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(2) GENERAL OBLIGATION REFUNDING BOND, SERIES 2011
CITY OF PORT ARTHUR, TEXAS TO: STEVE FI'I'ZGIBBONS, CITY MANAGER FROM: REBECCA UNDERHILL, CPA, ASSISTANT CITY MANAGER / A i t, ! • RA 1 ON CC: DEBORAII ECHOLS, CPA, DIRECTOR OF FINANCE SUBJECT: GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011 DATE: JUNE 13, 2011 On March 22, 2011, the City Council approved Ordinance 11 -11 which authorized a "parameter" sale of a General Obligation Bond, Series 2011. This issue would refund a portion of three bond issues, in order to take advantage of interest savings available. The "parameter" sale gave the City the option to wait for the most opportune moment in the market to garner the most savings. The target was to generate a net present value savings of 5 %, which would generate an annual interest cost savings averaging $55,713. 'Ile documents were prepared and the bond rating was secured. Moody's Investor's Service affirmed the credit rating that the City has held for some years, Aa3. A copy of the document and rating is attached. Moody's noted the City's history of financial management, increasing reserves to good levels. As usual, the concerns include concentration of petrochemical industry and weak socio- economic factors. Our financial advisors watched the market, and on May 5, 2011, received bids for the bonds which were much better that anticipated. Our net present value savings is 7.385 %, with average annual savings of $77,647. The total interest cost of this new issue is 2.391 %. The sale was completed on June 7, 2011. My thanks go out to Joe Morrow, our FA and Tom Sage, our bond counsel for their diligent work on this issue_. S: \ Finance \Bonds \cm_2011 fmal.docx L a § -- M 6 > ( § k 0 0 -- C. -4e1 Q cl g A a (,) a a \ & \ ® ; -o u G A A § % ± ( ,n 3 \ Q e -. 2 7. § 3 3 \ : ig F. m 4 4 § \ \ \ \ 0 tu \ _ 7 & \ [ ƒ Q Sr G @ @E/ k = o c 7 7 2 : 3err \ g f E G \ — 11 .-I - = arae 0 t .Z. 2 0 § k q k 2 © q 0 § 0 0 2 n eel en 0 EA E « m j \ - 4 ) \ § & \ •CO % 2 Call \ / ; o el f • 2 0 4 2 x 0 7 0 CIS k \� ƒO �� w 4) /j $k N \ o u g 3 .§ y 0 0 (...4 / \ TA V cl ~ � \/ \ \\ _ ___ '. \ / \ 0 k 2 6 A A ) t \ § \ k k § 4 r ] \ § k § ) el.) 7 ■ j f ]] Q 4:2 v ea 0 01 Wo 2 § a 0 ) ) 2 2 k § ] t "" § § \ 2 ] 6 / 2 eel A a -- z e, 2 CI } ) / a 6 2 4 0 6 0 A A A / � ) $ } Q 7 \ , j § « % u t ( el 1:7 10 \ (a ) RViC ei `.;. Rebccca "nderl:ill D; e etor of f finance City. of Port Arthur 444 Fourth Street Port Arthur, TX 77641 -1089 Dear Ms. Underhill, We wish to inform you that on April 25. 2011, Moody's Investors Service reviewed and assigned a Aa3 rating to the City of Port Arthur's General Obligation Bonds. Series 2011. In order for us to maintain the currency of our ratings, we request that you provide ongoing disclosure, including annual financial and statistical information. Moody's will monitor the rating and reserves the right, at its sole discretion, to revise or withdraw the rating at any time in the future. The rating as well as any revisions or withdrawals thereof will be publicly disseminated by Moody's through normal print and electronic media and in response to verbal requests to Moody's rating's desk. Should you have any questions regarding the above please do not hesitate to contact me or the analyst assigned to this transaction, Adebola (Bola) Kushimo at 214 - 220 -436. Sincerely, • Toby Cock Vice President /Team Lead cc: Joe Morrow First Southwest Company 1021 Main Street Suite 2200 Houston, TX 77002 TC /mjd '13,_: )_C Y S riVETTI)R SERVICE Vero lssu 4OCUY > .:t5:31r NS ` ;3 -. "!NO TO THE CITY OF PORT ARTHUR'S (TX) 39.E VIIL.L1i N !:,RAL OBLIGA iON 4EFL NDING BONDS. SERIES 2t)1 Global Cr :Mt Research - ,pr 2011 AS:SIGNMENTAND AFFIRMATION AFFECTS $75.3 MILLION IN OUTSTANDING PARITY DEBT, INCLUDING CURRENT REFUNDING Municipality TX Mcody's Rating ISSUE RATING General Obligation Bonds, Series 2011 Aa3 Sale Amount $9,875,000 - Expected Sale Date 04 /30/11 Rating Description General Obligation Limited Tax Opinion NEW YORK, Apr 25, 2011 — Moodys Investors Service has assigned a Aa3 underlying rating to the City of Port Arthur's (TX) $9.9 million General Obligation Refunding Bonds, Series 2011. Concurrently, Moody's has affirmed the Aa3 rating on the city's outstanding parity debt, affecting $65.9 million in outstanding parity debt, net of the refunding. Proceeds from the sale of the bonds will be used to refund certain maturities of the city's Series 2001, 20026 and 2002C for net present value savings and no extension of final maturity. SUMMARY RATING RATIONALE The bonds are secured by a continuing and direct annual ad valorem tax levied against all taxable property in the city, within the limits prescribed by law. The rating assignment and affirmation reflects the district's moderately sized tax base located on the Texas Gulf Coast that has experienced growth following the decline due to hurricane related damages, an economy dominated by the oil and gas industry, history of satisfactory financial management that is expected to continue, and manageable debt burdens. STRENGT'iS History of sound financial management WEAKNESSES Economy dominated by volatile oil and gas industry Inflated General Fund balance due to large receivable from Utility Fund DETAILED CREDIT DISCUSSION PETROCHEMICAL INDUSTRY DOMINATES CITY'S ECONOMY Located in Jefferson County (general obligation bond rating Aa2), on the Texas Gulf Coast, Port Arthur's economy is dominated by the petrochemical industry with several of the nation's major oil and chemical refining companies having facilities within the city's extraterritorial jurisdiction (ETJ). The list includes TOTAL (long term rating Aa1 /stable outlook), BASF (long term rating Al /negative outlook), Chevron (long term rating Aa1 /stable outlook), Flint Hill Resources (long term rating A1/stable outlook), and Exxon Mobile (long term rating Aaa/stable outlook), just to name a few. Contracts with corporations within the district allow the city to collect payment in lieu of taxes (PILOT). The PILOT revenues collected from the district are more than four Imes the revenues generated from property taxes within the city limit. Amajority of Industrial District payments are set at 75% of property taxes that would have been paid if the facilities were located within the city limits. As a result of petrochemical activity, taxable values within the city have experienced growth over the last decade, with the exception of the 6.3% decline in fiscal year 2006 due to hurricane related damages. In the past five years, taxable values grew an annual average of 7 %, with a growth of 4.3% in fiscal year 2011, reaching a total value of $2.1 billion. Also in fiscal year 2011, the gross value of the industrial district was approximately $7 billion. Although no numbers are available, officials expect an increase in taxable values in fiscal year 2012, as the recently completed expansion of TOTAL is captured on tax rolls. Over the intermediate term, officials project subsequent increases in taxable values due to the ongoing expansion project of Motiva and Valero, although actual numbers are unknown. Reflective of the industrial concentration, unemployment levels within the city have historically tracked higher than state and national levels. In February 2011, Port Arthur's unemployment rate was 16.5 %, which was substantially higher than the state's 8.2%, and the nation's 9.5% taken during the same time period. The city exhibits below median wealth levels with a 1999 per capita income of $14,183, which was 72.3% of the state's, and 65.7% of the nation's. Additionally, the 1999 median family income of $32,143 was 70.1% of the state's, and 64.2% of the nation's. HISTORY OF SATISFACTORY FINANCIAL MANAGEMENT GENERAL FUND CONTINUES TO SUPPORT UTILITY FUND OPERATIONS Moody's believes the city has demonstrated a history of satisfactory financial management that has increased reserves levels in the past four of five years, despite the General Fund supporting the Utility Fund's operations, which we believe is a credit weakness. After ending fiscal year 2008 with a total General Fund balance of $14.5 million (a healthy 30.7% of General Fund revenues), the city drew down reserve levels by $3.1 rnillion in fiscal year 2009, due to transfers out for the capital projects, and utility fund. Fiscal year 2010 saw a return of operating surpluses with an increase of approximately $4 million in the General Fund to $16.2 million (favorable 27.5% of General Fund revenues). We believe the fund balance is overstated given the large receivable from the water and sewer fund. Currently, there is no timeframe for when the receivable will be Ji..e1, and we ,.c ct that the receivable kdl increaser, re fi tore 3s the General F.rc continues aupcertinq Utitty Furc 7ceratiors. Future nit rev!F.v x ^ll .r_ a focus on the utility fund attaininr :elf- sustairment. The absence of which ro' l exert ocntirued oressur- on the Cereral G. and c .d result in downward rating action. For ,oat /ear 2011. officials report *'&t the budget -s fc ng ,lightly uetter'ran ;r go as..umpi cns. s sucf•. an operating surplus ..f $1.5 rr r n, ;ncreas •r g the General =Dnd balance : 317.' millior, 29.9 °0 of fiscal year ''et eral Fur'c1 r :venues;, Is exoecter. at *1 e ono of he ..r. The city adopted policy '..quires the c,t. to maintain a minimum level of rese :es months et operating exfenditures plus 51.5 ix��illicn, which Mc dy's views as a strength to mitigate periodic petrochemical industry vclat;ir he city received jority of its 2010 revenues from industrial district payments 144.9 %), sales taxes (13.7%), transfers in (13.5 %f, property axes (1:; %l, anc y r Dss receipts taxes (7.5 %' Sales taxes have averaged an annual growth of 7.5% over the past m,e years, despite a sharp Decline c 17.3% in fiscal year 2010. Officials report that collections are holding relatively steady in fiscal year 2011, with year to date collections 'own by :.23 °,0, compared to the prior year. With respect to taxes, the city is capped at a total tax rate of 525 per 31,000 of assessed values per state law, with the attomey General limiting the debt service levy to a maximum of $15 per $1,000 of assessed values. In fiscal year 2011, the city levied a total rate of $7.92 per $1,000 of assessed values, with $3.74 allocated to operations, and $4.18 allocated to debt service. tiKODER E DEBT BURDEN; NO CURRENT FUTURE DEBT ISSUANCE PLANS All of the city's debt is fixed rate, and the city is not party to any derivative agreements. Including the current refunding, the city's debt burdens are moderately elevated with a direct burden of 3.6% (14% overall). Payout is average with 78.4% of principal retired in ten years. Following the sale, the city has $30 million in remaining authorization, which may only be used for improvements within the boundaries of an annexed municipal utility district (MUD). Aside from the MUD authorization, the city does not have any authorized but unissued debt, and there are no plans to hold a bond election within the next five years. WHAT COULD MAKE THE RATING GO UP Improved reserve levels, coupled with structural balance in the Utility Fund alleviating the pressure on the General Fund Continued taxable value growth; strengthened socio-economic profile WHAT COULD MAKE THE RATING GO DOWN • Increased financial pressure in the General Fund due to increased support for the Utility Fund Erosion or reserve levels Significant tax base contraction • KEY STATISTICS FY 2011 Full Value: $2.1 billion FY 2010 Gross Value of Industrial District: $7 billion Full Value per Capita: $39,733 Per Capita Income (from 2000 U.S. Census): $14,183 (72.3% of state; 65.7% of U.S.) Direct Debt Burden (excluding industrial district value): 3.6% Overall Debt Burden (excluding industrial district value): 14% Payout o1 Principal (10 years): 78.4° FY 2010 General Fund Balance: $16.2 million (27.5% of General Fund revenues) PRINCIPAL METHODOLOGY The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. REGULATORY DISCLOSURES Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information. Ivbod's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating. 'body's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Mood's considers to be reliable including, when appropriate, independent third -party sources. However, Mood's is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Please see ratings tab on the issuer /entity page on Moodys.com for the last rating action and the rating history. The date on which some Credit Ratings were first released goes back to a time before Mood's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information. Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery. Analysts A'etola :< nirno A,I st Publir =:r 'ce Grcuo MCcy3 1n.astor73 James '-obbs ?aci._�c vnalyst Public Finance Group Ivbody's Investors Service Contacts Journalists: (212) 553 -0376 Research Clients: (212) 553 -1653 Moody's Investors Service 250 Greenwich Street New York, NY 10007 USA MOODY S INVESTORS SERVICE © 2011 Moody's Investors Service, Inc. and /or its licensors and affiliates (collectively, "MOODYS "). All rights reserved. • CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC. S ( "MIS ") CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT -LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. 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This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issi 'a or any form of security that is available to retail investors. It would be dangerous for retail investors to • make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser. OFFICIAL STATEMENT Dated May 5, 2011 Rating: Moody's: "Aa3" See ( "OTHER INFORMATION - NEW ISSUE - Book -Entry -Only RATINGS" herein) In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "Tax Exemption" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX MATTERS" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. THE BONDS HAVE BEEN DESIGNATED AS "QUALIFIED TAX - EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $9,530,000 CITY OF PORT ARTHUR, TEXAS (Jefferson and Orange County) GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011 Dated Date: June 1, 2011 Due: February 15 PAYMENT TERMS ... Interest on the $9,530,000 City of Port Arthur, Texas, General Obligation Refunding Bonds, Series 2011 (the "Bonds ") will accrue from June 1, 2011, (the "Dated Date ") and will be payable February 15 and August 15 of each year commencing August 15, 2011, and will be calculated on the basis of a 360 -day year consisting of twelve 30 -day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( "DTC ") pursuant to the Book -Entry -Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds wiill be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See "THE BONDS - BOOK - ENTRY -ONLY SYSTEM" herein. The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (see "THE BONDS - PAYING AGENT/REGISTRAR "). AUTHORITY FOR ISSUANCE OF THE BONDS ... The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, (the "State ") including particularly Chapter 1207, Texas Government Code, as amended, and are direct obligations of the City of Port Arthur, Texas (the "City "), payable from a continuing ad valorem tax levied on all taxable property in the City, within the limits prescribed by law, as provided in the ordinance authorizing the Bonds (the "Ordinance ") (see "The BONDS - AUTHORITY FOR ISSUANCE "). PURPOSE ... Proceeds from the sale of the Bonds will be used (i) to refund certain obligations of the City described in Schedule I (the "Refunded Obligations ") and (ii) to pay the costs associated with the issuance of the Bonds. MATURITY SCHEDULE Due Interest CUSIP Due Interest CUSIP Feb. 15 Principal Rate Yield (I) Number (2) Feb. 15 Principal Rate Yield (I) Number (2) 2012 $1,020,000 2.000 % 0.500 % 733488 A67 2018 $275,000 3.000 % 2.350 % 733488 B41 2013 1,055,000 2.000 0.750 733488 A75 2019 280,000 3.000 2.650 733488 B58 2014 2,220.000 3.000 1.100 733488 A83 2020 295,000 4.000 2.850 7334881366 2015 1,210.000 3.000 1.450 733488 A91 2021 (3) 305,000 4.000 3.030 733488 B74 2016 1,250.000 3.000 1.700 733488 B25 2022 (3) 320,000 4.000 3.180 733488 B82 2017 1,300..000 3.000 2.080 733488 B33 (1) The initial reoffering prices or yields on the Bonds are furnished by the Underwriter (as defined herein) and represent the initial offering prices or yields to the public, which may be changed by the Underwriter at any time. (2) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor's F inancial Service LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the City, Financial Advisor or Underwriter shall be responsible for the selection or corrections of CUSIP numbers put forth herein. (3) The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2020, or any date thereafter, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption. OPTIONAL REDEMPTION . .. The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2020, or any date thereafter, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption (see "THE BONDS - OPTIONAL REDEMPTION "). LEGALITY ... The Bonds are offered for delivery when, as and if issued and received by the Underwriter and subject to the approving opinion of the Attorney General of Texas and the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel (see APPENDIX C, "FORM OF BOND COUNSEL'S OPINION "). Certain other matters will be passed upon for the Underwriter by Fulbright & Jaworksi LLP, Houston, Texas, as Counsel to the Underwriter. DELIVERY It is expected that the Bonds will be available for delivery through The Depository Trust Company on June 7, 2011. COASTAL SECURITIES, INC. This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give 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. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein 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 affairs of the City or other matters described. The prices and other terms respecting the offering and sale of the Bonds may be changed from time to time by the Underwriter after the Bonds are released far sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealer who may sell the Bonds into investment accounts. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXHCNAGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED TEHREWITH. IA ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THE CITY, 17S FINANCIAL ADVISOR NO THE UNDERWRITER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CO,VTAINED IN THIS OFFICIAL STATEMENT REGARDING DTC. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVER -ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 TABLE OF CONTENTS MATURITY' SCHEDULE 1 TABLE 11 - COMPUTATION OF SELF - SUPPORTING DEBT 23 OFFICIAL STATEMENT SUMMARY 4 TABLE 12 — AUTHORIZED BUT UNISSUED CITY OFFICIALS, STAFF AND GENERAL OBLIGATION BONDS 23 TABLE 13 — OTHER OBLIGATIONS 24 CONSULTANTS 6 ELECTED OFFICIALS 6 FINANCIAL INFORMATION 26 SELECTED ADMINISTRATIVE STAFF 6 TABLE 14 - CHANGES IN NET ASSETS 26 CONSULTANTS AND ADVISORS 6 TABLE 14 -A - GENERAL FUND REVENUES AND W'I'RODIdCTION 7 EXPENDITURES HISTORY 27 DESCRIPTION OF THE CITY 7 TABLE 15 - MUNICIPAL SALES TAX HISTORY 28 TABLE 16- CURRENT INVESTMENTS 30 PLAN OF FINANCING 7 TAX MATTERS 31 PURPOSE 7 TAX EXEMPTION 31 SOURCES AND USES OF PROCEEDS 7 REFUNDED OBLIGATIONS 8 TAX TREATMENT OF ORIGINAL ISSUE THE BONDS 8 PREMIUM BONDS 32 PREMIUM BONDS 32 DESCRIPTION OF THE BONDS 8 AUTHORITY FOR ISSUANCE 8 QUALIFIED TAX- EXEMPT OBLIGATIONS .32 SECURITY AND SOURCE OF PAYMENT 8 CONTINUING DISCLOSURE OF TAX RATE LIMITATION 8 INFORMATION 32 OPTIONAL REDEMPTION 9 ANNUAL REPORTS 32 NOTICE OF REDEMPTION 9 MATERIAL EVENT NOTICES 33 DEFEASANCE 9 AVAILABILITY OF INFORMATION 33 BOOK ENTRY -ONLY SYSTEM 9 LIMITATIONS AND AMENDMENTS 33 PAYING AGENT /REGISTRAR 11 COMPLIANCE WITH PRIOR UNDERTAKINGS 34 TRANSFER, EXCHANGE AND REGISTRATION .... 11 RECORD DATE FOR INTEREST PAYMENT 11 OTHER INFORMATION 34 BONDHOLDERS' REMEDIES 11 RATINGS 34 TAX INFORMATION 12 LITIGATION 34 AD VALOREM TAX LAW 12 REGISTRATION AND QUALIFICATION OF BONDS EFFECTIVE TAX RATE AND ROLLBACK TAX FOR SALE 34 RATE 13 LEGAL INVESTMENTS AND ELIGIBILITY TO PROPERTY ASSESSMENT AND TAX PAYMENT 14 SECURE PUBLIC FUNDS IN TEXAS 34 PENALTIES AND INTEREST 14 LEGAL OPINIONS 35 CITY APPLICATION OF TAX CODE 15 AUTHENTICITY OF FINANCIAL DATA AND OTHER TAX ABATEMENT POLICY 15 INFORMATION 35 TAX INCREMENT FINANCING ZONE 15 FINANCIAL ADVISOR 35 TABLE 1 - VALUATION, EXEMPTIONS AND VERIFICATION OF ARITHMETICAL AND GENERAL OBLIGATION DEBT 16 MATHEMATICAL COMPUTATIONS 35 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY UNDERWRITING 35 CATEGORY 17 FORWARD- LOOKING STATEMENTS DISCLAIMER36 TABLE 3 - VALUATION AND GENERAL SCHEDULE OF REFUNDED OBLIGATIONS OBLIGATION DEBT HISTORY 18 TABLE 4 - TAX RATE, LEVY AND COLLECTION APPENDICES GENERAL INFORMATION REGARDING THE CITY A HISTORY 18 EXCERPTS FROM THE ANNUAL FINANCIAL REPORT B TABLIE 5 — TEN LARGEST TAXPAYERS 18 FORM OF BOND COUNSEL'S OPINION C TABLE 6 - TAX ADEQUACY 19 TABLE 7 ESTIMATED OVERLAPPING DEBT 19 The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the TABLE 8 - INDUSTRIAL DISTRICT CONTRACTS 20 Official Statement. DEBT INFORMATION 22 TABLE 9 - GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS 22 TABLE 10 - INTEREST AND SINKING FUND BUDGET PROJECTION 22 3 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and defmitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY The City of Port Arthur (the "City ") is a political subdivision and municipal corporation of the State, located in Jefferson and Orange County, Texas. The City covers approximately 87.96 square miles (see "INTRODUCTION - DESCRIPTION OF THE CITY "). THE BONDS The Bonds are issued as $9,530,000 General Obligation Refunding Bonds, Series 2011. The Bonds are issued as serial bonds maturing February 15, 2012 through 2022 (see "THE BONDS - DESCRIPTION OF THE BONDS "). PAYMENT OF INTEREST Interest on the Bonds accrues from June 1, 2011, and is payable August 15, 2011, and each August 15 and February 15 thereafter until maturity or prior redemption (see "THE BONDS - DESCRIPTION OF THE BONDS" and "THE BONDS - OPTIONAL REDEMPTION "). AUTHORITY FOR ISSUANCE The Bonds are issued pursuant to the Constitution and general laws of the State including particularly Chapter 1207, Texas Govemment Code, as amended, and an ordinance adopted by the City authorizing the issuance of the Bonds (the "Ordinance ") (see "The BONDS - AUTHORITY FOR ISSUANCE OF THE BONDS "). SECURITY FOR THE BONDS The Bonds constitute direct obligations of the City, payable from the levy and collection of a continuing, direct, annual ad valorem tax, within the limits prescribed by law, on all taxable property located within the City (see "THE BONDS - SECURITY AND SOURCE OF PAYMENT "). REDEMPTION The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2020, or any date thereafter, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption (see "THE BONDS - OPTIONAL REDEMPTION "). TAX EXEMPTION In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX MATTERS" herein, and is not includable in the alternative minimum taxable income of individuals. See "TAX MATTERS" for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. list: CIF PROCEEDS Proceeds from the sale of the Bonds will be used (i) to refund certain obligations of the City described in Schedule I (the "Refunded Obligations "), and (ii) to pay the costs associated with the issuance of the Bonds. RATINGS The presently outstanding tax supported debt of the City is rated "Aa3" by Moody's Investors Service, Inc. ( "Moody's ") and "A" by Standard & Poor's Rating Services, a Standard & Poor's Financial Services LLC business ( "S &P "), without regard to credit enhancement. The Bonds have been rated "Aa3" by Moody's. BOOK- ENTRY -ONLY SYSTEM The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book -Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds QUALIFIED TAX- EXEMPT OBLIGATIONS The City has designated the Bonds as "Qualified Tax- Exempt Obligations" for financial institutions (see "QUALIFIED TAX EXEMPT OBLIGATIONS "). PAYMENT RECORD The City has never defaulted in payment of its general obligation tax debt. 4 SELECTED FINANCIAL INFORMATION Ratio Tax Fiscal Per Capita General Per Debt to Year Estimated Taxable Taxable Obligation Capita Taxable Percent Ended City Assessed Assessed (G.O.) G.O. Assessed Total 9/30 _ Population Valuation Valuation Tax Debt Tax Debt Valuation Collection 2006 57,755 $ 1,527,385,850 $ 26,446 $ 69,080,000 $1,196 4.52% 98.14% 2007 57,755 1,431,012,945 (3) 24,777 66,290,000 1,148 4.63% 98.27% 2008 57,755 1,731,296,115 29,977 82,000,000 1,420 4.74% 97.86% 2009 57,755 1,970,913,867 34,125 77,725,000 1,346 3.94% 96.96% 2010 57,755 2,054,959,972 35,581 80,310,000 1,391 3.91% 94.76% 2011 53,818 2,138,373,185 39,733 74,140,000 (4) 1,378 (4) 3.47% (4) 89.49% (5) (1) Source: 2000 U. S. census held constant in fiscal years 2006 through 2010. Fiscal year 2011 represents 2010 U.S. census estimate. (2) As reported by the Jefferson County and Orange County appraisal Districts on the City's annual report of property value; subject to change during the ensuing year. (3) Change in value due to losses from property damage caused by Hurricane Rita in 2005. (4) Includes the Bonds and excludes the Refunded Obligations. (5) Collections as of February 28, 2011. GENERAL FUND CONSOLIDATED STATEMENT SUMMARY For Fiscal Year Ended September 30, 2010 2009 2008 2007 2006 Beginning Balance $ 11,416,518 (1) $ 14,508,096 $ 11,908,478 $ 10,953,885 $ 8,921,563 T otal Revenue 51,159,980 40,180,849 40,142,275 35,905,656 32,609,323 "Total Expenditures 51,600,347 46,918,813 42,356,436 40,409,021 35,991,991 ()their Sources (Uses) 4,417,276 3,646,387 4,813,779 5,457,958 5,861,143 Prior Period Adjustments 843,133 - - (446,153) Ending Balance $ 16,236,560 $ 11,416,519 $ 14,508,096 $ 11,908,478 $ 10,953,885 (1) Difference from prior year's ending balance due to rounding. For additional information regarding the City, please contact: Rebecca Underhill Joe Morrow Assistant City Manager - Administration or Senior Vice President City of Port Arthur First Southwest Company 444 4 Street 1021 Main Street, Suite 2200 Port Arthur, TX 77640 Houston, Texas 77002 (409) 983 -8150 (713) 654 -8690 Rebecca @portarthur.net jmorrow @firstsw.com 5 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS City Council Member Position Term Expires Deloris Prince Mayor May 2013 Morris Albright III Mayor Pro -Tem May 2011 Jack Chatman, Jr. Councilmember May 2011 Liz Segler Councilmember May 2011 Martin Flood Councilmember May 2011 John Beard, Jr. Councilmember May 2012 Robert E. Williamson Councilmember May 2012 D. Kay Wise Councilmember May 2011 Thomas E. Henderson Councilmember May 2011 SELECTED ADMINISTRATIVE STAFF Name Position Stephen Fitzgibbons City M anager Rebecca Underhill Asst. City Manager - Administration John Comeaux Asst. City Manager - Operations Deborah Echols Director of Finance Sherri Ballard Acting City Secretary Valecia Tizeno City Attorney CONSULTANTS AND ADVISORS Auditors J.R. Edwards and Associates, LLC Beaumont, Texas Bond Counsel Andrews Kurth LLP Houston, Texas Financial Advisor First Southwest Company Houston, Texas 6 OFFICIAL STATEMENT RELATING TO $9,530,000 CITY OF PORT ARTHUR, TEXAS GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $9,530,000 City of Port Arthur, Texas, General Obligation Refunding Bonds, Series 2011 (the "Bonds "). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the ordinance authorizing the issuance of the Bonds to be adopted by the City Council of Port Arthur (the "Ordinance "), except as otherwise indicated herein. There follows in this Official Statement descriptions of the Bonds and certain information reganiing 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's Financial Advisor, First Southwest Company, Houston, 1 exas. DESCRIPTION OF THE CITY The City is a home rule municipality, duly organized and existing under the laws of the State, including the City's Home Rule Charter. The City was incorporated in 1898, and first adopted its Home Rule Charter in 1963. The City operates under a Council/Manager form of government with a City Council comprised of the Mayor and eight Councilmembers. The term of office is three years for the Mayor and six Councilmembers, and the remaining Councilmembers serve two -year terms. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety (police and fire protection), highways and streets, electric, water and sanitary sewer utilities, health and social services, culture - recreation, public transportation, public improvements, planning and zoning, and general administrative services. The 2010 Census population for the City was 53,818. The City covers approximately 87.96 square miles. PLAN OF FINANCING PURPOSE The Bonds are being issued (i) to refund certain obligations of the City described in Schedule I to this Official Statement (the "Refunded Obligations ") and (ii) to pay certain costs incurred in connection with the issuance of the Bonds. SOURCES AND USES OF PROCEEDS The sources and uses of the Bonds' proceeds will be applied approximately as follows: Sources of Funds Par Amount $ 9,530,000.00 Accrued Interest 4,572.50 Premium 433,760.75 Transfer from Debt Service Funds 165,017.08 Total Sources of Funds $ 10,133,350.33 Use of Funds Deposit to Escrow Fund for Refunded Obligations $ 9,968,950.87 Deposit to Debt Service Fund 7,560.98 Underwriter's Discount 56,838.48 Costs of Issuance 100,000.00 Total Sources of Funds $ 10,133,350.33 ( 1) Includes accrued interest and rounding amount 7 REFUNDED OBLIGATIONS 'The principal of and interest due on the Refunded Obligations are to be paid on the respective redemption dates of such Refunded Obligations, from funds to be deposited pursuant to a certain Escrow Agreement (the "Escrow Agreement ") between the City and The Bank of New York Mellon Trust Company, National Association, Dallas, Texas (the "Escrow Agent "). The Ordinance provides that from the proceeds of the sale of the Bonds and other available moneys of the City, if any, the City will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Obligations on their respective redemption dates. Such funds will be held by the Escrow Agent in a special escrow account (the "Escrow Fund ") and used to purchase direct obligations of the United States of America and noncallable obligations of an agency or instrumentality of the United States that are rated, on the date of delivery of the Bonds, as "AAA" or its equivalent by a nationally recognized rating agency (the "Federal Securities "). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Obligations. Grant Thornton LLP, a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriter thereof the mathematical accuracy of the schedules that demonstrate the Federal Securities will mature and pay interest in such amounts which, together with uninvested funds, if any, in the Escrow Fund, will be sufficient to pay, when due, the principal of and interest on the Refunded Obligations. Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds (see "OTHER INFORMATION - Verification of Arithmetical and Mathematical Computations "). By the deposit of the Federal Securities and cash, if necessary, with the Escrow Agent pursuant to the Escrow Agreement sufficient to pay the redemption price of the Refunded Obligations on their respective redemption dates, the City will have effected the defeasance of all of the Refunded Obligations in accordance with the law. As a result of such defeasance, the Refunded Obligations will be outstanding only for the purpose of receiving payments from the Federal Securities and any cash held for such purpose by the Escrow Agent and such Refunded Obligations will not be deemed as being outstanding obligations of the City payable from taxes or revenues nor for the purpose of applying any limitation on the issuance of debt. The City has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Obligations, if for any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund are insufficient to make such payment. THE BONDS DESCRIPTION OF THE BONDS The Bonds are dated June 1, 2011, and mature on February 15 in each of the years and in the amounts shown on the cover page hereof. Interest will be computed on the basis of a 360 -day year of twelve 30 -day months, and will be payable on February 15 and August 15, commencing August 15, 2011. The definitive Bonds will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( "DTC ") pursuant to the Book -Entry-Only System described herein. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See "- BOOK- ENTRY -ONLY SYSTEM" herein. AUTHORITY FOR ISSUANCE Bonds are being issued pursuant to the Constitution and general laws of the State including particularly Chapter 1207, Texas Government Code, as amended, and the Ordinance. SECURITY AND SOURCE OF PAYMENT All taxable property within the City is subject to a continuing, direct annual ad valorem tax levied, within the limits prescribed by law, by the City sufficient to provide for the payment of principal of and interest on all Bonds. TAX RATE LIMITATION All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of $2.50 per $100 Taxable Assessed Valuation. Administratively, the Attorney General of the State of Texas has adopted rules that limit the amount of taxes to $1.50 per $100 Taxable Assessed Valuation for the payment of debt service. 8 OPTIONAL REDEMPTION The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2020, or any date thereafter, at the par value thereof plus accrued interest from the most recent interest payment date to the date of redemption. If less than all of the Bonds are to be redeemed, the City may select the maturities of Bonds to be redeemed. Bonds of a denomination larger than $5,000 may be redeemed in part ($5,000 or any integral multiple thereof) and upon any partial redemption of any such Bond the same shall be surrendered in exchange for one or more new Bonds of the same maturity in authorized denominations for the unredeemed portion of principal. Bonds (or portions thereof as aforesaid) for whose redemption and payment provision is made in accordance with the Ordinance will cease to bear interest from and after the redemption date. NOTICE OF REDEMPTION Not Tess than 30 days prior to a redemption date for the Bonds, 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 Bonds to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. 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 BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. DEFEASANCF the City reserves the right to defease the Bonds in any manner now or hereafter prescribed by law. BOOK: ENTRY -ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company ( "DTC "), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book -Entry -Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but 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 Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company ( "DTC "), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully- registered certificates registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully- registered Security certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited - purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non U.S. equity, 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 certificates 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 9 Trust & Clearing Corporation ( "DTCC "). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( "Indirect Participants "). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ( "Beneficial Owner ") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. 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 Bonds 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 Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the certificate documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds 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 Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct. Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds 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 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 certificates held for the accounts of customers in bearer form or registered in "street name." and will be the responsibility of such Participant and not of DTC nor its nominee, the City, or Paying Agent/Registrar, 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 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 Bonds at any time by giving reasonable notice to the City or Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry-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. 10 EFFECT OF TERMINATION OF BOOK - ENTRY -ONLY SYSTEM In the event that the Book - Entry-Only System is discontinued by DTC or the use of the Book -Entry-Only System is discontinued by the City, printed Bonds will be issued to the holders and the Bonds will be subject to transfer, exchange and registration provisions as set forth in the Ordinance and summarized under "THE BONDS - TRANSFER, EXCHANGE AND REGISTRATION" below. Discontinuation of the DTC Book -Entry-Only System by the City may require consent of DTC Participants under its Operational Arrangements. PAYING AGENT/REGISTRAR The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., 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 Bonds are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. TRANSFER, EXCHANGE AND REGISTRATION In the event the Book -Entry -Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transf;r or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Bonds surrendered for exchange or transfer. See "BOOK- ENTRY -ONLY SYSTEM" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. RECORD DATE FOR INTEREST PAYMENT 1 he record date ( "Record Date ") for the interest payable on the Bonds on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non - payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date ") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ( "Special Payment Date ", which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. BONDHOLDERS' REMEDIES The Ordinance does not provide for the appointment of a trustee to represent the interests of the Bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinance does not establish specific events of default with respect to the Bonds and, under State law, there is no right to the acceleration of maturity of the Bonds upon the failure of the City to observe any covenant under the Ordinance. A registered owner of Bonds could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy., assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes 11 due or perform other material terms and covenants contained in the Ordinance. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. 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 Bond 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 Bonds are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. TAX INFORMATION AD VALOREM TAX LAW The appraisal of property within the City is the responsibility of the Jefferson and Orange County Appraisal Districts (the "Appraisal Districts "). Excluding agricultural and open -space land, which may be taxed on the basis of productive capacity, the Appraisal Districts are required under the Property Tax Code to appraise all property within the Appraisal Districts on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. The appraised value of a residence homestead for a tax year may not exceed the lesser of (1) the most recent market value of the residence homestead as determined by the appraisal entity or (2) the sum of (a) 10 percent of the appraised value of the property for the preceding tax year; (b) the appraised value of the property for the preceding tax year; and (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal Districts is subject to review by an Appraisal Review Board of each individual Appraisal District, consisting of three members appointed by the Board of Directors of the Appraisal Districts. The Appraisal Districts are required to review the value of property within the Appraisal Districts at least every three years. The City may require annual review at its own expense. The Texas Comptroller of Public Accounts may provide for the administration and enforcement of uniform standards and procedures for appraisal of property. Further, a residence homestead is required to be appraised on the basis of its value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. Reference is made to Title I of the Texas Tax Code (the "Property Tax Code "), for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ( "Article VIII") and State law provide for certain exemptions from property taxes, the valuation of agricultural and open -space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section 1 -b, Article VIII, and State law, the goveming body of a political subdivision, at its option, may grant: (1) an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; or (2) an exemption of up to 20% of the market value of residence homesteads. The minimum exemption under this provision is $5,000. In the case of residence homestead exemptions granted under Section 1 -b. Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. 12 Effective January 1, 2004, under Article VIII and State law, the goveming body of a county, municipality or junior college district, may provide that the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older will not be increased above the amount of taxes imposed in the year such residence qualified for such limitation. Also, upon receipt of a petition signed by five percent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or older or who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead within the taxing unit and to a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repealed or rescinded. The City has established such a limitation on ad valorem taxes. Article VIII provides that eligible owners of both agricultural land (Section 1 -d) and open -space land (Section 1 -d -1), including open - space land devoted to farm or ranch purposes or open -space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1 -d and 1 -d -1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the goveming body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. State law additionally provides for one motor vehicle owned by an individual and used in the course of the owner's occupation or profession and also for personal activities of the owner to be exempted from ad valorem taxation. Article VIII, Section 1-j, provides for " freeport property" to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. In addition, under Section 11.253 of the Texas Property Tax Code, "Goods -in- transit" are exempt from taxation unless a taxing unit opts out of the exemption. Goods -in- transit are defined as tangible personal property that: (i) is acquired in or imported into the state to be forwarded to another location in the state or outside the state; (ii) is detained at a location in the state in which the owner of the property does not have a direct or indirect ownership interest for assembling, storing, manufacturing, processing, or fabricating purposes by the person who acquired or imported the property; (iii) is transported to another location in the state or outside the state not later than 175 days after the date the person acquired the property in or imported the property into the state; and (iv) does not include oil, natural gas, petroleum products, aircraft, dealer's motor vehicle inventory, dealer's vessel and outboard motor inventory, dealer's heavy equipment inventory, or retail manufactured housing inventory. Article VIII. section 1 -n of the Texas Constitution provides for the exemption from taxation of "goods-in-transit." "Goods -in- transit" is defined by a provision of the Property Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out -board motor, heavy equipment and manufactured housing inventory. The Property Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods -in -transit during the following tax year. A taxpayer may receive only one of the freeport exemption or the goods -in- transit exemption for items of personal property. The City may create one or more tax increment financing zones, under which the tax values on property in the zone are "frozen" at the value of the property at the time of creation of the zone. Other overlapping taxing units may agree to contribute all or part of future ad valorem taxes levied and collected against the value of property in the zone in excess of the "frozen value" to pay or finance the costs of certain public improvements in the zone. Taxes levied by the City against the values of real property in the zone in excess of the "frozen value" are not available for general city use but are restricted to paying or financing "project costs" within the zone. Currently, the City has created a tax increment financing zone. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE By each September 1 or as soon thereafter as practicable, the City Council adopts a tax rate per $100 taxable value for the current year. The City Council will be required to adopt the annual tax rate for the City before the later of September 30 or the 60 day after the date the certified appraisal roll is received by the City. If the City Council does not adopt a tax rate by such required date the tax rate for that tax year is the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the City for the preceding tax year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. 13 Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and "rollback tax rate ". Effective 2005, a tax rate cannot be adopted by the City Council that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings have been held on the proposed tax rate following notice of such public hearings (including the requirement that notice be posted on the City's website if the City owns, operates or controls an internet website and public notice be given by television if the City has free access to a television channel) and the City Council has otherwise complied with the legal requirements for the adoption of such tax rate. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one -half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. 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. PROPERTY ASSESSMENT AND TAX PAYMENT Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the fmal installment due on August 1. PENALTIES AND INTEREST Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18 After July, penalty remains at 12 %, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% attorney's collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post - petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post- petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court 14 CITY APPLICATION OF TAX CODE The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $25,000; the disabled are also granted an exemption of $25,000. The City has granted an additional exemption of 20% of the market value of residence homesteads; minimum exemption of $5,000. See "TABLE 1 — VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT" for a listing of the amounts of the exemptions described above. The City has adopted the tax freeze for citizens who are disabled or are 65 years of age or older, which became a local option and subject to local referendum on January 1, 2004. Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and Miriam Johnson collects taxes for the City. 'The City does permit split payments, and discounts are not allowed. The City does tax goods in transit. The City does not tax freeport property. The City does not collect the additional one -half cent sales tax for reduction of ad valorem taxes. TAX ABATEMENT POLICY The City has established a tax abatement program to encourage economic development. In order to be considered for tax abatement, a project must meet several criteria pertaining to job creation and property value enhancement. Currently, there are no abatement agreements in effect. T AX INCREMENT FINANCING ZONE The City may create a Tax Increment Reinvestment Zone. Any value within such a zone would not be available to tax and pay debt service on the Bonds. 15 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT 2010 /2011 Market Valuation Established by Jefferson County and $ 2,534,383,961 Orange County Appraisal Districts (excluding totally exempt property) (1) Less Exemptions/Reductions at 100% Market Value: Loss Due to Value Limit $ 29,209,193 Abatement 88,694,460 Over 65 Exemptions 91,079,750 Disabled Persons Exemptions 27,634,580 Homestead Exemptions 145,800,440 Veteran Homestead Exemptions 5,029,582 Pollution Control 8,562,771 396,010,776 2010/2011 Taxable Assessed Valuation $ 2,138,373,185 General Obligation Debt Payable from Ad Valorem Taxes (as of 6/1/11) General Obligation Bonds � $ 45,120,000 Certificates of Obligation 20,840,000 Plus: The Bonds 9,530,000 75,490,000 Less: Self - Supporting Debt (3) $ 6,315,000 Total General Obligation Debt Payable from Ad Valorem Taxes $ 69,175,000 Interest and Sinking Fund Balance as of 9/30/2010 $ 3,208,527 Net General Obligation Debt Payable from Ad Valorem Taxes $ 65,966,473 Ratio of Net General Obligation Debt to Taxable Assessed Valuation 3.08% 2011 Population Estimate - 53,818 Per Capita Taxable Assessed Valuation - $39,733 Per Capita Funded Net Debt - $1,226 (1) As reported by the Jefferson County and Orange County Appraisal Districts; subject to change during the ensuing year. (2) Excludes the Refunded Obligations. (3) Represents the City's Combination Tax & Revenue Certificates of Obligation, Series 2002C, a portion of the City's General Obligation Bonds, Series 2008, and a portion of the Bonds. 16 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value, Fiscal Year Ending September 30 2011 2010 2009 % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single - Family $ 1,003,537,012 39.60% $ 985,952,230 40.98% $ 971,237,950 41.95% Real, Residential, Multi - Family 125,671,060 4.96% 86,003,300 3.57% 91,515,590 3.95% Real, Vacant Platted Lots/Tracts 49,902,863 1.97% 51,326,302 2.13% 49,036,216 2.12% Real, Acreage (Land Only) 51,676,216 2.04% 53,758,129 2.23% 44,873,998 1.94% Real, Farm and Ranch Improvements 2,116,670 0.08% 1,849,380 0.08% 2,330,530 0.10% Real, Commercial and Industrial 838,227,390 33.07% 729,902,573 30.34% 554,489,290 23.95% Real, Oil, Gas & Other Mineral Reserves 29,042,530 1.15% 36,171,180 1.50% 25,084,790 1.08% Real and Intangible Personal, Utilities 103,667,430 4.09% 103,774,190 4.31% 227,092,753 9.81% Tangible Personal, Business 328,181,200 12.95% 355,984,330 14.80% 342,456,420 14.79% Tangible Personal, Other 2,361,590 0.09% 1,246,870 0.05% 7,326,260 0.32% Total Appraised Value Before Exemptions $ 2,534,383,961 100.00% $ 2,405,968,484 100.00% $ 2,315,443,797 100.00% Less: Total Exemptions/Reductions 396,010,776 355,729,152 344,529,930 Net Taxable Assessed Value $ 2,138,373,185 $ 2,050,239,332 $ 1,970,913,867 Taxable Appraised Value, Fiscal Year Ending 2008 2007 % of % of Category Amount Total Amount Total Real, Residential, Single- Family $ 821,567,120 40.70% $ 620,903,940 37.92% Real, Residential, Multi- Family 78,344,950 3.88% 46,586,550 2.85% Real, Vacant Platted Lots/Tracts 47,913,320 2.37% 38,616,599 2.36% Real, Acreage (Land Only) 32,116,390 1.59% 23,493,680 1.43% Real, Farm and Ranch Improvements 2,445,760 0.12% 2,047,370 0.13% Real, Commercial and Industrial 590,306,340 29.24% 465,479,656 28.43% Real, Oil, Gas & Other M ineral Reserves 13,137,020 0.65% 65,007,550 3.97% Real and Intangible Personal, Utilities 102,028,205 5.05% 96,621,122 5.90% Tangible Personal, Business 329,732,930 16.34% 277,732,310 16.96% Tangible Personal, Other 944,560 0.05% 736,270 0.04% Total Appraised Value Before Exemptions $ 2,018,536,595 100.00% $ 1,637,225,047 (4 100.00% Less: Total Exemptions/Reductions 287,240,480 206,212,102 Net Taxable Assessed Value $ 1,731,296,115 $ 1,431,012,945 (11 Change in Taxable Assessed Valuation due to losses in value from property damage caused by Hurricane Rita in 2005. NOTE: Valuations shown are certified taxable assessed values reported by the Jefferson and Orange County Appraisal District to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. 17 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY G.O. Ratio of Fiscal Taxable Tax Debt G.O. Tax Debt Year Taxable Assessed Outstanding to Taxable G.O. Ended Estimated Assessed Valuation at End Assessed Tax Debt 9/30 Population Valuation Per Capita of Year Valuation Per Capita 2006 57,755 $1,527,385,850 $26,446 $69,080,000 4.52% 1,196 2007 57,755 1,431,012,945 (3) 24,777 66,290,000 4.63% 1,148 2008 57,755 1,731,296,115 29,977 82,000,000 4.74% 1,420 2009 57,755 1,970,913,867 34,125 77,725,000 3.94% 1,346 2010 57,755 2,054,959,972 35,581 80,310,000 3.91% 1,391 2011 53,818 2,138,373,185 39,733 74,140,000 (4) 3.47% (4) 1,378 (4) (1) Source: 2000 U. S. census held constant in fiscal years 2006 through 2010. Fiscal year 2011 represents 2010 U.S. census estimate. (2) As reported by the Jefferson County and Orange County Appraisal Districts; subject to change during the ensuing year. (3) Change in Taxable Assessed Valuation due to losses in value from property damage caused by Hurricane Rita in 2005. (4) Includes the Bonds and excludes the Refunded Obligations. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Assessed Total General Interest and % Current % Total Ended 9/30 Value (I) Tax Rate Fund (2) Sinking Fund (2) Tax Levy (3) Collections Collections 2006 $1,527,385,850 $0.77500 $0.28664 $0.48836 $ 11,860,231 95.46% 98.14% 2007 1,431,012,945 0.77500 0.30920 0.46580 11,112,672 96.04% 98.27% 2008 1,731,296,115 0.76000 0.46560 0.29440 13,028,647 97.06% 97.86% 2009 1,970,913,867 0.76000 0.35799 0.40201 15,214,119 96.03% 96.96% 2010 2,054,959,972 0.79200 0.40450 0.38750 15,991,143 94.75% 94.76% 2011 2,138,373,185 0.79200 0.37421 0.41779 16,489,724 88.81% (4) 89.49% (4) (1) As reported by the Jefferson County and Orange County Appraisal Districts; subject to change during the ensuing year. (2) General Fund and Interest and Sinking Fund tax rate is based upon the taxable valuation of the City. Does not take into account the value of the Industrial Districts. See "TABLE 8— INDUSTRIAL DISTRICT VALUES." (3) The tax levy is adjusted for additions and corrections throughout the course of the year. The tax levy does not include Industrial District payments. (4 i Collections as of February 28, 2011. TABLE 5 - TEN LARGEST TAXPAYERS 2010/11 % of Total Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation Entergy Texas Inc. $ 179,070,700 8.37% Southeast Texas Hospital LP 71,719,870 3.35% Wal -Mart Stores Inc. 33,636,410 1.57% GG &A Central Mall Partners LP 30,746,180 1.44% Motiva Enterprises 24,795,210 (1) 1.16% Horizon Vessels Inc. 19,204,380 0.90% Madison Clearview 18,192,090 0.85% TOTAL Petrochemicals 18,240,710 0.85% Southwestern Bell Telephone Co. 15,408,270 0.72% Stone Creek Apartments Ltd. 14,522,480 0.68% $ 425,536,300 19.90% 11) Represents only the portion of the Motiva Refinery located within the City limits and subject to taxation by the City. 18 GENERAL OBLIGATION DEBT LIMITATION ... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "THE BONDS - TAX RATE LIMITATION "). TABLE 6 - TAX ADEQUACY 2011 Net Principal and Interest Requirements $ 8,553,171 (1) $0.4167 Tax Rate at 96 %Collection Produces $ 8,554,177 (2) Maximum Net Principal and Interest Requirements (2011) $ 8,553,171 (1) $0.4167 Tax Rate at 96% Collection Produces $ 8,554,177 (2) Average Net Principal and Interest Requirements (2011 -2030) $ 4,759,842 (1) $0.2319 Tax Rate at 96% Collection Produces $ 4,760,532 (2) (1) Includes the Bonds and excludes the Refunded Obligations. Does not include self - supporting debt. (2) Tax levy is based on the taxable assessed value of the City ($2,138,373,185) and does not include Industrial District payments. TABLE 7 - ES TIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ( "Tax Debt ") was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional bonds since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City. Total City's 2010/2011 G.O. Debt Estimated Overlapping Taxable as of % G.O. Debt as of Assessed Value 6/1/2011 Applicable 6/1/2011 City of Port Arthur $ 2,138,373,185 $ 75,490,000 (1) 100.00% $ 75,490,000 Beaumont ISD 9,850,122,135 380,110,000 0.04% 152,044 Bridge City ISD 806,786,452 20,659,734 14.85% 3,067,970 Jefferson County 25,039,826,823 64,465,000 9.18% 5,917,887 Nederland ISD 2,162,516,340 9,840,000 8.63% 849,192 Orange County 4,743,248,892 720,000 2.55% 18,360 Port Arthur ISD 3,929,240,245 282,285,000 69.56% 196,357,446 Port Neches- Groves ISD 3,141,640,900 129,351,077 3.77% 4,876,536 Port of Port Arthur Navigation District 7,470,626,128 35,220,000 27.12% 9,551,664 Sabine Pass ISD 1,003,366,840 18,996,904 14.85% 2,821,040 Sabine Pass Port Authority 707,152,620 1,200,000 18.20% 218,400 Total Direct and Overlapping Funded Debt $ 299,320,539 Ratio of Direct and Overlapping Funded Debt to Taxable Assessed Valuation 14.00% Per Capita Overlapping Funded Debt $ 5,183 (1) Includes the Bonds and excludes the Refunded Obligations. Includes self - supporting debt. 19 TABLE 8 - INDUSTRIAL DISTRICT CONTRACTS The City taxes property within its corporate limits, but has no such power for property located outside its boundaries. From 1987 through September 30, 2010 the City has collected an aggregate of approximately $336,906,021 in annual payments from certain corporations whose properties are located outside the City's boundaries but within the City's extra - territorial jurisdiction pursuant to contracts with such corporations for such payments (essentially the contracts have been in lieu of annexation and taxation). Pursuant to a Texas statute adopted in 1963 specifically enabling Texas cities to do so, in December 1975 the City Council authorized and caused the City to enter into separate contracts ( "Industrial District Contracts ") with corporations which provided that the City would not annex such corporate properties during the term of the contract unless the City determined that such annexation is reasonably necessary to promote and protect the general health, safety and welfare of the persons residing within the City (but that annexation would not be made for revenue purposes only). The City has contracts with the following corporations expiring as shown: Contractual Contract Payment Firm Expiration Date for FY 2011 Air Products December 31, 2013 $ 858,754 (1) BASF Corporation December 31, 2013 322,563 (1) BASF/Fina Joint Venture December 31, 2013 1,360,012 t BASF /Sabina/Atofma December 31, 2012 315,000 Chevron - Phillips Chemical Co., LLP December 31, 2013 1,138,802 (1) Chevron USA December 31, 2013 547,987 (1) Colonial Pipeline Co. December 31, 2011 25,000 Exxon Mobil Corporation December 31, 2011 62,500 Exxon Mobil Golden Pass LNG December 31, 2015 2,100,000 (2) Flint Hill Resources December 31, 2013 1,104,521 (1) Ineos Phenol December 31, 2013 147,816 (3) Motiva, Inc. December 31, 2019 4,700,000 (4) OxBow Calcining December 31, 2013 280,392 Port Arthur Steam Energy December 31, 2013 11,986 (1) Praxair December 31, 2013 370,778 (1) Premcor Feed and Decoker Project (5) December 31, 2014 283,165 (1) Premcor Hydroheater (5) December 31, 2013 56,799 (1) Premcor, Inc. (5) December 31, 2013 5,018,874 (6) Sunoco Logistics December 31, 2011 62,500 TOTAL - Deep Conversion Project December 31, 2021 - (7) TOTAL Petrochemicals, Inc. December 31, 2013 1,920,531 (1) Veolia December 31, 2013 135,000 $ 20,822,980 (I) Payments are 75% of City property taxes that would have been paid if the facilities were located within City limits. (2) Payments will be $2,100,000 in fiscal years 2010 -2013, and $2,300,000 in fiscal years 2014 -2016. (3) Payments begin in fiscal year 2010 and will be 75% of City property taxes that would have been paid if the facilities were located within City limits. (4) Payments increase to $4,700,000 in fiscal years 2010 -2012 and $7,700,000 in fiscal years 2013 -2020. (5) Premcor Corporation is doing business as Valero Refinery. Valero Refinery filed a lawsuit against the Jefferson County Appraisal District protesting the valuation of their plant facilities. A mediated settlement has been reached, however details of the agreement have not been released to the City. The City estimates that taxes from the current and prior years in the approximate amount of $1,200,000 will be due to Valero Refinery as a result of a lower valuation. The City expects to reduce future tax payments from Valero as a means of payment. (6) Payments are 65% of City property taxes that would have been paid if the facilities were located within City limits. (7) Payments begin in fiscal year 2013, starting at $500,000 and gradually increase thereafter to a payment of $4,250,000 in fiscal years 2021 and 2022. 20 Fiscal Gross Receipts from Ad Valorem Year Value of Industrial Tax Comparison Ended Industrial District Tax Tax Rate % of Actual 9/30 Districts Contracts Year Equivalent Tax Levy 2006 $ 3,694,594,650 $ 14,898,245 2005 $ 0.4032 125.62% 2007 5,418,344,930 15,259,988 2006 0.2816 137.32% 2008 6,527,539,250 16,238,958 2007 0.2488 124.64% 2009 7,658,872,370 32,005,507 (1) 2008 0.4179 210.37% 2010 6,749,824,079 26,520,879 2009 0.3929 165.85% 2011 6,997,730,520 20,482,981 (2) 2010 0.2927 124.22% (1) Increase from prior years attributed to a prepayment of $17,400,000 as several contracts were renegotiated. Total estimated future payments for the next 5 years range from approximately $22,700,000 to $26,500,000. (2) Represents collected receipts through March 31, 2011. In December 2008, the City entered into new five year agreements with the five industries listed in the table below. These agreements require that the companies make an advance payment at the execution of the contract, and that the advance payment would be credited with interest against the future payments over the term of the agreement. In Fiscal Year 2009, the City received $17.400,000 as payments in advance and will recognize the revenue over the five year term. Annual Amortization Prepayment of Prepayment in FY 2009 through FY 2013 BASF Corporation $ 500,000 $ 100,000 BASF/Fina Joint Venture 5,000,000 1,000,000 Flint Hill Resources 2,300,000 460,000 Premcor, Inc. 6,000,000 1,200,000 TOTAL Petrochemicals, Inc. 3,600,000 720,000 Total $ 17,400,000 $ 3,480,000 21 DEBT INFORMATION TABLE 9 - GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS Fiscal Year Outstanding' Less: Total Ended Debt Service Refunded Plus: The Bonds Self- Supporting Debt Service 9/30 Requirements Debt Service Principal Interest Total Debt (2) Requirements 2011 $ 9,273,398 $ 221,411 $ 56,394 $ 56,394 $ 555,209 $ 8,553,171 2012 8,785,549 1,362,823 $ 1,020,000 264,150 1,284,150 597,148 8,109,729 2013 8,775,088 1,374,873 1,055,000 243,400 1,298,400 600,919 8,097,696 2014 8,805,230 2,496,695 2,220,000 199,550 2,419,550 599,601 8,128,484 2015 7,764,388 1,433,749 1,210,000 148,100 1,358,100 588,105 7,100,634 2016 7,303,718 1,441,456 1,250,000 111,200 1,361,200 589,370 6,634,091 2017 7,324,174 1,449,718 1,300,000 72,950 1,372,950 590,317 6,657,090 2018 7,323,555 400,010 275,000 49,325 324,325 541,822 6,706,048 2019 7,331,807 399,290 280,000 41,000 321,000 538,259 6,715,258 2020 7,346,659 402,375 295,000 30,900 325,900 544,306 6,725,878 2021 6,152,439 404,125 305,000 18,900 323,900 543,172 5,529,042 2022 5,015,264 404,875 320,000 6,400 326,400 547,848 4,388,940 2023 1,978,160 - 221,551 1,756,609 2024 1,985,756 - 222,949 1,762,807 2025 1,990,444 - 223,982 1,766,462 2026 1,997,116 - 224,648 1,772,469 2027 2,010,136 - 226,467 1,783,670 2028 2,014,044 - 226,100 1,787,944 2029 607,913 - - 607,913 2030 612,900 - - 612,900 Total $ 104,397,737 $ 11,791,399 $ 9,530,000 $ 1,242,269 $ 10,772,269 $ 8,181,774 $ 95,196,834 (1) "Outstanding Debt" does not include lease /purchase obligations. (2) Represents the debt service on the City's Combination Tax & Revenue Certificates of Obligation, Series 2002C, a portion of the debt service on the City's General Obligation Bonds, Series 2008 and a portion of the Bonds. TABLE 10 - INTERES'r AND SINKING FUND BUDGET PROJECTION Tax Supported Debt Service Requirements, Fiscal Year Ending 9/30/2011 $ 8,553,171 Estimated Lease Payments 425,443 Interest and Sinking Fund, 9/30/2010 $ 3,208,527 Interest and Sinking Fund Tax Levy @ 96% Collections 8,576,594 (1) Budgeted Transfer from Economic Development Corporation 606,817 Estimated Investment Income 7,500 12,399,438 Estimated Balance, 9/30/2011 $ 3,420,824 (1) The levy is based on the value of the City; does not include Industrial District values. 22 TABLE 11 - COMPUTATION OF SELF - SUPPORTING DEBT Revenue Available for Debt Service from Waterworks and Sewer System (9/30/10) $ 3,791,992 Water and Sewer System General Obligation Bond Requirements (9/30/11) 3,292,284 (t) Balance $ 499,708 (2) Percentage of Water and Sewer System General Obligation Bonds Self - Supporting 100.00% Gross Sales Tax Receipts from 4A Corporation (9/30/10) $ 4,054,493 Sales "fax Revenue Bond Requirements (9/30/11) 573,385 Balance Available for General Obligation Requirements $ 3,481,108 General Obligation Bond Requirements Supported by Inter -Local Agreement (9/30/11) 537,572 (t) Balance $ 2,943,536 Percentage General Obligation Bonds Supported by Inter -Local Agreement Self- Supporting 100.00% (1) Excludes the Refunded Obligations. (2) The City also has certain outstanding general obligation bonds of which some proceeds were used for waterworks and sewer system improvements or for the purpose of refinancing obligations incurred for such purpose. TABLE 12 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS Amount Date of Amount Previously Authorized Authorization Purpose Authorized Issued But Unissued 01/20/79 Water and Sewer $ 6,500,000 $ 784,507 $ 5,715,493 l 01/17/81 Water and Sewer 24,670,000 - 24,670,000 (t) 11/06/07 Water 4,000,000 4,000,000 - 11/06/07 Public Safety Improvements 3,000,000 3,000,000 - 11/06/07 Drainage Improvements 2,000,000 2,000,000 - 11/06/07 Street & Drainage 3,000,000 3,000,000 - 11/06/07 Streets & Sidewalks 3,000,000 3,000,000 - 11/06/07 Parks & Recreation 2,000,000 2,000,000 - Totals $ 48,170,000 $ 17,784,507 $ 30,385,493 (It Such authorized but unissued debt may only be used for improvements within the previous boundaries of Park Central MUD, which was annexed effective September 30, 2001. ISSUANCE OF ADDITIONAL GENERAL OBLIGATION DEBT ... The City does not anticipate the issuance of additional general obligation debt within the next twelve months. 23 TABLE 13 — OTHER OBLIGATIONS Fiscal Year Telephone Fire Ended 9/30 System Equipment Apparatus Total 2011 $ 84,051 $ 287,087 $ 54,305 $ 425,442 2012 - 71,772 54,305 126,076 2013 - 54,305 54,305 2014 - 54,306 54,306 2015 - 54,306 54,306 2016 - 54,306 54,306 2017 - 54,306 54,306 2018 - 54,306 54,306 Total 84,051 358,858 434,444 877,353 Interest (3,713) (9,322) (62,858) (75,893) Net Present Value $ 80,338 $ 349,536 $ 371,586 $ 801,460 STATE MARINE SUPERFUND SITE... By letter dated February 12, 1999, the City of Port Arthur received a Request for Information from the U.S. Environmental Protection Agency ( "EPA ") concerning the State Marine of Port Arthur Superfund site located on Pleasure Islet adjacent to Sabine Lake. The site was the location of a former municipal solid waste landfill operated by the City from 1967 to 1974, at which time the landfill was closed in accordance with then applicable Texas Department of Health standards. The City then contracted with the Mid -South Jefferson County Economic Development Corporation to develop Pleasure Islet, and Mr. Chester Slay leased the property from the Mid -South Jefferson County Economic Development Corporation to operate a barge- cleaning company (State Marine, Inc.). In August 1981, the City sold the majority of Pleasure Islet to Pleasure Islet Associates, an entity headed by Mr. Slay. The barge maintenance operations allegedly caused environmental contamination on the property to which the State of Texas and EPA subsequently responded. The site was formally listed on the Superfund National Priorities List on July 28, 1998. The City responded to EPA's request for information in a letter dated April 30, 1999 and, by letter dated July 5, 2000, the City was notified by EPA that it was considered a potentially responsible party ( "PRP ") for environmental response activities taken at the site. EPA asserted that the City was a PRP due to its prior ownership of the site during barge maintenance operations. In October 2001, EPA proceeded with a government funded remedial investigation and removal action, employing private contractors. Following initial waste removal activities and extensive environmental sampling, EPA ultimately signed a "No Further Action Necessary" Record of Decision for the site on April 18, 2007, with the Texas Commission on Environmental Quality ( "TCEQ ") concurring in the decision. As previously reported to counsel for the City, EPA's last itemized cost summary of incurred costs for the site totals $2,262,625. This amount continues to accrue due to ongoing EPA oversight charges. EPA has indicated that it intends to seek cost recovery for its incurred costs against identified PRPs. At this time, the only identified PRPs are a bankrupt barge company, Chester Slay and the City, although EPA has continued its investigation to identify additional PRPs, including former customers of State Marine, Inc. No formal claim has been asserted against the City as of this date. [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK] 24 PENSION FUND ... The City provides pension benefits for all of its full -time employees through the Texas Municipal Retirement System ( "TMRS "), a State -wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. (For more detailed information concerning the retirement plan, see Appendix B, "Excerpts from the City's Annual Financial Report" — Note V. Other Information D. Employee Retirement Systems and Exhibit 10 at the end of the notes). OTHER POST- EMPLOYMENT BENEFITS ... In addition to pension benefits, the City of Port Arthur administers a single - employer defined benefit health care plan. The plan provides postretirement health care benefits to eligible retirees and their spouses. The City made changes to its retiree health insurance plan for employees who retire on or after January 1, 2011. Employees who retired on or before December 31, 2010 are "grandfathered" under a prior plan. Under the 2011 Plan, participants and their dependents at the time of termination are eligible for the City's medical plan (including prescription drugs) after termination of City employment if they had medical coverage in the City's group plan immediately prior to termination and meet the applicable Texas Municipal Retirement System (TMRS) or Firemen's Relief & Retirement Fund (FRRF) criteria to receive a monthly pension. Eligible retirees, disabled participants and spouses can continue coverage in the City's retiree benefits program for life. Eligible children can continue through age 26. The City finances this program on a pay -as- you -go basis. As of September 30, 2010, the City had 173 retirees participating in the plan. The City had a net cost of $1,730,144 during the fiscal year ended September 30, 2010. As of October 1, 2009, the Actuarial Accrued Liability of the Retiree Health Insurance Program was $32,067,950. (For more information regarding the plan see the Notes to the Financial Statement, Note V. Other Information C. Retiree Health Insurance Program and Exhibit 11 through Exhibit. 14 at the end of the notes.) [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK] 25 FINANCIAL INFORMATION TABLE 14 - CHANGES IN NET ASSETS For Fiscal Year Ended September 30, Revenues 2010 2009 2008 2007 2006 Progam Revenues: Chars for services $ 3,141,147 $ 3,276,308 $ 2,423,716 $ 3,341,887 $ 2,460,858 Operating grants 9,980,518 19,279,958 11,064,309 9,666,676 12,003,439 Capital pants 1,172,641 34,800 9,897 80,551 4,146,167 General Revenues: Ad valorem taxes 16,082,423 15,329,768 13,139,237 11,424,235 12,432,896 Industrial revenue 26,520,879 14,605,507 16,238,958 15,259,988 14,898,245 Gross receipts taxes 4,414,729 4,439,957 4,251,127 3,933,880 3,219,599 Sales tax 8,108,987 9,801,361 8,248,052 7,288,008 6,939,254 Other taxes 985,368 1,115,410 1,083,948 793,620 667,218 Investment earnings 379,046 240,344 692,378 1,221,857 971,310 Miscellaneous 1,940,243 1,999,733 2,192,092 3,885,701 7,942,824 Total Revenues $ 72,725,981 $ 70,123,146 $ 59,343,714 $ 56,896,403 $ 65,681,810 Expenses General government $ 13,639,715 $ 21,411,497 $ 13,332,504 $ 15,620,967 $ 20,165,793 Public safety 29,371,645 32,421,145 25,025,968 22,822,830 21,074,558 Public works 14,006,598 14,588,581 14,038,090 11,859,564 11,348,530 Community development 3,201,371 1,490,108 1,543,713 1,453,406 1,565,422 Culture and recreation 4,968,703 5,361,406 4,351,668 5,824,415 2,993,539 Health and welfare 2,905,668 2,723,071 4,349,172 2,106,857 1,831,279 Public transportation 3,061,791 2,563,463 2,361,839 2,122,404 1,938,632 Interest on longterm debt 3,294,557 3,421,325 2,944,208 2,753,310 3,002,311 Total Expenses $ 74,450,048 $ 83,980,596 $ 67,947,162 $ 64,563,753 $ 63,920,064 Increases (decreases) in net assets before transfers $ (1,724,067) $ (13,857,450) $ (8,603,448) $ (7,667,350) $ 1,761,746 Transfers 7,487,001 6,651,553 (4,003,613) 7,224,926 6,245,740 Increases in net assets $ 5,762,934 $ (7,205,897) $ (12,607,061) $ (442,424) $ 8,007,486 Netassets - beginningofyear 2,168,746 (D 16,067,342 28,674,403 29,116,827 21,109,341 (I) Prior Period Adjustment - (6,784,889) Net assets - end of year $ 7,931,680 $ 2,076,556 $ 16,067,342 $ 28,674,403 $ 29,116,827 (1) Restated. 26 TABLE 14 -A - GENERAL FUND REVENUES AND EXPENDITURES HISTORY For Fiscal Year Ended September 30, Revenues: 2010 2009 2008 2007 2006 Taxes $ 20,930,821 $21,762,246 $ 20,376,699 $16,020,891 $15,196,087 Industrial district payments 26,520,879 14,605,507 16,238,958 15,259,988 14,898,245 Licenses and permits 702,347 868,612 679,444 1,152,675 668,483 User fees 354,501 397,864 354,811 301,775 337,018 Fines and forfeitures 1,637,040 1,651,223 1,255,744 1,091,252 748,423 Intergovernmental 487,639 220,587 219,285 215,963 195,564 Interest revenue 217,333 129,648 337,283 446,802 347,541 Miscellaneous 309,420 545,162 680,051 1,416,310 217,962 Total revenues $ 51,159,980 $ 40,180,849 $40,142,275 $ 35,905,656 $ 32,609,323 Expenditures: General govermnent $ 10,988,142 $ 9,720,498 $ 8,472,050 $ 7,849,285 $ 6,505,418 Culture and recreation 3,766,181 3,637,689 3,248,707 2,929,124 2,503,076 Public safety 27,544,653 25,221,638 22,723,173 21,890,906 20,257,087 Health and welfare 1,077,345 809,351 894,392 873,228 821,389 Public works 8,224,026 7,529,637 7,018,114 6,866,478 5,905,021 Total expenditures $ 51,600,347 $46,918,813 $42,356,436 $40,409,021 $35,991,991 Excess (deficiency) of revenues over expenditures (440,367) (6,737,964) (2,214,161) (4,503,365) (3,382,668) Other financing sources (uses): Transfers in $ 7,969,327 $ 7,088,536 $ 7,132,646 $ 8,006,457 $ 7,178,378 Transfers out (3,552,051) (3,442,149) (2,318,867) (2,548,499) (1,317,235) Total other financing sources (uses) $ 4,417,276 $ 3,646,387 $ 4,813,779 $ 5,457,958 $ 5,861,143 Net change in fund balance $ 3,976,909 $ (3,091,577) $ 2,599,618 $ 954,593 $ 2,478,475 Fund balance, beginning of year $ 11,416,518 (I) $ 14,508,096 $11,908,478 $10,953,885 $ 8,921,563 Prior period adjustment 843,133 - - - (446,153) Fund balance, end of year $ 16,236,560 $11,416,519 $14,508,096 $11,908,478 $10,953,885 (1) Difference from prior year's ending balance due to rounding. 27 TABLE 15 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, VATCS, 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 Bonds. 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. Fiscal Year % of Equivalent of Ended Total Ad Valorem Ad Valorem Per 9/30 Collected Tax Levy Tax Rate Capita 2006 $ 6,939,254 58.51% $ 0.4534 $ 120 2007 7,288,008 65.58% 0.5083 126 2008 8,248,052 63.31% 0.4811 143 2009 9,801,360 64.42% 0.4896 170 2010 8,108,987 50.71% 0.4016 140 The sales tax breakdown for the City is as follows: Economic and Community Development 0.50% County Sales & Use Tax 0.50% City Sales & Use Tax 1.00% State Sales & Use Tax 6.25% Total 8.25% FINANCIAL POLICIES Basis of Accounting: The City policy is to adhere to the accounting principles set out by Statement No. 1 issued by the National Council on Governmental Accounting, as amended. (See APPENDIX B — "AUDITED FINANCIAL STATEMENTS FOR THE CITY OF PORT ARTHUR FOR THE PERIOD ENDED SEPTEMBER 30, 2008. ") General Fund Balance: The City Council's financial policies require the General Fund balance to be maintained at a level equal to 60 days of operating expenditures plus an emergency reserve of $1.5 million. Budgetary Procedures: The City policy is to begin the budgetary procedure at the department level in June of each year. The department heads submit their budget request to the Director of Financial who assembles and prepares a budget requirement workbook for each department for submission to the City Manager. After the City Manager reviews and meets with department heads, the City Manager submits a proposed budget to the City Council on or before August 31 of each year. The Council holds public hearings and a final budget must be prepared and adopted by September 30. IN VESTMENTS The City of Port Arthur invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City of Port Arthur. Both state law and the City's investment policies are subject to change. 28 LEGAL INVEsmIENTs...Available City funds are invested as authorized by Texas law and in accordance with investment policies approved by the City Council. Both state law and the City's investment policies are subject to change. Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (51 obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A -1 or P -1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A -1 or P -1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no -load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) no -load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not Tess than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b -1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the City must do so by order, ordinance, or resolution. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage- backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage- backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. INVESTMENT POLICIES ... Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar- weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. 29 Under Texas Yaw, City investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the City Council. ADDITIONAL PROVISIONS ... Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers' with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (3) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform an annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict its investment in mutual funds in the aggregate to no more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, and to invest no portion of bond proceeds, reserves and funds held for debt service, in mutual funds; and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. TABLE 16 - CURRENT INVESTMENTS As of January 31, 2011, the City's investable funds were invested in the following categories: % of Book Market Total Value Value Cash 16.28% $ 8,016,346 $ 8,016,346 TexPoo1 48.37% 23,813,953 23,813,953 Money Market 1.37% 675,514 675,514 Federal Securities 33.47% 16,481,809 16,476,720 Certificates of Deposit 0.51% 250,000 250,000 100.00% $ 49,237,621 $ 49,232,533 30 TAX MATTERS TAx EXEMPTION In the opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, interest on the Bonds is (1) excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code "), from gross income of the owners thereof for federal income tax purposes and (2) is not includable in the alternative minimum taxable income of individuals or corporations, except as described below. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Bonds. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Bonds in gross income of the owners thereof or change the treatment of such interest for purposes of computing altemative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the City with certain covenants of the ordinance authorizing the issuance of the Bonds (the "Ordinance ") and has relied on representations by the City with respect to matters solely within the knowledge of the City, which Bond Counsel has not independently verified. The covenants and representations relate to, aunong other things, the use of Bond proceeds and any facilities financed therewith, the source of repayment of the Bonds, the investment of Bond proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Bond proceeds and certain other amounts be paid periodically to the United States and that the City file an information report with the Internal Revenue Service (the "Service "). If the City should fail to comply with the covenants in the Ordinance, or if its representations relating to the Bonds that are contained in the Ordinance should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds, regardless of the date on which the event causing such taxability occurs. Interest on all tax- exempt obligations, such as the Bonds, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust ( FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's altemative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of receipt or accrual of interest on or acquisition or disposition of the Bonds. Boncl Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Service with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax- exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the City as the "taxpayer," and the owners of the Bonds may have no right to participate in the audit process. In responding to or defending an audit of the tax - exempt status of the interest on the Bonds, the City may have different or conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome. Under the Code, taxpayers are required to provide information on their retums regarding the amount of tax- exempt interest, such as interest on the Bonds, received or accrued during the year. Prospective purchasers of the Bonds should be aware that the ownership of tax- exempt obligations, such as the Bonds, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax- exempt obligations, taxpayers owning an interest in a FASIT that holds tax - exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds. 31 TAX TREATMENT OF ORIGINAL ISSUE PREMIUM BONDS PREMIUM BONDS Some of the Bonds are offered at initial offering prices which exceed the stated redemption prices payable at the maturity of such Bonds. If a substantial amount of any maturity of the Bonds is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Bonds of such maturity ( "Premium Bonds ") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium Bond in the hands of an initial purchaser who purchases such Bond in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Bond by the amount of amortizable bond premium. This reduction in basis will increase the amount of any gain (or decrease the amount of any loss) recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Bond by the initial purchaser. Generally, no corresponding deduction is allowed for federal income tax purposes, for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Bond which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Bond based on the initial purchaser's original basis in such Bond . The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Bonds that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Bonds of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Bonds should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Bonds. QUALIFIED TAX - EXEMPT OBLIGATIONS Section 265(a) 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 certain 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 has designated the Bonds as "qualified tax- exempt obligations." Further, the City represents that it has or will take such action necessary for the Bonds to constitute "qualified tax - exempt obligations." Notwithstanding the designation of the Bonds as "qualified tax- exempt obligations," financial institutions acquiring the Bonds will be subject to a twenty percent (20 %) disallowance of interest expenses allocable to the Bonds. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (the "MSRB "). This information will be available free of charge from the MSRB via the Electronic Municipal Market Access ( "EMMA ") system at www.emma.msrb.org. ANNUAL REPORTS The City will provide certain updated financial information and operating data to the MSRB. 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 heading "TAX INFORMATION ", "FINANCIAL INFORMATION ", "GENERAL FUND REVENUE AND EXPENDITURES HISTORY ", "DEBT INFORMATION" and in APPENDIX B. The City will update and provide this information within six months after the end of each fiscal year ending on and after September 30, 2011. 32 The financial information and operating data to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Web site or filed with the United States Securities and Exchange Commission (the "SEC "), as permitted by SEC Rule 15c2 -12 (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 available by the required time, the City will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the City may be required to employ from time to time pursuant to State law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change. MATERIAL EVENT NOTICES The City will also provide timely notices of certain events to the MSRB. The City will provide notice in a timely manner not in excess of ten business days after the occurrence of the event of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non - payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 -TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. As used above, the phrase "bankruptcy, insolvency, receivership or similar event" means the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court of governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if jurisdiction has been assumed by leaving the Board and officials or officers of the City in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. (Neither the Bonds nor the Ordinance make any provision for debt service reserves, liquidity enhancement or credit enhancement, or the pledge of property other than certain ad valorem tax revenues to secure repayment of the Bonds). 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." AVAILABILITY OF INFORMATION Effective July I, 2009 (the "EMMA Effective Date "), the SEC implemented amendments to the Rule which approved the establishment by the MSRB of EMMA, which is now the sole national municipal securities information repository with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the City in accordance with its undertaking made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. The City will continue to make information filings, including material event notices, with the Texas state information repository (the "SID ") so long as it is required to do so pursuant to the terms of any undertakings made under the Rule prior to the EMMA Effective Date. LIMITATIONS AND AMENDMENTS The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell bonds at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from a breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the City to comply with its agreement. 33 The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2 -12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2 -12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS The City has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2 -12. OTHER INFORMATION R ATINGS The presently outstanding tax supported debt of the City is rated "Aa3" by Moody's and "A" by S &P, without regard to credit enhancement. The Bonds have been rated "Aa3" by Moody's. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Bonds. LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to 1:he availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Certificates be assigned a rating of "A" or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION — RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. 34 LEGAL OPINIONS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Bond and to the effect that the Bonds are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under "Tax Matters" herein, including the alternative minimum tax on corporations. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information under captions "PLAN OF FINANCING — Refunded Obligations ", "THE BONDS" (exclusive of the subcaption "Book -Entry -Only System" and "Bondholders' Remedies "), and "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the subcaption "Compliance with Prior Undertakings ") and Bond Counsel is of the opinion that the statements and information contained therein fairly and accurately reflect the provisions of the Ordinance; further, Bond Counsel has also reviewed the subcaptions "Legal Opinions ", "Legal Investments and Eligibility to Secure Public Funds in Texas" and "Registration and Qualification of the Bonds for sale" under the heading "OTHER INFORMATION" and the captions "TAX MATTERS" in the Official Statement and such firm is of the opinion that the information therein is correct as to matters of law. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent on the sale and delivery of the Bonds. The legal opinion will accompany the Bonds deposited with DTC or will be printed on the Bonds in the event of the discontinuance of the Book- Entry-Only System. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski, LLP, Houston, Texas, Counsel to the Underwriter. A UTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from City records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. FINANCIAL ADVISOR The Financial Advisor to the City has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its 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. VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by First Southwest Company on behalf of the City relating to (a) computation of forecasted receipts of principal and interest on the Federal Securities and the forecasted payments of principal and interest to redeem the Refunded Obligations and (b) computation of the yields of the Refunding Bonds and the restricted Federal Securities were verified by Grant Thornton, LLP, certified public accountants. Such computations were based solely on assumptions and information supplied by First Southwest Company on behalf of the City. Grant Thornton, LLP has restricted its procedures to verifying the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information on which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. UNDERWRITING Coastal Securities, Inc. (the "Underwriter ") have agreed, subject to certain conditions, to purchase the Bonds from the City. The purchase price of the Bonds is $9,906,922.27 (representing the par amount of $9,530,000.00, plus a premium of $433,760.75 and less an underwriter's discount of $56,838.48) plus accrued interest on the Bonds. The Underwriter will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Underwriter. 35 FORWARD- LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward - looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward - looking statements. All forward - looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward - looking statements. The City's actual results could differ materially from those discussed in such forward- looking statements. The forward - looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject, to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward- looking statements included in this Official Statement will prove to be accurate. /s/ Deloris Prince Mayor City of Port Arthur, Texas ATTEST: /si Sherri Ballard City Secretary City of Port Arthur, Texas 36 Schedule I SCHEDULE OF REFUNDED OBLIGATIONS General Obligation Refunding Bonds, Series 2001 Maturity Interest Par Call Call August 15 Rate Amount Date Price 2012 4.125 % $ 920,000 06/10/11 100.00 % 2013 4.375 970,000 06/10/11 100.00 2014 4.375 1,020,000 06/10/11 100.00 $ 2,910,000 Combination Tax & Revenue Certificates of Obligation, Series 2002B Maturity Interest Par Call Call February 15 Rate Amount Date Price 2014 4.550 % $ 880,000 02/15/12 100.00 % 2015 4.650 925,000 02/15/12 100.00 2016 4.750 975,000 02/15/12 100.00 2017 4.850 1,030,000 02/15/12 101.00 $ 3,810,000 Combination Tax & Revenue Certificates of Obligation, Series 2002C Maturity Interest Par Call Call February 15 Rate Amount Date Price 2014 4.400 % $ 260,000 02/15/12 100.00 % 2015 4.500 270,000 02/15/12 100.00 2016 4.600 285,000 02/15/12 100.00 2017 4.700 300,000 02/15/12 100.00 2018 4.800 320,000 02/15/12 100.00 2019 4.800 335,000 02/15/12 100.00 2020 5.000 355,000 02/15/12 100.00 2021 5.000 375,000 02/15/12 100.00 2022 5.000 395,000 02/15/12 100.00 $ 2,895,000 37 APPENDIX A GENERAL INFORMATION REGARDING THE CITY THE CITY The City of Port: Arthur is located in Jefferson County and Orange County on the west shore of Sabine Lake directly adjacent to the Gulf of Mexico in the extreme southeast corner of the State of Texas. The land area of the City covers approximately 81.5 square miles. The City is located along the 40 -foot deep Sabine - Neches Ship Channel which links Jefferson and Orange Counties with the Gulf of Mexico. The City is a component of the Beaumont -Port Arthur Metropolitan Statistical Area ( "MSA ") comprised of Jefferson, Hardin and Orange Counties. ECONOMY The economy of the MSA is based primarily upon petroleum refining; the production of petrochemicals and other chemicals, the fabrication of steel and steel products, shipping activity, the manufacture of wood, pulp, food and feed products, agriculture, and health care services. Transportation, communications and public utilities account for about 30% of area employment. Six oil refineries located in the County have a combined capacity 1.142 million barrels per stream day of crude oil. Approximately 250 manufacturing, firms are located in the MSA. The City is experiencing a tremendous economic expansion in the industrial district. The world's largest steam cracker was recently completed at Fina's Port Arthur facility through a joint venture with BASF. This $1 billion project is providing 150 permanent jobs. The Clark facility has recently been upgraded in its entirety. The approximate value of this upgrade is $775 million and created 50 permanent jobs. Motiva is constructing new facilities with an estimated cost of $4.5 billion. ExxonMobil has begun construction of its new Golden Pass Liquid Natural Gas plant. Total has recently reached an abatement agreement with Jefferson County for a new cracker unit with an estimated cost of $1 billion. Sempra is in the permitting process for a proposed Liquid Natural Gas facility. Valero is planning a $1 billion expansion of their refining capacity. This activity is driving other developments in the housing and retail markets. Single family housing continues to grow and new multi - family properties are under construction. A $35 million retail development was recently announced. This complex will include three large retail stores and up to five restaurants. The mall is undergoing major renovations and considering expansion. POPULATION 1960 1970 1980 1990 2000 Official Official Official Official Official Census Census Census Census Census City of Port Arthur 66,676 57,371 61,195 58,724 57,755 Jefferson County 245,659 246,402 250,928 239,397 252,051 Beaumont -Port Arthur MSA 306,016 347,568 375,497 361,226 385,090 SERVICES PROVIDED BY THE CITY The City provides water, sanitary sewer, library and park services. The City also has the responsibility of maintaining its storm drainage facilities, bridges, streets and sidewalks, providing local law enforcement activities, fire protection, solid waste disposal services, building inspection and civil defense services, and maintaining preventative health services through numerous health facilities within the community. MAJOR EMPLOYERS The following are the major employers located within the Port Arthur area: Number of _ Employers Type of Company Employees Port Arthur ISD Education 1,301 Huntsman Corp Petrochemical Manufacturing 1,101 Medical Center Medical 900 Motiva Petrochemical Manufacturing 900 Christus St. Mary Medical 850 Wal Mart Retailer 816 Valero Petrochemical Manufacturing 750 City of Port Arthur Local Government 658 Total Petrochemical Manufacturing 450 A -1 LABOR STATISTICS City of Port Arthur Labor Total Year Force Employment Unemployment Rate 2005 22,669 20,448 2,221 9.8% 2006 22,487 20,779 1,708 7.6% 2007 22,577 20,942 1,635 7.2% 2008 23,203 21,072 2,131 9.2% 2009 24,037 20,763 3,274 13.6% 2010 (I) 24,366 20,818 3,548 14.6% Jefferson County Labor Total Year Force Employment Unemployment Rate 2005 111,802 103,155 8,647 7.7% 2006 111,791 105,015 6,776 6.1% 2007 112,045 105,855 6,190 5.5% 2008 113,545 105,885 7,660 6.7% 2009 115,568 104,330 11,238 9.7% 2010 (1) 117,653 104,608 13,045 11.1% Source: Texas Workforce Commission. (1) Average through December 2010. A -2 APPENDIX B EXCERPTS FROM THE CITY OF PORT ARTHUR, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2010 The information contained in this Appendix consists of excerpts from the City of Port Arthur, Texas Annual Financial Report for the Year Ended September 30, 2010, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information. 1 R. Eclwarcls & Associates LLC Certified Public Accountants March 14, 2011 INDEPENDENT AUDITOR'S REPORT The Honorable Mayor and City Council City of Port Arthur, Texas We have audited the accompanying financial statements of the governmental activities, business- type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Port Arthur, Texas (the "City ") as of and for the year ended September 30, 2010, 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 did not audit the financial statements of the Pleasure Island Commission, which is both, a discretely presented component unit and 3 percent, 6 percent, and Tess than 1 percent respectively, of the assets, net assets, and revenues of the City of Port Arthur, Texas. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for the City of Port A rt hur. Texas. is based on the report of the other auditors. 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, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, the aggregate discretely presented component units, each major fund, the aggregate remaining fund information, and the respective budgetary comparison for the general fund of the City of Port Arthur, Texas as of September 30, 2010. 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. 4349 Crow Road • Beaumont, Texas 77706 Phone (409) 924 -9100 • Fax (409) 924 -0990 Honorable Mayor and City Council City of Port Arthur. Texas Page 2 March 14. 2011 In accordance with Governmental Auditing Standards, we have also issued our report dated March 14, 2011, on our consideration of the City's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral pan of an audit performed in accordance with Governmental Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and required supplementary information as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a pan of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential pan of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We and the other auditors have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries , the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Port Arthur, Texas' basic financial statements as a whole. The Introductory Section. combining and individual nonmajor fund statements and schedules. and statistical section are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied by us and the other auditors in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion. based on our report and the report of the other auditors, the information is fairly stated in all material respects in relation to the financial statements taken as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied by us and the other auditors in the audit of the basic financial statements and. accordingly. we do not express an opinion or provide any assurance on it. J.R. Edwards & 1csr,ciates, LLC CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis As management of the City of Port Arthur, Texas (City), we offer readers of the City's financial statement this narrative overview and analysis of the financial activities of the City for the year ended September 30, 2010. 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 page -v- of this report. FINANCIAL HIGHLIGHTS The assets of the City of Port Arthur exceeded its liabilities at the close of the fiscal year by $77.4 million (net assets). • The City's total net assets increased by $3.6 million. In part, this increase was driven by capital improvements. These improvements were funded by a General Obligation Bond Issue and by Federal American Relief and Recovery Act (ARRA) grant awards. • As of the close of the fiscal year, the City of Port Arthur's governmental funds reported combined ending fund balances of $30 million. Over 59.1% of this total amount, $17.79 million is unreserved and available for use within the City's designation and policies. • At the end of the current fiscal year, unreserved balance in the General Fund was $16.1 million, or 31.2% of the total General Fund expenditures, within the City's General Fund balance policy requi rement. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City's basic financial statements are comprised of three components: 1) government -wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the 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 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. That being said, the net assets of the City increased $3.6 million in this fiscal year. 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 the 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 distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from functions that are intended to recover all or a significant portion of their costs through user fees and charges (business -type activities). The governmental activities of the City include general government, public safety, community development, public works, health and welfare, economic development, public transportation and culture and recreation. The business -type activities include the water and sewer utility and solid waste operations. The government -wide financial statements are found on pages 13 and 15 of this report. - 5 - CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis 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 and 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, the 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 on 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 34 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, Debt Service, Community Development Block Grant, FEMA, and Capital Projects Funds which are considered to be major funds. Data from the other 29 funds are combined into a single, aggregated presentation. Individual fund data for each of these non -major governmental funds is provided in the form of combining statements elsewhere in the report. Proprietary Funds — The City maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business -type activities in the government -wide financial statements. The City uses enterprise funds to account for the water and sewer utility and solid waste operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses internal service funds to account for fleet maintenance, liability insurance, employee benefits, and equipment replacement activities. All internal service funds are combined into a single aggregated presentation on 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 are found on pages 27 -29 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. 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 and other post employment benefits to its employees. Required supplementary information can be found on pages 55 -59 of this report. See section V.C. and V.D. in the notes to the financial statements, on pages 46 -51 of this report for additional information concerning the City's retirement systems and other post employment benefits. GOVERNMENT -WIDE FINANCIAL ANALYSIS As noted earlier, net assets may serve, over time, as a useful indicator of the government's financial position. In the case of the City of Port Arthur, Texas, assets exceeded liabilities by $77.4 million -6- CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis as of September 30, 2010. The largest portion of the City's net assets reflects investment in capital assets (e.g. land, building, equipment, improvements, and construction in progress), less any debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide service to citizens; consequently, these assets are not available for future spending. Although the City's investment in 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 Port Arthur's Net Assets Governmental Activities Business -Type Activities Total 2010 2009 2010 2009 2010 2009 Current and other assets $ 64,270,739 $ 61,438,332 $ (6,299,694) $ (1,624,438) $ 57,971,045 $ 59,813,894 Capital assets 68,383,700 66,879,351 86,587,387 82,251,758 154,971,087 149,131,109 Total assets $ 132,654,439 $ 128,317,683 $ 80,287,693 $ 80,627,320 $ 212,942,132 $ 208,945,003 Long term liabilities $ 98,979,912 $ 97,001,310 $ 5,171,798 $ 7,742,580 $ 104,151,710 $ 104,743,890 Other liabilities 25,742,847 29,239,817 5,371,904 1,146,602 31,114,751 30,386,419 Total liabilities $ 124,722,759 $ 126,241,127 $ 10,543,702 $ 8,889,182 $ 135,266,461 $ 135,130,309 Net Assets Invested in capital assets, net of related debt $ 52,886,404 $ 57,871,638 $ 86,587,387 $ 82,251,758 $ 80,289,627 $ 66,200,896 Restricted 12,159,977 10,073,955 10,896,172 12,748,482 23,056,149 22,822,437 Unrestricted (57,114,701) (65,869,037) (27,739,568) (23,262,102) (25,670,105) (15,208,639) Total net assets 7.931.680 $ 2.076.556 $ 69.743.991 $ 71.738.138 $ 77.675.671 $ 73.81 Analysis of City's Operations — The following table provides a summary of the City's operations for the year ended September 30, 2010. Governmental activities increased the City of Port Arthur's net assets by $5.6 million. The infusion of grant funded projects and increased industrial revenue resulted in this increase in assets. Business -type activities decreased the City's net assets by $1.99 million. The solid waste fund saw a significant drop in landfill revenues which drove this decline in net assets. -7- CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis City of Port Arthur's Changes in Net Assets Governmental Activities Business -Tvoe Activities Total 2010 2009 2010 2009 2010 2009 Revenues Program revenues ('harges for services $ 3,141,147 $ 3,276,308 $ 24,584,884 $ 26,210,406 $ 27,726,031 $ 29,486,714 Operating grants 9,980,518 19,279,958 - - 9,980,518 19,279,958 Capital grants and contributions 1,172,641 34,800 6,850,178 - 8,022,819 34,800 General revenues Ad valorem taxes 16,082,423 15,329,768 - - 16,082,423 15,329,768 Industrial revenue 26,520,879 14,605,507 - - 26,520,879 14,605,507 Gross receipts taxes 4,414,729 4,439,957 - - 4,414,729 4,439,957 Sales tax 8,108,987 9,801,361 - - 8,108,987 9,801,361 Other taxes 985,368 1,115,410 - - 985,368 1,115,410 Investment earnings 379,046 240,344 53,355 108,582 432,401 348,926 Miscellaneous 1,940,243 1,999.733 6,555 - 1.946.798 1999,733 Total revenues $ 72.725.981 $ 70.123.146 $ 31.494.972 $ 26.318.988 $ 104.220.953 $ 96.442.134 Expenses General government $ 13,639,715 $ 21,411,497 $ - $ - $ 13,639,715 $ 21,411,497 Public safety 29,371,645 32,421,145 - - 29,371,645 32,421,145 Public works 14,006,598 14,588,581 - - 14,006,598 14,588,581 Community development 3,201,371 1,490,108 - - 3,201,371 1,490,108 Culture and recreation 4,968,703 5,361,406 - - 4,968,703 5,361,406 Health and welfare 2,905,668 2,723,071 - - 2,905,668 2,723,071 Public transportation 3,061,791 2,563,463 - - 3,061,791 2,563,463 [merest on long -term debt 3,294,557 3,421,325 - - 3,294,557 3,421,325 Water and sewer - - 17,579,403 16,965,508 17,579,403 16,965,508 Solid waste - - 8,422.715 9.685.522 8.422.715 9.685,522 Total expenses $ 74,450,048 8 83,980,596 $ 26,002,118 8 26,651,030 $ 100,452,166 $ 110,631,626 Increases (decreases) in net assets before transfers (1,724,067) (13,857,450) 5,492,854 (332,042) 3,768,787 (14,189,492) Transfers 7,487.001 6,651,553 (7.487,001) (6.651.553) - - Increases (decreases) in net assets 5,762,934 (7,205,897) (1,994,147) (6,983,595) 3,768,787 (14,189,492) Net assets - beginning of year 2,168,746 16,067,342 71,738,138 80,542,220 73,906,884 96,609,562 Adjustment to beginning net assets - (6,692,699) - (1.820.487) - (8,513.186) Net assets - end of year $ 7,931,680 $ 2,168,746 $ 69,743,991 $ 71,738,138 $ 77,675,671 $ 73,906,884 FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS Governmental Funds — The focus of the City of Port Arthur'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 the government's net resources available for spending at the end of the fiscal year. At the end of the 2010 fiscal year, the City of Port Arthur's governmental funds reported combined ending fund balances of $30 million. Approximately 59% of this total amount ($17.79 million) consists of -8- CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis unreserved fund balances. The remainder of the balance is reserved to indicate that it is not available for new spending because it has been committed to 1) provide for prepaid items ($128,709), 2) pay for debt service ($3.2 million) and 3) capital projects ($8.95 million). In the General Fund, the City budgeted for a decrease in fund balance of $874,000. This was a planned reduction. Due to revenues and transfers lagging budgeted projections by $1.6 million and actual expenses being less than budgeted by $2.9 million, the fund balance increased $1.3 million. The primary revenue variances were provided in Sales Tax which declined sharply in 2010 ($491,000 less than budget) due in large part to the sluggish economy, and the completion of Hurricane Ike recovery spending by retail customers. Industrial revenue finished the year $959,000 less than budget due to declines in the values in the industrial districts that were not anticipated at the budget preparation, and the refund to one payer after a successful litigation of value with the Jefferson County Appraisal District. Expenses were under budget in every department, except for City Secretary, Police and Fire, for a net savings of $2.9 million. Debt service fund balance decreased $845,000, as was budgeted. The FEMA fund carries a significant receivable from the federal government. This is due to outstanding project reimbursements from Hurricanes Rita (2005) and Ike (2008). In 2010, the City issued $8 million in General Obligation Debt that will fund various new Capital Projects in that fund. General Fund Budgetary Highlights — The City Council approved ten budget amendments to the original appropriations. This change resulted in an increase of 6% of the original operating appropriation, or $3.33 million. These amendments were to fund additional capital projects, a litigation settlement and unanticipated equipment and maintenance needs in various departments. Proprietary funds — The City's proprietary fund statements provide the same type of information found on the government -wide statements, but in more detail. Net assets in the proprietary funds decreased $1.4 million. The water utility fund does not generate sufficient revenue to fund the entire cost of capital. CAPITAL ASSETS The City of Port Arthur's investment in capital assets for its governmental and business -type activities as of September 30, 2010, amounts to $154.97 million (net of accumulated depreciation). This investment in capital assets includes land, buildings, equipment, improvements, infrastructure and construction in progress. Major capital assets during the current year included the following: Capital Assets at Year -End Governmental Activities Business -type Activities Total 2010 2009 2010 2009 2010 2009 Land $ 2,474,132 $ 2,474,132 $ 362,843 $ 362,843 $ 2,836,975 $ 2,836,975 Buildings 20,464,102 18,968,558 35,348,650 35,348,650 55,812,752 54,317,208 Improvements 8,526,264 8,526,264 106,776,168 106,177,491 115,302,432 114,703,755 Infrastructure 249,663,476 248,492,305 - - 249,663,476 248,492,305 Equipment 41,181,159 39,087,569 4,318,666 4,239,644 45,499,825 43,327,213 Construction in progress 13,113,198 7,763,919 8,848,584 1,080,262 21,961,782 8,844,181 Accumulated depreciation (267,038,631) (258,433,396) (69,067,524) (64.957,132) (336,106,155) (323,390,528) Total $ 68.383.700 $ 66.879.351 $ 86.587.387 $ 82.251.758 $ 154.971.087 $ 149.131.109. -9- CITY OF PORT ARTHUR, TEXAS Management's Discussion and Analysis Detailed information on capital asset activity can be found on pages 39-41 in the Notes to the Financial Statements, Note IV. C. DEBT ADMINISTRATION The City of Port Arthur General Obligation Bond Series 2010 (the last issue for the City) was rated `A' by Standard and Poor's and A2 by Moody's Investors Service. At the end of the current fiscal year, the City of Port Arthur had a total bonded debt of $80,310,000. More detailed information on long -term debt activity can be found on pages 43 -45 in the Notes to the Financial Statements, Note IV.F. Governmental Activities 2010 2009 General obligation bonds $ 50,750,000 $ 45,980,000 Certificates of obligation 29,560,000 31,745,000 Total $ 80,310,000 $ 77,725,000 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The City of Port Arthur's budget for fiscal year 2011 included increased property tax revenue due to a 3.9% increase in assessed valuation. However, industrial district revenues declined a sharp 10% due to significant decreased values in those values. The decrease was limited however by a 10% floor in the industrial contracts. The property tax rate remained the same as the prior year, $0.792 per $100 valuation. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the City of Port Arthur's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report, or requests for additional financial information should be addressed to the Office of the Assistant City Manager for Administration, P.O. Box 1089, Port Arthur, Texas 77641 -1089. - 10 - CITY OF PORT ARTHUR, TEXAS Exhibit 1 Statement of Net Assets September 30, 2010 Primary Government Component Units Economic Pleasure Governmental Business -type Development Island Activities Activities Total Corporation Commission Assets Cash $ 2,442,500 $ - $ 2,442,500 $ 1,241,666 $ 113,501 Investments 23,371,785 10,246,925 33,618,710 6,976,456 1,193,264 Due from other funds 23,418,973 (23,418,973) - - - Receivables (net of allowances for doubtful accounts) Property taxes 2,819,849 - 2,819,849 - - Accounts 2,276,178 3,414,471 5,690,649 428,127 11,456 Federal and state grants 8,779,386 3,048,958 11,828,344 - - Notes 732,246 - 732,246 - - Inventories 170,113 408,925 579,038 - - Prepaid items 259,709 - 259,709 - 11,872 Capital assets: Land 2,474,132 362,843 2,836,975 5,757,631 - Buildings 20,464,102 35,348,650 55,812,752 315,480 - Improvements 8,526,264 106,776,168 115,302,432 - 8,893,480 Infrastructure 249,663,476 - 249,663,476 - - Equipment 41,181,159 4,318,666 45,499,825 35,826 243,659 Construction in progress 13,113,198 8,848,584 21,961,782 - - Accumulated depreciation (267,038,631) (69,067,524) (336,106,155) (53,704) (3,878,752) Total Assets 132,654,439 80,287,693 212,942,132 14,701,482 6,588,480 Liabilities Wages payable 1,645,393 333,661 1,979,054 15,311 2,973 Accounts payable 2,625,148 1,767,890 4,393,038 55,403 81,743 Other liabilities 89,483 74,449 163,932 - - Deferred revenue 13,920,000 - 13,920,000 - 642,147 Noncurrent liabilities. Due within one year: Bonded debt 6,085,000 - 6,085,000 330,000 - Capital leases 399,466 - 399,466 - - Notes payable - - - - 30,000 Compensated absences - 192,954 192,954 - 10,364 Due in more than one year: Bonded debt 74,225,000 - 74,225,000 5,780,000 - Capital leases 401,994 - 401,994 - - Notes payable - - - - 52,447 Compensated absences 8,030,920 913,191 8,944,111 9,739 - Net pension obligation 505,348 126,337 631,685 - - Other post employment benefits 14,488,950 3,639,325 18,128,275 - - Refundable deposits - 1,368,099 1,368,099 - - Accrued landfill closure costs - 2,127,796 2,127,796 - - Long -term risk liability 2,306,057 - 2,306,057 - - Total Liabilities 124,722,759 10,543,702 135,266,461 6,190,453 819,674 Net Assets Invested in capital assets, net of related debt 52,886,404 86,587,387 80,289,627 6,055,233 5,258,435 Restricted for: Debt service 3,208,527 - 3,208,527 705,275 - Capital projects 8,951,450 10,896,172 19,847,622 1,000,000 (49) Unrestricted (57,114,701) (27,739,568) (25,670,105) 750,521 510,469 Total Net Assets $ 7,931,680 $ 69,743,991 $ 77,675,671 $ 8,511,029 $ 5,768,855 See accompanying notes to the basic financial statements 13 • N 0 O O Vl . . 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A m E., - • a 0 O N 0 7 r 10 01 01 Al 0 • • •'. 1p O 0 A O -8 0 -a ,fl 0 y l� l� l0 M 10 l� Vt Vl O 7 l- -• -• C •:d — • O Q OA O e C e ON 00 -• Vi A0 ,r 0 a; N N N 0 • 0 y w e M A0 r-- 0 0 10 O ON ...1 r- N 0 VI � y A y y V) N d 10 a1 M N 01 0 0 Cl 7 Vl 7 0 7 'C 2 N yl M N M N M 7 1--- 00 N O G ti y y N V y N y W EA EA v Pr r E V In O S H U a� • a"i ca H z < a . 4.4 CI 0 .0 A ) ' � • > .,. p 0 'tJ a e ° C4 74 n.a .1 414 C y _ y q = N o D o e • O L Q' 0 v 04 G u N 0 C7 > b e . E E y i... .b N O :� C y R 3 e N O >i at. 40 Is C. - O 'c7UP x0.P.� ;�� 0 p W aF y 0 U un Gz, C7 0:1 F" c.) cil CITY OF PORT ARTHUR, TEXAS Exhibit 3 Balance Sheet Governmental Funds September 30, 2010 Community Development Non Major Total Debt Block Capital Governmental Governmental General Service Grant FEMA Projects Funds Funds Assets Cash $ 368,281 $ 156,568 $ - $ - $ 597,754 $ 316,187 $ 1,438,790 Investments 5,000,000 3,000,000 - - 7,000,000 1,811,515 16,811,515 Due from other funds 26,550,162 - - - 981,321 198,632 27,730,115 Receivables (net of allowance for doubtful accounts): Property taxes 1,516,914 1,302,935 - - - - 2,819,849 Accounts 93,308 - 1,190,969 - - 958,385 2,242,662 Federal and state grants 121,115 - 498,464 4,354,433 700,000 3,105,374 8,779,386 Notes 732,246 - - - - - 732,246 Inventories - - - - - 116,515 116,515 Prepaid items 128,709 - - - - - 128,709 Total Assets $ 34,510,735 $ 4,459,503 $ 1,689,433 $ 4,354,433 $ 9,279,075 $ 6,506,608 $ 60,799,787 Liabilities and Fund Balances Liabilities Wages payable $ 1,455,572 $ - $ 18,090 $ - $ - $ 150,778 $ 1,624,440 Accounts payable 1,430,602 - 71,248 14,638 327,625 704,193 2,548,306 Due to other funds - - 571,889 4,339,795 - 3,512,244 8,423,928 Other liabilities - - - - - 89,483 89,483 Deferred revenue 15,388,001 1,250,976 1,028,206 - - 371,054 18,038,237 Total Liabilities 18,274,175 1,250,976 1,689,433 4,354,433 327,625 4,827,752 30,724,394 Fund Balances: Reserved for: Prepaid items 128,709 - - - - - 128,709 Debt service - 3,208,527 - - - - 3,208,527 Capital projects - - - - 8,951,450 - 8,951,450 Unreserved, reported in: General fund 16,107,851 - - - - - 16,107,851 Special revenue - - - - - 1,678,856 1,678,856 Total fund balances 16,236,560 3,208,527 - - 8,951,450 1,678,856 30,075,393 Total liabilities and fund balances $ 34,510,735 $ 4,459,503 $ 1,689,433 $ 4,354,433 $ 9,279,075 $ 6,506,608 Reconciliation to government -wide statement of net assets Capital assets used in governmental activities are not financial resources, and therefore, are not reported in these funds. 61,994,881 Other long -term assets are not available to pay for current period expenditures and, therefore, are deferred in these funds. 4,118,237 Internal service funds are used by management to charge the costs of certain capital assets, employee benefits and risk management activities to individual funds. The assets and liabilities of the internal service funds are included in the governmental activities in the statement of net assets. 15,049,769 Long term liabilities are not due and payable in the current period, and therefore are not reported in these funds (103,306,600) Net assets of governmental activities $ 7,931,680 See accompanying notes to the basic financial statements 19 CITY OF PORT ARTHUR, TEXAS Exhibit 4 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For the Year Ended September 30, 2010 Community Development Non major Total Debt Block Capital Governmental Governmental General Service Grant FEMA Projects Funds Funds Revenues Taxes: Property $ 7,944,360 $ 7,659,925 $ - $ - $ - $ - $ 15,604,285 Penalty and interest 335,569 - - - - - 335,569 Industrial district payments 26,520,879 - - - - - 26,520,879 Gross receipts taxes 4,414,729 - - - - - 4,414,729 Sales 8,108,987 - - - - - 8,108,987 Other taxes 127,176 - - - - 858,192 985,368 Licenses and pernits 702,347 - - - - - 702,347 User fees 354,501 - - - - 134,820 489,321 Fines and forfeitures 1,637,040 - - - - 156,713 1,793,753 Intergovernmental 487,639 - 1,324,477 (1,030,152) 950,000 9,328,302 11,060,266 Donations - - - - 25,000 7,665 32,665 Program revenue - - 35,513 - - 107,208 142,721 Interest revenue 217,333 30,369 - - 56,802 9,981 314,485 Miscellaneous 309,420 609,635 - 758,992 33,725 198,505 1,910,277 Total revenues 51,159,980 8,299,929 1,359,990 (271,160) 1,065,527 10,801,386 72,415,652 Expenditures Current: General government 10,988,142 - - 436,247 - 1,818,668 13,243,057 Culture and recreation 3,766,181 - - - - 813,433 4,579,614 Public safety 27,544,653 - - - 1,370,189 28,914,842 Community development - - 758,501 - - 2,249,701 3,008,202 Health and welfare 1,077,345 - - - - 1,784,925 2,862270 Public transportation - - - - - 3,242,534 3,242534 Public works 8,224,026 - - - - - 8,224,026 Capital outlay - - - - 7,553,541 - 7,553,541 Debt service: Principal retirement - 5,414,884 - - - - 5,414,884 Interest and fiscal charges - 3,252,051 - - - - 3,252,051 Total Expenditures 51,600,347 8,666,935 758,501 436,247 7,553,541 11,279,450 80,295,021 Excess (deficiency) of revenues over expenditures (440,367) (367,006) 601,489 (707,407) (6,488,014) (478,064) (7,879,369) Other financing sources (uses) Proceeds from bond issuance - - - - 8,092,240 - 8,092,240 Transfers in 7,969,327 - - - 1,326,679 895,951 10,191,957 Transfers out (3,552,051) (477,876) (601,489) - - (311,966) (4,943,382) Total other financing sources (uses) 4,417,276 (477,876) (601,489) - 9,418,919 583,985 13,340,815 Net changes in find balances 3,976,909 (844,882) - (707,407) 2,930,905 105,921 5,461,446 Fund balances, beginning ofyear as originally reported 11,416,518 4,053,409 - 707,407 6,020,545 1,503,957 23,701,836 I'riorperiod adjustment, Note V.F. 843,133 - - - - 68,978 912,111 Fund balances, beginning ofyear as restated 12,259,651 4,053,409 - 707,407 6,020,545 1,572935 24,613,947 Fund balances, end of year $ 16,236,560 $ 3,208,527 $ - $ - $ 8,951,450 $ 1,678,856 $ 30,075,393 See accompanpng notes to the basic financial statements 20 CITY OF PORT ARTHUR, TEXAS Exhibit 5 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of the Governmental Funds to the Statement of Activities For the year ended September 30, 2010 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds $ 5,461,446 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. 2,515,535 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 155,574 The issuance of long -term debt provides current financial resources to governmental funds, while the repayment of the principal of long -term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also governmental funds report the effect of issuance cost, premiums, discounts, and similar items when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long -term debt and related items. Bond principal retired 5,414,884 Procceds of Bond Issuance (8,092,240) Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. Increase in long term accrued compensated absences (479,693) Increase in net pension obligation (310,064) Decrease in other post employment benefits 68,348 Internal service funds are used by management to charge the costs of certain capital assets and employee benefits to individual funds. The net revenue of certain activities of internal service funds is reported with governmental activities. Change in net assets 461,700 Net amount allocated to business activities 567,445 Change in net assets of governmental activities $ 5,762,935 21 CITY OF PORT ARTHUR, TEXAS Exhibit 6 General Fund Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual (Budget Basis) For the Year Ended September 30, 2010 Variance with Budgeted Amounts Actual Final Budget Amounts Positive Original Final Budget Basis (Negative) Revenues Taxes: Property taxes $ 7,767,000 $ 7,767,000 $ 7,944,360 $ 177,360 Penalty and interest 314,000 314,000 335,569 21,569 Industrial district payments 24,000,000 24,000,000 23,040,879 (959,121) Gross receipts taxes 4,340,000 4,340,000 4,414,729 74,729 Sales tax 8,600,000 8,600,000 8,108,987 (491,013) Other taxes 93,000 93,000 127,176 34,176 Licenses and permits 652,700 652,700 702,347 49,647 User fees 356,200 356,200 354,501 (1,699) Fines and forfeitures 1,536,000 1,536,000 1,637,040 101,040 Intergovernmental 668,743 668,743 487,639 (181,104) Interest revenue 240,000 240,000 217,333 (22,667) Miscellaneous 90,000 90,000 309,420 219,420 Total revenues 48,657,643 48,657,643 47,679,980 (977,663) Expenditures Current: General government: Administration 2,024,143 3,020,142 2,392,120 628,022 City secretary 971,522 1,003,522 1,015,287 (11,765) City attorney 594,511 594,511 478,977 115,534 Finance 3,434,394 3,669,794 3,608,455 61,339 Human resources 648,878 648,878 529,142 119,736 One Block at at Time 238,848 721,131 487,350 233,781 Grants Management 606,683 - - - Planning 433,414 433,414 419,757 13,657 Community services 2,137,745 2,202,745 2,057,054 145,691 Culture and recreation: Civic center 525,969 541,969 520,409 21,560 Parks and recreation 2,357,696 2,357,696 2,052,103 305,593 Library 1,359,257 1,359,257 1,193,669 165,588 Public safety: Police 16,269,329 16,300,329 16,597,719 (297,390) Fire 10,600,423 10,918,423 10,946,934 (28,511) Health and welfare 1,230,661 1,356,171 1,077,345 278,826 Public works 8,455,200 9,455,200 8,224,026 1,231,174 Total expenditures 51,888,673 54,583,182 51,600,347 2,982,835 Excess (deficiency) of revenues over expenditures (3,231,030) (5,925,539) (3,920,367) 2,005,172 Other financing sources (uses): Transfers in 7,996,934 8,603,617 7,969,327 (634,290) Transfers out (2,916,100) (3,552,051) (3,552,051) - Total other financing sources (uses) 5,080,834 5,051,566 4,417,276 (634,290) Excess (deficiency) of revenues and other sources over expenditures and other uses 1,849,804 (873,973) 496,909 1,370,882 Fund balance, beginning of year - budget basis, as previously reported 28,416,518 28,416,518 28,416,518 - Prior period adjustment, note V.F. 843,133 843,133 843,133 - Fund balance, beginning of year - budget basis, as restated 29,259,651 29,259,651 29,259,651 - Fund balance, end of year - budget basis $ 31,109,455 $ 28,385,678 $ 29,756,560 $ 1,370,882 See accompanying notes to the basic financial statements 23 CITY OF PORT ARTHUR, TEXAS Exhibit 7 Statement of Net Assets Proprietary Funds September 30, 2010 Governmental Business Type Activities - Enterprise Funds Activities - Water and Solid Internal Sewer Waste Totals Service Funds :\ssets Current assets: Cash $ - $ - $ - $ 1,003,710 Investments 10,246,925 - 10,246,925 6,560,270 Due from other funds 112,806 - 112,806 2,926,418 Receivables (net, where applicable, of allowance for doubtful accounts) Accounts 1,887,472 1,526,999 3,414,471 33,516 Federal and state grants 3,048,958 - 3,048,958 - Inventories 408,925 - 408,925 53,598 Prepaid expense - - - 131,000 Total current assets 15,705,086 1,526,999 17,232,085 10,708,512 Noncurrent assets: Capital assets: Land 362,844 - 362,844 - Buildings 35,348,650 - 35,348,650 878,663 Improvements 106,776,168 - 106,776,168 - Equipment 3,392,011 926,655 4,318,666 22,855,783 Construction in progress 8,848,583 - 8,848,583 - Total capital assets 154,728,256 926,655 155,654,911 23,734,446 Accumulated depreciation (68,642,404) (425,120) (69,067,524) (17,345,627) Capital assets, net of accumulated depreciation 86,085,852 501,535 86,587,387 6,388,819 Total assets $ 101,790,938 $ 2,028,534 $ 103,819,472 $ 17,097,331 Liabilities Current liabilities: Wages payable $ 229,229 $ 104,432 $ 333,661 $ 20,953 Accounts payable 1,460,319 307,571 1,767,890 76,842 Due to other funds 19,418,993 1,524,079 20,943,072 1,402,339 Capital leases payable - current portion - - - 399,466 Compensated absences 137,812 55,142 192,954 14,377 Total current liabilities 21,246,353 1,991,224 23,237,577 1,913,977 Noncurrent liabilities: Refundable deposits 1,368,099 - 1,368,099 - Other liabilities 74,449 - 74,449 - Capital leases payable - - - 401,994 Accrued landfill closure costs - 2,127,796 2,127,796 - Compensated absences 683,811 229,380 913,191 14,241 Net pension benefit obligation 79,592 46,745 126,337 - Other post employment benefits 2,292,775 1,346,550 3,639,325 - Long-term risk liability - - - 2,306,057 Total non current liabilities 4,498,726 3,750,471 8,249,197 2,722,292 Total liabilities 25,745,079 5,741,695 31,486,774 4,636,269 Net Assets Invested in capital assets 86,085,852 501,535 86,587,387 5,587,359 Restricted for construction 10,246,925 - 10,246,925 - Unrestricted (20,286,918) (4,214,696) (24,501,614) 6,873,703 Total net assets $ 76,045,859 $ (3,713,161) 72,332,698 $ 12,461,062 Reconciliation to government -wide statement of net assets: Adjustment to reflect the consolidation of intemal service funds activities related to enterprise funds (2,588,707) Net assets of business -type activities $ 69,743,991 See accompanying notes to the basic financial statements 27 CITY OF PORT ARTHUR, TEXAS Exhibit 8 Statement of Revenues, Expenses and Changes in Fund Net Assets Proprietary Funds For the Year Ended September 30, 2010 Governmental Business -Type Activities - Enterprise Funds Activities - Water and Solid Internal Sewer Waste Total Service Funds Operating Revenues Charges for services $ 16,931,852 $ 7,653,032 $ 24,584,884 $ 13,729,660 Operating Expenses Personnel services 6,134,447 3,083,972 9,218,419 646,702 Other operating expenses 6,043,388 4,858,866 10,902,254 2,538,015 Depreciation 4,109,577 815 4,110,392 2,121,113 Health and life insurance - - - 7,876,708 Employee injury claims - - - 680,820 Other employee benefits - - - 402,841 Damage claims - - - 1,352,435 Landfill closure costs - 234,913 234,913 - Loss on uncollectable accounts 962,025 6,670 968,695 - Total operating expenses 17,249,437 8,185,236 25,434,673 15,618,634 Income from operations (317,585) (532,204) (849,789) (1,888,974) Nonoperating revenues (expenses) Interest revenue 53,355 - 53,355 64,561 Interest expense - - - (42,506) Federal and state grants 6,850,178 6,850,178 60,228 Gain (loss) on sale of capital assets - 6,555 6,555 29,965 Total nonoperating revenues (expenses) 6,903,533 6,555 6,910,088 112,248 Income before transfers 6,585,948 (525,649) 6,060,299 (1,776,726) Transfers in - - - 2,517,676 Transfers out (6,669,497) (817,504) (7,487,001) (279,250) Net transfers (6,669,497) (817,504) (7,487,001) 2,238,426 Change in net assets (83,549) (1,343,153) (1,426,702) 461,700 Net assets, beginning of year 76,129,408 (2,370,008) 11,999,362 Net assets, end of year $ 76,045,859 $ (3,713,161) $ 12,461,062 Reconciliation to government -wide statement of net assets: Adjustment to reflect the consolidation of intemal service fund activities related to enterprise funds (567,445) Increase in net assets of business -type activities $ (1,994,147) See accompanying notes to the basic financial statements 28 CITY OF PORT ARTHUR, TEXAS Exhibit 9 Statement of Cash Flows Proprietary Funds For the Year Ended September 30, 2010 Governmental Business -Type Activities- Enterprise Funds Activities - Water and Solid Internal Sewer Waste Total Service Funds CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users $ 13,025,386 $ 7,923,077 $ 20,948,463 $ 13,724,696 Payments to employees (5,975,878) (3,042,445) (9,018,323) (639,795) Payments to vendors (5,199,627) (4,710,831) (9,910,458) (13,146,284) Net cash provided by operating activities 1,849,881 169,801 2,019,682 (61,383) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Advances from other funds 3,860,547 641,148 4,501,695 (1,524,079) Transfers from other funds - - - 2,517,676 Transfers to other funds (6,669,497) (817,504) (7,487,001) (279,250) Net cash provided (used) by noncapital financing activities (2,808,950) (176,356) (2,985,306) 714,347 CASH FLOWS FROM CAPITAL AND RELATED ACTIVITIES Acquisition and construction of capital assets (8,446,021) - (8,446,021) (1,154,127) Principal paid on capital debt - - - (435,370) Interest paid on capital debt - - - (42,506) Federal and state capital grants 6,850,178 - 6,850,178 60,228 Proceeds from sale of assets - 6,555 6,555 83,167 Net cash (used) by capital and related financing activities (1,595,843) 6,555 (1,589,288) (1,488,608) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments 1,977,305 - 1,977,305 6,500,000 Purchase of investments - - - (6,560,270) Interest on cash and investments 53,355 - 53,355 64,561 Net cash provided by investing activities 2,030,660 - 2,030,660 4,291 Net (decrease) in cash (524,252) - (524,252) (831,353) Cash, beginning of year 524,252 - 524,252 1,835,063 Cash, end of year $ - $ - $ - $ 1,003,710 Reconciliation of income from operations to net cash provided by operating activities: Income from operations $ (317,585) $ (532,204) $ (849,789) $ (1,888,974) Adjustments to reconcile income from operations to net cash provided (used) by operating activities: Depreciation 4,109,577 815 4,110,392 2,112,112 Provision for doubtful accounts 962,025 6,670 968,695 - Change in assets and liabilities: (Increase) decrease in accounts receivable (936,144) 270,045 (666,099) 41,513 (Increase) in grants receivable (3,048,958) - (3,048,958) - (Increase) decrease in inventory (149,079) - (149,079) 82,838 (Increase) decrease in prepaid expense - - - 24,924 Increase in wages payable 52,569 19,626 72,195 1,735 Increase (decrease) in accounts payable 1,006,569 148,035 1,154,604 (223,635) Increase in deposits 78,636 - 78,636 - Increase in other liabilities (13,729) - (13,729) - Increase in landfill closure costs - 234,913 234,913 - Increase (decrease) in compensated absences 57,165 (6,780) 50,385 4,841 Increase in net pension benefit obligation 48,835 28,681 77,516 - Increase in long -term risk liability - - - (216,737) Net cash provided by operating activities $ 1,849,881 $ 169,801 $ 2,019,682 $ (61,383) See accompanying notes to the basic financial statements 29 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 I. Summary of Significant Accountinz Policies The financial statements of the City of Port Arthur, Texas (the "City ") have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard- setting body for establishing governmental accounting and financial reporting principles. The following represents the significant accounting policies used by the City. A. REPORTING ENTITY The City of Port Arthur, Texas (City) was incorporated under the laws of the State of Texas, May 30, 1898 and has operated under a Council - Manager form of government since March 8, 1932. As required by generally accepted accounting principles, the financial statements of the reporting entity include those of the City of Port Arthur (the primary government) and its component units. The component units discussed below are included in the City's reporting entity because of the significance of their operational or financial relationships with the City. Each discretely presented component unit is reported in a separate column in the government -wide financial statements (see note below for description) to emphasize that each is legally separate from the government. Discretely presented component units The Port Arthur Section 4A Economic Development Corporation [EDC), an entity legally separate from the City, is governed by a nine member board of directors appointed by the City Council. The EDC is funded by a one half cent additional sales tax dedicated to economic development activities, which was approved by voters November 7, 1995 and implemented April 1, 1996. The budget, financial reports, and bonds of the EDC must be approved by the City Council. The Pleasure Island Commission (Commission) was created by the City's Charter and an Act of the State of Texas to manage, control, maintain, operate, and develop lands owned by the City in and under Sabine Lake. The Commission is governed by a nine - member commission appointed by the City Council. Although it is a legally separate entity, the Commission's operations are limited solely to property owned by the City and the City Council must approve many of the Commissions transactions, such as the issuance of bonds. The notes to the financial statements include disclosures pertaining to the City as the primary government and also the Port Arthur Section 4A Economic Development Corporation as a component unit. There is not a separately issued financial statement. Disclosures related to the Pleasure Island Commission are not included in these disclosures unless otherwise noted. The complete financial report of the Pleasure Island Commission can be obtained directly from their administrative offices: Pleasure Island Commission, 520 Pleasure Pier Blvd., Port Arthur, Texas 77640. B. GOVERNMENT -WIDE AND FUND FINANCIAL STATEMENTS The government -wide financial statements (i.e. the statement of net assets and the statement of changes in net assets) report information on all of the activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business -type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given structure or segment, are offset by program revenues. Direct expenses are those that are clearly identifiable with a 31 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING AND BASIS OF PRESENTATION The government -wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenue to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures as well as expenditures related to compensated absences and claims and judgments are recorded only when payment is due. Property taxes, franchise taxes, licenses and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the government. The City reports the following major governmental funds: • The general fund is the government's primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. • The debt service fund accounts for the resources accumulated and payments made for principal and interest on long -term general obligation debt of governmental funds. • The community development block grant and the Federal Emergency Management Agency - fema funds each account for the activities under these respective grant programs. The fema fund accounts for costs and reimbursements related to hurricanes that affected the City from 2005 — 2008. • The capital projects fund accounts for the City's capital improvement plan. The City reports the following major proprietary funds: • The water and sewer fund accounts for the activities of the water and sewer utility of the City. This fund operates the water treatment and distribution functions, along with the wastewater collection and treatment. 32 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 • The solid waste fund accounts for the activities of the solid waste function of the City. The fund operates the municipal landfill, along with the collection of residential and commercial garbage, trash and green waste. Additionally, the City reports the following fund type: • Internal service funds account for fleet management, equipment replacement, and employee benefit costs. These costs are reimbursed, on a user cost basis, by departments. The internal service funds predominantly serve the governmental funds and are reported accordingly. Private- sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government -wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private- sector guidance for their business -type activities and enterprise funds, subject to this same limitation. The government has elected not to follow subsequent private- sector guidance. As a general rule the effect of interfund activity has been eliminated from the government -wide financial statements. Exceptions to this general rule are charges for administrative services between funds. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. 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. The principal operating revenues of the City's water and sewer and solid waste funds are from charges to customers for sales and services. Operating expenses from the enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non - operating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the government's policy to use restricted resources first, and then unrestricted resources as they are needed. D. ASSETS, LIABILITIES AND EQUITY 1. Deposits and Investments The City's cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with maturities of three months or less. Statutes of the State of Texas and policies adopted by City Council authorize the City to invest in obligations of the U.S. Treasury, securities issued by U.S. government agencies, bankers acceptances, repurchase agreements, certificates of deposit, and local government investment pools. Investments are stated at fair value in all funds. 2. Property Taxes Receivable The City's property taxes are levied annually, October 1, on the basis of assessed values as of January 1 of that calendar year, which are certified by the Jefferson County Appraisal District. Taxes are applicable to the fiscal year in which they are levied. They become delinquent on February 1 of the subsequent calendar year at which time the applicable property is subject to lien, and penalties and interest are assessed. 33 • CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 3. Receivables All receivables are reported at their gross value and, where appropriate, are reduced by the estimated portion that is expected to be uncollectible. 4. Interfund Receivables and Payables Interfund receivables and payables arise from interfund transactions and are recorded by all funds affected in the period in which transactions are executed. 5. Inventories and Prepaid Items Inventories are valued at cost using the weighted average cost method. Payments made to vendors for services that will benefit future accounting periods are recorded as prepaid items. 6. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets (e.g. roads, bridges, sidewalks and similar items) are reported in the applicable governmental or business -type activities columns in the government -wide financial statements. The government defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the assets' lives are not capitalized. Property, plant and equipment of the primary government are depreciated using the straight line method over the following estimated useful lives: Type of Asset Life Buildings 20 - 55 years Improvements 20 - 60 years Equipment 2 - 10 years 7. Compensated Absences The City's employees earn vacation and sick leave, which may be accumulated, subject to certain restrictions, until paid on termination. Employees may accumulate vacation, in excess of that earned in the current year, only with the approval of the City Manager. Upon termination, employees are paid for all unused vacation that has been accumulated. Accumulated vacation is expected to be liquidated with expendable available financial resources, and is reported as expenditure and a liability in the governmental or proprietary fund that will pay for it. The limits for sick leave accumulation vary by hire date and position classification. Civil service employees (police officers and firefighters) may accumulate sick leave without limit. Upon termination, they are paid for a maximum of 140 days. Non -civil service employees accumulate sick leave up to their limit, which is based upon their hire date. For employees hired before May 31, 1989, the limit is 140 days. For employees hired after that date the limit is 90 days. This accumulated sick leave is not payable upon termination, for non -civil service employees, until they have completed five (5) years of service. For non -civil service employees hired after January 1, 1996, the accumulated sick leave will be paid at 50% of their unused, accumulated balance. After ten (10) years of service, these employees will be paid for 1 of their unused, accumulated balance, up to a maximum of 60 days. Accumulated sick leave, attributable to governmental funds, that is not expected to be liquidated with available financial resources are reported as long term liabilities on the statement of net assets. No expenditure is reported in the fund financial statements for these amounts. Those amounts attributable to proprietary funds are recorded as expenses and liabilities in those funds as the benefits accrue to the employee. 34 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 8. Long - term Obligations 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. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. 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 financial 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. 9. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. II. Reconciliation of Government -wide Financial Statements Explanation of Reclassification Required on the Government -Wide Statement of Net Assets When governmental activities report debt that financed the acquisition of capital assets that business -type activities report, that debt is not considered to be capital- related debt of the governmental activities. Such debt should not be part of the calculation of net assets invested in capital assets, net of related debt within that reporting unit. However, when the total reporting entity is presented as the reporting unit, the debt is related to the capital assets within that reporting unit. Thus reconciliation is necessary as follows: Primary Government Governmental Business -type Net Assets Activities Activities Reclassification Total Invested in capital, net of related debt $ 52,886,404 $ 86,587,387 $ (59,184,164) $ 80,289,627 Restricted for: Debt Service 3,208,527 - 3,208,527 Capital Projects 8,951,450 10,896,172 19,847,622 Unrestricted (57,114,701) (27,739,568) 59,184,164 (25,670,105) Total Net Assets $ 7,931,680 $ 69,743,991 $ - $ 77,675,671 Explanation of Certain Differences Between the Governmental Funds Balance Sheet and the Government -wide Statement of Net Assets The governmental fund balance sheet includes reconciliation between fund balance -- total governmental funds and net assets - governmental activities as reported in the government -wide financial statement of net assets. One element of that reconciliation explains, "long -term liabilities, including bonds payable are not due and payable in the current period and therefore are not reported in the funds." The details of this $102,410,966 difference are as follows: 35 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Bonds payable $ 80,310,000 Compensated absences 7,933,954 Net pension obligation - TMRS 505,348 Other post employment benefits 14,557,298 Net adjustment to reduce fund balances -total governmental funds to arrive at net assets - governmental activities $ 103,306,600 Explanation of Certain Differences Between the Governmental Funds Statement of Revenue, Expenditures and Changes in Fund Balance and the Government -wide Statement of Activities The governmental fund statement of revenue, expenditures and changes in fund balances includes reconciliation between net changes in fund balances — total governmental funds and changes in net assets of governmental activities as reported in the government -wide statement of activities. One element of the reconciliation explains, "Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense." The details of this $2,515,535 difference are as follows: Capital outlay $ 9,858,091 Depreciation expense (7,342,556) Net adjustment to increase fund balances- total governmental funds to arrive at net assets - governmental activities $ 2,515,535 III. Stewardship, Compliance and Accountability A. BUDGETARY INFORMATION Annual budgets are adopted on a basis consistent with generally accepted accounting principles (GAAP) for the following governmental fund types of the primary government: the General Fund, the Debt Service Fund, the Library Special Fund, the Golf Course Fund, the Police Special Fund, Municipal Court Technology Fund, the Hotel Occupancy Tax Fund, and the Transit System Fund. The Capital Projects fund is budgeted on a project basis, rather than an annual basis. The remaining governmental type funds are not budgeted. Budgets for the Enterprise Funds and the Internal Service Funds are adopted on a basis not consistent with generally accepted accounting principles because the budget presents capital outlays as expenditures and there is no provision for depreciation expense. All operating funds of the Port Arthur Section 4A Economic Development Corporation have annual budgets adopted on a basis consistent with GAAP. On or before August 31 of each year the City Manager presents the City Council with a proposed budget for the ensuing fiscal year. The Council holds public hearings and a final budget must be prepared and adopted by September 30. Budgets are appropriated by fund and department. The legal level of control is the department level. The City Council made eleven supplementary budgetary appropriations during the year. These ordinances added $7.3 million in funding for various capital projects, development projects, equipment purchases, additional personnel, and unanticipated operating cost increases. The City's department heads may make transfers of appropriations within department line items with the City Manager's approval. Transfers between departments require the approval of the City Council. General Fund Statement of Revenues, Expenditures and Changes in Fund Balances, Budget and Actual (Budget Basis) is presented as Exhibit 6, on Page 23, of this report. The following is a reconciliation of the differences between budget and GAAP basis: 36 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Actual amount (budgetary basis) of industrial revenue received in fiscal 2010 as reported on Exhibit 6 $ 23,040,879 Year one of the five year amortization of prepaid industrial payments received in fiscal 2009 recorded as deferred revenue 3,480,000 GAAP Basis industrial revenue as reported on Exhibit 4 $ 26,520,879 Actual fund balance (budget basis) as reported on Exhibit 6 $ 29,756,560 Balance of advance industrial payments, recorded as deferred revenue for GAAP purposes (13.520.000) GAAP Basis fund balance as reported on Exhibit 4 $ 16,236,560 The City uses 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. Encumbrances outstanding at year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because the commitments will be honored in the subsequent year. Appropriations lapse at September 30. B. EXCESS OF EXPENDITURES OVER APPROPRIATIONS For the year ended September 30, 2010, expenditures exceeded appropriations in the following departments of the City of Port Arthur: Department Budget Actual Variance City Secretary $ 1,003,522 $ 1,015,287 $ (11,765) Police 16,300,329 16,597,719 (297,390) Fire 10,918,423 10,946,934 (28,511) These expenditures were funded through savings in other General Fund departments. In the General Fund total expenditures were $2,982,835 less than the budget, as amended. C. DEFICIT FUND EQUITY The following funds had deficit fund equity, or net assets, as of September 30, 2010: Amount Health Grants Fund $ 491,499 Neighborhood Stabilization Grant 2,027 Transit System Fund 3,787 Solid Waste Fund 2,370,008 Equipment Services Fund 1,369,474 37 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 IV. Detailed Notes on all Funds A. CASH AND INVESTMENTS For the purposes of managing cash and investments, the funds of the Port Arthur Section 4A Economic Development Corporation (EDC) are pooled with those of the City. At year end, the carrying amount of these deposits was $3,658,740 and the bank balance was $5,552,354. Of the bank balance, 100% was covered by federal depository insurance or by collateral held by the City's agent in the City's name. The carrying amount of deposits for the Pleasure Island Commission, a discretely presented component unit, was $1,306,765. All balances are entirely insured or collateralized with securities held by a financial institution in the Commission's name. At year end, the City's investment balances, including funds of the Port Arthur Section 4A Economic Development Corporation, were as follows: Weighted Average Fair Maturity Investment Type Value (days) Iligh yield deposits $ 4,687,582 1 Cert ificates of Deposit 500,000 248 Federal agency coupon secrurities 24,606,668 721 Texas Local Government Investment Pool (Tex Pool) 10,800,916 1 Total fair value $ 40,595,166 Portfolio weighted average maturity 440 Interest rate risk. In accordance with its investment policy, the City manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to less than 366 days for operating funds. Credit risk. The State of Texas authorizes investment instruments allowed for local government funds. The City's investment policy further restricts those authorized investments, maintaining safety and preservation of principal as the primary goal of the policy. The City's investments include deposits in the Texas Local Government Investment Pool ( TexPool). Under the TexPool Participation Agreement, administrative and investment services to TexPool are provided by Federated Investors Inc. through an agreement with the State of Texas Comptroller of Public Accounts. The State of Texas Comptroller of Public Accounts is the sole officer, director and shareholder of the Texas Treasury Safekeeping Trust Company authorized to operated TexPool. TexPool operates on a $1 net asset value basis. In order to maintain a stable $1 price of the fund, the pool will sell portfolio holdings if the ratio of market value of the portfolio divided by the book value of the portfolio is less that .995 or greater than 1.005. Tex Pool is rated AAA by Standard and Poor's. Concentration of credit risk. The City's investment policy limits investments from a specific issuer, and by investing in instruments of varying maturities. Custodial credit risk In the case of deposits, this is the risk that in the event of a bank failure, the government's deposits may not be returned to it. The City does not have a deposit policy for custodial risk. As of September 30, 2010, none of the City's deposits were subject to custodial credit risk. For an investment, this is the risk that, in the event of the failure of counterparty, the government will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The City limits this risk by contracting with a third party custodian for securities. This bank holds the securities in the City's name which are evidenced by safekeeping receipts of the institution. 38 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 B. RECEIVABLES Receivables as of September 30, 2010 for the City's individual major funds and non -major and internal service funds in the aggregate, including applicable allowances for uncollectible amounts, are as follows: Nonmajor Proprietary Governmental General Debt Service Funds and Other Funds Total Receivables: Taxes $ 1,784,605 $ 1,532,865 $ - $ - $ 3,317,470 Accounts 4,693,680 11,888,437 2,182,870 18,764,987 Intergovernmental 121,115 3,048,958 8,537,196 11,707,269 Other 952,247 - - - 952,247 Gross receivables 7,551,647 1,532,865 14,937,395 10,720,066 34,741,973 Less: allowance for uncollectibles (5,088,064) (229,930) (8,473,966) - (13,791,960) Net total receivables $ 2,463,583 $ 1,302,935 $ 6,463,429 $ 10,720,066 $ 20,950,013 Governmental funds report deferred revenues in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue and unearned revenue reported in the governmental funds were as follows: Delinquent property taxes receivable (general and debt service funds) $ 2,718,977 Advance industrial district payments (general fund) 13,920,000 Grant activity (special revenue funds) 1,389,206 Total deferred revenue $ 18,028,183 C. CAPITAL ASSETS Capital asset activity of the primary government for the year ended September 30, 2010 was as follows: Beginning Ending Balance Increase Decrease Balance Governmental activities Capital assets, not being depreciated Land $ 2,474,132 $ - $ - $ 2,474,132 Construction in process 7,763,919 8,015,994 (2,666,715) 13,113,198 Total capital assets, not being depreciated 10, 238, 051 8,015,994 (2,666,715) 15, 587, 330 Capital assets, being depreciated Buildings 18,968,558 1,495,544 - 20,464,102 Improvements 8,526,264 - - 8,526,264 Infrastructure 248,492,305 1,171,171 - 249,663,476 Equipment 39,087,569 2,996,225 (902,635) 41,181,159 Total capital asssets, being depreciateed 315, 074, 696 5,662,940 (902, 635) 319, 835, 001 Less: accumulated depreciation for: Buildings (12,313,807) (490,926) - (12,804,733) Improvements (4,151,622) (868,051) - (5,019,673) Infrastructure (216,226,766) (5,073,349) - (221,300,115) Equipment (25,741,201) (3,022,343) 849,434 (27,914,110) Total accumulated depreciation (258, 433, 396) (9,454,669) 849,434 (267, 038, 631) Total capital assets, being depreciated, net 56,641,300 (3,791,729) (53,201) 52,796,370 Governmental activities, capital assets, net $ 66,879,351 $ 4,224,265 $ (2,719,916) $ 68,383,700 39 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Beginning Ending Balance Increase Decrease Balance Business type activities Capital assets, not being depreciated Land $ 362,843 $ - $ - $ 362,843 Construction in process 1.080262 8,356,211 (587,889) 8,848,584 Total capital assets, not being depreciated 1,443,105 8,356,211 (587,889) 9,211,427 Capital assets, being depreciated Buildings 35,348,650 - - 35,348,650 Improvements 106,188,279 587,889 - 106,776,168 Equipment 4,228,856 89,810 - 4,318,666 Total capital asssets, being depreciated 145,765,785 677,699 - 146,443,484 Less: accumulated depreciation for: Buildings (12,661,528) (1,048,708) - (13,710,236) Improvements (50,625,116) (2,934,961) - (53,560,077) Equipment (1,670,488) (126,723) - (1,797,211) Total accumulated depreciation (64,957,132) (4,110,392) - (69,067,524) Total capital assets, being depreciated, net 80,808,653 (3,432,693) - 77,375,960 Business type activities, capital assets, net $ 82,251,758 $ 4,923,518 $ (587,889) $ 86,587,387 Depreciation expense was charged to functions /programs of the primary government as follows: Governmental activities: General government $ 403,461 Public safety 184,086 Public works 5,842,530 Community development 168,754 Culture and recreation 244,781 Health and welfare 50,187 Public transportation 448,757 Captial assets held by the govemment's internal service funds are charged to the various functions based on their usage of assets 2,112,113 Total depreciation expense - governmental activities $ 9,454,669 Business type activities: Water and sewer $ 4,109,577 Solid waste 815 Total depreciation expense - buisness type activities $ 4,110,392 Construction commitments The primary government has active construction projects as of September 30, 2010. At year end, the City's major commitments with contractors are as follows: Contract Spentthrt Remaining Proiect Amount 9/30/2010 Commitment Texas Water Development Board / ARRA Sanitary Sewer Rehab Projects $ 15,404,916 $ 6,917,385 $ 8,487,531 Police Station Remodel 2,246,511 102,354 2,144,157 Recreation Center Improvements 1,449,194 626,617 822,577 40 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Port Arthur Economic Development Corporation Activity for the capital assets of the Port Arthur Economic Development Corporation, for the year ended September 30, 2010, was as follows: Beginning Ending Balance Increase Decrease Balance Governmental activities Capital assets, not being depreciated Land $ 5,779,130 $ - $ (21,499) $ 5,757,631 Total capital assets, not being depreciated 5,779,130 - (21,499) 5,757,631 Capital assets being depreciated Building 315,480 - - 315,480 Equipment 35,826 - - 35,826 Less: accumulated depreciation (34.361) (19,343) - (53,704) Total capital assets being depreciated 316,945 (19,343) - 297,602 Governmental activites, capital assets, net $ 6,096,075 $ (19,343) $ (21,499) $ 6,055,233 Pleasure Island Commission Activity for the capital assets of the Pleasure Island Commission, for the year ended September 30, 2010, was as follows: Beginning Ending Balance Increase Decrease Balance Governmental Activities Capital assets, being depreciated: Buildings and improvements $ 4,789,225 $ - $ - $ 4,789,225 Total capital assets being depreciated 4,789,225 - - 4,789,225 L ess: Accumulated depreciation for.: Buildings and improvements (1,785,789) (173,496) - (1,959,285) Total accumulated depreciation (1,785,789) (173,496) - (1,959,285) Governmental Activities, capital assets, net $ 3,003,436 $ (173,496) $ - $ 2,829,940 Business -type Activities Capital assets, not being depreciated: Construction in progress $ 81,431 $ - $ (81,431) $ - Total capital assets, not being depreciated 81,431 - (81,431) - Capital assets, being depreciated: Buildings and improvements 4,104,255 - - 4,104,255 Equipment 243,660 - - 243,660 Total capital assets being depreciated 4,347,915 - - 4,347,915 Less: accumulated depreciation for: Buildings and improvements (1,571,470) (119,914) - (1,691,384) Equipment (218,758) (9,326) - (228,084) Total accumulated depreciation (1,790,228) (129,240) - (1,919,468) Total capital assets, being depreciated, net 2,557,687 (129,240) - 2,428,447 Business -type activities, capital assets, net 2,557,687 (129,240) (81,431) 2,428,447 Total assets $ 5,561,123 $ (302,736) $ - $ 5,258,387 41 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 D. INTERFUND PAYABLES, RECEIVABLES AND TRANSFERS Interfund balances resulted from a time lag between the dates that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made. These balances also include the amount of working capital loans made from the general fund and debt service fund that are expected to be collected in the subsequent year. The composition of interfund balances as of September 30, 2010, is as follows: Interfund Interfund Receivables Payables Governmental Fund Types: General fund $ 26,550,162 $ - Community development block grant - 571,889 FEMA - 4,339,795 Capital Projects 981,321 - Nonmajor funds 198,632 3,512,244 Governmental total 27,730,115 8,423,928 Proprietary Fund Types: Enterprise Funds Water and Sewer fund 112,806 19,418,993 Solid Waste Fund - 1,524,079 Enterprise Funds total 112,806 20,943,072 Internal service funds 2,926,418 1,402,339 Proprietclv total 3,039,224 22,345,411 Total interfund receivables and payables $ 30,769,339 $ 30,769,339 Interfund transfers are budgeted cost allocations and reimbursements between funds for items such as administrative and insurance reimbursements. Certain transfers also fund cash matches as required under grants. Transfers In Transfers Out Governmental Fund Types: General fund $ 7,969,327 $ 3,552,051 Debt service fund - 477,876 Community development block grant - 601,489 Capital Projects 1,326,679 - Nonmajor funds 895,951 311,966 Governmental total 10,191,957 4,943,382 Proprietary Fund Types: Enterprise Funds Water and Sewer fund - 6,669,497 Solid Waste Fund - 817,504 Enterprise Funds total - 7,487,001 Internal service funds 2,517,676 279,250 Proprietayfunds total 2,517,676 7,766,251 Total interfund transfers $ 12,709,633 $ 12,709,633 42 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 E. LEASES The City has entered into lease agreements as lessee for financing the acquisition of equipment. These lease agreements qualify as capital leases for accounting purposes and have been recorded at the present value of the future minimum lease payments as of the inception in the internal service funds. The assets acquired through capital leases are as follows: Asset Telephone system $ 505,000 Equipment 1,300,000 Fire apparatus 449,144 Total $ 2,254,144 The future minimum lease payments and the net present value of these minimum lease payments as of September 30, 2010, were as follows: Year ending Telephone Fire September 30 System Equipment Apparatus Total 2011 $ 84,051 $ 287,087 $ 54,305 $ 425,443 2012 - 71,772 54,305 126,077 2013 - - 54,305 54,305 2014 - - 54,306 54,306 2015 - - 54,306 54,306 2016 - - 54,306 54,306 2017 - - 54,306 54,306 2018 - - 54,306 54,306 Total 84,051 358,859 434,445 877,355 Interest (3,713) (9,323) (62,859) (75,895) Net present value $ 80,338 $ 349,536 $ 371,586 $ 801,460 F. LONG - TERM DEBT General Obligation Debt. The City issues general obligation bonds and certificates of obligation to provide funds for the acquisition and construction of major capital facilities. General obligation bonds have been issued for both governmental and business -type activities. The original amount of general obligation bonds issued in prior years was $115,040,000. General obligation bonds are direct obligations and pledge the full faith and credit of the City. General obligation bonds of $80,310,000 are currently outstanding. The annual debt service requirements to maturity, for all bonds, are as follows: Year Ended Total Setpember 30 Principal Interest 2011 $ 6,085,000 $ 3,188,397 2012 5,835,000 2,950,549 2013 6,050,000 2,725,087 2014 6,325,000 2,480,230 2015 5,545,000 2,219,388 2016 -2020 29,075,000 7,554,912 2021 -2025 14,695,000 2,427,063 2026 - 2030 6,700,000 542,109 Total $ 80,310,000 $ 24,087,735 43 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 At September :30, 2010, bonds payable consisted of the following individual issues: 2010 General Obligation Bonds, $8,000,000,3.0% to 4.3 %, $275,000 to $600,000, annually to 2030 $ 8,000,000 2008 General Obligation Bonds, $9,000,000, 3.5% to 5.0%, $170,000 to $665,000 annually to 2028; $3,000,000 of which is funded by the City of Port Arthur Section 4A Economic Development Corporation 8,520,000 2007 Certificates of Obligation, $10,000,000, 4.05 %, $330,000 to $715,000 annually to 2028 9,325,000 2006 General Obligation Refunding Series, $8,585,000, 4.0%, $0 to $1,540,000 annually to 2022 8,425,000 2005 General Obligation Refunding Series, $11,280,000,3.25% to 5.0%, $0 to $1,125,000 annually to 2021 9,670,000 2003 General Obligation Refunding Series, $18,225,000, 2.0% to 4.0%, $1,050,000 to $1,435,000 annually to 2020 12,150,000 2002C Certificates of Obligation Series, $5,000,000, 4.25% to 5.1 %, $180,000 to $395,000 annually to 2022, funded by the City of Port Arthur Section 4A Economic Development Corp 3,590,000 2002B Certificates of Obligation Series, $17,000,000, 4.125% to 5.0%, $610,000 to $1,335,000 annually to 2022 6,185,000 2002A Certificiates of Obligation Series, $15,000,000, 0.75% to 4.2 %, $605,000 to $1,050,000 annually to 2022 10,185,000 2001 General Obligation Refunding Series, $10,550,000, 3.875% to 4.375 %, $770,000 to $1,075,000 annually to 2014 3,985,000 2000 Certificates of Obligation Series, $2,400,000, 4.7% to 5.124 %, $225,000 to $275,000 annually to 2011 275.000 $ 8 2 3 12 0 0Q Changes in long -term liabilities Beginning Ending Due within 1 Balance Additions Reductions Balance Year Governmental activities: Bonds payable General obligation bonds $ 45,980,000 $ 8,000,000 $ (3,230,000) $ 50,750,000 $ 3,795,000 Certificates of obligation 31,745,000 - (2,185,000) 29,560,000 2,290,000 Total bonds payable 77,725,000 8,000,000 (5,415,000) 80,310,000 6,085,000 Capital leases 1,236,830 - (435,370) 801,460 399,466 Compensated absences 7,546,370 1,619,507 (1,134,957) 8,030,920 - Governmental activities Long - Term Liabilities $ 86,508,200 $ 9,619,507 $ (6,985,327) $ 89,142,380 $ 6,484,466 Business -type activities: Compensated absences 1,055,760 292,616 (242,231) 1,106,145 192,954 Business -type activities Long - Term Liabilities $ 1,055,760 $ 292,616 $ (242,231) $ 1,106,145 $ 192,954 44 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Internal service funds predominantly serve the governmental funds. Accordingly, long -term liabilities for them are included as part of the above totals for governmental activities. At the year end, $28,618 of internal service funds compensated absences and $801,460 of capital lease obligations are included in the above amounts. Also, for the governmental activities, claims and judgments and compensated absences are generally liquidated by the General Fund. Arbitrage Rebate Liability The Tax Reform Act of 1986 established regulations for the rebate to the federal government of arbitrage earnings on certain local government bond issued after December 31, 1985, and all local governmental bonds issued after August 31, 1986. Issuing governments must calculate any rebate due and remit the amount due at least every five years. As of September 30, 2010, there is no estimated liability for arbitrage rebate. The debt service and residual balances in the capital project funds have typically been used to liquidate the arbitrage liability in previous years. Port Arthur Economic Development Corporation The Port Arthur Economic Development (EDC) issued a sales tax revenue bond, Series 2003 to provide funds for the development of infrastructure related to development projects. This issue, $ 8.05 million, pledged the sales tax revenue of the EDC. The issue is payable at $220,000 to $570,000, 3% to 5 %, to 2024, the balance outstanding at September 30, 2010, $6,110,000. As stated above, the EDC funds the City's 2002C Certificates of Obligation debt service, and 33% of the debt service for the 2008 General Obligation Bond. V. Other Information A. RISK MANAGEMENT The City is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters for which the City maintains a limited risk management program. Claims in excess of the self - insured retention amounts are covered through third -party limited- coverage insurance policies. The City also maintains a limited risk management program for workers' compensation. Premiums are paid into the Employee Benefit Fund and the General Liability Fund by all other funds and are available to pay claims, claim reserves and administrative costs, and insurance premiums. These interfund premiums are recorded as revenue in the Employee Benefit Fund and the General Liability Fund as they are Internal Service Funds. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Worker's General Compensation Liability Total Estimated liability, 9/30/08 $ 722,191 $ 529,192 $ 1,251,383 fiscal 2009 claims incurred 1,062,431 2,287,805 3,350,236 fiscal 2009 claims paid (946,145) (1,132,680) (2,078,825) Fstimated liability, 9/30/09 $ 838,477 $ 1,684,317 $ 2,522,794 fiscal 2010 claims incurred 762,920 1,352,435 2,115,355 fiscal 2010 claims paid (844,537) (1,486,555) (2,331,092) Estimated liability, 9/30/10 $ 756,860 $ 1,550,197 $ 2,307,057 45 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Liabilities of the funds are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported (IBNRs). The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly claims are reevaluated periodically to consider the effects of inflation, recent claims trends (including frequency and amount of pay- outs), and other economic and social factors. The estimate of claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. An excess coverage insurance policy covers claims in excess of $300,000. Settlements have not exceeded coverages for each of the past three fiscal years. B. CONTINGENT LIABILITIES The City is defendant in various lawsuits arising in the ordinary course of its municipal and enterprise activities. In the opinion of City management, the outcome of all pending litigation will not materially affect the financial position of the City. Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenditures which may be disallowed by the grantor cannot be determined at this time although the City expects such amounts, if any, to be immaterial. C. OTHER POSTEMPLOYMENT BENEFITS Retiree Health Insurance Program Program Description In addition to the pension benefits described in Note D that follows, as required by state law, the City makes available healthcare benefits to all employees who retire from the City and who are eligible to receive benefits from a City sponsored retirement program (Texas Municipal Retirement System, or the Port Arthur Firemen's Relief and Retirement Fund) through a single - employer defined benefit healthcare plan. This Program provides lifetime health insurance for eligible retirees, their spouses and dependents through the City's group health insurance plan, which covers both active and retired participants. Benefit provisions are established by management. Employees retiring on or before December 31, 2010 are allowed to remain in the health insurance plan at approximately 30% of the expected under age 65 cost or 75% of the expected over age 65 costs. These costs (a.k.a. retiree contribution rates) are calculated separately for retirees not eligible for Medicare (under age 65) and retirees eligible for Medicare (over age 65). Employees retiring on or after January 1, 2011 contribute a tiered percentage of the retiree contribution rates based upon their years of City service at retirement. The percentage ranges from 50% for retirees with at least 30 years of City service to 100% for retirees with less than 20 years of City service. Employees hired on or after November 1, 2010 are required to contribute 100% of the retiree contribution rates upon retirement. For financial reporting purposes, the Retiree Health Insurance Program is accounted for in the Employee Benefit Fund, an internal service fund. Funding Policy Current retirees over age 65 contribute $163 per month effective October 1, 2009 and $179 effective October 1, 2010 or approximately 75% of their expected cost. Current retirees under age 65 contribute $206 per 46 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 month effective October 1, 2009 and $226 effective October 1, 2010 or approximately 30% of their expected cost. Future retirees who retire on or after January 1, 2011 will contribute a percentage ranging from 50% to 100% of their expected costs. Effective January 1, 2011, the expected cost is $248 per month for retirees over age 65 and $833 for retirees under age 65. Costs for retiree spouses and dependents are also similarly subsidized, in part, by the City. For fiscal year 2010, the City finances this program on a pay -as- you -go basis. As of September 30, 2010 the City had 173 retirees participating in this plan,. In fiscal year 2010, the Program incurred actual retiree costs of $2,285,541 offset by retiree contributions of $555,397 for a net cost to the City of $1,730,144. Annual OPEB Cost and Net OPEB Obligation The City's annual other postemployment benefit (OPEB) cost (expense) for the Retiree Health Insurance Program is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover benefits earned each year (i.e. normal costs) and an amortization of the unfunded actuarial liability (UAAL). The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City's net OPEB obligation. 9/30/2008 9/30/2009 9/30/2010 Annual required contribution (ARC) $ 10,041,987 $ 10,041,987 $ 1,657,081 Interest on Net OPEB obligation - - 727,865 Adjustment to ARC - - (723.150) Annual OPEB cost (expense) $ 10,041,987 $ 10,041,987 $ 1,661,796 Contributions made (939,553) (947,798) (1,730,144) Change in OPEB obligation $ 9,102,434 $ 9,094,189 $ (68,348) Net OPEB - beginning of year - 9,102,434 18,196,623 Net OPEB - end of year $ 9,102,434 $ 18,196,623 $ 18,128,275 Precentage of Fiscal year Discount Annual OPEB Net OPEB ended Rate Cost OPEB Cost Obligation Contributed 9/30/2006 N/A N/A N/A N/A 9/30/2007 N/A N/A N/A N/A 9/30/2008 4% $ 10,041,987 9.36% $ 9,102,434 9/30/2009 4% 10,041,987 9.44% 18,196,623 9/30/2010 4% 1,661,796 104.11% 18,128,275 Actuarial valuations on an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 47 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short- term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long -term perspective of the calculations. In the October 1, 2009 actuarial valuation, the Projected Unit Credit actuarial cost method was used. The actuarial assumptions used included a 4% discount rate, 4% expected long -term investment return and annual healthcare trend rates of 10% initially declining 'h% annually to an ultimate rate of 5% after 10 years. The initial UAAL and subsequent unanticipated changes in UAAL are being amortized over closed 30 -year periods in amounts that increase 3% per year (assumed payroll growth rate). Supplemental Death Benefit The City also participates in the cost sharing multiple - employer defined benefit group -term life insurance plan operated by the Texas Municipal Retirement System (TMRS) known as the Supplemental Death Benefit Fund (SDBF). The City elected, by ordinance, to provide group -term life insurance coverage to both current and retired employees (with the exception of firefighters). The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. The city contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one -year term life insurance. The funding policy for the SBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to pre -fund retiree term life insurance during employees' entire careers. Schedule of Contributions and Rates Calendar ARC Actual % of ARC Actual Year Rate Rate Contributed Contributions 2007 0.10% 0.10% 100% $ 21,349 2008 0.10% 0.10% 100% 25,073 2009 0.10% 0.10% 100% 25,827 2010 0.825% 0.825% 100% 22,783 D. EMPLOYEE RETIREMENT SYSTEMS Texas Municipal Retirement System (TMRS) Plan Description. The City provides pension benefits for all of its eligible employees, with the exemption of firefighters, through a non - traditional, joint contributory, hybrid defined benefit plan in the state -wide Texas Municipal Retirement System (TMRS), an agent multi- employer public employee retirement system. The plan provisions that have been adopted by the city are within the options available in the governing state statutes of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained by writing to TMRS, P.O. Box 149153, Austin, TX 78714 -9153 or by calling 800 - 924 -8677; in addition, the report is available on the TMRS' website at www.TMRS.com. 48 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 The plan provisions are adopted by the City Council, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Plan provisions for the City of Port Arthur were as follows: Plan Year 2008 Plan Year 2009 Employee deposit rate 5% 5% Matching ratio (city to employee) 2 to 1 2 to 1 Years required for vesting 10 10 Service retirement eligibility (expressed as age /years of service) 60/10,0/20 60/10,0/20 Updated Service Credit 100% Repeating, 100% Repeating, Transfers Transfers Annuity Increase (to retirees) 70% of CPI Repeating 70% of CPI Repeating Contributions. Under the state law governing TMRS, the City's contribution rate is annually determined by the actuary, using the Projected Unit Credit actuarial cost method. This rate consists of the normal cost contribution rate and the prior service contribution rate, which is calculated to be a level percentage of payroll from year to year. The normal cost contribution rate finances the portion of an active member's projected benefit allocated annually; the prior service contribution rate amortizes the unfunded actuarially liability over the applicable period. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity Increases. The City contributed to the TMRS Plan at an actuarially determined 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 serves as the basis for the rate and the calendar year when the rate goes into effect. The annual pension cost and the net pension obligation are as follows: Annual Required Contribution (ARC) $ 5,073,226 Interest on Net Pension Obligation - Adjustment to the ARC - Annual Penison Cost (APC) 5,073,226 Contributions Made (4,685,647) Increase in net pension obligation 387,579 Net Pension Obligation, beginnning of the year 244,106 Net Pension Obligation, end of the year $ 631,685 49 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 Annual Actual Precentage of Fiscal year Pension Cost Contribtuion ARC Net OPEB ended JARC1 Made Contributed Obligation 9/30/2004 $ 2,545,329 $ 2,545,329 100.00% $ - 9/30/2005 2,992,314 2,992,314 100.00% 9/30/2006 3,020,170 3,020,170 100.00% - 9/30/2007 3,074,361 3,074,361 100.00% - 9/30/2008 3,496,139 3,496,139 100.00% - 9/30/2009 4,460,181 4,216,075 95.76% 244,106 9/30/2010 5,073,226 4,685,646 92.36% 387,579 A summary of actuarial assumptions is as follows: Actuarial Valuation Date December 31, 2009 Actuarial Cost Method Projected Unit Credit Amortization Method Level Percent of Payroll Remaining Amortization Period 28 Years — Closed Period Asset Valuation Method 10 year smoothed market Investment Rate of Return 7.5% Payroll Growth Varies by age and service Includes Inflation At 3 % Cost -of- Living Adjustments 2.1% The funded status as of December 31, 2009, the most recent actuarial valuation date, is as follows: UAAL as a Actuarial Actuarial Actuarial Percentage of Valuation Value of Accrued Funded Unfunded AAL Covered Date Assets Liability(AAL) Ratio UAAL Covered Payroll Payroll 12/31/2007 $ 56,671,406 $ 92,838,703 61.0% $ 36,167,297 $ 22,849,860 158.28% 12/31/2008 $ 56,101,664 $ 94,396,612 59.4% $ 38,294,948 $ 25,708,137 148.96% 12/31/2009 $ 58,868,681 $ 97,757,164 60.2% $ 38,888,483 $ 27,175,618 143.10% The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi -year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits. Port Arthur Firemen's Relief and Retirement Fund (Fund) Plan Description. The fund is established pursuant to the Texas Local Fire Fighters Retirement Act ( TELFRA). TELFRA provides for a Board of Trustees to administer a single - employer defined benefit pension plan covering all City firefighters. The plan is an independent entity for financial reporting purposes. The Board (composed of the Mayor and the Director of Finance as ex- officio Trustees, three firemen elected by a majority vote of firemen, and two citizens who must be appointed unanimously by the first five trustees), is subject to administrative supervision by the State Firemen's Pension Commissioner. The City does not hold title to any of the Fund's assets, have right to any surpluses, or responsibility for any deficits. The City's contribution rate is set by the City Charter to be the same as the rate required by the 50 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 TMRS. The fund issues its own stand alone financial statements, prepared using the accrual basis of accounting, which can be obtained from the fund's office at P.O. Box 1089, Port Arthur, Texas 77641. All active firefighters of the City are members of the Fund. The Fund provides service retirement, death, disability, and withdrawal benefits. Benefits vest after 20 years of credited service. Employees may retire at age 50 with 20 years of service. Vested termination benefits on a deferred basis are available for firefighters who terminate employment with 20 or more years of service but who have not attained age 50 at their date of termination. A firefighter who becomes disabled is eligible for disability benefits for 30 months. After 30 months, the board may continue, terminate or reduce benefits. In the event of the death of a firefighter in active service, the firefighter's spouse will receive a monthly benefit. Each unmarried child will also receive benefits until 18 (22 if full -time student or for life if disabled). The sum of all benefits payable may not exceed the service retirement benefit to which the firefighter was entitled as the date of his/her death. A firefighter at age of 53 and with at least 20 years of service may enroll in the Deferred Retirement Option Plan (DROP), which allows the participant to receive certain amount of benefits in lump a sum payment. For the plan in effect January 1, 2010, the Fund required fire fighters to contribute 13% of pay and 17% was the City's contribution rate. A summary of actuarial assumptions is as follows: Actuarial Valuation Date January 1, 2010 Actuarial Cost Method Individual Entry Age Amortization Method Level Percent of Payroll Remaining Amortization Method 22.5 Years — Open Period Asset Valuation Method 5 Year Smoothed Market Value Investment Rate of Return 8% Payroll Growth Rate 4% Projected Salary Increases 5% Post Retirement Cost -of- Living None Adjustments Fiscal Annual Percentage of Net Pension Year Pension Cost APC Obligation (APC) Contribution 2004 $674,081 100% - 2005 795,186 100% - 2006 725,597 100% - 2007 803,263 100% - 2008 898,683 100% - 2009 1,118,605 100% - 2010 1,192,906 100% - E. LANDFILL CLOSURE AND POSTCLOSURE CARE COSTS State and federal laws and regulations require that the City place a final cover on its landfill when closed and perform certain maintenance and monitoring functions at the landfill site for thirty years after closure. In addition to operating expenses related to current activities of the landfill, an expense provision and related liability are being recognized based on the future closure and postclosure care costs that will be incurred near or after the date the landfill no longer accepts waste. The recognition of these landfill closure and postclosure care costs is based on the amount of the landfill used during the year. The estimated liability for landfill closure and postclosure care cost has a balance of $2,127,796 as of September 30, 2010, which is based on 20.4% usage (filled) of the landfill. It is estimated that an additional $8,255,114 will be recognized 51 CITY OF PORT ARTHUR, TEXAS Notes to the Financial Statements September 30, 2010 as closure and postclosure care expenses between the date of the balance sheet and the date the landfill is expected to be filled to capacity (2035). The estimated total current cost of the landfill closure and postclosure care $10,382,910 based on the amount that would be paid if all equipment, facilities, and services required to close, monitor, and maintain the landfill were acquired as of September 30, 2010. However, the actual cost of closure and postclosure care may be higher due to inflation, changes in technology, or changes in landfill laws and regulations. The City was required by state and federal laws and regulations to meet financial assurance regulations by April 9, 1997, with updates annually. The City met these requirements and is in full compliance with the financial assurance requirement. F. PRIOR PERIOD ADJUSTMENTS The beginning fund balance of certain governmental funds as of October 1, 2009 were restated in order to correct prior year reporting of accrued compensated absences. Beginning Fund Balance Beginning As Previously Fund Balance, Reported Adjustment As Restated Exhibit 4 General Fund (GAAP Basis) $11,416,518 $843,133 $12,259,651 Exhibit 6 General Fund (Budget Basis) 28,416,518 843,133 29,259,651 Schedule A -2 Health Grants Fund (436,429) 35,929 (400,429) Schedule A -2 Transit System Fund 155,956 33,049 189,005 This prior period adjustment was also required for the component unit, the Port Arthur Section 4A Economic Development Corporation. Beginning Fund Balance Beginning As Previously Fund Balance, Reported Adjustment As Restated Schedule C -2 Port Arthur EDC $5,873,845 $7,870 $5,881,715 G. RESTATEMENT OF NET ASSETS The beginning net assets of the component unit, the Port Arthur Section 4A Economic Development Corporation, were increased $260,769. The restatement was due to a land purchase that was not recorded on the Government Wide Statement of Net Assets at September 30, 2009. H. SUBSEQUENT EVENTS On March 22, 2011, The City of Port Arthur issued $9,875,000, General Obligation Refunding Bonds, Series 2011 dated April 15, 2011. This issue refunded the following issues: General Obligation, Series 2001 $2,910,000 Combination Tax and Revenue Certificates of Obligation, Series 2002B $3,810,000 Combination Tax and Revenue Certificates of Obligation, Series 2002C $2,895,000 $9,615,000 52 APPENDIX C FORM OF BOND COUNSEL'S OPINION ANDREWS 600 Travis, Suite 4200 Houston, Texas 77002 Al TOANEYS K U RT H LLP 713.220.4200 Phone 713.220.4285 Fax andrewskurth.com June 7, 2011 WE HAVE ACTED as Bond Counsel for the CITY OF PORT ARTHUR, TEXAS, a municipal corporation of the State of Texas (the "City") in connection with an issue of bonds (the "Bonds ") described as follows: CITY OF PORT ARTHUR, TEXAS GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011, dated June 1, 2011, in the aggregate principal amount of $9,530,000. The Bonds mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Bonds and in the ordinance (the "Ordinance ") adopted by the City Council of the City authorizing their issuance. WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Bonds and the obligations that are being refunded (the "Refunded Obligations ") with the proceeds of the Bonds, as described in the Ordinance. The transcript contains certified copies of certain proceedings of the City and The Bank of New York Mellon Trust Company, N.A. (the "Escrow Agent "); the report (the "Report") of Grant Thornton LLP (the "Verification Agent "), which verifies the sufficiency of the deposits made with the Escrow Agent for the defeasance of the Refunded Obligations and the mathematical accuracy of certain computations of the yield on the Bonds and the obligations acquired with the proceeds of the Bonds; certain certifications and representations and other material facts within the knowledge and control of the City, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Bonds and the firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations. We have also examined executed Bond No. I -1 of this issue. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Bonds. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. BASED ON SUCH EXAMINATION, it is our opinion as follows: Austin Beijing Dallas Houston London New York The Woodlands Washington, DC Ht U 3102614.1 June 7, 2011 Page 2 (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently in effect; the Bonds constitute valid and legally binding obligations of the City enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Bonds have been authorized and delivered in accordance with law; (2) The Bonds 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 all taxable property located within the City, which taxes have been pledged irrevocably to pay the principal of and interest on the Bonds; and (3) The escrow agreement between the City and the Escrow Agent (the "Escrow Agreement ") has been duly executed and delivered and constitutes a binding and enforceable agreement in accordance with its terms; the establishment of the Escrow Fund pursuant to the Escrow Agreement and the deposit made therein constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations; in reliance upon the accuracy of the calculations contained in the Report, the Refunded Obligations, having been discharged and paid, are no longer outstanding and the lien on and pledge of ad valorem taxes and other revenues as set forth in the order authorizing their issuance will be appropriately and legally defeased; the holders of the Refunded Obligations may obtain payment of the principal of, redemption premium, if any, and interest in the Refunded Obligations only out of the funds provided therefor now held in escrow for that purpose by the Escrow Agent pursuant to the terms of the Escrow Agreement; and therefore the Refunded Obligations are deemed to be fully paid and no longer outstanding, except for the purpose of being paid from the funds provided therefor in such Escrow Agreement. ALSO BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is our further opinion that, subject to the restrictions hereinafter described, interest on the Bonds is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code "), that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted in the Ordinance to comply with each such requirement. HOU:3102614.1 June 7, 2011 Page 3 Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Bonds in gross income of the owners thereof for federal income tax purposes. INTEREST ON all tax - exempt obligations, including the Bonds, owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed. Purchasers of Bonds are directed to the discussion entitled "TAX EXEMPTION" set forth in the Official Statement. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax - exempt obligations, such as the Bonds, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax - exempt obligations, taxpayers owning an interest in a FASIT that holds tax - exempt obligations and individuals otherwise qualified for the earned income tax credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. HOU:3102614 1