the following table provides a summary of the City's operations for the year ended September 30, 2006, with comparative totals for year ended September 30, 2005. Governmental activities decreased the City of La Porte's net assets by $173,642. Business -type activities increased the City's net assets by $3,962,734. City of La Porte's Changes in Net Assets Expenses General Government Governmental Business -Type 7,348,812 Activities Activities 11,602,951 Total 2006 2005 2006 2005 2006 2005 Revenues: 5,209,686 5,164,855 Health and Sanitation 1,862,368 1,887,204 Program Revenues: 1,862,368 1,887,204 Culture and Recreation 3,579,917 3,717,791 Charges for Services $ 4,535,854 $ 4,083,297 $ 9,435,426 $ 8,254,116 $ 13,971,280 $ 12,337,413 Operating grants and contributions 1,106,596 2,639,934 - - 1,106,596 2,639,934 General revenues: 6,844,635 6,477,962 Sewer Services 1,894,415 Property taxes, levied for general purposes 10,535,316 10,192,599 Airport Bay Forest Golf Course 10,535,316 10,192,599 Property taxes, levied for debt service 1,661,801 1,623,095 Sylvan Beach Convention Center 1,661,801 1,623,095 Industrial payments 7,659,591 6,991,926 Total Expenses 30,829,965 7,659,591 6,991,926 Franchise taxes 1,986,698 1,885,801 Change in net assets before transfers 3,736,415 1,986,698 1,885,801 Sales tax 4,067,767 3,459,979 Transfers (3,910,056) 4,067,767 3,459,979 Unrestricted investment earnings 1,874,828 720,137 300,099 165,162 2,174,927 885,299 Miscellaneous 1,137,928 753,595 694,507 827,183 1,832,435 1,580,778 Gain (loss) on sale/retirement of capital assets - 103,594 (16,083) - (16,083) 103,594 Total revenues $ 34,566,379 32,453,957 10,413,949 9,246,461 44,980,328 41,700,418 Expenses General Government 7,348,812 7,411,122 7,348,812 7,411,122 Public Safety 11,602,951 10,367,759 11,602,951 10,367,759 Public Works 5,209,686 5,164,855 5,209,686 5,164,855 Health and Sanitation 1,862,368 1,887,204 1,862,368 1,887,204 Culture and Recreation 3,579,917 3,717,791 3,579,917 3,717,791 Interest on Long-term debt 1,226,231 863,818 1,226,231 863,818 Water Services - - 6,844,635 6,477,962 6,844,635 6,477,962 Sewer Services 1,894,415 11819,756 1,894,415 1,819,756 Airport Bay Forest Golf Course 122,548 157,186 122,548 157,186 Sylvan Beach Convention Center 1,285,121 1,242,613 1,285,121 1,242,613 Total Expenses 30,829,965 29,412,549 214,552 10,361,271 211,682 9,909,199 214,552 41,191,236 211,682 39,321,748 Change in net assets before transfers 3,736,415 3,041,408 52,678 (662,738) 3,789,092 2,378,670 Transfers (3,910,056) 381,625 3,910,056 (381,625) Change in net assets (173,642) 3,423,033 3,962,734 (1,044,363) 3,789,092 2,378,670 Net assets - beginning 54,944,827 51,521,794 31,261,944 32,306,306 86,206,771 83,828,100 Netassets- ending $ 54,771,185 $ 54,944,827 $ 35,224,678 $ 31,261,943 $ 89,995,863 $ 86,206,770 20 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS Governmental funds — The focus of the City of La Porte's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the City of La Porte's governmental funds reported combined ending fund balances of $37,296,933. Approximately 95% of this total amount ($34,885,752) constitutes unreserved fund balance. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1) to pay for encumbrances ($74,649), 2) to provide for inventories ($70,126), 3) to pay for debt service ($1,813,887), 4) to provide for municipal court building security ($106,652), 5) to provide for municipal court technology ($73,724), 6) to provide for park zone ($153,006) and 7) to provide for confiscated funds ($119,137). In the general fund, the City budgeted for a decrease in the fund balance of $213,070. Due to actual expenses being less than budgeted, the actual fund balance increase for fiscal year 2006 was $1,934,333. The Section 4B Sales Tax Fund balance increased by $627,110 due to additional revenues. The 2005 General Obligation Fund balance decreased by $604,347 due to the expenditure of bond proceeds. Other Governmental fund balances increased in 2006 by $3,353,361 due to increased revenues and other sources of financing. Proprietary funds — The City's proprietary fund statements provide the same type of information found in the government -wide financial statements, but in more detail. Unrestricted net assets of the respective proprietary funds are Utility - $1,993,041, Airport $338,580, La Porte Area Water Authority - $1,338,767, Sylvan Beach Convention Center -$134,358 and Bay Forest Golf Course — $(306,821)The change (decrease) in net assets of the proprietary funds in 2006 was as follows: Utility - $4,076,332, Airport -$(74,748), La Porte Area Water Authority - $123,645, Sylvan Beach Convention Center - $(14,539), and Bay Forest Golf Course -$(147,958). General Fund Budgetary Highlights — The City made revisions to the original appropriations a City Council. Overall these changes resulted in an increase from the original budget of 1% or $210,d by the 076 Variances noted in the general fund are due to City Council appropriating additional capital projects, increased spending for public safety projects and salary savings. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - The City of La Porte's investment in capital assets for its governmental and business -type activities as of September 30, 2006 amounts to $84,451,940 (net of accumulated depreciation). This investment in capital assets includes land, building, equipment, improvements, infrastructure and construction in progress. Major capital asset events during the current fiscal year included the following: • Construction in progress Fire Station Number 2 $1.2 million. • Construction in progress Police Station $3.1 million. • Automated Meter Reading $2.3 million. 21 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 Capital Assets at Year-end Net of Accumulated Depreciation Total $ 10,035,995 8,185,969 5,287,424 36,042,349 12,277,269 12,622,934 $ 84,451,940 Additional information of the City of La Porte's capital assets can be found in Note 4 on pages 58-60 of this report. Debt Administration — At the end of the current fiscal year, the City of La Porte had bonded debt payable of $43,200,000 . Of this amount, $34,145,000 comprises bonded debt backed by the full faith and credit of the government and $9,055,000 represents bonds secured solely by water and sewer revenues. General Obligations Revenue Bonds Payable Certificate of Obligations Total Outstanding Debt at Year End Bonds Payable Governmental Business -type Activities Activities 2006 2006 $ 17,740,000 $ 16,405,000 $ 34,145,000 6,430,000 2,625,000 $ 9,055,000 Totals $ 17,740,000 6,430,000 19,030,000 $ 43,200,000 The City of La Porte maintains an "Aa3", "A+", "AA" by Moody's, Standard and Poor's and Fitch respectively for general obligation debt. The revenue bonds have been rated "A" by all three of these rating agencies. Additional information on the City of La Porte's long-term debt can be found in Note 5 on pages 61-65 of this report. 22 Governmental Business -type Activities Activities 2006 2006 Land $ 7,685,517 $ 2,350,478 Buildings 7,776,721 409,248 Equipment 5,217,519 69,905 Improvements 2,915,006 33,127,343 Infrastructure 12,277,269 - Construction in Progress 9,983,973 2,638,961 Total $ 45,856,005 $ 38,595,935 Total $ 10,035,995 8,185,969 5,287,424 36,042,349 12,277,269 12,622,934 $ 84,451,940 Additional information of the City of La Porte's capital assets can be found in Note 4 on pages 58-60 of this report. Debt Administration — At the end of the current fiscal year, the City of La Porte had bonded debt payable of $43,200,000 . Of this amount, $34,145,000 comprises bonded debt backed by the full faith and credit of the government and $9,055,000 represents bonds secured solely by water and sewer revenues. General Obligations Revenue Bonds Payable Certificate of Obligations Total Outstanding Debt at Year End Bonds Payable Governmental Business -type Activities Activities 2006 2006 $ 17,740,000 $ 16,405,000 $ 34,145,000 6,430,000 2,625,000 $ 9,055,000 Totals $ 17,740,000 6,430,000 19,030,000 $ 43,200,000 The City of La Porte maintains an "Aa3", "A+", "AA" by Moody's, Standard and Poor's and Fitch respectively for general obligation debt. The revenue bonds have been rated "A" by all three of these rating agencies. Additional information on the City of La Porte's long-term debt can be found in Note 5 on pages 61-65 of this report. 22 CITY OF LA PORTE, TEXAS Management's Discussion and Analysis For the Year Ended September 30, 2006 ECONOMIC FACTS AND NEXT YEAR'S BUDGETS AND RATES The unemployment rate for the Houston metropolitan area is currently 4.5 percent, which is a decrease from a rate of 6.1 percent a year ago. This compares identical to the state's average unemployment rate of 4.7 percent which is comparable to the national average rate of 4.4 percent. The City's budgets for all funds have benefited from a strong and expanding economy from the past several years, which is anticipated to continue in the upcoming Fiscal Year. The City is projected to benefit from growth in the tax base due to increased valuations and new construction. Total assessed property value for all residential and commercial property in the City of La Porte exceeded $2.1 billion for fiscal year 2006 which is 10 percent higher than last year. The trend for total assessed property values has been steadily increasing each year with an average annual increase of 16 percent over the past 5 years. Sales tax receipts have grown 16% this fiscal year due to an increase in economic activity. This revenue source is the most volatile and subject to decline if an economic slowdown occurs. 2.1 Assessed Property Valuations (in billions) 2002 2003 2004 2005 2006 Sales Tax Collections (in millions) 2002 2003 2004 2005 2006 REQUEST FOR INFORMATION This financial report is designed to provide our citizens, customers and creditors a general overview of the City's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Interim Director of Finance, 604 West Fairmont Parkway, La Porte, Texas, 77571. 23 24 BASIC FINANCIAL STATEMENTS 25 T IEXAG 26 CITY OF LA PORTE, TEXAS Statement of Net Assets September 30, 2006 ASSETS Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Accounts receivable Taxes receivable Due from other governments Accrued interest receivable Deferred Issuance Costs Internal Balances Materials and supplies inventories at cost Cash and cash equivalents restricted for customer service deposits Investments restricted for debt service Other Capital assets: Land Buildings and improvements Improvements other than buildings Infrastructure Machinery and equipment Construction in progress Accumulated depreciation Total assets LIABILITIES Accounts payable Accrued salaries payable Interest payable Due to others Unearned revenue Other current liabilities Premium on Issuance Accrued interest payable Customer deposits Noncurrent liabilities Due within one year Due in more than one year Total liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Debt service Grants and state programs Unrestricted Total net assets Primary Government Governmental Business -type Activities Activities Total $ 16,759,498 27,196,952 4,485,118 761,592 4,716 183,367 346,635 1,490,460 116,306 7,685,517 17,732,228 7,687,857 26,873,816 13,319,881 9,983,973 37,427,269 97,200,647 4,762,818 296,234 88,945 5,226 86,557 293,388 12,728 1,384,000 35,499, 566 42,429,462 28,424,345 $ 1,821,041 4,455,769 1,156,952 26,289 (1,490,460) 4,540 505,287 125,000 825,010 2,350,478 1,166,840 69,188,355 422,213 2,638,961 (37,170,883) 46,025,392 607,062 52,100 87,150 5,930 76,330 527,655 877,500 8,566,985 10,800,712 29,642,136 $ 18,580,539 31,652,721 5,642,070 761,592 4,716 209,656 346,635 120,846 505,287 125,000 825,010 10,035,995 18,899,068 76,876,212 26,873,816 13,742,094 12,622,934 (74, 598,152 ) 143,226,039 5,369,880 348,334 88,945 5,226 173,707 5,930 293,388 89,058 527,655 2,261, 500 44, 066, 551 53,230,174 58,066,481 1,838,370 2,185,791 4,024,161 5,524,817 - 5,524,817 18,983,653 3,396,751 22,380,404 $ 54,771,185 $ 35,224,678 $ 89,995,863 See accompanying notes to financial statements. 27 CITY OF LA PORTE, TEXAS Statement of Activities For The Year Ended September 30, 2006 Program Activities Governmental activities: General Government Public Safety Public Works Health & Sanitation Culture and recreation Interest on Long Term Debt Total governmental activities Business -type activities: Water Services Sewer Services Airport Golf Course Sylvan Beach Convention Ctr Total business -type activities Total government Program Revenues Fees, Fines and Operating Charges for Grants and Expenses Services Contributions $ 7,348,812 11,602,951 5,209,686 1,862,368 3,579,917 1,226,231 30,829,965 6,844,635 1,894,415 122,548 1,285,121 214,552 10,361,271 $ 1,002,267 $ - 1,333,005 935,588 1,770,611 - 429,971 95,820 4,535,854 1,031,408 5,438,932 2,842,495 35,624 955,867 162,508 9,435,426 $ 41,191,236 $ 13,971,280 $ 1,031,408 IRV General revenues: Taxes: Property taxes, levied for general purposes Property taxes, levied for debt service Industrial payments Franchise taxes Public service taxes Grants not specified for specific program Investment earnings Miscellaneous Gain (Loss) on sale of assets Transfers Total general revenues and transfers Change in net assets Net assets—beginning Net assets—ending Net (Expenses) Revenues and Changes in Net Assets Governmental Activities $ (6,346,545) (9,334,358) (5,209,686) (91, 757) (3,054,126) (1,226,231) (25,262,703) _$ (25,262,70 10,535,316 1,661,801 7,659,591 1,986,698 4,067,767 75,188 1,874,828 1,137, 928 (3,910,056) 25,089,061 (173,642) 54,944,827 $ 54,771,185 Business -type Activities (1,405,703) 948,080 (86, 924) (329,254) (52,044) (925,845) $ (925,845) 300,099 694,507 (16,083) 3,910,056 4,888,579 3,962,734 31,261,944 $ 35,224,678 Total $ (6,346,545) (9,334,358) (5,209,686) (91,757) (3,054,126) (1,226,231) (25,262,703) (1,405,703) 948,080 (86,924) (329,254) (52,044) (925,845) _$ (26,188,548) 10,535,316 1,661,801 7,659,591 1,986,698 4,067,767 75,188 2,174,927 1,832,435 (16,083) 29,977,640 3—,7-8 9, 092 86,206,771 $ 89,995,863 29 CITY OF LA PORTE, TEXAS Balance Sheet Governmental Funds September 30, 2006 ASSETS Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles: Accounts receivable Taxes receivable Due from other funds Grant receivable Other accounts receivables Accrued interest receivable Materials and supplies inventories, at cost Total assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Accrued salaries payable Due to other funds Retainage payable Deferred revenue Accrued employee separation pay Total liabilities Fund balances: Reserved for: Inventories Encumbrances Municipal Court Building Security Municipal Court Technology Fee Park Zone Confiscated funds Debt service Unreserved, Designated for capital projects Unreserved/Undesignated Unreserved, reported in nonmajor: Special revenue funds Capital projects funds Total fund balances Total liabilities and fund balances General $ 5,415,959 5,287,784 4,126,733 647,980 2,091,346 74,781 70,126 17,714,709 2,679,812 280,320 3,538,917 100,000 6,599,049 70,126 74,649 51,084 10,919,801 11,115, 660 $ 17,714,709 See accompanying notes to basic financial statements. 30 Section 4B Sales Tax $ 1,830,686 1,772,321 229,385 21,223 3,853,615 3,853,615 3,853,615 $ 3,853,615 2005 General Obligation Bonds $ 97,152 7,598,390 918 572 7,697,032 651,832 651,832 7,045,200 7,045,200 $ 7,697,032 Other Total Governmental Governmental Funds Funds $ 5,754,307 $ 13,098,104 10,960,558 25,619,053 - 4,126,733 108,386 756,366 - 2,091,346 4,716 4,716 46,286 276,589 56,056 152,632 - 70,126 16,930,309 46,195,665 881,195 4,212,839 2,319 282,639 600,886 600,886 168 168 163,282 3,702,199 - 100,000 1,647,850 8,898,731 70,126 74,649 106,652 106,652 73,724 73,724 153,006 153,006 119,137 119,137 1,813,887 1,813,887 - 51,084 - 21,818,616 1,247,380 1,247,380 11,768,672 11,768,672 15,282,458 37,296,933 $ 16,930,308 46,195,664 31 32 CITY OF LA PORTE, TEXAS Reconciliation of the Governmental Funds Balance Sheet to Statement of Net Assets September 30, 2006 Amounts reported for governmental activities in the statement of net assets are different because: Total fund balances - total governmental funds $ 37,296,933 Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in this fund financial statement, but are reported in the governmental activities of the statement of net assets. 41,427,153 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds Unearned Revenues 3,617,756 Interest payable on long-term debt does not require current financial resources. Therefore, interest payable is not recorded as a liability in governmental funds balance sheets. (88,945) The assets and liabilities of certain internal service funds are not included in the fund financial statement, but are included in the governmental activities of the statement of net assets. 9,127,242 Some liabilities, (such as notes payable, capital lease contract payable, long-term compensated absences and bonds payable), are not due and payable in the current period and are not included in the fund financial statement, but are included in the governmental activities of the statement of net assets: (34,294,000) Bonds Payable (293,388) Premium on Issuance Compensated Absences Payable (2,368,201) Bond Issuance Costs 346,635 Net assets of governmental activities $ 54,771,185 See accompanying notes to basic financial statements. 33 CITY OF LA PORTE, TEXAS Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For The Year Ended September 30, 2006 REVENUES Property taxes Franchise taxes Sales taxes Donations Industrial payments Harris County Joint Venture Other taxes Licenses and permits Fines and forfeits Charges for services Intergovernmental Interest Miscellaneous Total revenues EXPENDITURES Current: General Government Public Safety Public Works Health and Sanitation Culture and Recreation Debt service: Principal retirements Interest and fiscal charges Capital outlay Total expenditures Excess (deficiency) of revenues over expenditures OTHER FINANCING SOURCES (USES) Issuance of debt Premium on bonds Transfers in Transfers out Proceeds from sale of Assets Total other financing sources (uses) - - 3,707,975 24,303,861 - 3,707,975 4,242,604 647,449 (3,045,803) 90,083 (2,308,271) 1,367,170 (740,060) (740,060) (3,404,347) 2,800,000 2,800,000 Net change in fund balances 1,934,333 627,110 (604,347) Fund balances—beginning 9,181,327 3,226,505 7,649,547 Fund balances—ending $ 11,115,660 $ 3,853,615 $ 7,045,200 See accompanying notes to basic financial statements. 34 2005 General Section 4B Obligation General Sales Tax Bonds $ 10,454,157 $ - $ - 1,986,698 - - 2,495,547 1,245,774 - 7,470,700 69,310 - - 683,284 - - 848,232 - - 3,852,570 - - 8,489 - - 652,700 121,396 303,628 24,778 - - 28,546,465 1,367,170 303,628 6,047,422 - - 11,071,829 - - 2,360,073 - - 1,813,812 - - 3,010,725 - - - - 3,707,975 24,303,861 - 3,707,975 4,242,604 647,449 (3,045,803) 90,083 (2,308,271) 1,367,170 (740,060) (740,060) (3,404,347) 2,800,000 2,800,000 Net change in fund balances 1,934,333 627,110 (604,347) Fund balances—beginning 9,181,327 3,226,505 7,649,547 Fund balances—ending $ 11,115,660 $ 3,853,615 $ 7,045,200 See accompanying notes to basic financial statements. 34 Other Governmental Funds $ 1,708,484 257,194 35,000 1,165,892 631,439 138,602 3,936,611 1,189,343 1,195,000 1,374,314 2,842,334 6,600,991 (2,664,380) 6,965,000 191,055 2,608,425 (3,746,739) 6,017,741 3,353,361 11,929,098 $ 15,282,459 Total Governmental Funds $ 12,162,641 1,986,698 3,741,321 7,470,700 326,504 683,284 848,232 3,887,570 1,174,381 1,709,163 163,380 34,153,874 7,236,765 11,071,829 2,360,073 1,813,812 3,010,725 1,195,000 1,374,314 6,550,309 34,612,827 (458,953) 6,965,000 191,055 6,055,874 (7,532,602) 90,083 5,769,410 5,310,457 31,986,477 $ 37,296,934 35 CITY OF LA PORTE, TEXAS Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities For The Year Ended September 30, 2006 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances—total governmental funds: Governmental funds report outlays for capital assets as expenditures because such outlays use current financial resources. In contrast, the statement of activities reports only a portion of the outlay as expense. The outlay is allocated over the assets' estimated useful lives as depreciation expense for the period. This is the amount by which capital outlays $7,150,012 exceeded depreciation $6,088,751 and losses from the disposition of capital assets in the current period Governmental funds do not present revenues that are not available to pay current obliqations. In contrast, such revenues are reported in the statement of activities when earned. 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. Some expenses reported in the statement of activities do not require the use of current financial resources and these are not reported as expenditures in governmental funds: Accrued interest not reflected in governmental funds Additional compensated absences not reflected in governmental funds Internal service funds are used by management to charge the costs of certain activities, such as fleet maintenance and information technology, to individual funds. The net revenue (expense) of the internal service funds is reported with governmental activities. Change in net assets of governmental activities See accompanying notes to basic financial statements. 36 $ 5,310,457 (1,061,261) 246,841 (5,768,649) (38,129) 59,199 1,077,900 $ (173,642) 37 CITY OF LA PORTE, TEXAS Statement of Net Assets Proprietary Funds September 30, 2006 ASSETS Current assets: Cash and cash equivalents Investments Receivables, net of allowance for uncollectibles Accrued interest receivable Miscellaneous receivables Material and supplies inventories, at cost Restricted cash and cash equivalents for: Customer service deposits Current debt service Investments restricted for: Current debt service Total current assets Noncurrent assets: Capital assets: Land Buildings and improvements Improvements other than buildings Vehicles and equipment Construction in progress Less accumulated depreciation Total noncurrent assets Total assets LIABILITIES Current liabilities: Accounts payable Accrued salaries payable Due to other funds Unearned Revenue Other current liabilities Accrued interest payable Payable from restricted assets: Current portion of revenue bonds Customer deposits Total current liabilities Noncurrent liabilities: Revenue bonds, net of current portion Accrued separation pay Total noncurrent liabilities Total liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Unrestricted (deficit) Total net assets Business -type Activities - - 2,084,469 Enterprise Funds - 1,115,110 47,884,819 Other 6,584,096 La Porte Area Proprietary 6,130 Utility Water Authority Funds 119,905 $ 685,800 $ 833,596 $ 301,645 3,803,599 407,428 244,742 934,103 169,605 53,244 10,458 12,351 3,480 4,540 - - 459,426 - 45,861 125,000 - - - 825,010 - 6,022,926 2,247,990 648,972 266,009 - 2,084,469 51,730 - 1,115,110 47,884,819 14,719,440 6,584,096 319,777 6,130 96,306 2,519,056 - 119,905 (26,895,821) (5,420,933) (4,854,129) 24,145,570 9,304,637 5,145,757 30,168,496 11,552,627 5,794,729 432,410 148,523 26,130 36,711 - 15,388 1,362,358 - 128,102 - - 87,150 - - 5,930 63,250 13,080 - 637,500 460,000 - 459,526 - 68,129 2,991,755 621,603 330,829 2,362,500 5,595,000 - 237,459 - 152,026 2,599,959 5,595,000 152,026 5,591,714 6,216,603 482,855 21,145,570 3,249,637 5,145,757 1,438,171 747,620 - 1,993,041 1,338,767 166,117 $ 24,576,782 $ 5,336,024 $ 5,311,874 See accompanying notes to basic financial statements. Governmental Activities — Internal Totals Service Funds $ 1,821,041 $ 3,078,666 4,455,769 2,160,627 1,156, 952 - 26,289 30,730 - 81,792 4,540 46,180 505,287 125,000 - 825,010 - 8,919,888 5,397,995 2,350,478 1,166, 840 69,188, 355 422,213 2,638,961 (37,170,883) 38,595,964 47,515,852 607,063 52,099 1,490,460 87,150 5,930 76,330 11,740,018 (7,311,172) 4,428,846 9,826,841 560,225 15,903 2,106 1,097,500 - 527,655 - 3, 944,187 578,234- 78,2347,957,500 7,957,500 - 389,485 121,365 8,346,985 121,365- 21,36512,291,172 12,291,172 699,599- 29,540,964 4,428,846 2,185,791 - 3,497,925 4,698,396 $ 35,224,680 $ 9,127,242- 39 CITY OF LA PORTE, TEXAS Statement of Revenues, Expenses and Changes in Fund Net Assets Proprietary Funds For The Year Ended September 30, 2006 Operating revenues: User fees Operating expenses: Personal services Supplies Other services and charges Depreciation Total operating expenses Business -type Activities – EnterDrise Funds Other La Porte Area Proprietary Utility Water Authority Funds $ 7,207,376 $ 1,079,126 $1,160,634 2,369,805 - 944,256 200,153 42 135,702 2,819,825 1,033,491 271,404 1,548,168 441,913 270,859 6,937,951 1,475,446 1,622,221 Operating income (loss) 269,425 (396,320) (461,587) Nonoperating revenues (expenses): Interest income 230,640 44,081 25,378 Interest expense and fiscal charges (175,495) (325,653) - Gain (loss) on sale of equipment (7,279) - (8,804) Total nonoperating revenue (expenses) 47,866 (281,572) 16,574 Income (loss) before contributions and transfers 317,291 (677,892) (445,013) Capital contributions 4,179,571 858,292 - Transfers in 3,084,361 - 241,000 Transfers out (3,504,891) (56,755) (33,232) Change in net assets 4,076,332 123,645 (237,245) Total net assets—beginning 20,500,450 5,212,379 5,549,119 Total net assets—ending $ 24,576,782 $ 5,336,024 $ 5,311,874 See accompanying notes to basic financial statements Governmental Activities - Internal Totals Service Funds $ 9,447,136 $ 5,868,224 3,314,061 1,361,286 335,897 320,961 4,124,720 4,100,247 2,260,940 869,740 10,035,618 6,652,234 (588,482) (784,010) 300,099 165,671 (501,148) - (16,083) (50,006) (217,132) 115,665 (805,614) (668,345) 5,037,863 - 3,325,361 1,949,442 (3,594,878) (203,197) 3,962,732 1,077,900 31,261,948 8,049,342 $ 35,224,680 $ 9,127,242 41 CITY OF LA PORTE, TEXAS Statement of Cash Flows Proprietary Funds For The Year Ended September 30, 2006 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from user fees Cash payments to suppliers Cash payments for personal services Net cash provided by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from other funds Transfers to other funds Net cash from noncapital financing activies CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments received from participants for debt service Payments received from participants for capital recovery Payments for capital acquisitions Proceeds from sale of assets Issuance of debt Principal payments on revenue bonds Interest paid on debt Net cash (used) by capital and related financing activies CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments Net Investments (purchased) sold Net cash provided by investing activities Net increase (decrease) in cash and cash equivalents Balances -beginning of the year Balances -end of the year Reconciliation of operating income (loss) to net cash provided (used) by operating activities: Operating income (loss) Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation expense (Increase) decrease in accounts receivable (Increase) decrease in inventories Increase (decrease) in accrued salaries payable Increase (decrease) in accounts payable Increase (decrease) in other current liabilities Increase (decrease) in due to other funds Increase (decrease) in customer utility deposits Increase (decrease) in accrued employee separation Total adjustments Net cash provided by operating activities Reconciliation of total cash and cash investments: Current Assets - cash and cash equivalents Restricted Assets - cash and cash equivalents: Customer Deposits Current Debt Service Total cash and cash equivalents 42 Business -type Activities - Enterprise Funds Other La Porte Area Proprietary Utility Water Authority Funds $ 6,932,518 $ 1,073,420 $ 1,184,726 (395,562) (962,716) (419,041) (2,349,415) - (933,806) 4,187,541 110,704 (168,121) 3,084,361 - 241,000 (3,504,891) (56,755) (33,232) (420,530) (56,755) 207,768 - 771,718 - 86,574 - (5,627,847) - 2,625,000 (270,000) (445,000) (113,461) (326,719) - (3,386,308) 86,573 - 242,466 38,943 23,920 (59,511) 1,022,404 53,579 182,955 1,061,347 77,499 563,658 1,201,869 117,146 706,568 456,737 230,360 $ 1,270,226 $ 1,658,606 $ 347,506- $ 269,425 $ (396,320) $ (461,587) 1,548,168 (297,816) (5,195) 1,262,058 1,362,358 22,958 25,585 3,918,116 $ 4,187,541 $ 685,800 459,426 125,000 $ 1,270,226 441,913 (5,706) 70,817 507,024 $ 110,704 $ 833,596 825,010 $ 1,658,606 270,859 49,125 120 (127,080) (60,361) 128,102 22,370 10,331 293,466 $ (168,121) $ 301.645 45,861 $ 347,506 Governmental Totals Internal Service Funds $ 9,190,664 $ 5,868,249 (1,777,319) (4,261,959) (3,283,221) (1,345,904) 4,130,124 260,386 3,325,361 1,948,753 (3,594,878) (202,508) (269,517) 1,746,245 771,718 86,574 (5,627,847) (1,432,709) - 12,217 2,625,000 (715,000) - (440,180) (3,299,735) (1,420,492) 43 305,329 152,095 1,016,472 373,094 1,321,801 525,189 1,882,673 1,111,328 1,393,665 1,967,338 $ 3,276,338 $ 3,078,666 $ (588,482) $ (784,010) 2,260,940 869,740 (254,397) (705) (1,649) (5,075) (51) 1,205,795 160,898 (60,361) - 1,490,460 45,328 - 35,916 15,433 4,718,606 1,043,666 $ 4,130,124 $ 259,656 $ 1,821,041 $ 3,078,666 825,010 459,426 - 170,861 - $ 3,276,338 $ 3,078,666 43 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies A. General Statement The City of La Porte, Texas (the "City"), was incorporated on August 10, 1892, and operates under a "Council — Manager" form of government and provides the following services as authorized by its charter: public safety, development services, public health and welfare, culture and recreation and waterworks. The accounting and reporting policies of the City relating to the funds included in the accompanying basic financial statements conform to U.S. Generally Accepted Accounting Principles (GAAP) applicable to state and local governments which include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants and the Financial Accounting Standards Board. The more significant accounting policies of the City are described below. B. Financial Reportinq Entity The City's basic financial statements include the accounts of all City operations. The City, with its elected governing body of mayor and eight council members, is considered a primary government. As required by generally accepted accounting principles, the basic financial statements include the City and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the government's operations. All component units have been included as blended component units because of the significance of their operational and financial relationships with the City. The La Porte Area Water Authority (the "Authority") is governed by a five -member board appointed by the City Council. Although it is a legally separate entity, the Authority provides services almost exclusively for the City's water operations, and is in substance a part of the City's primary operations. The Authority was created by the City to finance the operations involved in obtaining surface water supplies and converting these supplies to potable water. This water is sold primarily to the City of La Porte (86%) with the remainder being sold to other neighboring political subdivisions. The operations of the Authority are reported as a proprietary fund type. The Tax Increment Reinvestment Zone One (the "Zone") is governed by a nine -member board appointed by the City Council. The Zone provides benefits exclusively for the City through reinvestment financing of ad valorem taxes, which are utilized for capital improvements for the City of La Porte. The Zone is presented as a governmental fund type. The Section 413 Sales Tax corporation provides services that exclusively benefit the City of La Porte and is governed by a seven -member board appointed by City Council. The Section 4B Sales Tax Corporation is presented as a governmental fund type. Complete financial statements for each of the individual component units may be obtained through the City of La Porte. C. Basis of Presentation Government Wide Statements The government -wide financial statements (i.e. the statement of net assets and the statement activities) report information on all of the nonfiduciary activities of the City, including the component units. The effect of interfund activity has been removed from these statements. Governmental activities, which are normally supported by taxes and intergovernmental revenues, are reported separately from business -type activities, which rely significantly on fees and charges for support. 45 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies - Continued The statement of activities demonstrates the degree to which the direct expenses of a given program or function is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program or function. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given program or function and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program or function. Taxes and other items not properly included among program revenues are reported instead as general revenues. 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. Government resources are allocated to and accounted for in individual funds based on the purposes for which they are to be spent and the means by which spending activities are controlled. Individual funds and account groups summarized in the accompanying financial statements are classified below. Fund Financial Statements: The City segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. Separate statements are presented for governmental and proprietary activities. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. -Governmental funds are those through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The City has presented the following major governmental funds: (a) General Fund - is the main operating fund of the City. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. (b) Section 4B Sales Tax Fund - This fund is used to account for funds received from the '/z cent sales tax dedicated to certain economic and infrastructure projects. (c) 2005 General Obligation Bond Fund - This fund is used to fund projects that benefit the City in general. A specific project from this issue is the construction of the Police Facility. W, CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued Proprietary Funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. The accounting objectives are determinations of net income, financial position and cash flow. All assets and liabilities are included on the Statement of Net Assets. Proprietary funds distinguish operating revenues and expenses from non-operating 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. Operating expenses for the proprietary funds include the cost of personal and contractual services, supplies and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The City reports the following major proprietary funds: (a) Utility Fund — is used to account for the provision of water and sewer services to the residents of the City. All activities necessary to provide such services are accounted for in this fund, including, but not limited to administration, operations and maintenance of the water and sewer system and billing and collection activities. The fund also accounts for the accumulation of resources for, and the payment of, long-term debt principal and interest for water and sewer debt. All costs are financed through charges to utility customers with rates reviewed regularly and adjusted if necessary to ensure integrity of the fund. (b) La Porte Area Water Authority Fund — is used to account for revenues and expenses related to obtaining raw surface water and converting it to potable water to be sold to La Porte and neighboring cities. Additionally, the City reports the Internal Service Funds which are used to account for the Motor Pool, Technology and Insurance services provided to other departments of the City on a cost reimbursement basis. D. Measurement Focus and Basis of Accountinq Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government -wide financial statements and fund financial statements for proprietary funds are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets. The operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when they are earned. Expenses are recognized at the time the liability is incurred. Unbilled water and wastewater utility service receivables are accrued as revenues and reflected in the financial statements. 47 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies - Continued Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the current fiscal period. Most revenue sources are recorded as revenues when received in cash because they are generally not measurable until actually received. The revenues susceptible to accrual are property and sales taxes, franchise fees, interest income and intergovernmental revenues. A one-year availability period is used for recognition of all other Governmental Fund revenues. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures, as well as expenditures related to compensated absences are recorded only when payment is due. E. Budgetary Information Annual budgets are adopted on a basis consistent with generally accepted accounting principles. Annual appropriated budgets are adopted for the general, special revenue funds and debt service funds. All annual appropriations lapse at fiscal year-end. Project length financial plans are adopted for all capital projects funds. The City uses the following procedures in establishing the budgets reflected in the financial statements: 1. Prior to August, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing on the following October 1. The operating budget includes proposed expenditures and the means of financing them. 2. A public hearing is conducted to obtain taxpayer comments. 3. Prior to September 30, the budget is legally enacted through passage of an ordinance. 4. The City Manager must approve changes within a fund, which is the legal level of control. City Council approves changes between departments as well as amendments to the budget during the year as may be required. 5. Formal budgetary integration is employed as a management control device during the year for the General Fund and Proprietary Funds. Formal budgetary integration is not employed for the Debt Service Fund and Capital Projects Funds because effective budgetary control is alternatively achieved through bond indenture provisions and legally binding construction contracts, respectively. 6. The budget for the General Fund and Special Revenue Funds are adopted on a basis consistent with GAAP. Budgets for the Proprietary Funds are utilized for planning, control and evaluation purposes. They are adopted on a basis consistent with GAAP except that bond principal payments and fixed asset acquisitions are treated as expenditures. 7. Budgeted amounts are amended by the City Council during the year. Individual amendments were not material in relation to the original appropriations, which were amended. Encumbrances represent commitments related to unperformed contracts for goods or services. Encumbrance accounting - under which purchase orders, contracts and other commitments for the expenditure of resources are recorded to reserve that portion of the applicable appropriation - is utilized in the governmental funds throughout the year. Encumbered amounts lapse at year-end. However, encumbrances generally are reappropriated as part of the following year's budget. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued F. Cash and Investments Cash includes amounts in demand deposits, short-term investments, which mature within ninety days of the fiscal year end, and various petty cash funds. The short-term investments are stated at cost or amortized cost, which approximate fair value. The short-term investments consist of U.S. Treasury Bills and deposits in the Texas Local Government Investment Pool (TexPool), the Local Government Investment Cooperative (LOGIC) and Texas Short Term Asset Reserve Program (TexStar) all of which have the general characteristics of a demand deposit account. For purpose of the statement of cash flows, Proprietary Fund types consider temporary investments with a maturity of three months or less when purchased to be cash equivalents. In accordance with Statement No. 31, the City reports all investments at fair value, except for "money market investments" and "2a7 -like pools". Money market investments, which are short-term highly liquid debt instruments that may include U.S. Treasury and agency obligations, are reported at amortized costs. Investment positions in external investment pools that are operated in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940, such as TexPool, LOGIC and TexStar are reported using the pools' share price. G. Prepaid Items Prepaid balances are for payments made by the City in the current year to provide services occurring in the subsequent fiscal year, and the reserve for prepaid items has been recognized to signify that a portion of fund balance is not available for other subsequent expenditures. H. Receivables Receivables as of year-end of the government's individual major and non -major funds and internal service funds, including the applicable allowances for uncollectible accounts, are as follows: CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies - Continued Fund Taxes Grant Interest Other Accounts Total General $1,222,893 $ - $ 74,781 $ - $ 6,179,258 $ 7,476,932 Section 4b Sales Tax - - 21,224 229,385 - 250,609 Debt Service 321,954 - 10,438 - - 332,392 Grant - - 2,643 41,981 - 44,624 Community Investment - - 3,864 - - 3,864 Hotel/Motel Tax - - 3,610 - - 3,610 T.I.R.Z.One - - 1,046 - - 1,046 Capital Improvements - 4,716 8,745 - - 13,461 Transportation - - 6,505 - - 6,505 1998 G.O. Bonds - - 6,546 - - 6,546 2000 C.O. Bonds - - 157 - - 157 2000 G.O. Bonds - - 6,543 - - 6,543 2002 G.O. Bonds - - 2,550 - - 2,550 2004.C.O. Bonds - - 3,150 2,157 - 5,307 2005 C.O. Bonds - - - 2,152 2,152 2005 G.O. Bonds - - 572 918 - 1,490 2006 C.O. Bonds - - 103 - - 103 2006 G.O. Bonds - - 158 - - 158 Utility - - 10,458 - 968,734 979,192 Water Authority - - 12,351 - 169,605 181,956 Airport - - 1,972 - 2,771 4,743 Sylvan Beach - - 1,508 - - 1,508 Golf Course - - - - 50,473 50,473 Motorpool - - 13,980 - 79,711 93,691 Technology - - 5,643 - - 5,643 Insurance - - 11,107 - 2,081 13,188 Gross Receivables 1,544,847 4,716 209,654 276,593 7,452,633 9,488,443 Less: allowance for uncollectibles (788,481) - - - (2,087,157) (2,875,638) Net total receivables $ 756,366 $ 4,716 $ 209,654 $ 276,593 $ 5,365,476 $ 6,612,805 50 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued Governmental funds reported unearned revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Revenue recognition is also deferred in connection with resources that have been received, but not yet earned in the proprietary funds. At the end of the current fiscal year, the various components of deferred revenue and unearned revenue reported in the governmental and proprietary funds were as follows: Delinquent property taxes receivable Charges for services and customer deposits Grant Revenues Total deferred / unearned revenue I. Use of Estimates Unavailable Unearned Grant General Debt Service Proprietary Revenue Total $ 647,980 $ 113,612 $ - $ - $ 761,592 2,890,937 - 87,151 - 2,978,088 - - - 49,670 49,670 $ 3,538,917 $ 113,612 $ 87,151 $ 49,670 $ 3,789,350 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenditures, and expenses during the reporting period. Actual results may differ from those estimates. J. Indirect Expense Allocations It is the policy of the City not to allocate indirect expenses to various functions in the Government -wide Statement of Activities. K. Restricted Assets The City applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. L. Inventories Inventories consist of material and supplies and are valued at cost (first -in, first -out). Inventories for all funds consist of expendable supplies held for consumption and the cost thereof is recorded as an expenditure at the time individual inventory items are issued. Reported inventories in the Governmental Funds are offset by a fund balance reserve, which indicates they are unavailable for appropriation even though they are a component of net current assets. M. Interfund Transactions Transactions Between Funds Transactions between funds that would be treated as revenues, expenditures or expenses if they involved organizations external to the governmental unit are accounted for as revenues, expenditures or expenses in the funds involved. Transactions, which constitute reimbursement to a fund for expenditures or expenses initially made from that fund, which are properly attributable to another fund, are recorded as expenditures or expenses in the reimbursing fund and as reductions of the expenditure or expense in the fund that is reimbursed. Nonrecurring or nonroutine transfers of equity between funds are reported as additions to, or reductions of, the fund balance of Governmental Funds. All other legally authorized transfers are treated as transfers and are included in the results of operations of both Governmental and Proprietary Funds. 51 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 Summary of significant accounting policies - Continued N. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets, are reported in the applicable governmental or business -type activities columns in the government -wide financial statements and in the fund financial statements for proprietary funds. Capital assets are defined by the government as assets with an initial unit cost of $5,000 or more and an estimated useful life exceeding two years. Such assets are recorded at historical cost or estimated historical cost if actual historical cost is not available. Donated capital assets are recorded at their fair market value on the date donated. Repairs and maintenance that do not add to the value of the asset or extend assets lives are recorded as expenses. Interest cost during construction is capitalized when the effect of capitalization materially impact the financial statements. During the year ended September 30, 2006, no interest costs were capitalized. Property, plant and equipment of the primary government, as well as the component units, are depreciated using the straight line method over the following estimated useful lives: Buildings 20 years Water and Sewer System 20 - 40 years Infrastructure 20 - 30 years Machinery and Equipment 4 - 10 years Improvements 20 years O. Compensated Absences The City's employees earn vacation and sick leave, which may either be taken or accumulated, up to certain amounts, until paid upon termination or retirement. For all funds, this liability reflects amounts attributable to cumulative employee services already rendered, where the payment is probable and can be reasonably estimated. The current and long-term portions of the governmental fund type liabilities are recorded in the Government -Wide Statement of Net Assets. The proprietary fund type liability is recorded as a liability in the individual proprietary funds since payment of this liability will be made from resources of these funds. Also, for the governmental activities, compensated absences are generally liquidated by the general fund. Policies relating to the accrual and payment of these benefits are as follows: • Vacation - Employees earn from 10 to 25 days of vacation per year. Upon separation, employees are paid for all accumulated vacation leave (up to one and one half times their annual accrual rate). ■ Sick Leave - Employees earn an average of 10 sick hours per month of service. Non -civil service employees hired after November 19, 1991 and who have completed 10 consecutive years of service with the City, are paid for accumulated sick leave, subject to a limit of 480 hours. Civil service employees are subject to a limit of 720 hours. The liability for compensated absences at September 30, 2006 is comprised of the following: Governmental Business Type Total Vacation $ 675,505 $ 124,553 $ 800,058 Sick Leave 1,595,279 198,404 1,793,683 Total All Funds $ 2,270,784 $ 322,957 $ 2,593,741- 52 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 1. Summary of significant accounting policies — Continued P. Lona -term Obliqations In the government -wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business -type activities or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Q. Reservations of Fund Balances The fund balance reserves for revenue bond retirement and construction, prepaid items, inventory and debt service are discussed in Notes 5, 1(G), 1(L) and 1(C), respectively. Other reserves of funds are for the Municipal Court Building Security Fees and Municipal Court Technology Fees, park zone and confiscated funds. R. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciations, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the city or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. 2. Cash, Cash Equivalents and Investments Cash and Cash Equivalents The City reports cash and cash equivalents in the City's statement of cash flows for Proprietary Fund Types and in all other financial statements of financial position. The City considers cash and cash equivalents to be cash on hand, demand deposits, certificates of deposit, balances in privately managed public funds investment pools and money market mutual funds. Investments Investments consist of balances in privately managed public funds investment pools, money market mutual funds and investments in United States (US) Agency securities. The City reports all investments at fair value based on quoted market prices at year-end date. 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. Statutes and the depository contract require full security for all funds in the depository institution through federal depository insurance or a combination of federal depository insurance and acceptable collateral securities and/or an acceptable surety bond. The City requires the depository to place the collateral securities with an independent trustee institution. The depository is required to deliver the 53 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued safekeeping receipts to the City. In accordance with Texas statutes, the safekeeping receipts are in the name of the depository with proper indication of pledge of the collateral securities by the depository to secure funds of the City. The City must approve all collateral securities pledged and also must approve in writing any changes to the pledged collateral securities. The City has adopted a written investment policy regarding the investment of its funds as defined by the PFIA. The PFIA also requires the City to have independent auditors perform test procedures related to investment practices as provided by the Act. The City complies with the requirements of the Act and with local policies. The City's investment policy permits investment of City funds in only the following investment types, consistent with the strategies and maturities defined in the policy: ➢ Obligations of the U.S., its agencies and instrumentalities. ➢ Direct obligations of the State of Texas or its agencies. ➢ 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. ➢ Other obligations, the principal and interest on which are unconditionally guaranteed or insured by, or backed by full faith and credit of the State of Texas or the United States or their agencies and instrumentalities. ➢ Obligations of states, agencies, counties, cities and other political subdivisions of any state having been rated as to the investment quality by a nationally recognized investment firm and having received a rating of not less than A or its equivalent. ➢ Certificates of Deposit issued by state and national banks or savings and on associations domiciled in this state that are: a. guaranteed or insured by the Federal Deposit Insurance Corporation; or b. secured by obligations that are described in 1-5 above, which are intended to include all direct federal agency or instrumentality issued mortgage backed securities that have a market value of not less than the principal amount of the certificates or in any other manner and amount provided by law for deposit of the investing entities. ➢ Certificates of Deposit and share certificates issued by a state or federal credit union domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in 1 through 5 above in any other manner and amount provided by law for the City deposits. ➢ Fully collateralized repurchase agreements having a defined termination date, secured by obligations of the United States, its agencies or instrumentalities, pledged with a third party selected or approved by the political entity, and placed through a primary government securities dealer, as by the Federal Reserve or through a financial institution domiciled in the State of Texas. ➢ Prime domestic banker's acceptances, defined as a banker's acceptance with a 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 equivalent by at least one nationally recognized credit rating agency. ➢ Commercial paper that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit 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. ➢ SEC -registered no-load money market mutual fund (MMMF), with a dollar weighted average portfolio maturity of 90 days or less, includes in their investment objectives the maintenance of a stable net asset value of $1 for each share. ➢ SEC -registered, no-load money market mutual funds (MMMF) that have an average weighted maturity of less than two years, invests exclusively in obligations described above and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of no less than "AAA" or its equivalent. ➢ Authorized government investment pools that invest solely in obligations of any of the above investments provided that the pools are rated no lower than "Aaa" or "AAA" or an equivalent by at least one nationally recognized rating service. 54 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued Deposit and Investment Amounts At year-end, the City recorded cash on hand, demand deposits, certificates of deposit, balances in privately managed public funds investment pools, money market mutual funds, and investments stated at fair value of $51,688,558. The following schedule shows the City's recorded cash and investments at year-end: General Debt Service Capital Projects Special Revenue Funds Total Governmental Funds Internal Service Funds Total Governmental Activities Enterprise Total Cash Bank Deposits Pooled Funds Investments Total $ 905,549 $ 4,510,411 $ 5,287,784 $ 10,703,744 178,690 890,030 752,683 1,821,403 585,744 17,616,871 2,467,282 20,669,897 496,420 2,472,598 2,553,096 5,522,114 2,166,403 25,489,910 11,060,845 38,717,158 514,753 2,563,913 2,160,627 5,239,293 2,681,156 28,053,823 13,221,472 43,956,451 304,478 5,686,214 1,741,415 7,732,107 $ 2,985,633 $ 33,740,038 $14,962,887 $ 51,688,558 Quoted market prices are the basis of the fair value for US Agency securities and commercial paper. The amount of increase or decrease in the fair value of investments during the current year is included in the City's investment income as follows: Interest Income $ 2,122,366 Net Increase (Decrease) in Fair Value of Investments 50,053 Total Investment Income $ 2,172,419 Investment Risks At year-end, the City had the following investments, shown below for all funds by investment type: Investment Type Fair Value Public funds investment pools $ 33,740,038 US Agency securities 14,962,887 Total $ 48,702,925 55 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 2. Cash, Cash Equivalents and Investments - Continued Interest Rate Risk At year-end, the City had the following investments subject to interest rate risk disclosure, under U.S. generally accepted accounting principles, by fund: Federal Home Loan Bank (FHLB) Fair Weighted Average Value Maturity (Months) $9,965,937 4.42 Federal Home Loan Mortgage Corporation (FHLMC) 1,997,580 1.69 Federal National Mortgage Association (FNMA) 2,999,370 0.78 Total fair value $14,962,887 Portfolio weighted average maturity 9.42 The City's investment policy specifies the maximum stated maturity, from the date of purchase; for any individual investment may not exceed 5 years and the maximum dollar -weighted average maturity for the pooled fund group (investment portfolio) may not exceed 2 years. Concentration of Credit Risk The policy does require investments to be staggered in a way that protects interest income from the volatility of interest rates. The policy has not established limitations on percentages of total portfolio that may be invested in securities other than repurchase agreements, Treasury bills and notes or insured and collateralized Certificates of Deposits. Credit Risk At year-end balances in TexPool, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, balances in TexStar, a privately managed public funds investment pool was rated AAAm by Standard & Poor's and balances in Logic, a privately managed public funds investment pool was rated Aaa/MR1+ by Standard and Poor's. Federal Home Loan Bank (FHLB) agency notes, Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) agency notes were rated AAA by Standard & Poor's, AAA by Fitch Ratings and Aaa by Moody's Investors Service. All credit ratings met acceptable levels required by legal guidelines prescribed in both the PFIA and the City's investment policy. Legal guidelines require an Al rating by Standard & Poor's and a P-1 rating by Moody's Investors Service for investments in commercial paper. 56 Percentage of Total Investment Type Fair Value Portfolio Agency Notes $ 14,962,887 48% Investment Pools 33,740,038 52% $ 48,702,925 100% Credit Risk At year-end balances in TexPool, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, balances in TexStar, a privately managed public funds investment pool was rated AAAm by Standard & Poor's and balances in Logic, a privately managed public funds investment pool was rated Aaa/MR1+ by Standard and Poor's. Federal Home Loan Bank (FHLB) agency notes, Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) agency notes were rated AAA by Standard & Poor's, AAA by Fitch Ratings and Aaa by Moody's Investors Service. All credit ratings met acceptable levels required by legal guidelines prescribed in both the PFIA and the City's investment policy. Legal guidelines require an Al rating by Standard & Poor's and a P-1 rating by Moody's Investors Service for investments in commercial paper. 56 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 3. Property tax The appraisal of property within the City is the responsibility of the Harris County Appraisal District (the "Appraisal District"). The Appraisal District is required under the Property Tax Code to appraise all property within the county on the basis of 100% of its market value. The value of real property within the Appraisal District must be reviewed every five years; however, the City may, at its own expense, require annual reviews of appraised values. The City may challenge appraised values established by the Appraisal District through various appeals and, if necessary, take legal action. Under this legislation, the City continues to set tax rates on City property. However, if the effective tax rate, excluding tax rates for repayment of general obligation bonds and other contractual obligations, adjusted for new improvements, exceeds the rate for the previous year by more than 8 percent, qualified voters of the City may petition for an election to determine whether to limit the tax rate to no more than 8 percent above the effective tax rate. The City's property taxes are levied annually in October on the basis of the Appraisal District's assessed values as of January 1 of that calendar year. Appraised values are established by the Appraisal District at market value, assessed at 100% of appraised value and certified by the Harris County Appraisal District Board of Review. The City's property taxes are billed and collected by the City's Tax Assessor/Collector. Such taxes are applicable to the fiscal year in which they are levied and become delinquent with an enforceable lien on property on January 1 of the current calendar year. The City is permitted, by Article XI, Section 5, of the State of Texas Constitution and the City Charter, to levy property taxes up to $2.50 per $100 of assessed valuation for general governmental services. Within the $2.50 maximum levy, there is no legal limit upon the amount of property taxes, which can be levied for debt service. The property tax rates to finance general governmental services and debt service for the 2005-06 tax year were $0.613 and $0.097, respectively, per $100 of assessed valuation. The 2005 assessed value and total tax levy as adjusted through September 30, 2006 were $1,695,166,598 and $12,035,686 respectively. The City has enacted an ordinance providing for the exemption of twenty percent (20%) of the assessed Value of residential homesteads plus and additional $60,000 for persons 65 years of age or older for property taxes. An exemption of $60,000 is allowed for disabled persons on homesteads and up to $12,000 is allowed for disabled veterans on any one piece of property. Additionally, the market value of agricultural land is reduced to agricultural value for purposes of the City's tax levy calculation. 57 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets Capital asset activity for the year ended September 30, 2006 was as follows: Capital assets, being depreciated: Buildings and improvements Beginning 20,659 (213,655) Ending Improvements other than buildings Balance 103,503 Retirements & Balance Infrastructure 10/01/05 Additions. Adjustments 09/30/06 Governmental activities: 12,236,506 1,663,337 (579,962) 13,319,881 Capital assets, not being depreciated: 64,119,886 2,642,096 (1,148,199) 65,613,783 Land $ 7,682,585 $ 2,932 $ - $ 7,685,517 Construction in progress 9,431,427 4,518,754 (3,966,207) 9,983,974 Total capital assets, not being depreciated 17,114,012 4,521,686 (3,966,207) 17,669,491 Capital assets, being depreciated: Buildings and improvements 17,925,224 20,659 (213,655) 17,732,228 Improvements other than buildings 10,476,050 103,503 (2,891,695) 7,687,858 Infrastructure 23,482,106 854,597 2,537,113 26,873,816 Machinery and equipment 12,236,506 1,663,337 (579,962) 13,319,881 Total capital assets being depreciated 64,119,886 2,642,096 (1,148,199) 65,613,783 Less accumulated depreciation for: Buildings 9,227,792 736,872 (9,157) 9,955,507 Improvements other than buildings 4,512,020 300,019 (39,186) 4,772,853 Machinery and equipment 7,572,159 1,008,556 (478,353) 8,102,362 Infrastructure 13,505,407 1,090,389 751 14,596,547 Total accumulated depreciation 34,817,378 3,135,836 (525,945) 37,427,269 Total capital assets, being depreciated, net 29,302,508 (493,740) (622,254) 28,186,514 Governmental activities capital assets, net $ 46,416,520 $ 4,027,946 $ (4,588,461) $ 45,856,005 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets — Continued Business -type activities: Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated Capital assets, being depreciated Beginning Ending Balance Retirements & Balance 10/01/05 Additions Adjustments 09/30/06 $ 2,350,478 $ - $ - $ 2,350,478 1,184,241 2,371,664 (916,944) 2,638,961 3,534,719 2,371,664 (916,944) 4,989,439 Buildings and improvements 1,166,840 - - 1,166,840 Improvements other than buildings 63,504,133 580,706 5,096,516 69,181,355 Machinery and equipment 453,644 6,330 (30,790) 429,184 Total capital assets, being depreciated 65,124,617 587,036 5,065,726 70,777,379 Less accumulated depreciation for: Buildings and improvements Improvements other than buildings Machinery and equipment Total accumulated depreciation Total capital assets, being depreciated net Business -type activities capital assets, net 706,880 50,102 - 756,982 33,871,842 2,189,521 - 36,061,363 345,929 21,317 (14,708) 352,538 34,924,651 2,260,940 (14,708) 37,170,883 30,199,966 (1,673,902) 5,080,434 33,606,500 $ 33,734,685 $ 697,761 $ 4,163,489 $ 38,595,935 59 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 4. Capital Assets - Continued Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities: General government $ 298,938 Public safety 307,965 Public works 1,167,845 Culture and Recreation 491,459 Capital assets held by the government's internal service funds are charged to the various functions based on their usage of the assets 869,628 Total depreciation expense - governmental activities $ 3,135,835 Business -type activities: Water & Sewer Services $ 1,990,081 Airport 108,772 Golf Course 147,215 Sylvan Beach Pavillion 14,872 Total depreciation expense - business -type activities $ 2,260,940 The City has active construction projects as of September 30, 2006. Total accumulated commitments for ongoing capital projects are composed of the following: Utility Capital Projects Fund Sylvan Beach Fund Airport Fund Hotel/Motel Occupancy Tax Fund TIRZ Fund General CIP S1998 General Obligation Bonds S2000 General Obligation Bonds S2002 General Obligation Bonds S2004 Cert. of Obligation Bonds S2005 General Obligation Bonds Construction In Progress $ 2,519,056 34,905 85,000 52,316 21,057 557,584 558,210 822,486 1,514,308 3,460,479 2,997,534 Remaining Contract Balance $ 19,545 19,545 645,255 21,716 7,120, 597 Total $ 12,622,935 $ 7,826,658 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities At September 30, 2006 bonds payable consisted of the following individual issues: 1998 General Obligation Serial Bonds; Governmental Business -type due in annual installments of $125,000 through March 15, 2019; interest at 4.25% to 6.25% $ 1,625,000 1998 Waterworks and Sewer System Revenue Bonds due in annual installments of $125,000 through March 15, 2009; interest at 4.35% to 6.2% 375,000 1999 La Porte Area Water Authority Contract Revenue Refunding Bonds due in annual payments through March 15, 2017; interest at 7% to 7.5% 6,055,000 2000 General Obligation Serial Bonds due in annual installments of $150,000 through March 15, 2010, changing to $175,000 through March 15, 2020; interest at 5% to 7% 2,350,000 2000 Certificates of Obligation due in annual installments of $150,000 through March 15, 2020; interest at 5% to 7% 2,100,000 2002 Limited Tax Bonds due in annual installments of $270,000 through March 15, 2025; interest at 4.25% to 5% 5,130,000 2004 Certificates of Obligation 6,800,000 due in annual payments through March 15, 2025; interest at 3.6% to 4.45% 2005 General Obligation Serial Bonds 7,435,000 due in annual payments through March 15, 2025; interest at 3.75% to 4.25% 2005 Certificates of Obligation 1,740,000 due in annual payments through March 15, 2015; interest at 2.8% to 3.8% 2006 Public Property Finance Contractual Obligation due in annual payments through January 25, 2016; interest at 3.74% 2,625,000 2006General Obligation Serial Bonds due in annual payments through March 15, 2005; interest at 3.625% to 4.25% 1,200,000 2006 Certificate of Obligation due in annual payments through March 15, 2025; interest at 3.75% to 4.3% 5,765,000 Total Bonds Payable $ 34,145,000 $ 9,055,000 61 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities — Continued Changes in Outstanding Debt — Transactions for the year ended September 30, 2006 are summarized as follows: Governmental Type Activities General Obligation Bonds Certificates of Obligation Compensated Absences Total governmental fund types Business Type Activities Revenue Bonds Payable Public Property Finance Contractual Obligation Compensated absences Total business fund types Total of all fund types Balance Issues Balance October 1, or Payments or September 30, Due within 2005 Additions Expenditures 2006 one year $ 17,325,000 $ 1,200,000 $ 785,000 $ 17,740,000 $ 810,000 11,050,000 5,765,000 410,000 16,405,000 425,000 2,602,839 151,420 237,058 2,517,201 149,000 30,977,839 7,116,420 1,432,058 36,662,201 1,384,000 7,145,000 - 715,000 6,430,000 585,000 - 2,625,000 - 2,625,000 262,500 459,500 63,387 12,037 510,850 30,000 7,604,500 2,688,387 727,037 9,565,850 877,500 $ 38,582,339 $ 9,804,807 $ 2,159,095 $ 46,228,051 $ 2,261,500 General Obligation Bonds and Certificates of Obligation — General Obligation Bonds are direct obligations issued on a pledge of the general taxing power for the payment of the debt obligations of the City. General Obligations Bonds and Certificates of Obligation require the City to compute, at the time other taxes are levied, the rate of tax required to provide (in each years bonds are outstanding) a fund to pay interest and principal at maturity. The City is in compliance with this requirement. Arbitrage provisions of the Internal Revenue Tax Act of 1986 require the City to rebate excess arbitrage earnings from bond proceeds to the federal government. As provided for by the bond indentures, this amount has been recorded as a liability in the General Fund for the benefit of the federal government and will be paid as required by applicable regulations. Certain General Obligation Bonds and Certificate of Obligations Bonds are to be repaid by revenues of the proprietary funds. Also, for the governmental activities, compensated absences are generally liquidated by the general fund and for business type, compensated absences are paid from the utility fund. 62 CITY OF LA PORTE, TEXAS Notes to the Financial Statements 5. Long Term Liabilities - Continued September 30, 2006 Revenue Bonds - Water and Sewer Revenue Bonds constitute special obligations of the City solely secured by a lien on and pledge of the net revenues of the water and sewer system. The Revenue Bonds are collateralized by the revenue of the water and sewer system and the various special funds established by the bond ordinances. The ordinances provide that the revenue of the system is to be used first to pay operating and maintenance expenses of the system and second to establish and maintain the Revenue Bond funds. Remaining revenues may then be used for any lawful purpose. The ordinances also contain provisions, which, among other items, restrict the issuance of additional Revenue Bonds unless the special funds noted above contain the required amounts and certain financial ratios are met. The City is in compliance with all significant financial requirements as of September 30, 2006. Below is a reconciliation of the various restricted cash and cash investments: Current Maturities of Revenue Bonds Customer Deposits Payable Total Restricted Cash and Cash Investments as of September 30, 2006 63 $ 950,010 505,287 $ 1,455,297 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities - Continued Annual Requirements to Retire Debt Obligations - The annual aggregate maturities for each bond type for the years subsequent to September 30, 2006, are as follows: General Obligation Bonds Governmental Activities Year Ending Business -type Activities September 30 Principal Interest Principal Interest Total 2007 $ 810,000 $ 782,479 $ - $ - $ 1,592,479 2008 865,000 724,726 - - 1,589,726 2009 875,000 684,138 - - 1,559,138 2010 895,000 644,779 - - 1,539,779 2011 930,000 605,335 - - 1,535,335 2012-2016 4,890,000 2,398,341 - - 7,288,341 2017-2021 4,960,000 1,289,372 - - 6,249,372 2022-2026 3,515,000 315,505 - - 3,830,505 2012-2016 4,080,000 Total $17,740,000 $ 7,444,676 $ - $ - $ 25,184,676 Certificate of Obligations Governmental Activities Year Ending Business -type Activities September 30 Principal Interest Principal Interest Total 2007 $ 425,000 $ 780,813 $ 262,500 $ 93,266 $ 1,561,579 2008 650,000 671,014 262,500 83,449 1,666,963 2009 670,000 642,120 262,500 73,631 1,648,251 2010 700,000 613,310 262,500 63,814 1,639,624 2011 725,000 584,340 262,500 53,996 1,625,836 2012-2016 4,080,000 2,437,383 1,312,500 122,719 7,952,601 2017-2021 4,875,000 1,451,051 - - 6,326,051 2022-2026 4,280,000 379,209 - - 4,659,209 Total $ 16,405,000 $ 7,559,240 $ 2,625,000 $ 490,875 $ 27,080,115 Revenue Bonds Governmental Activities Year Ending Business -type Activities September 30 Principal Interest Principal Interest Total 2007 $ - $ - $ 585,000 $ 314,263 $ 899,263 2008 - - 610,000 281,688 891,688 2009 - - 630,000 247,788 877,788 2010 - - 525,000 215,456 740,456 2011 - - 550,000 185,513 735,513 2012-2016 - - 3,210,000 474,706 3,684,706 2017-2021 - - 320,000 7,600 327,600 Total $ - $ - $ 6,430,000 $ 1,727,014 $ 8,157,014 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 5. Long Term Liabilities — Continued Bonds Authorized and Unissued — At September 30, 2006, the City had $4,100,000 in Certificate of Obligations Bonds which were authorized and unissued. Defeased Bonds Outstanding — In 1994, the City defeased certain general obligation and revenue bonds by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the City's financial statements. On October 6, 1999, the La Porte Area Water Authority issued $8.08 million in Contract Revenue Refunding Bonds, Series 1999, with an average interest rate of 5.159 percent to refund $8.08 million in outstanding Water Supply Contract Revenue Bonds, Series I and II, 1998 with an average interest rate of 6.94 percent. The Authority completed the current refunding to reduce its total debt service payments over the next 18 years by $1.476 million and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $1.048 million. The bonds are payable from the net revenues of the Authority. The bonds are in $5,000 denominations. The Authority is in compliance with all significant requirements and restrictions contained in the bond resolution. As of September 30, 2006, $2,025,000 of the refunded bonds have been paid and $6,055,000 remain outstanding. 6. Pension Benefits Plan Descriptions The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan (the "Plan") in the statewide Texas Municipal Retirement System (TMRS), one of 811 administered by TMRS, an agent multiple -employer public employee retirement system. A copy of the 2005 TMRS Comprehensive Annual Financial Report may be obtained by writing to P.O. Box 149153, Austin, Texas 78714. In addition, the city provides pension benefits to its volunteer firemen through the Texas Statewide Emergency Services Personnel Retirement Fund, one of 150 administered by the Fire Fighters' Pension Commissioner, a cost sharing multiple employer pension system. That report may be obtained by writing to Firefighters Pension Commission, P.O. Box 12577, Austin, Texas 78711. Both Plans are more fully described below. Texas Municipal Retirement System Benefits depend upon the sum of the employee's contributions to the Plan, with interest, and the City financed monetary credits, with interest. At the date the Plan began, the city granted monetary credits for service rendered before the Plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to the establishment of the Plan. Monetary credits for service since the Plan began are a percentage (100%, 150% or 200%) of the employee's accumulated contributions. In addition, the City can grant 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's contributions accumulated with interest if the employee's contribution rate and City's matching percentage had always been in existence and if the employee's salary had always been the average of his salary in the last three years and 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 -finance monetary credits with interest were used to purchase an annuity. 65 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits — Continued Members can retire at ages 60 and above with 10 or more years of service or with 20 years of service regardless of age. The Plan also provides death and disability benefits. A member is vested after 10 years. The Plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing the TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for employees is 7 percent and the City's matching ratio is currently 2 to 1, both as adopted by the governing body of the City. 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 percentage of payroll from year to year. The normal cost contribution rate financing the currently accruing monetary credits is due to the City's matching percentage, which is 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 percentage of payroll necessary to satisfy the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfounded (over funded) actuarial liability (asset) over the Plan's 25 -year amortization period. When the City periodically adopts updated service credits and increases in annuities, in effect, the increased unfounded actuarial liability is to be amortized over a new 25 -year period. Currently, the unfounded actuarial liability is being amortized over the 25 -year period, which began January 1998. The unit credit actuarial cost method is used for determining the City's contribution rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, 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. A summary of actuarial assumptions is presented below: Fiscal Year 2003 2004 2005 Actuarial Valuation Date Actuarial Cost Method Amortization Method Remaining Amortization Period Asset Valuation Method Investment Rate of Return Projected Salary Increases Inflation Rate Cost of Living Adjustment Annual Pension Cost (APC) $ 1,743,041 2,037,218 1,984,770 December 30, 2005 Unit Credit Level Percent of Payroll 25 Years — Open Period Amortized Cost 7% None 3.5% None Percentage of APC Net Pension Contribution Obligation 100% - 100% - 100% - Additional supplementary three-year trend information may be found on page 73. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits — Continued Texas Statewide Emergency Services Personnel Retirement Fund Summary of Significant Accounting Policies and Plan Asset Matters The Texas Statewide Emergency Services Personnel Retirement Fund financial statements are prepared using the accrual basis of accounting. The Fund's fiscal year is from September 1 through the following August 31. Contributions are recognized as revenues in the period in which they are due to the Fund. No contributions applicable to the H.B. 258 Texas Local Fire Fighters Retirement Act (TLFFRA) are included herein. The Texas Statewide Emergency Services Personnel Retirement Fund investments are reported at a smoothed market -related value. Plan Description The Fire Fighters' Pension Commission is the administrator of the Texas Statewide Emergency Services Personnel Retirement Fund, a cost sharing multiple employer pension system established and administered by the State of Texas to provide pension benefits for emergency services personnel who serve without monetary remuneration. The Texas Statewide Emergency Services Personnel Retirement Fund is considered a component unit of the State of Texas financial reporting entity and is included in the State's financial reports as a pension trust fund. At August 31, 2006 there were 181 member departments participating in the pension system. The following table summarizes the pension system membership as of August 31, 2006: Retirees and beneficiaries currently receiving benefits 1,766 Terminated members entitled to benefits but not yet receiving those 1,815 Current active members (vested and non -vested) 4,480 The pension system was created by Senate Bill 411, 65th Legislature, Regular Session (1977). Benefit provisions include retirement benefits as well and death and disability benefits. Members are vested at the beginning of the fifth year of service, at 5 percent per year of service for the first ten years and 10 percent for each of the next five years of service. Upon reaching age 55, a vested member may retire and receive a monthly pension equal to his vested percentage multiplied by six times the governing body's average monthly contribution over the member's years of qualified service. For years of service in excess of 15 years, this monthly benefit is increased at the rate of 6.2 percent compounded annually. Death and disability benefits are dependent on whether or not the member was engaged in the performance of duties at the time of death or disability. Death benefits include a lump -sum amount and continuing monthly payments to a member's surviving spouse and/or dependents. Contribution requirements were established by S.B. 411, 65th Legislative, Regular Session (1977) and no contributions are required by members. As of September 1, 2006, the governing bodies of participating department members are required to contribute at least $16 per month for each member. Additional contributions may be necessary to pay for unfunded prior service costs and "buybacks" of vested benefits. The State may also be required to make a limited amount of annual contributions to make the fund actuarially sound. M CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 6. Pension Benefits - Continued Contributions Required and Contributions Made As previously stated the required contribution of at least $16 per member per month is not actuarially determined. The 2005 Legislative Session gave the Board of Trustees of the Texas Emergency Services Retirement System (TESRS) the authority to establish vesting periods, contribution levels, benefit formulas and eligibility requirements under Title 8, Government Code, Subtitle H. The minimum monthly contribution rate per member is increasing from $12 to $36 in $4 annual increments beginning September 1, 2006 and becoming $36 September 1, 2011. For the fiscal year ending August 31, 2006, contributions totaling $2,077,728 for dues and prior service were paid into the fund by the governing bodies sponsoring the member participating departments. The contributions made were equal to the contributions required. City Percentage of Fiscal Annual Required Year Contributions Contributions 2004 13,392 100% 2005 13,104 100% 2006 10,360 100% The purpose for the biennial actuarial valuations is to test the adequacy of the monthly contributions and determine if they are adequate to fund the benefits that are promised. The total contributions expected from the governing bodies sponsoring the members for the fiscal year ending August 31, 2006 are $546,780 less than the minimum required contributions for that fiscal year, based on amortizing the unfunded actuarial accrued liability over 30 years. 7. InterFund Receivables, Payables and Transfers Interfund transfers during the year ended September 30, 2006 were as follows: Transfer In: Capital Debt Special Internal General Project Service Revenue Enterprise Service Transfer out: Fund Funds Fund Funds Fund Funds Totals General Fund 1,368,365 $ - 500,000 $ - 1,177,438 $ 3,045,803 Capital Project Funds - 2,800,000 - - - 636,925 3,436,925 Debt Service Fund - - - - - - Special Revenue Funds 249,814 - 740,060 60,000 - 1,049,874 Enterprise Funds 343,000 - - 3,084,361 112,882 3,540,243 Internal Service Funds - - - - 181,000 22,197 203,197 Total $ 592,814 $ 4,168,365 $ 740,060 $ 500,000 $ 3,325,361 $ 1,949,442 $ 11,276,042 Transfers are used to 1) for general and administrative transfer from Utility Fund to the General Fund, 2) transfer to the Insurance Fund for liability insurance and worker's compensation, 3) annual transfers to fund capital projects, 4) annual transfers fro debt service, 5) transfer from General Fund to La Porte Area Water Authority for an operator's agreement, 6) transfers to fund an employee incentive program and 7) transfer from Hotel/Motel to the Golf Fund for advertising expenditures. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 7. Interfund Receivables, Payables and Transfers - Continued In the year September 30, 2006, the government made the following one-time transfers: A transfer of $500,000 from the General Fund to the Insurance Fund for additional funding for health insurance to offset potential increases to the employee's contributions. A transfer of $714,450 from the General Fund to the Capital Projects Fund for additional funding for general CIP projects. The Capital Projects Fund does not have an alternative source of revenue so additional amounts were sent over since expenditures were higher than anticipated. A transfer of $500,000 from the General Fund to the Community Development Fund to fund future economic development. A transfer of $500,000 from the General Fund to the 2000 General Obligation Bond Fund to cover project overruns for Fire Station #3. A transfer of $153,915 from the General Fund to the 2002 General Obligation Bond Fund to cover project overruns for the EMS remodel project. A transfer of $130,000 was made from the Vehicle Replacement to the Golf Fund to purchase Golf Carts. A transfer of $51,000 from the Insurance Fund to the Golf Fund for repairs due to storm damage. The composition of interfund balances as of September 30, 2006 is as follows: Due to/from other funds: Receivable Fund Payable Fund General Utility Fund $ 1,362,358 Golf Fund 128,102 2005 Certificates of Obligation Bond Fund 600,886 $ 2,091,346 The outstanding balances result from overdraws of the pooled cash. 8. Risk Management The City is exposed to various risks related to torts: theft, damage to and destruction of assets; errors and omissions; and natural disasters. The City's risk management program encompasses various means of protecting the City against loss by obtaining property, casualty and liability coverage from participation in a risk pool. The participation of the City in the risk pool is limited to the payment of premiums. Further information regarding the pool is provided below. Settled claims have not exceeded insurance coverage in any of the previous three fiscal years. There has not been any significant reduction in insurance coverage from that of the previous year. Health Insurance Benefits The City self -insures a portion of health insurance benefits provided to employees. The City records revenues and expenses for providing employee health coverage in an Internal Service Fund and accrues the estimated incurred but not reported claims. Charges are assessed to various City divisions based on their full-time employee count. CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 8. Risk Management - Continued Activity during the year included: Revenues: Charges to divisions Charges to employees Charges to retirees Charges to COBRA participants Total revenues Expenses: Personnel expenses Other expenses Claims administration Claims incurred Re -insurance premiums Total health services expenses $ 2,539,214 446,593 80,443 3,066,250 408,278 396,213 136,222 2,750,136 188,684 $ 3,879,533 Included in the claims paid amount is $406,650 for incurred but not reported claims. Settled claims have not exceeded insurance coverage in any of the previous four fiscal years. Estimates of claims payable and of claims incurred but not reported at September 30, 2006 are reflected as liabilities of the Internal Service Fund. Because actual claims liabilities depend on such complex factors as inflation, changes in legal requirements and damage awards, the process used in computing claims liability is an estimate based on historical claims. Analysis of claims liability for the fiscal years 2004, 2005 and 2006 are as follows: Beginning Current Payment End of of Year Year for Year Accrual Estimates Claims Accrual Fiscal Year 2004 $163,452 $ 3,304,198 $ 3,241,263 $ 226,387 Fiscal Year 2005 226,387 2,992,671 2,914,671 304,387 Fiscal Year 2006 304,387 2,750,136 2,647,873 406,650 Risk Pool The City is a member of the Texas Municipal League Intergovernmental Risk Pool, an unincorporated association of 1,860 political subdivisions of the State of Texas. The Pool contracts with a third party administrator for administration, investigation and adjustment services in the handling of claims. All loss contingencies, including claims incurred but not reported, if any, are recorded and accounted for by the Pool. 70 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 9. Commitments and Contingent Liabilities From time to time, the City is a defendant in legal proceedings relating to its operations as a municipality. In the best judgment of the City's management, the outcome of any pending legal proceedings will not have an adverse effect on the accompanying general purpose financial statements. The City participates in certain federal and state assisted grant programs. These programs are subject to program compliance audits by the grantors or their representatives. Any liability for reimbursement which may arise as the result of these audits is not believed to be material. 10. Post -Employment Benefits In addition to pension benefits described in Note 6, employees who retire from the City and are eligible for pension benefits shall be provided medical coverage by the City to the extent and subject to the conditions of such coverage that is provided to current employees of the City. This coverage for retired employees is provided at the option of City council through adoption of the annual budget. The City funds these premiums in the same manner as it funds similar premiums for current employees. Employees, who retired from the City before October 1, 1992, have 100% of their coverage paid for by the City. Employees who retired from the City in 1993 and up to December 31, 1999, with 20 or more years of service have 100% of their coverage paid for by the City. Prior to January 1, 2000, employees who have 15 years but less than 20 years of service are required to pay for 10% of the cost and employees who have 10 years but less than 15 years of service are required to pay for 20% of their costs. For employees who retire after January 1, 2000 the following applies: Years of Service with City Retiree Cost City Cost Retiree Cost Per Year At least 10 but less than 15 years 55% 45% $3,300 At least 15 but less than 20 years 25% 75% 1,500 At least 20 years 0% 100% 0 71 CITY OF LA PORTE, TEXAS Notes to the Financial Statements September 30, 2006 10. Post -Employment Benefits -Continued Employees who retire after January 1, 2006 and who have a combination of years of service with the City of La Porte plus age totaling 80 and who retire as a qualified annuitant under the Texas Municipal Retirement System; who retire in accordance with the City of La Porte Employee Policies Handbook; who complete at least 20 years of service with the City of La Porte are currently employed by the City of La Porte at the time of their retirement. The total premium cost is the total annual dollar allocated by budget as approved by City Council for the City of La Porte for health insurance for each employee, including employee and employer contributions. The cost allocation shall be as follows: Years of Service Retiree City with City Cost Cost at least 20 years 60% + dependent premiums 40% 21 years 55% + dependent premiums 45% 22 years 50% + dependent premiums 50% 23 years 45% + dependent premiums 55% 24 years 40% + dependent premiums 60% 25 years 35% + dependent premiums 65% 26 years 30% + dependent premiums 70% 27 years 25% + dependent premiums 75% 28 years 20% + dependent premiums 80% 29 years 15% + dependent premiums 85% 30 years 10% + dependent premiums 90% The costs of providing these benefits and number of retired employees are as follows: Number of Total Cost City's Cost Retiree Cost Retired Employees $480,182 $376,202 $103,980 57 Retirees who are entitled to receive retirement benefits under the City's retirement plan may purchase continued health benefits for the retiree and the retiree's dependents. The person must inform the City no later than the day on which the person retires that the person elects to continue coverage. If the retiree elects to continue coverage for himself and/or his dependents, once he decides to drop either type of coverage, the person and/or his dependents become eligible for coverage at the next open enrollment period. The level of coverage provided is the same level of coverage provided to current employees. The City's coverage is secondary to Medicare when the person becomes eligible for those benefits. Payment for dependent coverage will be at the same rate as payments for current employees. 72 ATTORNEYS K U R T H LLP APPENDIX C FORM OF BOND COUNSEL OPINION , 2007 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 La Porte, Texas (the "City"), in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF LA PORTE, TEXAS, CERTIFICATES OF OBLIGATION, SERIES 2007, dated June 1, 2007, in the aggregate principal amount of $8,075,000, maturing on March 15 in each year from 2008 through and including 2024 and in the years 2026 and 2029. The Certificates are issuable in fully registered form only, in denominations of $5,000 or integral multiples thereof (or in an amount equal to an authorized denomination, as the case may be), bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance (the "Ordinance") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Certificates, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Certificates. We have also examined executed Certificate No. R-1. 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. 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 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 (not to exceed $1,000) to be derived from the operation of the City's water and sewer system, after the payment of all operation and maintenance expenses thereof (the "Net Revenues"), are pledged to the payment of the principal of and interest on the Certificates, to the extent that ad valorem taxes may ever be insufficient or unavailable for said purpose; provided, however, that such pledge is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of Net Revenues to the payment of the Certificates. The City has reserved the right to issue, for any lawful purpose at any time, in one or more installments, bonds, certificates of obligation and other obligations of any kind secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of Net Revenues securing the Certificates. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the issuance of the Certificates in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Certificates in gross income for federal income tax purposes to be retroactive to the date of issuance of the Certificates. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Certificates in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax-exempt obligations, including the Certificates, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Purchasers of Certificates are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations, such as the Certificates, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Certificates. APPENDIX D SPECIMEN OF MUNICIPAL BOND INSURANCE POLICY FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York 10504 Policy No. [NUMBER] MBIA Insurance Corporation (the "Insurer"), in consideration of the payment of the premium and subject to the temps of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to [PAYING AGENT/TRUSTEE] or its successor (the 'Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration, unless the Insurer elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." "Obligations" shall mean: [PAR] [LEGAL NAME OF ISSUE] Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the hrsured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners, or the Paying Agent payment of the Insured Amounts due on such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such purpose. The term owner shall not include the Issuer or any party whose agreement with the Issuer constitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding. This policy is non -cancellable for any reason The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. IN WITNESS WHEREOF, the Insurer has caused this policy to be executed in facsimile on its behalf by its duly authorized officers, this [DAY] day of [MONTH, YEAR]. MBIA Insurance CorporationF L _.. Pre n Attest: Assistant Secretary DISCLOSURE OF GUARANTY FUND NONPARTICIPATION: In the event the Insurer is unable to fulfill its contractual obligation under this policy or contract or application or certificate or evidence of coverage, the policyholder or certificateholder is not protected by an insurance guaranty fund or other solvency protection arrangement. STD -TX -7 01/05 - -------- ---- O N W � W W � � Z � O F a � ifs O 00 i rZl O w H rW V O � � CJ N i 40 o p N � N en N � o N �Ci y v ..�... ...i y _.. 0 rl v t b t �O rl O N a h+M .. 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