SUPPLEMENT TO OFFICIAL STATEMENT DATED NOVEMBER 14, relating to $239,585,000

Transcription

1 SUPPLEMENT TO OFFICIAL STATEMENT DATED NOVEMBER 14, 2012 relating to $239,585,000 $66,425,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012A HARRIS COUNTY, TEXAS $52,815,000 $77,145,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012B (TAXABLE) $43,200,000 PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012A PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012B (TAXABLE) CUSIP Prefix: PLEASE BE ADVISED that the above-referenced Official Statement has been supplemented as follows: Schedule 1, SCHEDULE OF REFUNDED BONDS, Page 1: T he schedule entitled Harris County, Texas, Permanent Improvement and Refunding Bonds, Series 2002 is hereby deleted in its entirety and replaced with the following to correct the CUSIP Numbers for the refunded Permanent Improvement and Refunding Bonds, Series 2002: Harris County, Texas Permanent Improvement and Refunding Bonds Series 2002 Maturity October 1 Principal Amount $3,745,000 3,590,000 3,780,000 3,980,000 2,005,000 2,105,000 2,210,000 2,320,000 2,425,000 2,535,000 5,425,000 12,485,000 Interest Rate 5.250% CUSIP No.(1) Redemption Date FG FH FJ FK FL FM FN JK JL NK NM NH7 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 December 14, 2012 [The Remainder of this Page Intentionally Left Blank] -1-

2 Schedule 1, SCHEDULE OF REFUNDED BONDS, Page 2: T he schedule entitled Harris County, Texas, Permanent Improvement and Refunding Bonds, Series 2004A is hereby deleted in its entirety and replaced with the following to correct the CUSIP Numbers for the refunded Permanent Improvement and Refunding Bonds, Series 2004A: Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2023 $2,230, % B91 October 1, ,100, JQ2 October 1, 2014 Schedule 1, SCHEDULE OF REFUNDED BONDS, Page 2: T he schedule entitled Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2003A is hereby deleted in its entirety and replaced with the following to correct the CUSIP Numbers for the refunded Unlimited Tax Road Refunding Bonds, Series 2003A: Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2013 $1,290, % HV ,280, HW1 October 1, ,270, EY0 October 1, 2013 Schedule 1, SCHEDULE OF REFUNDED BONDS, Page 2: T he schedule entitled Harris County, Texas, Unlimited Tax Road and Refunding Bonds, Series 2004B is hereby deleted in its entirety and replaced with the following to correct the CUSIP Numbers for the refunded Unlimited Tax Road and Refunding Bonds, Series 2004B: Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2022 $15,165, % HY7 October 1, ,350, D65 October 1, ,755, D73 October 1, 2014 The date of this Supplement is November 28,

3 NEW ISSUE BOOK-ENTRY ONLY OFFICIAL STATEMENT DATED NOVEMBER 14, 2012 RATINGS: Fitch: AAA S&P: AAA As described herein In the opinion of Bond Counsel, interest on the Tax-Exempt Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX MATTERS FOR THE TAX-EXEMPT BONDS herein and is not includable in the alternative minimum taxable income of individuals. See TAX MATTERS FOR THE TAX-EXEMPT BONDS for a discussion of Bond Counsel s opinion, including the alternative minimum tax consequences for corporations. Interest on the Taxable Bonds is not excluded from gross income. $66,425,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012A $77,145,000 PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012A $239,585,000 HARRIS COUNTY, TEXAS $52,815,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012B (TAXABLE) $43,200,000 PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012B (TAXABLE) Interest Accrual Date: Date of Delivery CUSIP Prefix: Due: As shown on inside cover The Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012A (the Tax-Exempt Road Bonds ), the Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012B (Taxable) (the Taxable Road Bonds and together with the Tax-Exempt Road Bonds, the Road Bonds ), the Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012A (the Tax- Exempt Permanent Improvement Bonds ), and the Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012B (Taxable) (the Taxable Permanent Improvement Bonds and together with the Tax-Exempt Permanent Improvement Bonds, the Permanent Improvement Bonds and collectively with the Road Bonds, the Bonds) are being issued by Harris County, Texas (the County ) pursuant to applicable Texas law, particularly Chapter 1207, Chapter 1371, and Chapter 1471, Texas Government Code, as amended, and the terms of orders of the Commissioners Court, the governing body of the County, and respective officer s pricing certificates approving the pricing and terms of sale of the Bonds (together, the Orders ). The Bonds are being issued, together with other available funds of the County, to refund certain outstanding bonds or obligations (collectively, the Refunded Bonds ), as more fully set forth on SCHEDULE I hereto. A portion of the proceeds of the Bonds will also be used to pay costs of issuance related to the Bonds. See PURPOSE AND PLAN OF FINANCE. The Road Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, without legal limit as to rate or amount, on all taxable property within the County. The Permanent Improvement Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the County. Principal of the Bonds will be paid at maturity or redemption by The Bank of New York Mellon Trust Company, National Association, a limited purpose national banking association with trust powers (the Paying Agent/ Registrar ). Interest on the Bonds accrues from the Date of Delivery (as defined herein) and is payable on April 1 and October 1 of each year, commencing April 1, 2013, until maturity or earlier redemption. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. See THE BONDS Description. Certain of the Bonds are subject to redemption prior to maturity, as described herein. See THE BONDS Redemption of the Bonds. The Bonds are issuable only in fully registered form in denominations of $5,000 principal amount or integral multiples thereof. The Bonds are initially registered solely in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ( DTC ), New York, New York, acting as securities depository for the Bonds, until DTC resigns or is discharged. The Bonds initially will be available to purchasers in book-entry form only. So long as Cede & Co. is the registered owner of the Bonds, as nominee for DTC, the Bonds will be payable to Cede & Co., which will, in turn, remit such amounts to DTC participants for subsequent disbursement to the beneficial owners of the Bonds. See APPENDIX D BOOK-ENTRY-ONLY SYSTEM. SEE INSIDE COVER FOR MATURITY SCHEDULE, INTEREST RATES, INITIAL YIELDS AND CUSIP NUMBERS The Bonds are offered for delivery, when, as and if issued by the County, and received by the Underwriters, subject to the approving opinion of the Attorney General of Texas and the legal opinion of Greenberg Traurig, LLP, Houston, Texas, Bond Counsel, as to the validity of the Bonds under the Constitution and the laws of the State of Texas. Certain legal matters will be passed upon for the County by Vince Ryan, County Attorney, and Fulbright & Jaworski L.L.P., Houston, Texas, Disclosure Counsel. Certain legal matters will be passed upon for the Underwriters by their co-counsel, Andrews & Kurth LLP, Houston, Texas and Bates & Coleman, P.C., Houston, Texas. The Bonds are expected to be available for delivery through DTC on or about December 12, 2012 (the Date of Delivery ). Jefferies Piper Jaffray & Co. Estrada Hinojosa & Company, Inc. Loop Capital Markets Siebert Brandford Shank & Co., L.L.C. Morgan Stanley Ramirez & Co., Inc. Rice Financial Products Company Stifel, Nicolaus & Company, Incorporated

4 MATURITY SCHEDULE, INTEREST RATES, INITIAL YIELDS AND CUSIP NUMBERS $66,425,000 HARRIS COUNTY, TEXAS UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012A Maturity (1) (October 1) Principal Amount Interest Rate (%) Yield (%) CUSIP No. (3) 2022 $11,725, QN ,740, (2) QP ,960, (2) QQ4 $52,815,000 HARRIS COUNTY, TEXAS UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012B (TAXABLE) Maturity (1) (October 1) Principal Amount Interest Rate (%) Yield (%) CUSIP No. (3) 2015 $7,115, RH ,085, RJ ,155, RK ,335, RL ,505, RM ,685, RN ,600, RP ,585, RQ ,750, RR1 (1) The Tax-Exempt Road Bonds are subject to optional redemption prior to their scheduled maturities, as described herein. The Taxable Road Bonds are not subject to optional redemption prior to their scheduled maturities. See THE BONDS Redemption of the Bonds. (2) Yield calculated to first optional redemption date. See THE BONDS - Redemption of the Bonds. (3) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC, on behalf of The American Bankers Association, and is included solely for convenience of the holders of the Bonds. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. Neither the County nor the Financial Advisor nor the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

5 $77,145,000 HARRIS COUNTY, TEXAS PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012A Maturity (1) (October 1) Principal Amount Interest Rate (%) Yield (%) CUSIP No. (3) 2013 $4,085, QR ,105, QS ,195, QT ,325, QU ,310, QV ,375, QW ,445, QX ,500, QY ,560, QZ ,640, RA ,950, (2) RB ,910, (2) RC ,800, (2) RD ,885, (2) RE ,980, (2) RF ,080, (2) RG5 $43,200,000 HARRIS COUNTY, TEXAS PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012B (TAXABLE) Maturity (1) (October 1) Principal Amount Interest Rate (%) Yield (%) CUSIP No. (3) 2013 $805, RS , RT , RU , RV ,515, RW ,570, RX ,650, RY ,740, RZ ,850, SA ,975, SB ,115, SC3 (1) The Tax-Exempt Permanent Improvement Bonds are subject to optional redemption prior to their scheduled maturities, as described herein. The Taxable Permanent Improvement Bonds are not subject to optional redemption prior to their scheduled maturities. See THE BONDS Redemption of the Bonds. (2) Yield calculated to first optional redemption date. See THE BONDS - Redemption of the Bonds. (3) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC, on behalf of The American Bankers Association, and is included solely for convenience of the holders of the Bonds. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. Neither the County nor the Financial Advisor nor the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein.

6 THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OF THIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. Information set forth herein has been furnished by the County and includes information obtained from other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation, by the Underwriters. 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 will, under any circumstances, create any implication that there has been no change in the affairs of the County or the other matters described herein since the date hereof. The Bank of New York Mellon Trust Company, National Association, in each of its capacities, including but not limited to the Escrow Agent, Paying Agent and Bond Registrar, has not participated in the preparation of this Official Statement and assumes no responsibility for its content. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. This Official Statement includes descriptions and summaries of certain events, matters and documents. Such descriptions and summaries do not purport to be complete and all such descriptions, summaries and references thereto are qualified in their entirety by reference to this Official Statement in its entirety and to each such document, copies of which may be obtained from the County or from the Financial Advisor to the County. Any statements made in this Official Statement or the appendices hereto involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of such opinions or estimates will be realized. This Official Statement is delivered in connection with the sale of securities referred to herein and may not be reproduced or used, in whole or in part, for any other purposes. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor will there be any sale of the Bonds in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. No dealer, salesperson or other person has been authorized by the County to give any information or to make any representation other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the County, any Underwriter or any other person. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the matters described herein since the date hereof. The prices and other terms respecting the offering and sale of the Bonds may be changed from time to time by the Underwriters after such Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including to dealers who may sell the Bonds into investment accounts. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

7 TABLE OF CONTENTS INTRODUCTION... 1 PURPOSE AND PLAN OF FINANCE... 1 ESTIMATED SOURCES AND USES OF FUNDS... 2 THE BONDS... 2 Source of Payment... 2 Description... 2 Legal Holidays and Unclaimed Funds... 3 Ownership... 3 Perfection of Security... 3 Transfers and Exchanges... 3 Redemption of the Bonds... 4 Selection of Bonds for Redemption... 4 Notice of Redemption... 5 Defeasance... 5 Successor Paying Agent/Registrar... 5 CONSTITUTIONAL TAX RATE LIMITATION... 6 AD VALOREM TAXES... 6 Property Subject to Taxation... 6 Valuation of Property for Taxation... 6 Limitations on Tax Rate Increases... 7 Collections, Penalty and Interest... 7 Tax Liens... 7 COUNTY-WIDE AD VALOREM TAXES... 8 Table 1 County Tax Rates... 8 Table 2 County Assessed Values and Tax Rates... 9 Tax Increment Reinvestment Zones... 9 Table 3 County Tax Levies, Collections and Delinquencies Table 4 Principal Taxpayers COUNTY-WIDE AD VALOREM TAX DEBT Payment Record Table 5 Tax Debt Outstanding Table 6 Estimated County-Wide and Overlapping Ad Valorem Tax Debt Table 7 County-Wide Ad Valorem Tax Debt Service Requirements Table 8 Debt Service Requirements for the County s Limited Tax Bonds Table 9 Debt Service Requirements for the County s Unlimited Tax Bonds Table 10 County-Wide Authorized but Unissued Bonds Commercial Paper Other Obligations INVESTMENTS Financial Management Products Investment Strategy and Policy Table 11 Current Investments THE COUNTY Administration of the County Table 12 County Employees Retirement Program County Offices and Courts and Branch Office Buildings Other County Services Public Infrastructure Department Harris County Toll Road Authority Harris County Flood Control District Harris County-Houston Sports Authority BUDGETING PROCEDURES AND OPERATING FUNDS BUDGET Current Operating and Debt Service Funds Budgeting Procedures for the County Table 13 Operating Funds Budget for the County s Fiscal Year Ending Last Day of February Tax Anticipation Borrowing Table 14 General Fund Balances For Fiscal Years 2008 Through Table 15 County Capital Project Funds PENDING LITIGATION ENVIRONMENTAL REGULATION General Air Quality Area Topography and Land Subsidence BONDHOLDERS REMEDIES LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS REGISTRATION AND QUALIFICATION OF BONDS UNDERWRITING RATINGS VERIFICATION OF MATHEMATICAL COMPUTATIONS TAX MATTERS FOR THE TAX-EXEMPT BONDS Tax Exemption Impact of President s 2013 Budget Proposal Original Issue Premium of Tax-Exempt Bonds CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IN RESPECT OF THE TAXABLE BONDS General Certain U.S. Federal Income Tax Consequences to U.S. Holders Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders ERISA CONSIDERATIONS LEGAL PROCEEDINGS FINANCIAL ADVISOR CONTINUING DISCLOSURE OF INFORMATION Annual Reports Certain Event Notices Limitations and Amendments Compliance with Prior Undertakings Audited Financial Report of the County INDEPENDENT AUDITOR FORWARD-LOOKING STATEMENTS AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION MISCELLANEOUS vi

8 TABLE OF CONTENTS (continued) APPENDICES AND SCHEDULES: SCHEDULE I REFUNDED BONDS... I-1 APPENDIX A AUDITED BASIC FINANCIAL STATEMENTS OF THE COUNTY FOR FISCAL YEAR ENDED FEBRUARY 29, A-1 APPENDIX B FORMS OF BOND COUNSEL OPINIONS... B-1 APPENDIX C CONTINUING DISCLOSURE SCHEDULES... C-1 APPENDIX D BOOK-ENTRY-ONLY SYSTEM... D-1 vii

9 OFFICIAL STATEMENT SUMMARY This summary is furnished to provide limited introductory information regarding the terms of the Bonds and is qualified by the more detailed descriptions appearing in this Official Statement and the appendices hereto. The offering of the Bonds is made only by means of this entire Official Statement, and no person is authorized to make offers to sell or to solicit offers to buy the Bonds unless the entire Official Statement is delivered. Certain terms used in this summary are defined elsewhere in this Official Statement. The Road Bonds... The Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012A (the Tax-Exempt Road Bonds ), the Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012B (Taxable) (the Taxable Road Bonds and together with the Tax-Exempt Road Bonds, the Road Bonds ) are being issued in the principal amounts shown on the front cover page of this Official Statement. The Permanent Improvement Bonds... The Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012A (the Tax-Exempt Permanent Improvement Bonds ), and the Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012B (Taxable) (the Taxable Permanent Improvement Bonds and together with the Tax-Exempt Permanent Improvement Bonds, the Permanent Improvement Bonds ) are being issued in the principal amounts shown on the front cover page of this Official Statement. The Bonds... The Road Bonds and the Permanent Improvement Bonds are herein collectively referred to as the Bonds. Use of Proceeds... The Bonds are being issued for the purposes of refunding all or a portion of certain of the County s outstanding obligations (the Refunded Bonds ), as more fully set forth in SCHEDULE I hereto. A portion of the proceeds of the Bonds will also be used to pay costs of issuance related to the Bonds. See PURPOSE AND PLAN OF FINANCE and ESTIMATED SOURCES AND USES OF FUNDS. Maturity... The Bonds mature on the dates and in the principal amounts set forth on the inside cover hereof. See THE BONDS. Interest on the Bonds... Interest on the Bonds accrues from the Date of Delivery and is payable on April 1 and October 1 of each year, commencing April 1, 2013, until maturity or earlier redemption. See THE BONDS. Redemption... The Tax-Exempt Road Bonds and the Tax-Exempt Permanent Improvement Bonds are subject to redemption prior to maturity as described herein. See THE BONDS Redemption of the Bonds. The Taxable Road Bonds and the Taxable Public Improvement Bonds are not subject to optional redemption prior to maturity. Security for the Road Bonds... Security for the Permanent Improvement Bonds... Book-Entry-Only System... Payment Record... Municipal Bond Ratings... Escrow Agent for Refunded Bonds... The Road Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, without legal limit as to rate or amount, on all taxable property within the County. See THE BONDS Source of Payment. The Permanent Improvement Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the County. See THE BONDS Source of Payment. The Bonds are initially issuable only to Cede & Co., the nominee of DTC pursuant to a book-entry-only system. No physical delivery of the Bonds will be made to the beneficial owners of the Bonds. Principal and interest will be paid to Cede & Co., which will distribute such payments to the participating members of DTC for remittance to the beneficial owners of the Bonds. See APPENDIX D BOOK- ENTRY-ONLY SYSTEM. The County has never defaulted in paying the principal of or interest on any of its debt. Fitch Rating Services and Standard & Poor s Ratings Services have assigned credit ratings of AAA and AAA, respectively, to the Bonds. See RATINGS. The escrow agent for the Refunded Bonds is The Bank of New York Mellon Trust Company, National Association, a limited purpose national banking association with trust powers. viii

10 Paying Agent/Registrar... The initial paying agent is The Bank of New York Mellon Trust Company, National Association, a limited purpose national banking association with trust powers. Tax Exemption on the Tax-Exempt Road Bonds and the Tax-Exempt Permanent Improvement Bonds... In the opinion of Bond Counsel, interest on the Tax-Exempt Road Bonds and the Tax-Exempt Permanent Improvement Bonds (together, the Tax-Exempt Bonds ) is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX MATTERS FOR THE TAX- EXEMPT BONDS herein, including the alternative minimum tax consequences for corporations. Tax Exemption on the Taxable Road Bonds and the Taxable Permanent Improvement Bonds... Interest on the Taxable Road Bonds and the Taxable Permanent Improvement Bonds (together, the Taxable Bonds ) is not excluded from gross income. See CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IN RESPECT OF THE TAXABLE BONDS. [THE REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] ix

11 $66,425,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012A OFFICIAL STATEMENT $239,585,000 HARRIS COUNTY, TEXAS $52,815,000 UNLIMITED TAX ROAD REFUNDING BONDS, SERIES 2012B (TAXABLE) INTRODUCTION $77,145,000 PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012A $43,200,000 PERMANENT IMPROVEMENT REFUNDING BONDS, SERIES 2012B (TAXABLE) The Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012A (the Tax-Exempt Road Bonds ), the Harris County, Texas, Unlimited Tax Road Refunding Bonds, Series 2012B (Taxable) (the Taxable Road Bonds and together with the Tax-Exempt Road Bonds, the Road Bonds ), the Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012A (the Tax-Exempt Permanent Improvement Bonds ), and the Harris County, Texas Permanent Improvement Refunding Bonds, Series 2012B (the Taxable Permanent Improvement Bonds and together with the Tax-Exempt Permanent Improvement Bonds, the Permanent Improvement Bonds and collectively with the Road Bonds, the Bonds) are being issued by Harris County, Texas (the County ) pursuant to applicable Texas law, particularly Chapter 1207, Chapter 1371, and Chapter 1471, Texas Government Code, as amended, and the terms of orders of the Commissioners Court, the governing body of the County, and respective officer s pricing certificates approving the pricing and terms of sale of the Bonds (together, the Orders ). The Road Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, without legal limit as to rate or amount, on all taxable property within the County. The Permanent Improvement Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the County. Interest on the Bonds accrues from the Date of Delivery and is payable on April 1 and October 1 of each year, commencing April 1, 2013, until maturity or earlier redemption. Principal of the Bonds will be paid at maturity or redemption by The Bank of New York Mellon Trust Company, National Association, a limited purpose national banking association with trust powers (the Paying Agent/Registrar ). PURPOSE AND PLAN OF FINANCE The Bonds are being issued for the purpose of refunding all or a portion of certain of the County s outstanding bonds or obligations (the Refunded Bonds ), as more fully set forth in SCHEDULE I. The proceeds of the Road Bonds will also be used to pay the costs of issuance related to the Road Bonds, and the proceeds of the Permanent Improvement Bonds will also be used to pay the costs of issuance related to the Permanent Improvement Bonds as described in ESTIMATED SOURCES AND USES OF FUNDS. The Refunded Bonds shall be refunded to achieve present value debt service savings. A portion of the proceeds of the Bonds, together with other available funds, if any, will be deposited to one or more escrow accounts in the escrow fund (the Escrow Fund ) created pursuant to an escrow agreement (the Escrow Agreement ) with The Bank of New York Mellon Trust Company, National Association (the Escrow Agent ), in an amount which will be sufficient to pay, on the redemption dates or maturities, as applicable, the principal of and interest on the Refunded Bonds. See SCHEDULE I REFUNDED BONDS. The Orders provide that proceeds from the sale of the Bonds, together with other available funds, if any, will be used to purchase a portfolio of securities authorized under Texas law (the Escrowed Securities ) and will be deposited with the Escrow Agent, in the amount necessary to accomplish the refunding and final payment of the Refunded Bonds on their respective redemption dates. Such funds will be held by the Escrow Agent in the Escrow Fund. The Escrow Fund is irrevocably pledged to payment of principal of and interest on the Refunded Bonds. The accuracy of the mathematical computations of the adequacy of the funds held in the Escrow Fund to provide for the payment of the Refunded Bonds will be verified by Grant Thornton LLP, a firm of independent certified public accountants. See VERIFICATION OF MATHEMATICAL COMPUTATIONS. 1

12 In the opinion of Bond Counsel for the County, by making the escrow deposit required by the Orders and the Escrow Agreement to be entered into with the Escrow Agent in connection with the Refunded Bonds, the County will have made firm banking and financial arrangements for the discharge and final payment of the Refunded Bonds pursuant to the provisions of Chapter 1207, Texas Government Code, as amended. Thereafter, the Refunded Bonds will be deemed to be fully paid and no longer outstanding except for the purpose of being paid from the funds provided therefor pursuant to the Escrow Agreement. ESTIMATED SOURCES AND USES OF FUNDS The following table summarizes the estimated sources and uses of proceeds of the Bonds and certain other available funds: SOURCES OF FUNDS: Tax-Exempt Road Bonds Taxable Road Bonds Tax-Exempt Permanent Improvement Bonds Taxable Permanent Improvement Bonds Total Par Amount of Bonds... $66,425, $52,815, $77,145, $43,200, $239,585, Original Issue Premium... 18,739, ,426, ,164, ,329, TOTAL SOURCES... $85,164, $59,241, $95,309, $43,200, $282,914, USES: Deposit with Escrow Agent... $84,618, $58,875, $94,727, $42,904, $281,126, Underwriters Discount , , , , , Costs of Issuance (1) , , , , , Additional Proceeds... 1, , , , TOTAL USES... $85,164, $59,241, $95,309, $43,200, $282,914, (1) Includes legal fees, rating agency fees, fees of the Paying Agent/Registrar and other costs of issuance. Source of Payment THE BONDS The Road Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, without legal limit as to rate or amount, on all taxable property within the County. The Permanent Improvement Bonds are secured by and payable from the receipt of an annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the County. See AD VALOREM TAXES, CONSTITUTIONAL TAX RATE LIMITATION and COUNTY-WIDE AD VALOREM TAXES. Pursuant to the provisions of the Orders, the Commissioners Court, as the governing body of the County, has levied and agreed to assess and collect such annual ad valorem taxes. Each year the Commissioners Court will make a determination of the specific amount to be collected to pay interest as it accrues and principal as it matures on the Bonds and will formally levy such taxes for that year. The receipts of the taxes are to be credited to the debt service funds for the Bonds established by their respective Orders to be used solely for the payment of the principal of and interest on such Bonds. Description The Bonds mature on the dates and in the amounts as set forth on the inside cover page of this Official Statement. Interest on the Bonds accrues from the Date of Delivery and is payable on April 1 and October 1 of each year, commencing April 1, 2013, until maturity or earlier redemption. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. The Bonds will be issued in fully registered form, in the denomination of $5,000 principal amount, or any integral multiple thereof. The Bonds may be successively registered and transferred at no cost to the owners, except any tax or governmental charge in connection therewith. The principal or redemption price of the Bonds will be 2

13 payable upon maturity or redemption by the Paying Agent/Registrar. Interest on the Bonds is payable to registered owners thereof as shown on the registration books maintained by the Paying Agent/Registrar at the close of business on the 15th day of the month next preceding an interest payment date (the Record Date ), by check mailed by the Paying Agent/Registrar to the address of the registered owner shown on such registration books or by such other method of payment requested by, and at the risk and expense of, the registered owner and acceptable to the Paying Agent/Registrar. See APPENDIX D BOOK-ENTRY-ONLY SYSTEM for a description of the system to be utilized initially in regard to the ownership and transferability of the Bonds. Legal Holidays and Unclaimed Funds In any case where the date interest accrues and becomes payable on the Bonds or principal of the Bonds matures or the date fixed for redemption of any Bonds or a Record Date will be in the County, a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, or the Record Date will not occur on such date, but payment may be made or the Record Date must occur on the next succeeding day that is not in the County, a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if (i) made on the date of maturity or the date fixed for redemption and no interest will accrue for the period from the date of maturity or redemption to the date of actual payment or (ii) the Record Date had occurred on the fifteenth day of that calendar month. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Bonds remaining unclaimed by the Registered Owner thereof after the expiration of three years from the date such funds have become due and payable (a) will be reported and disposed of by the Paying Agent/Registrar in accordance with the provisions of Title 6 of the Texas Property Code, as amended, to the extent such provisions are applicable to such funds or (b) to the extent such provisions do not apply to the funds, such funds will be paid by the Paying Agent/Registrar to the County upon receipt by the Paying Agent/Registrar of a written request therefor from the County. Ownership The County, the Paying Agent/Registrar and any other person may treat the person in whose name any Bond is registered as the absolute owner of such Bond for the purpose of making and receiving payment of the principal thereof and the interest thereon and for all other purposes, whether or not such bond is overdue. Neither the County nor the Paying Agent/Registrar will be bound by any notice or knowledge to the contrary. All payments made to the registered owner of such Bond in accordance with the Order will be valid and effectual and will discharge the liability of the County and the Paying Agent/Registrar for such bond to the extent of the sums paid. Perfection of Security Chapter 1208, Texas Government Code, applies to the issuance of the Bonds and the pledge of the tax revenues thereto, and such pledge is, therefore, valid, effective and perfected. See THE BONDS Source of Payment. If Texas law is amended at any time while the Bonds are outstanding and unpaid and the result of such amendment is that the pledge of tax revenues is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, in order to preserve to the registered owners of the Bonds a security interest in such pledge, then the County agrees to take such measures as it may determine are reasonable and necessary to enable a filing of a security interest in such pledge to occur. Transfers and Exchanges The following provisions for transfers and exchanges of the Bonds will apply in the event that the Bonds are no longer held in book-entry-only form. See APPENDIX D BOOK-ENTRY-ONLY SYSTEM. The Paying Agent/Registrar is appointed as the registrar for the Bonds. As long as any Bond remains outstanding, the Paying Agent/Registrar must keep a Register for such Bonds at the payment office of the Paying Agent/Registrar, presently located in Dallas, Texas, in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar must provide for the registration and transfer of the Bonds in accordance with the terms of the Order. 3

14 Each Bond will be transferable only upon the presentation and surrender thereof at the payment office of the Paying Agent/Registrar, duly endorsed for transfer, or accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Bonds for transfer, the Paying Agent/Registrar must authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Bond or Bonds, registered in the name of the transferee or transferees, in authorized denominations and of the same series, maturity and aggregate principal amount, and bearing interest at the same rate as the Bond or Bonds so presented and surrendered. All Bonds will be exchangeable upon the presentation and surrender thereof at the payment office of the Paying Agent/Registrar for a Bond or Bonds of the same series, maturity and interest rate and in any authorized denomination, in an aggregate principal equal to the unpaid principal amount of the Bond or Bonds presented for exchange. The Paying Agent/Registrar is authorized to authenticate and deliver exchange Bonds. Each Bond delivered by the Paying Agent/Registrar will be entitled to the benefits and security of the Order to the same extent as the Bond or Bonds in lieu of which such Bond is delivered. All Bonds issued in transfer or exchange will be delivered to the Registered Owners thereof at the payment office of the Paying Agent/Registrar or sent by United States mail, first class, postage prepaid. The County or the Paying Agent/Registrar may require the Registered Owner of any Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Bond. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange will be paid by the County. Redemption of the Bonds Optional Redemption of the Tax-Exempt Road Bonds The County reserves the right to redeem the Tax-Exempt Road Bonds maturing on or after October 1, 2023, in whole or from time to time in part, on October 1, 2022, or on any date thereafter at par plus accrued interest on the Bonds called for redemption to the date fixed for redemption. Optional Redemption of the Taxable Road Bonds The Taxable Road Bonds are not subject to optional redemption prior to maturity. Optional Redemption of the Tax-Exempt Permanent Improvement Bonds The County reserves the right to redeem the Tax-Exempt Permanent Improvement Bonds maturing on or after October 1, 2023, in whole or from time to time in part, on October 1, 2022, or on any date thereafter at par plus accrued interest on the Bonds called for redemption to the date fixed for redemption. Optional Redemption of the Taxable Permanent Improvement Bonds The Taxable Permanent Improvement Bonds are not subject to optional redemption prior to maturity. Selection of Bonds for Redemption Bonds may be redeemed in part only in integral multiples of $5,000. If a Bond subject to redemption is in a denomination larger than $5,000, a portion of such Bond may be redeemed, but only in integral multiples of $5,000. In selecting portions of Bonds for redemption, each Bond shall be treated as representing that number of Bonds of $5,000 denomination, which is obtained by dividing the principal amount of such Bond by $5,000. Upon presentation and surrender of any Bond for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Order, shall authenticate and deliver in exchange therefor a Bond or Bonds of the same series and like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Bond so surrendered. 4

15 Notice of Redemption Notice of any redemption identifying the Bonds to be redeemed, in whole or in part, must be given by the Paying Agent/Registrar at least 30 days prior to the date fixed for redemption, by first class mail, addressed to the Owner of such Bond to be redeemed at the address shown on the Register. Such notices must state the redemption date, the redemption price, the place at which Bonds are to be surrendered for payment and, if fewer than all Bonds outstanding are to be redeemed, the CUSIP numbers of the Bonds or portions thereof to be redeemed. Such notice may also state that such redemption is subject to the deposit of the redemption funds with the Paying Agent/Registrar on the date fixed for redemption and shall be of no effect unless such funds are so deposited. ANY NOTICE GIVEN AS DESCRIBED HEREIN WILL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE OWNER RECEIVES SUCH NOTICE, BY THE DATE FIXED FOR REDEMPTION, DUE PROVISION HAVING BEEN MADE WITH THE PAYING AGENT/REGISTRAR FOR PAYMENT OF THE REDEMPTION PRICE OF THE BONDS OR PORTIONS THEREOF TO BE REDEEMED, PLUS ACCRUED INTEREST TO THE DATE FIXED FOR REDEMPTION. WHEN BONDS HAVE BEEN CALLED FOR REDEMPTION IN WHOLE OR IN PART AND DUE PROVISION HAS BEEN MADE TO REDEEM SAME, THE BONDS OR PORTIONS THEREOF SO REDEEMED WILL NO LONGER BE REGARDED AS OUTSTANDING EXCEPT FOR THE PURPOSE OF RECEIVING PAYMENT SOLELY FROM THE FUNDS SO PROVIDED FOR REDEMPTION, AND THE RIGHTS OF THE OWNERS TO COLLECT INTEREST WHICH WOULD OTHERWISE ACCRUE AFTER THE REDEMPTION DATE ON ANY BOND OR PORTION THEREOF CALLED FOR REDEMPTION WILL TERMINATE ON THE DATE FIXED FOR REDEMPTION. Defeasance The County reserves the right to defease the Bonds in any manner now or hereafter permitted by law. Any bond will be deemed paid and will no longer be considered to be Outstanding within the meaning of the Order when payment of the principal of and interest on such bond to the stated maturity thereof or to the redemption date therefor must have been made or must have been provided for by any means then provided by law, including but not limited to, depositing with the Paying Agent/Registrar or with the Comptroller of Public Accounts of the State of Texas either (i) cash in an amount equal to the principal amount of and interest on such bond to the date of maturity or earlier redemption or (ii) pursuant to an escrow or trust agreement, cash and/or (A) direct noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (B) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the Commissioners Court adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (C) noncallable obligations of a state or an agency or a county, municipality or other political subdivision of a state that have been refunded and that, on the date the Commissioners Court adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA, or (D) any other securities or obligations which, at the time of such defeasance, are authorized by state law to be used to effectuate a defeasance of the Bonds, which, in the case of (A), (B), (C) or (D), may be in book-entry form, and the principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, will be sufficient to provide for the timely payment of the principal of and interest on such bonds to the date of maturity or earlier redemption; provided, however, that if any of the Bonds are to be redeemed prior to their dates of maturity, provision will have been made for giving notice of redemption as provided in the Order. Upon such deposit such Bonds shall no longer be considered as Outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the County. Successor Paying Agent/Registrar Provision is made in the Order for replacing the Paying Agent/Registrar. If the County replaces a Paying Agent/Registrar, such Paying Agent/Registrar must, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar s records to the successor Paying Agent/Registrar, and the successor Paying Agent/Registrar must act in the same capacity as the previous Paying Agent/Registrar. Any successor Paying Agent/Registrar selected by the County will be a commercial bank, trust company organized under the laws of the State of Texas or 5

16 other entity duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for its Bonds. CONSTITUTIONAL TAX RATE LIMITATION The Texas Constitution authorizes the County to levy a tax for general fund, permanent improvement fund, road and bridge fund and jury fund purposes limited in the aggregate to $0.80 per $100 of assessed valuation (the $0.80 Tax Limitation ). The County has consolidated all of these constitutional purposes into a general fund tax levy, subject to the $0.80 Tax Limitation (the General Fund Tax ). The General Fund Tax is pledged to the payment of the Permanent Improvement Bonds. The Texas Constitution also authorizes the County to levy (1) a tax, without legal limit as to rate, to pay debt service on county road bonds (the Road Bond Taxes ) and (2) a special road and bridge fund tax, not to exceed $0.15 per $100 of assessed valuation, for restricted purposes. The Road Bond Taxes are pledged to the payment of the Road Bonds, but are not pledged to payment of the Permanent Improvement Bonds. See THE BONDS Source of Payment and COUNTY-WIDE AD VALOREM TAXES Table 1 County Tax Rates. The Commissioners Court is responsible for levying taxes on behalf of the County. Property Subject to Taxation AD VALOREM TAXES Except for certain exemptions provided by Texas law, all real and certain tangible personal property and certain intangible personal property with a tax situs in the County is subject to taxation by the County. The County s assessed value, including the assessed value of railroad rolling stock and intangible properties of railroads and certain common carriers, is the assessed value used by the Commissioners Court to determine the tax rate for the County s levy. Principal categories of exempt property include: property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which ad valorem taxes have been abated for a specified period of time pursuant to tax abatement agreements; farm products owned by the producer; certain property owned by qualified charitable, religious, veterans, youth, fraternal or educational organizations; property of a nonprofit corporation that is used in scientific research and educational activities benefiting a college or university; designated historic sites; solar and wind powered energy devices; nonprofit cemeteries; and tangible personal property not held or used for production of income. Valuation of Property for Taxation The Property Tax Code of Texas (the Tax Code ) generally requires all taxable property (except property utilized for a qualified agricultural use, as that definition has been expanded by recent legislation, and timberland) to be appraised at 100% of market value as of January 1 of each year. Section 1, Article VIII, Texas Constitution provides that real property that is the residence homestead of the property owner will be taxed solely on the basis of its value as a residence homestead, regardless of whether residential use by the owner is considered to be the highest and best use of the property. Residential property that has never been occupied as a residence and is being held for sale is treated as inventory for property tax purposes. The appraisal of taxable property for the County (except certain railroad rolling stock and certain intangible property of railroads and certain common carriers, the taxable value of which is recommended by the state tax board and accepted or modified by the County) and all other taxing entities in the County is the responsibility of the Harris County Appraisal District (the Appraisal District ), a county-wide agency created under the Tax Code for that purpose. The Appraisal District is governed by a five-member board whose members are appointed by vote of the Commissioners Court and the governing bodies of the cities, towns, school districts and, upon request, conservation and reclamation districts in the County under a voting system weighted in direct proportion to the amount of taxes imposed by the voting entities. Cumulative voting for Appraisal District Board members is permitted and, through the exercise of that right, the Commissioners Court, the Houston City Council and the Houston Independent School District Board of Education may each select one member. 6

17 The Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of all taxable property in the County, and reappraisal must be effected at least once every three years. The Appraisal District has established a schedule of reappraisal for different classifications of property to comply with such requirements. The Texas Constitution authorizes the Texas Legislature to (1) authorize a single board of equalization for two or more adjoining appraisal entities that elect to provide for consolidated equalizations and (2) provide for the administration and enforcement of uniform standards and procedures for appraisal of property for ad valorem tax purposes. Taxable values determined by the chief appraiser of the Appraisal District are submitted for review and equalization to an Appraisal Review Board (the Appraisal Review Board ) appointed by the local administrative district judge. Appraisals may be contested before the Appraisal Review Board by taxpayers or, under limited circumstances, the County, and the Appraisal Review Board s orders are appealable to a State district court. Limitations on Tax Rate Increases The Commissioners Court adopts tax rates for the County by September 1 of each year, or as soon thereafter as is practicable. The Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the latter of September 30 or the sixtieth day after the date the certified appraisal roll is received by the taxing unit, and the failure to adopt a tax rate by such required date will result in the tax rate for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Such rates are based on the assessed values at January 1 of each year, as shown on the tax roll approved by the Appraisal Review Board which must be used by the County for such purpose. The Tax Code imposes limitations on certain tax increases. The Commissioners Court may under certain circumstances be required to publish notice and hold a public hearing on a proposed tax rate before voting on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations, and to produce, when applied to the property which was on the prior year s roll, the prior year s taxes levied for purposes other than debt service and such contractual obligations, such excess portion of the levy may be repealed at an election with the County held upon petition of 7% of the qualified voters of the County. See COUNTY-WIDE AD VALOREM TAXES Table 1 County Tax Rates. Collections, Penalty and Interest The County Tax Assessor-Collector is responsible for collection of taxes. The Tax Code contains provisions which allow the assessment and collections of County taxes by the Appraisal District or another taxing unit if the Commissioners Court elects to enter into a contract for that purpose and the County Tax Assessor- Collector approves such contract. The Tax Code also provides for assessment and collections of County taxes by the Appraisal District or another taxing unit in the County if that procedure is approved at an election which may be initiated by petition of 10,000 qualified voters of the County. Tax statements are required to be mailed by October 1, or as soon thereafter as practicable, and taxes become delinquent on February 1 of the following year. If tax statements are mailed after January 10, the delinquency date is postponed to the first day of the next month that will provide a period of least 21 days between the date the statement is mailed and the date taxes become delinquent. So long as the Commissioners Court or voters of the County have not transferred responsibility for collection of the taxes to another taxing unit or the Appraisal District, the Commissioners Court may permit payment without penalty or interest of one half of the taxes due from each taxpayer by July 1 if one half of the taxes due for the current year from such taxpayers are paid prior to December 1. Delinquent taxes are subject to a 6% penalty for the first month of delinquency, 1% for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. If the delinquency date is postponed, then the postponed date is the date from which penalty and interest accrues on the delinquent taxes. The County may waive penalties and interest on delinquent taxes if the error or omission of a representative of the County or of the Appraisal District caused the failure to pay the tax before delinquency and if the tax is paid within 21 days after the taxpayer knows or should know of the delinquency. Tax Liens The Tax Code provides that on January 1 of each year a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of each 7

18 taxing unit, including the County, having power to tax the property. The tax lien on real property has priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the other debt or lien existed before the attachment of the tax lien. Taxes levied by the County are the personal obligation of the property owner and, under certain circumstances, personal property is subject to seizure and sale for the payment of delinquent taxes, penalty and interest thereon. Except with respect to taxpayers 65 and older, any time after taxes on property become delinquent, the County may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax or both. In filing a suit to foreclose a tax lien on real property, the County must join other taxing units that have claims for delinquent taxes against all or part of the same property. The ability of the County to collect delinquent taxes by foreclosure may be adversely effected by the amount of taxes owed to other taxing units, certain affirmative defenses, adverse market conditions affecting the liquidation of such owned property, taxpayer redemption rights, general principals of equity or bankruptcy proceedings which restrain the collection of taxpayer s debt. Table 1 County Tax Rates COUNTY-WIDE AD VALOREM TAXES The following table shows the ad valorem tax rates per $100 of assessed value levied by the County for each of the tax years 2008 through The tax rates are based on assessment of taxable property at 100% of appraised value. In addition to the County s ad valorem taxes, the Commissioners Court levies taxes on property in the County on behalf of the Flood Control District, the Port of Houston and the Hospital District. The County Tax Assessor-Collector collects ad valorem taxes for the Flood Control District, the Port of Houston and the Hospital District using the same property values as the County, except that the rolling stock of railroads and intangible properties of railroads and certain common carriers are taxable only by the County. Purpose County: Operating Fund $ $ $ $ $ Public Improvement Contingency Fund Debt Service Total ($0.80 Limited Tax Rate) Road Bond Debt Service: (Unlimited Tax Rate) Toll Road Authority Tax Bond: Debt Service (Unlimited Tax Rate) (a) Total County Tax Rate $ $ $ $ $ Harris County Flood Control District: (b) Operating Fund Debt Service Total $ $ $ $ $ Port of Houston Authority Debt Service (c) Harris County Hospital District (d) Total County-Wide Ad Valorem Tax Rate $ $ $ $ $ (a) (b) (c) (d) The County s policy and practice has been to provide for payment of debt service on the Toll Road Authority Tax Bond debt from toll revenues and certain other funds, and no taxes have to date been collected to provide for such debt service. See COUNTY-WIDE AD VALOREM TAX DEBT Table 5 - Tax Debt Outstanding. The ad valorem tax rate that the Commissioners Court may levy on behalf of the Flood Control District is limited by law to a maximum of $0.30 per $100 of assessed value. The ad valorem tax rate that the Commissioners Court may levy on behalf of the Port of Houston to pay its bonds is by law unlimited. The ad valorem tax rate that the Commissioners Court may levy on behalf of the Hospital District is limited by law to a maximum of $0.75 per $100 assessed value. Source: Harris County Tax Assessor-Collector and Harris County Auditor s Office. 8

19 Table 2 County Assessed Values and Tax Rates The following table shows the County s assessed values and tax rates for each of the tax years 2003 through Taxable property is assessed at 100% of the appraised value as established by the Appraisal District. Property in the County is reassessed each year. Property is assessed at market value; therefore, the assessed values are generally the Appraisal District s estimate of market value as of January 1 of the tax year. Tax rates are per $100 of assessed value. Assessed Value as of January 1 (Dollars In Thousands) Tax Year Fiscal Year Ended Feb. 28/29 Real Property Personal Property Less Exemptions Total Taxable Value (a) Total County Tax Rate per $100 of Taxable Values ,334,256 30,644,381 34,822, ,156, ,378,304 32,159,586 37,273, ,263, ,050,598 37,313,520 61,017, ,346, ,997,888 40,381,452 66,142, ,237, ,251,230 46,122,092 73,150, ,222, ,740,198 50,453,455 82,016, ,177, ,949,419 54,044,038 85,902, ,090, ,139,208 51,636,041 85,743, ,032, ,475,950 51,539,733 88,299, ,716, (b) 321,667,795 46,923,912 87,996, ,594, (a) Based on Appraisal District tax supplements utilized for CAFR reporting unless otherwise noted. Includes rolling stock and assessed values for properties that are still under protest. The County, either by action of the Commissioners Court or through a process of petition and referendum initiated by its residents, may grant partial exemptions for residential homesteads of persons 65 years of age or older and of certain disabled persons. The Commissioners Court has granted an exemption of residential homesteads for persons 65 years of age or older and disabled persons of up to $160,000 of assessed value. If requested, the County must grant exemptions to disabled veterans or certain surviving dependents of disabled veterans or of persons who died while on active duty in an amount not to exceed $3,000 of assessed value. The County may also authorize exemptions of up to 20% of the value of residential homesteads from ad valorem taxation. The Commissioners Court has granted a 20% exemption. The County and certain taxing units located within the County may enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The County or taxing unit (as applicable) in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. An abatement agreement may last for a period of up to 10 years. The estimated value of property in the County that was subject to tax abatement as of September 14, 2012 is approximately $271.8 million and such value at the end of the abatement period is currently estimated to be approximately $406.8 million. Assessed taxable value figures herein are net of abatements. (b) Based on September 2012 Harris County Appraisal District Correction Roll Reports. Source: Harris County Tax Assessor-Collector and Harris County Auditor s Office. Tax Increment Reinvestment Zones The County and certain taxing units located within the County may elect to participate in tax increment reinvestment zones ( TIRZs ). TIRZs are created by municipalities to revitalize or redevelop unproductive, underproductive or blighted areas. The participating taxing units contribute some or all of the tax revenues generated by the growth in a TIRZ s taxable value to the revitalization or redevelopment effort. TIRZs generally are created for a period of up to 30 years. In the event the County elects to participate in TIRZs, the County cannot predict the tax consequences. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 9

20 Table 3 County Tax Levies, Collections and Delinquencies The table below sets forth a comparison of the ad valorem taxes levied and collected by the County (excluding the District, the Port of Houston and the Hospital District) for the tax years 2002 through This table is as presented in the 2012 CAFR, but also includes an additional column identifying the tax year and includes subsequent collections for tax year 2011 (see footnote (b) below). (Unaudited) (Dollars in Thousands) Tax Year Fiscal Year ended Feb 28/29 Taxes Levied for the Fiscal Year Adjusted Levy as of the End of Current Fiscal Year Collected within the Fiscal Year of the Levy Amount Percentage of the Levy Collections in Subsequent Years (a) Total Collections to Date Amount Percentage of Levy $682,975 $682,666 $657, % $21,581 $679, % , , , , , , , , , , , , , , , , , , , , , , , , , ,089,141 1,085, , ,630 1,078, ,114,429 1,101,323 1,036, ,755 1,092, ,058,623 1,050, , ,110 1,038, ,081,861 1,081,861 1,022, ,494 (b) 1,060, (a) Represents subsequent collections of taxes occurring any time following the end of the fiscal year of the tax levy. For reporting purposes, refunds associated with a prior year are netted against the prior year collections. The County is barred from bringing suit for collection of delinquent personal property taxes after four years from the time such taxes become delinquent. Real property taxes, until paid, constitute a lien against the property. The County is barred from bringing suit for collection of delinquent personal property and real property taxes annually. Pursuant to Section 33.05(c) of the Tax Code, the County Tax Assessor-Collector is required to cancel and remove from the delinquent tax roll a tax on real property that has been delinquent for more than 20 years or a tax on personal property that has been delinquent for more than 10 years. The delinquent taxes may not be canceled if litigation concerning the taxes is pending. (b) Represents collections associated with the 2011 tax year levy collected after the Fiscal Year 2012 year end through September 30, Taxes for the 2012 tax year become delinquent on February 1, Source: Harris County Tax Assessor-Collector and Harris County Auditor's Office. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 10

21 Table 4 Principal Taxpayers The following table lists the 15 taxpayers with the largest taxable values in the County. (Dollars in Thousands) (unaudited) Percentage of Total Taxpayers Type of Business 2011 Taxable Valuations (a) 2011 Taxable Valuation (b) 1. Exxon Mobil Corporation Oil, Chemical Plant $2,835, % 2. Centerpoint Energy, Inc. Electric Utility 2,393, Shell Oil Company Oil Refinery 2,319, Chevron Chemical Company Oil, Gas 1,531, Hines Interest Ltd Partnership Real Estate 1,180, Hewlett Packard Computers 1,118, Crescent Real Estate Real Estate 1,076, National Oilwell Oil & Gas Equipment 1,053, Equistar Chemicals LP Chemical 984, Houston Refining Oil Refinery 948, Walmart Retail 808, AT&T Mobility LLC Telephone 780, Lyondell Chemical Company Oil, Chemical Plant 728, Amoco Chemical Company Oil, Chemical Plant 577, Continental Airlines Inc. (c) Aviation 492, Total $18,828, % (a) Amounts shown for these taxpayers do not include taxable valuations, which may be substantial, attributable to certain subsidiaries and affiliates which are not grouped on the tax rolls with the taxpayers shown. (b) County s total taxable value based on Appraisal District supplemental reports dated as of March 9, (c) Continental Airlines Inc. is now a wholly owned subsidiary of United Continental Holdings, Inc. Source: Harris County Appraisal District [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 11

22 COUNTY-WIDE AD VALOREM TAX DEBT Payment Record The County has never defaulted in the payment of the principal of or the interest on any of its debt. Table 5 Tax Debt Outstanding The following table shows the total principal amount of the County s debt outstanding payable from ad valorem taxes as of October 31, 2012, and has been adjusted to give effect to the issuance of the Bonds and the refunding of the Refunded Bonds. The outstanding long-term tax debt is payable from separate taxes levied for debt service: County s Total Outstanding Long-Term Debt Limited Tax Debt (a) $ 1,061,637,190 Unlimited Tax Bonds (b) 711,615,000 Flood Control District Contract Tax Bonds (c) 572,165,000 Toll Road Tax Bonds (d) 479,630,000 Total $ 2,825,047,190 Less: Toll Road Tax Bonds (d) (479,630,000) Total (approximately.82% of Tax Year 2011 Estimated Assessed Value) $ 2,345,417,190 (a) Does reflect the issuance of the Permanent Improvement Bonds and the refunding of the Refunded Bonds. (b) Does reflect the issuance of the Road Bonds and the refunding of the Refunded Bonds. (c) Flood Control District Contract Tax Bonds are payable from contractual payments made by the County to the Flood Control District secured by the County s limited tax pursuant to Flood Control Projects Contracts. See Other Obligations. (d) Toll Road Tax Bonds are secured by a subordinate pledge of net revenues of the County s toll road system. The County has never levied and collected taxes for the payment of such bonds. In addition to the outstanding long-term debt shown above, Commissioners Court has established a general obligation commercial paper program payable from ad valorem taxes for the purpose of financing various short-term assets and temporary construction financing for certain long-term fixed assets. See Commercial Paper. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 12

23 Table 6 Estimated County-Wide and Overlapping Ad Valorem Tax Debt In addition to the taxing entities mentioned below, approximately 33 cities, towns and villages; 31 independent school districts; four junior college districts; and approximately 368 utility districts are empowered to levy taxes on property within their boundaries within the County and are reported by the Municipal Advisory Council of Texas as having debt outstanding. The following summary of estimated outstanding ad valorem tax debt of taxing entities within the County was compiled by the County s Financial Advisor from a variety of sources, including Texas Municipal Reports as compiled and published by the Municipal Advisory Council of Texas. The County believes such sources to be reliable, but the County takes no responsibility for the accuracy or completeness thereof. The table reflects debt outstanding as of various dates. Certain entities listed below may have issued substantial amounts of debt since the latest available data and may have capital improvement programs requiring the issuance of a substantial amount of additional debt which the County cannot control. Long Term Debt Outstanding (Dollars in Thousands) County-Wide Taxing Entities: (a) Harris County Flood Control District $ 96,470 Harris County (b) 2,345,417 Port of Houston Authority 731,969 $3,173,856 Cities: (c) Houston $3,207,460 Other cities 558,757 $3,766,217 Independent School Districts, Junior College Districts and the Harris County Department of Education (c) $11,333,272 Utility Districts (c) $3,898,832 Total $22,172,177 (a) As of October 5, 2012, information has been adjusted to give effect to the issuance of the Bonds and the refunding of the Refunded Bonds. Exclusive of commercial paper transactions. (b) Includes Flood Control District Contract Tax Bonds secured by County contract payments. See Other Obligations. Excludes all outstanding Toll Road Tax Bonds, which are secured by a subordinate lien on toll road net revenues; no tax has ever been required to pay such bonds. See Table 7 - County-Wide Ad Valorem Tax Debt Service Requirements and footnote (b) thereto. (c) Includes certain contract tax bonds substantially equivalent to ad valorem tax bonds. Source: Harris County and the Municipal Advisory Council of Texas. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 13

24 Table 7 County-Wide Ad Valorem Tax Debt Service Requirements The following table sets forth the debt service requirements on the County-wide outstanding ad valorem tax debt. The following table has been adjusted to give effect to the issuance of the Bonds and the refunding of the Refunded Bonds, and does not include commercial paper or tax anticipation notes. See Commercial Paper and BUDGETING PROCEDURES AND OPERATING FUNDS BUDGET Tax Anticipation Borrowing. Fiscal Year (Ended Feb. 28/29) (a) (b) (c) (d) (e) (f) County Limited Tax Bonds (a) County Unlimited Tax Bonds (b) Toll Road Unlimited Tax Bonds (c) Flood Control District Limited Tax Bonds (d) Flood Control District Contract Tax Bonds (e) Port of Houston Authority Unlimited Tax Bonds 2013 $ 75,171,746 $ 61,804,546 $ 84,627,966 $ 8,443,169 $ 37,042,119 $ 51,841,316 $ 318,930, ,476,507 56,505,752 73,812,290 8,250,694 37,047,219 51,849, ,942, ,474,311 62,322,163 82,855,667 6,737,356 36,955,069 52,135, ,480, ,923,731 67,703,663 58,516,811 5,567,238 36,637,819 52,144, ,493, ,145,757 66,754,676 42,799,013 4,384,000 36,621,619 52,149, ,855, ,094,771 70,785,976 41,737,731 4,384,000 36,596,369 54,337, ,935, ,070,615 71,957,413 41,187,050 4,384,000 50,918,869 54,415, ,933, ,491,376 65,243,600 40,622,563 4,384,000 65,506,831 55,129, ,377, ,301,902 68,028,000 40,049,775 4,384,000 63,975,031 55,492, ,231, ,237,156 48,655,675 28,930,613 4,384,000 66,450,181 55,470, ,128, ,646,085 87,546,675 28,689,022 4,384,000 64,203,569 54,715, ,185, ,636,661 86,325,675 28,084,903 4,384,000 63,254,069 49,267, ,952, ,652,787 74,891,775 27,462,059 4,384,000 31,373,819 49,263, ,027, ,316,787 55,715,175 17,500,338 17,184,000 33,908,500 49,256, ,881, ,522,537 53,561,425 16,886,138 16,544,000 33,885,750 49,249, ,649, ,749,412 51,407,675 16,275,756 15,904,000 33,838,000 49,910, ,084, ,236,000 49,373,925 15,659,194 15,296,000 33,169,000 49,910, ,644, ,700,250 36,920,425 15,046,450 14,688,000 32,492,250 49,912, ,759, ,499,875 32,703,175 14,432,394 14,080,000 31,822,000 49,911, ,449, ,332,625 31,319,088 13,817,025 13,440,000 31,146,750 49,910, ,965, ,355,250-13,205,213-17,020,500 49,907, ,488, ,586,956-17,019,500 49,908,025 79,514, ,019,750 49,905,806 66,925, ,019,750 49,910,275 66,930, ,023,000 49,909,275 66,932, ,022,750 49,910,113 66,932, ,022,500 49,912,181 66,934, ,020,500 34,608,000 51,628,500 $1,702,036,141 $1,199,526,477 $754,784,927 $175,590,457 $993,013,083 $1,420,244,318 $6,245,195,403 Includes debt supported by both the County s limited ad valorem tax and a lien on hotel occupancy tax. Includes debt service of the Permanent Improvement Bonds, and excludes debt service on the Refunded Bonds. Includes debt service of the Road Bonds, and excludes debt service on the Refunded Bonds. The County s policy and practice has been to provide for payment of debt service on the Toll Road Tax Bonds from toll road revenues and certain other funds, and no tax has to date been collected to provide for such debt service. Flood Control District Limited Tax Bonds are secured by a pledge of a limited tax levied by Commissioners Court on behalf of the Flood Control District. Flood Control District Contract Tax Bonds are payable from contractual payments made by the County to the Flood Control District secured by the County s limited tax pursuant to Flood Control Projects Contracts. See Other Obligations. Discrepancies in totals due to rounding. 14 Grand Total (f)

25 Table 8 Debt Service Requirements for the County s Limited Tax Bonds The following table sets forth the expected debt service on bonds secured by the County s limited tax and has given effect to the issuance of the Permanent Improvement Bonds and the refunding of the Refunded Bonds, but does not include any commercial paper or the County s Flood Control Contract Payment. See Commercial Paper and Other Obligations. Fiscal Year Limited Tax Bond Debt Service (a) Less Refunded Bonds Debt Service The Permanent Improvement Bonds Principal Interest Adjusted Limited Tax Bond Debt Service Requirements 2013 $75,171, $ 75,171, ,266,178 $10,193,125 $ 4,890,000 $ 3,513,454 96,476, ,263,720 9,841,513 3,760,000 4,292, ,474, ,715,763 9,843,038 3,855,000 4,196, ,923, ,936,138 9,844,588 3,990,000 4,064, ,145, ,882,925 12,505,638 6,825,000 3,892, ,094, ,863,188 12,508,138 6,945,000 3,770, ,070, ,279,369 12,508,388 7,095,000 3,625, ,491, ,092,775 12,504,000 7,240,000 3,473, ,301, ,026,525 12,503,838 7,410,000 3,304, ,237, ,435,175 12,506,363 7,615,000 3,102,273 78,646, ,430,825 14,740,638 10,065,000 2,881,474 79,636, ,967,637 46,757,600 42,910,000 2,532, ,652, ,632,575 3,503,038 1,800, ,250 66,316, ,840,100 3,499,813 1,885, ,250 63,522, ,066,587 3,500,175 1,980, ,000 61,749, ,550,650 3,498,650 2,080, ,000 53,236, ,700, ,700, ,499, ,499, ,332, ,332, ,355, ,355,250 $1,728,309,876 $190,258,543 $120,345,000 $43,639,808 $1,702,036,141 (a) Includes debt supported by both the County s limited ad valorem tax and a lien on the County s hotel occupancy tax. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 15

26 Table 9 Debt Service Requirements for the County s Unlimited Tax Bonds The following table sets forth the expected debt service on bonds secured by the County s unlimited tax and has given effect to the issuance of the Road Bonds or the refunding of the Refunded Bonds, but does not include any commercial paper. See Commercial Paper and Other Obligations. Fiscal Year Unlimited Tax Bond Debt Service Less Refunded Bonds Debt Service Principal The Road Bonds Interest Adjusted Limited Tax Bond Debt Service Requirements 2013 $61,804, $ 61,804, ,087,738 $ 12,774,975 - $ 4,192,989 56,505, ,681,538 11,582,475-5,223,100 62,322, ,102,738 12,737,175 $ 7,115,000 5,223,100 67,703, ,101,163 11,494,500 6,085,000 5,063,013 66,754, ,305,513 15,555,000 10,155,000 4,880,463 70,785, ,200,513 9,077,750 4,335,000 4,499,650 71,957, ,486,100 9,073,750 4,505,000 4,326,250 65,243, ,271,200 9,074,250 4,685,000 4,146,050 68,028, ,820,525 4,123,500-3,958,650 48,655, ,751,525 24,488,500 20,325,000 3,958,650 87,546, ,427,525 21,455,250 18,325,000 3,028,400 86,325, ,976,525 45,942,750 43,710,000 2,148,000 74,891, ,715, ,715, ,561, ,561, ,407, ,407, ,373, ,373, ,920, ,920, ,703, ,703, ,319, ,319,088 $1,217,018,037 $187,379,875 $119,240,000 $50,648,315 $1,199,526,477 [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 16

27 Table 10 County-Wide Authorized but Unissued Bonds The following table shows County-wide ad valorem tax bonds that have been authorized by the voters but remain unissued. The table reflects the County s use of voted authority when it issues general obligation commercial paper notes pursuant to its Series B (parks and libraries) and Series C (roads and bridges) programs. Type and Purpose (a) (b) Authorized But Unissued (Dollars in Thousands) County Ad Valorem Tax Bonds Limited Tax: Civil Justice Center $ 33,000 Certificates of Indebtedness for Fire-Fighting Facilities 0 Libraries 0 Parks 65,000 Forensic Lab 80,000 Family Law Center $ 70,000 Total Limited Tax Bonds $ 248,000 Unlimited Tax: Road Bonds $ 128,277 Total Unlimited Tax Bonds $ 128,277 Combination Unlimited Tax and Revenue: Toll Bonds $ 15,148 Total Combination Unlimited Tax and Revenue Bonds $ 15,148 Harris County Flood Control District Limited Tax Bonds 0 Total Harris County Ad Valorem Tax Bonds $ 391,425 Port of Houston Authority Unlimited Tax Bonds Port Improvements $ 0 Deepening and Widening of Houston Ship Channel Port Improvements, Docks and Security Enhancements $ 0 Total Authorized but Unissued Port of Houston Authority Bonds 0 Total Authorized but Unissued Bonds $ 391,425 (a) In November 1999, voters authorized $119 million in debt for a Civil Justice Center of which $33 million of authorization remains. In November 2007 voters authorized $435 million of County debt which includes $95 million for parks (of which $65 million is still available) and $80 million for a forensic lab and $70 million for a Family Law Center. Also authorized was $190 million for roads, of which $128.3 million remains available. Harris County Toll Road Authority has voter authorization of $15.1 million remaining from the 1983 election in which voters authorized $900 million. The County may also issue tax supported certificates of obligation and commercial paper notes without voter authorization. (b) As of October 31, Source: Harris County Financial Management. Commercial Paper In addition to the outstanding long-term tax debt shown in Table 5 Tax Debt Outstanding, the Commissioners Court has established a general obligation commercial paper program secured by ad valorem taxes for the purposes of financing various short-term assets and providing temporary construction financing for certain long-term fixed assets. The commercial paper program consists of five series and totals $800 million as follows: Series Program Size Security Liquidity Bank Liquidity Expiration A-1 $100 million limited tax State Street 08/20/2013 B $40 million limited tax Bank of America 08/20/2013 C $260 million unlimited tax Bank of Tokyo Mitsubishi 09/25/2015 D $200 million limited tax JPMorgan Chase 08/20/2013 F $200 million limited tax Helaba 08/01/

28 A portion of the Series B (parks and libraries) and Series C (roads and bridges) programs are issued pursuant to voted authorization obtained at elections held within the County in November See Table 9 County-Wide Authorized but Unissued Bonds. A portion of the Series B Notes is authorized to be issued for certain purposes (libraries) not required to be approved at an election. As of October 31, 2012, specific projects have been approved for no more than $624.4 million of commercial paper. As of such date, the County had outstanding $237.1 million of commercial paper, of which $74.6 million was secured by the County s limited tax and $162.5 million was secured by the County s unlimited tax. Other Obligations In addition to voter-authorized bonds, the Commissioners Court can also authorize the issuance of certificates of obligation, short-term notes, contractual obligations for personal property, and lease obligations. In addition, the County has contractual obligations to make payments to the Flood Control District secured by the County s limited tax pursuant to certain Flood Control Projects Contracts. See Table 5 Tax Debt Outstanding. INVESTMENTS The County invests its investable funds in investments authorized by Texas law in accordance with written investment policies approved by the Commissioners Court of the County, a copy of which is available upon request. Both state law and the County s investment policies are subject to change. The Financial Management office of the County invests all investable County funds, which include funds of the following departments or governmental bodies: Harris County, the Flood Control District, the Toll Road Authority and Community Supervision and Corrections. The County operates as an investment agent for the 911 Emergency Network, the Port of Houston, the Harris County-Houston Sports Authority and the Hospital District. Each of the above entities has a separate investment portfolio and the funds are not commingled into a single pool of investments. Current Texas law authorizes the County to invest in: (1) obligations, including letters of credit, of the United States or its agencies and instrumentalities; (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 of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit that are issued by a depository institution that has its main office or a branch office in the State of Texas and is guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor; (b) secured by obligations described in the preceding clauses, including mortgage backed securities directly issued by a federal agency or instrumentality that have a market value of not less than the principal amount of the certificates, but excluding those mortgage backed securities of the nature described by Section (b) of the Texas Government Code; or(3) secured in any other manner and amount provided by law for County deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by cash or obligations described in clause (1) and requires the securities being purchased by the County or cash held by the County to be pledged to the County, held in the County s name, and deposited at the time the investment is made with the County or with a third party selected and approved by the County, 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 value of the securities loaned under the program are not less than 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) pledged irrevocable letters of credit issued by a bank organized under the laws of the United States or any other 18

29 state, 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) and (15) below, (ii) securities held as collateral under a loan are pledged to the County and held in the County s name, (iii) deposited at the time the investment is made with the County or with a third party selected by or approved by the County; (iv) 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 (v) 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 bank organized and existing under the laws of the United States or any state; (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; (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of no less than AAA or its equivalent, and conforms to certain requirements relating to the eligibility of investment pools to receive and invest funds of the County; (14) guaranteed investment contracts that have a defined termination date and are secured by obligations described in clause (1) above in an amount at least equal to the amount of bond proceeds invested under such contract; and (15) eligible investment pools if the Commissioners Court by order authorizes investment in that particular pool. Financial Management Products As part of the County s management of its debt portfolio, the County, consistent with the guidelines set forth in its financial management products policy adopted by the County on June 29, 2004, as readopted on April 13, 2010 (the Financial Management Products Policy ), considers and uses various financial management products such as interest rate swaps, caps, and floors (collectively, Financial Management Products ) in connection with debt issued by the County. The County may enter into such Financial Management Products as authorized by Commissioners Court and approved by the Attorney General of the State of Texas. At this time, the County has no Financial Management Products outstanding payable from the General Fund Tax Levy. Pursuant to the Financial Management Products Policy, the County will evaluate the use of Financial Management Products by comparing them to traditional financing vehicles and structures and will only use a Financial Management Product if it produces significant quantifiable value or reduces the risk exposure in management of its debt portfolio. In addition, the County shall neither have fixed rate swaps in effect with an aggregate notional amount in excess of 30% of the aggregate outstanding principal amount of debt and bonds issued by the County, nor basis swaps in effect with an aggregate notional amount in excess of 30% of the aggregate outstanding principal amount of debt and bonds issued by the County. The Financial Management Products Policy provides that the County may choose counterparties for entering into Financial Management Products provided such counterparties are rated at least AA- by S&P or Fitch Ratings or Aa3 by Moody s or the obligations of such counterparties are guaranteed by a person with such rating or the obligations of such counterparties are collateralized by obligations with such rating, with such ratings determined at the time the County enters into such agreements, all as required by the Commissioners Court and other applicable regulations. In addition, any uncollateralized counterparty s termination exposure may not exceed between $75 million and $100 million per any single counterparty. The County tracks and regularly reports on the financial implications of its Financial Management Products. A semi-annual report is prepared for the County s Executive Director of the Budget Management Department by the County s Financial Management Products Committee. In addition, the County s Financial Management Products Committee performs such monitoring and reporting as is required by the rating agencies or the Government Accounting Standards Board ( GASB ). 19

30 Investment Strategy and Policy Under Texas law, the County is required to invest its funds under a written investment policy that primarily emphasizes safety of principal and liquidity and that addresses investment diversification, yield, maturity, and the quality and capability of investment management. All County funds must be invested in investments that are consistent with the operating requirements of the County. Table 11 Current Investments As of October 31, 2012, the following percentages of the County s investable funds were invested in the following categories of investments. The average remaining maturity of such investments was 305 days based on par value. Distribution of County Investable Funds Source: Harris County Financial Management. Administration of the County U.S. Government Securities 36% Commercial Paper 33% Money Market Deposits 20% Municipal Securities 11% 100% THE COUNTY The County Judge and the four County Commissioners who comprise the Commissioners Court, the County Tax Assessor-Collector and the County Treasurer, all of whom are elected officials, and the County Auditor and County Budget Officer have responsibility for the budget and financial administration of the County. The Commissioners Court is the governing body of the County. It has certain powers expressly granted to it by the Legislature and powers necessarily implied from such grant. Its duties include approval of the County budget, determination of County tax rates, approval of contracts in the name of the County, calling elections, issuance of bonds and appointments of certain County officials. The County Judge, Ed Emmett, is the presiding officer of the Commissioners Court. The County Judge is elected by the voters to a four-year term of office. The County Commissioners are El Franco Lee, Jack Morman, Steve Radack and R. Jack Cagle. Each County Commissioner represents one of the four precincts into which the County is divided and is elected by the voters to a four-year term of office. Commissioner Cagle was appointed as Harris County Commissioner Pct. 4 by Harris County Judge Ed Emmett and sworn in on October 3, 2011 to fill the vacancy created by the resignation of Commissioner Jerry Eversole. The County Treasurer, Orlando Sanchez, is an elected official of the County and the chief custodian of County funds, which duties include the receipt of all monies belonging to the County from whatever source they may be derived, the deposit of such funds in a designated depository and the payment and application or disbursement of such funds, in such manner as the Commissioners Court may require or direct not inconsistent with law. The County Tax Assessor-Collector and Voter Registrar, Don Sumners, CPA, RTA, is an elected official of the County responsible for assessing and collecting ad valorem taxes and processing voter registration in the County. The County Clerk, Stan Stanart, is an elected official of the County and serves as Ex-Officio Clerk of the Commissioners Court. 20

31 The County Attorney, Vince Ryan, an elected official of the County, advises and represents the County and its officers and employees in connection with legal matters. The County Auditor, Barbara Schott, CPA, has oversight responsibility for the financial books and records of the County and its officials. The duties of the County Auditor include prescribing accounting procedures, preparing statutorily required financial reports, budgetary oversight and performing financial and compliance audits. The County Auditor is appointed for a two-year term by the State District Judges of the County. The Executive Director, Budget Management Department, William Jackson, is also the County Investment Officer and Budget Officer responsible for both County investments and debt management, respectively. Table 12 County Employees The number of County employees at Fiscal Years ended 2008 through 2012 are set forth below: (a) Administration of Justice 8,740 9,425 9,308 8,779 8,462 Parks County Administration 3,024 3,339 3,161 3,032 2,901 Health and Human Services 1,706 1,796 1,718 1,467 1,385 Flood Control Tax Administration Roads and Bridges Total 15,769 16,985 16,687 15,258 14,583 (a) As of February 29, 2012, it is estimated that approximately 2,639 of the County s employees were members of various labor organizations, some of which are unions affiliated with the AFL-CIO. The County does not maintain collective bargaining agreements with any unions. Source: Harris County Auditor s Office. Retirement Program The Texas County and District Retirement System administers a combined retirement program for officials and eligible employees of both the County and the Flood Control District. For a description of the plan, including County and employee contributions for the most recent fiscal year and the possibility of unfunded liabilities, see Note 12 to the Basic Financial Statements attached hereto as APPENDIX A. Beginning with the fiscal year that ended February 29, 2008, the County was subject to GASB 45, as promulgated by the GASB. GASB 45 requires the County to estimate the liabilities of its retiree healthcare plan (other post-employment benefits or OPEB), as well as recognize contribution amounts and reserves relating to its OPEB plans for current retirees and employees. The actuarially determined unfunded actuarial accrued liability (UAAL) for Harris County and Flood Control District retiree health care benefits at March 1, 2011, was $960,495,459. The County may modify its OPEB plans in the future and such liabilities may change. See Note 13 to the Basic Financial Statements attached hereto as APPENDIX A. County Offices and Courts and Branch Office Buildings The County s courthouse complex in downtown Houston (the Complex ) covers an area of approximately eight city blocks and houses most of the County s administrative offices and the County s State District Courts and County Courts. Currently, the ten major buildings in the Complex include a civil courts building, a criminal courts building, a domestic relations courts building, three buildings housing administrative offices, a Criminal Justice Center, two County detention facilities and a building housing the jury assembly room, several courtrooms and a parking garage. 21

32 The County also owns or rents a number of branch office buildings. These buildings house fifteen Justice of the Peace Courts at separate locations and various facilities for the Sheriff, the Constables, the Tax Assessor- Collector, the County Clerk and the County Commissioners. Other County Services The County operates a County jail and detention system, an extensive system of roads, streets, bridges and highways, a park system, a library system and juvenile homes and provides various levels of civil and criminal courts, a District Attorney s office, a County Attorney s office, a County Sheriff s department, juvenile probation and detention services and mosquito control services. The County also provides various public health and social welfare services which include financial assistance to indigent people requiring extensive nursing care, protective services for dependent and neglected children, special nutrition programs for the elderly, employment of public health nurses, regular inspection of restaurants and other food handling establishments, investigation of sanitary sewer and other pollution control facilities, immunization and licensing of animals and operation of a mental health and mental retardation facility and related services. In addition, the County owns the Reliant Park (formerly known as the Astrodome Complex), which is comprised of Reliant Center, Reliant Stadium, Reliant Astrodome and Reliant Arena, and provides for their operation through the Harris County Sports & Convention Corporation, a non-profit corporation created by the County. Public Infrastructure Department The purpose of the Harris County Public Infrastructure Department is to coordinate and develop plans, budgets and studies for an infrastructure program that includes roads, parks and flood control. The executive director is appointed by the Commissioners Court. Harris County Toll Road Authority The Harris County Toll Road Authority (the Authority ) was established pursuant to Chapter 284, Texas Transportation Code, as amended, by an order adopted by the Commissioners Court in September, 1983, and the members of its operating board are the members of the Commissioners Court. The Authority was created for the sole purpose of implementing the County s toll road projects and does not have any responsibilities with respect to the other road projects of the County, but plans and operations are coordinated with the Public Infrastructure Department and other support groups in County government. The management of the Authority is the responsibility of its Director, reporting through the Harris County Public Infrastructure Department. Harris County Flood Control District The Harris County Flood Control District (the Flood Control District ), created by a special act of the Texas Legislature in 1937, is a conservation and reclamation district authorized under Article XVI, Section 59 of the Texas Constitution, and a political subdivision of the State of Texas, having boundaries continuous with those of the County. The Flood Control District was created for the purpose of controlling storm and floodwater of rivers and streams and reclaiming and draining overflow lands. Since the creation of the Flood Control District, the County has relinquished certain flood control and drainage activities to the Flood Control District. The Flood Control District encompasses approximately 1,700 square miles, 22 watersheds and 3,000 miles of watercourses. Substantially all of the City of Houston, the fourth most populated city in the nation, is located within the Flood Control District. The management of the Flood Control District is the responsibility of its Director, reporting through the Harris County Public Infrastructure Department. Harris County-Houston Sports Authority The Harris County-Houston Sports Authority (the Sports Authority ) was created by concurrent orders of the Commissioners Court of Harris County, Texas and the City Council of the City of Houston, Texas, effective September 1, The Sports Authority is a separate political subdivision of the State of Texas, organized as a sports and community venue district under Chapters 334 and 335, Texas Local Government Code. Since its creation, the Authority has issued debt to finance the construction of (a) Minute Maid Park for use by the Houston Astros Major League Baseball team, (b) Reliant Stadium for use by the Houston Texans National Football League team and (c) the Toyota Center and Tundra garage for use by the Houston Rockets National Basketball Association team. The Sports Authority s debt is secured by senior, junior and subordinate lien pledges of hotel occupancy and 22

33 motor vehicle taxes, and by separate pledges of certain special revenues. The Sports Authority is a separate governmental subdivision from the County and the County is prohibited from using its ad valorem tax revenues for payment of any of the Sports Authority s obligations. Neither the County nor taxpayers have direct liabilities related to Sports Authority obligations. The management of the Sports Authority is the responsibility of its 13 member board of directors, six which are appointed by the City Council of the City of Houston, six which are appointed by Commissioners Court of Harris County and the chair which is appointed jointly by both the City and Harris County. BUDGETING PROCEDURES AND OPERATING FUNDS BUDGET Current Operating and Debt Service Funds Budgeting Procedures for the County Under the County s budgeting procedures, the County Budget Officer, who is appointed by the Commissioners Court, prepares the budgets for the County for the Fiscal Year, after consultation with department heads and representatives of members of the Commissioners Court. The proposed budgets, together with revenue estimates furnished by the County Auditor, are submitted to the Commissioners Court for its consideration. Public hearings on the budgets are held by the Commissioners Court, which may increase or decrease any budget item prior to such budget s formal adoption; however, the amount budgeted for any fund cannot exceed the County Auditor s estimate of revenues for the budget year plus the cash balances at March 1. After the budgets have been adopted by the Commissioners Court, the Budget Officer and County Auditor are responsible for monitoring the expenditures of the various departments of the County to prevent expenditures from exceeding budgeted appropriations and for keeping the members of the Commissioners Court advised of the condition of the various appropriation accounts. The Commissioners Court may transfer amounts among budget classifications in these funds, but no such transfer will increase the total of the budget. Purchase orders and contracts are not valid until the County Auditor certifies that money is or will be available to make payment. Encumbrances against budgeted appropriations are recorded in the County s records upon execution of purchase orders, contracts or other appropriate documents. Encumbered amounts remaining unexpended at the end of the year are reappropriated in the following year s budget. Table 13 Operating Funds Budget for the County s Fiscal Year Ending Last Day of February 2013 On March 13, 2012, the Commissioners Court adopted the budget for the County for the Fiscal Year 2013 which included appropriations for some capital projects which are financed from current revenues. The following is a summary of the Fiscal Year 2013 budget for the County s Current Operating Funds: Cash Balance as of March 1, 2012 $ 145,954,000 Estimated Revenues: Ad Valorem and Miscellaneous Taxes 907,692,298 Charges for Services 190,405,616 Fines and Forfeitures 17,881,860 Intergovernmental Revenues 35,618,948 Interest 707,500 Other 41,259,346 Total Cash and Estimated Revenues $1,339,519,568 Appropriations: Current Operating Expenses $1,329,086,633 Capital Outlay: Roads 8,852,227 Parks 1,450,708 Office/Courts 130,000 Total General Fund Appropriations $1,339,519,568 23

34 Tax Anticipation Borrowing The County engages in a tax anticipation note program each Fiscal Year for the purpose of providing funds for the payment of working capital expenditures of the County until ad valorem taxes are received. The County s tax anticipation note program for Fiscal Year 2013 is $375 million. Table 14 General Fund Balances For Fiscal Years 2008 Through 2012 The table below shows the County s General Fund balances for Fiscal Years 2008 through (a) information provided in such table was prepared using the modified accrual basis of accounting. The (b) Unrestricted Cash Balance $315,858,122 $284,217,954 $263,585,397 $224,773,207 $333,775,263 Unreserved Fund Balance 192,615, ,726,080 59,062,550 (22,289,770) Total Reserve Fund Balance 175,956, ,320, ,664, ,139,263 Revenues / Other Sources 1,448,162,204 1,841,325,745 1,704,832,551 1,777,064,195 1,700,840,884 Expenditures / Other Uses 1,383,309,122 1,840,850,860 1,731,152,626 1,800,941,445 1,616,367,925 Fund Balance: Nonspendable 4,839,967 Restricted 280,566,166 Committed 2,120,000 Assigned 33,491,342 Unassigned 91,926,420 Total Fund Balances 412,943,965 (a) The amounts for the fiscal years shown above include the general fund, general fund debt service, public improvement contingency fund, and the mobility fund. For Fiscal Years , the mobility program was an integral part of the general fund. Beginning in Fiscal Year 2010, the mobility program was separated into the mobility fund, which the County Auditor classifies as part of the General Fund group. For all years, funds associated with the mobility program are included above, regardless of whether those funds are part of the general fund itself ( ) or are in the separate mobility fund that is part of the General Fund group. (b) GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, replaced the categories that previously had been used to classify fund balance. The County implemented GASB No. 54 for fiscal year Source: Harris County Auditor s Office. Table 15 County Capital Project Funds The County Capital Project Funds, exclusive of projects undertaken by the Toll Road Authority, are used to construct roads, offices, courts and other buildings, jails, juvenile home facilities, parks and libraries. Cash and investments on hand in the Capital Projects Funds, as of February 29, 2012 (audited), are designated to be spent over a period of several years for the following purposes (except that portions of such representing investment income may be used for debt service): Roads $166,942,150 Permanent Improvements 33,150,006 Flood Control 174,447,402 Reliant Park 13,408,254 Total $387,947,812 Source: Harris County Auditor s Office. PENDING LITIGATION The County is a defendant in various lawsuits and is aware of pending claims arising in the ordinary course of the performance of governmental functions, certain of which seek substantial damages. Such litigation includes lawsuits claiming damages that allege personal injuries, wrongful deaths and property damage and lawsuits alleging 24

35 discriminatory hiring and firing practices; various claims from contractors for amounts under construction contracts; inverse condemnation claims; and various other liability claims. The status of such litigation ranges from an early discovery stage to various levels of appeal of judgments. The amount of damages is limited in certain cases under the Texas Tort Claims Act and is subject to appeal. The County intends to defend itself against these suits vigorously. The County cannot predict, as of the date hereof, the final outcome of any of such claims and suits. In the opinion of management of the County, it is improbable that lawsuits now outstanding against the County that are associated with the operation of the County could become final in a time and manner so as to have a material adverse financial impact upon the operations of the County. General ENVIRONMENTAL REGULATION The County is subject to the environmental regulations of the State and the United States. These laws and regulations are subject to change, and the County may be required to expend substantial funds to meet the requirements of such regulatory authorities. Failure to comply with these laws and regulations may result in the imposition of administrative, civil and criminal penalties. Air Quality Air quality control measures required by the United States Environmental Protection Agency (the EPA ) and the Texas Commission on Environmental Quality ( TCEQ ) may curtail new industrial, commercial and residential development in Houston and adjacent areas. Under the Clean Air Act Amendments of 1990, the eight county Houston-Galveston-Brazoria Area ( HGB Area ) has been designated by the EPA as a severe nonattainment area under the EPA s ozone standards. Such areas are required to demonstrate progress in reducing ozone concentrations each year until compliance with EPA s standards are achieved. To provide for annual reductions in ozone concentrations, the EPA and the TCEQ have imposed increasingly stringent limitations on emissions of volatile organic compounds and nitrogen oxides ( NOx ) from existing stationary sources of air emissions. In addition, any new source of significant air emissions, such as a new industrial plant, must provide for a net reduction of air emissions by arranging for other industries to reduce their emissions by 1.3 times the amount of pollutants proposed to be emitted by the new source. Even though existing air emissions controls are quite stringent, studies have indicated that even more stringent air emissions controls will be necessary in order for the HGB Area to achieve compliance with the ozone standards. In 2010, the EPA proposed to lower its existing ozone standard from parts per million (ppm) to ppm, but abandoned imposition of the stricter rule in Due to the magnitude of air emissions reductions required as well as shortage of economically reasonable control options, the development of a successful air quality compliance plan has been and continues to be extremely challenging and will inevitably impact a wide cross-section of the business and residential community. Extremely stringent controls on sources of air emissions in the HGB Area could make the Houston area a less attractive location to do business in comparison to other areas of the country that do not impose similar stringent emissions controls. If the HGB Area fails to demonstrate progress in reducing ozone concentrations or fails to meet EPA s one-hour and eight-hour ozone standards by the initial deadline for serious non-attainment areas (June 15, 2019), EPA may impose a moratorium on the awarding of federal highway construction grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of hydrocarbon emissions for which construction has not already commenced. Other constraints on economic growth and development include lawsuits filed under the Clean Air Act by plaintiffs seeking to require emission reduction measures that are even more stringent than those adopted by TCEQ and approved by EPA. From time to time, various plaintiff environmental organizations have filed lawsuits against TCEQ and EPA seeking to compel the early adoption of additional emission reduction measures, many of which could make it more difficult for businesses to construct or expand industrial facilities or which could result in travel restrictions or other limitations on the actions of businesses, governmental entities and private citizens. Any successful court challenge to the currently effective air emissions control plan could result in the imposition of even more stringent air emission controls that could threaten continued growth and development in the HGB Area. It remains to be seen exactly what additional steps will ultimately be required to meet federal air quality standards, how the EPA may respond to developments as they occur and what impact such steps and any EPA responses may have upon the economy and the business and residential communities in the HGB area. 25

36 Area Topography and Land Subsidence The land surface in certain areas of the County has subsided several feet over the past 75 years and the subsidence is continuing. The principal causes of subsidence are considered to be the withdrawal of groundwater and, to a lesser extent, oil and gas production. Subsidence may impair development in certain areas and expose such areas to flooding and severe property damage in the event of storms and hurricanes, and thus may affect assessed valuations in those areas. In 1975, the Texas Legislature created the Harris-Galveston Coastal Subsidence District ( Subsidence District ) to provide regulatory control over the withdrawal of groundwater in Harris and Galveston Counties in an effort to limit subsidence. This groundwater conservation district, with no powers to levy taxes or incur debt, has required most suppliers of water to reduce consumption of groundwater and to convert their primary source of supply to surface water. With the reduction of withdrawal of groundwater, the rate of subsidence has been reduced. However, Subsidence District regulations that require conversion to surface water can be costly to industries, municipalities and other water suppliers since the process of converting from a groundwater supply to a surface water supply can result in substantial capital expenditures. The per unit cost of supplying surface water is substantially higher due to the greater cost of treatment and transportation. In response to the Subsidence District s requirements, local municipalities within the County, water authorities and water districts have initiated several measures and programs to provide treated surface water in the region, including the negotiation and execution of water supply contracts and capital cost sharing agreements to support the development and expansion of water purification plants in the region. Due in part to its relatively flat topography and moist coastal climate, and partly due to the effects of subsidence, certain areas of the County are subject to periodic flooding and associated severe property damage as a result of storm events and hurricanes. The County and most of the municipalities located within the County participate in the National Flood Insurance Program administered by the Federal Emergency Management Agency ( FEMA ). Communities participating in the National Flood Insurance Program are required by FEMA to adopt restrictions on development in designated flood prone areas. In exchange, the National Flood Insurance Program makes federally subsidized flood insurance available to property owners located in the participating communities. Given the ongoing effects of subsidence as well as increased development and urbanization within the County, FEMA periodically updates and revises its maps designating the areas of the County that are subject to special flood hazards. Properties that are currently located outside of a designated flood prone area may suffer a reduction in value if they are placed within the boundaries of a special flood hazard area the next time FEMA updates and revises its flood maps. BONDHOLDERS REMEDIES The Orders obligate the Commissioners Court to levy, assess and collect an annual ad valorem tax, without legal limit as to rate or amount in the case of the Road Bonds and within the limits prescribed by law in the case of the Permanent Improvement Bonds. The Orders, however, make no provisions for (1) other security for the payment of the Bonds, (2) express remedies in the event of default, (3) acceleration of maturity of the Bonds if default occurs or (4) a trustee to protect the rights of the owners of the Bonds. The Texas Legislature has not waived nor has it authorized the County to waive sovereign immunity from suits for money damages. Even if an owner of the Bonds obtained a judgment against the County for a default in the payment of principal of or interest on the Bonds, such judgment could not be satisfied by execution against any public purpose property of the County. The principal remedy against the County, if a default occurs, is a mandamus proceeding to compel the Commissioners Court to annually levy, assess and collect the appropriate ad valorem tax in an amount sufficient to pay the principal of and interest on the Bonds. In general, Texas courts have held that a writ of mandamus may be issued to require public officials to perform ministerial acts that clearly pertain to their duties. Texas courts have held that a ministerial act is defined as a legal duty that is prescribed and defined with a precision and certainty that leaves nothing to the exercise of discretion or judgment, though mandamus is not available to enforce purely contractual duties. However, mandamus may be used to require a public officer to perform legally-imposed ministerial duties necessary for the performance of a valid contract to which the State or a political subdivision of the State is a party (including the payment of monies due under a contract). 26

37 The enforcement of a claim for payments of principal of or interest on the Bonds, including the remedy of mandamus, would be subject to the applicable provisions of the federal bankruptcy laws and to any other similar laws affecting the rights of creditors of political subdivisions generally. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Securities Procedures Act (Chapter 1201, Texas Government Code, as amended) provides that the Bonds are negotiable instruments, are investment securities 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 fund of municipalities or other political subdivisions or public agencies of the State of Texas. The Bonds are eligible to secure deposits of any public funds of the state, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. For political subdivisions in the State which have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended), the Bonds may have to be assigned a rating of A or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds. No review by the County has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. The County has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. REGISTRATION AND QUALIFICATION OF BONDS The Bonds have not been registered under the federal Securities Act of 1933, as amended, in reliance upon an exemption contained therein; the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; and the Bonds have not been qualified under the securities acts of any other jurisdiction. The Order has not been qualified under the federal Trust Indenture Act of 1939, as amended, in reliance upon an exemption therefrom. The County assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds will not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. UNDERWRITING Jefferies & Company, Inc., as representative of the Underwriters (collectively, the Underwriters ), has agreed, subject to certain conditions, to purchase the Bonds from the County at a price of $281,931,765.14, which reflects the par amount of the Bonds, plus an original issue premium of $43,329, and less an underwriting discount of $982, The Underwriters obligation is subject to certain conditions precedent and they will be obligated to purchase all of the Bonds if any such Bonds are purchased. The prices and other terms respecting the offering and sale of such Bonds may be changed from time to time by the Underwriter after such Bonds are released for sale, and such Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell such Bonds into investment accounts. Morgan Stanley, parent company of Morgan Stanley & Co. LLC, an underwriter of the Bonds, has entered into a retail brokerage joint venture with Citigroup Inc. As part of the joint venture, Morgan Stanley & Co. LLC will distribute municipal securities to retail investors through the financial advisor network of a new broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1, As part of this arrangement, Morgan Stanley & Co. LLC will compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds. Piper Jaffray & Co. and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement (the Agreement ) which enables Pershing LLC to distribute certain new issue municipal 27

38 securities underwritten by or allocated to Piper Jaffray & Co., including the Bonds. Under the Agreement, Piper Jaffray & Co. will share with Pershing LLC a portion of the fee or commission paid to Piper. The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for Harris County, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities or related derivative securities and financial instruments, which may include bank loans and/or credit default swaps, for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the County. RATINGS Fitch Ratings, Standard & Poor s Ratings Services have assigned credit ratings of AAA and AAA, respectively, to the Bonds. The ratings reflect only the views of the rating agencies, from whom an explanation of the significance of such ratings may be obtained. The County is not obligated to maintain the current ratings on the Bonds and there is no assurance that ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely if, in the judgment of a rating agency, circumstances so warrant. Any such downward revision or withdrawal could have an adverse effect on the market price of any or all of the Bonds. The County will undertake no responsibility to oppose any withdrawal or revision of such ratings or to notify the owners of the Bonds of any such revisions or withdrawals of ratings. A securities rating is not a recommendation to buy, sell or hold the Bonds. Due to the ongoing uncertainty regarding the economy of the United States of America including, without limitation, matters such as the future political uncertainty regarding the United States debt limit, obligations issued by state and local governments, such as the Bonds, could be subject to a rating downgrade. Additionally, if a significant default, other financial crisis or budgetary reductions should occur in the affairs of the United States or of any of its agencies or political subdivisions, then such event could also adversely affect the market for and ratings, liquidity, and market value of outstanding debt obligations, including the Bonds. On June 5, 2012, Standard & Poor s affirmed its AAA long-term rating on the County s general obligation bonds, but it revised its outlook on the County s general obligation bonds, which include the Bonds, to negative from stable. On July 28, 2011, Moody s Investors Service ( Moody s ) placed under review for possible downgrade the Aaa ratings of 177 public finance credits, including the County. These 177 credits were assessed by Moody s to be indirectly linked to the federal government and therefore vulnerable to a Moody s downgrade of the credit rating of the federal government. On August 2, 2011, Moody s confirmed the Aaa credit ratings of the federal government and the other indirectly linked public finance credits, but assigned negative outlooks to each credit. However, Moody s has indicated that its ongoing review may still result in ratings downgrades for the federal government and the indirectly linked credits. Previously, on June 23, 2011, Moody s placed the County s Aaa general obligation credit rating on review for possible downgrade for reasons unrelated to its indirect link to the federal government s credit rating. Although Moody s has not been asked to assign a credit rating to the Bonds, it is possible that Moody s may, in the future, assign an unsolicited rating to the Bonds. In such event, Moody s unsolicited rating may adversely affect the market for and ratings, liquidity and market value of the Bonds. VERIFICATION OF MATHEMATICAL COMPUTATIONS Grant Thornton LLP, a firm of independent public accountants, will deliver to the County, on or before the settlement date of the Bonds, its verification report indicating that it has verified, in accordance with attestation standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the invested funds, to pay, when due, the maturing principal of, interest on and related call premium requirements, if any, of 28

39 Refunded Bonds and (b) the mathematical computations of yield used by Bond Counsel to support its opinion that interest on the Bonds will be excluded from gross income for federal income tax purposes. The verification performed by Grant Thornton LLP will be solely based upon data, information and documents provided to Grant Thornton LLP by the County and its representatives. Grant Thornton LLP has restricted its procedures to recalculating the computations provided by the County and its representatives and has not evaluated or examined the assumptions or information used in the computations. Tax Exemption TAX MATTERS FOR THE TAX-EXEMPT BONDS The delivery of the Tax-Exempt Road Bonds and the Tax-Exempt Permanent Improvement Bonds (together, the Tax-Exempt Bonds ) is subject to the opinion of Bond Counsel to the effect that interest on the Tax- Exempt Bonds for federal income tax purposes (1) will be excludable from gross income, as defined in Section 61 of the Internal Revenue Code of 1986, as amended to the date of such opinion (the Code ), pursuant to Section 103 of the Code and existing regulations, published rulings and court decisions and (2) will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. The forms of Bond Counsel s anticipated opinions are reproduced as Appendix B. The statute, regulations, rulings and court decisions on which such opinion will be based are subject to change. Interest on the Tax-Exempt Bonds owned by a corporation will be included in such corporation s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund, a real estate investment trust, a real estate mortgage investment conduit, or a financial asset securitization investment trust ( FASIT ). A corporation s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by Section 55 of the Code will be computed. In rendering the foregoing opinions, Bond Counsel will rely upon representations and certifications of the County made in a certificate dated the date of initial delivery of the Tax-Exempt Bonds pertaining to the use, expenditure and investment of the proceeds of the Tax-Exempt Bonds and will assume continuing compliance by the County with the provisions of the Order subsequent to the issuance of the Tax-Exempt Bonds. The Order contains covenants by the County with respect to, among other matters, the use of the proceeds of the Tax-Exempt Bonds and the facilities financed or refinanced therewith by persons other than state or local governmental units, the manner in which the proceeds of the Tax-Exempt Bonds are to be invested, the periodic calculation and payment to the United States Treasury of any arbitrage profits from the investment of the proceeds, and the reporting of certain information to the United States Treasury. Failure to comply with any of these covenants may cause interest on the Tax-Exempt Bonds to be includable in the gross income of the owners thereof from the date of the issuance of the Tax-Exempt Bonds. Bond Counsel s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the County described above. No ruling has been sought from the Internal Revenue Service (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 tax-exempt obligations. If an audit of the Tax-Exempt Bonds is commenced, under current procedures the Service is likely to treat the County as the taxpayer, and the beneficial owners ( Owners ) of the Tax-Exempt Bonds would 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 Tax-Exempt Bonds, the County may have different or conflicting interests from the Owners of the Tax-Exempt Bonds. Public awareness of any future audit of the Tax-Exempt Bonds could adversely affect the value and liquidity of the Tax-Exempt Bonds during the pendency of the audit regardless of its ultimate outcome. Except as described above, Bond Counsel will express no other opinion with respect to any federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Tax-Exempt Bonds. Prospective purchasers of the Tax-Exempt Bonds should be aware that the ownership of tax-exempt obligations such as the Tax-Exempt Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with 29

40 subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Impact of President s 2013 Budget Proposal On February 13, 2012, President Obama released the language of his proposed budget for fiscal year 2013 (the Budget ). One provision of the Budget would have the effect of imposing an additional amount of tax on certain high income taxpayers based on, among other things, the amount of interest on tax-exempt obligations, such as the Tax-Exempt Bonds, received by such taxpayers. As originally proposed, this provision will be effective for taxable years beginning on or after January 1, 2013, and will apply to interest on the Tax-Exempt Bonds and other tax-exempt obligations received by such taxpayers on or after that date. The introduction or enactment of this provision or any similar legislative proposal may also affect the market price for, or marketability of, the Tax- Exempt Bonds. Prospective purchasers of the Tax-Exempt Bonds are advised to consult their tax advisors with respect to the impact of the Budget or other legislative proposals, as to which Bond Counsel expresses no opinion. Original Issue Premium of Tax-Exempt Bonds The initial public offering price of certain Tax-Exempt Bonds (the Premium Bonds ) may be greater than the amount payable on such Bonds at maturity. An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Bonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser s yield to maturity. Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Bonds. General CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IN RESPECT OF THE TAXABLE BONDS The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the Taxable Bonds. The discussion below is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Code ), current final, temporary and proposed Treasury regulations, judicial authority and current administrative rulings and pronouncements of the Internal Revenue Service (the IRS ). There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS has been, or is expected to be, sought on the issues discussed herein. Legislative, judicial, or administrative changes or interpretations may occur that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences discussed below. TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, YOU ARE HEREBY NOTIFIED THAT ANY DISCUSSION OF FEDERAL TAX ISSUES CONTAINED HEREIN (I) IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN AND (II) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES UNDER THE CODE. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. 30

41 The summary is not a complete analysis or description of all potential U.S. federal tax considerations that may be relevant to, or of the actual tax effect that any of the matters described herein will have on, particular holders of Taxable Bonds and does not address U.S. federal gift or (for U.S. Holders) estate tax consequences or alternative minimum, foreign, state, local or other tax consequences. This summary does not purport to address special classes of taxpayers (such as S corporations, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, real estate investment trusts, grantor trusts, former citizens of the United States, broker-dealers, traders in securities and tax-exempt organizations) that are subject to special treatment under the federal income tax laws, or persons that hold Taxable Bonds that are a hedge against, or that are hedged against, currency risk or that are part of a hedge, straddle, conversion or other integrated transaction, or persons whose functional currency is not the U.S. dollar. This summary also does not address the tax consequences to an owner of Taxable Bonds held through a partnership or other pass-through entity treated as a partnership for U.S. federal income tax purposes. In addition, this discussion is limited to persons purchasing the Taxable Bonds for cash in this offering at their issue price within the meaning of Section 1273 of the Code (i.e., the first price at which a substantial amount of Taxable Bonds are sold to the public for cash), and it does not address the tax consequences to holders that purchase the Taxable Bonds after their original issuance. This discussion assumes that the Taxable Bonds will be held as capital assets within the meaning of Section 1221 of the Code. As used herein, the term U.S. Holder means a beneficial owner of Taxable Bonds that is (i) an individual citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation (or other entity classified as a corporation for U.S. federal tax purposes) created or organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust if (a) a U.S. court can exercise primary supervision over the administration of such trust and one or more United States persons (within the meaning of the Code) has the authority to control all of the substantial decisions of such trust or (b) the trust has made a valid election under applicable Treasury regulations to be treated as a United States person (within the meaning of the Code). As used herein, the term Non-U.S. Holder means a beneficial owner of Taxable Bonds that is not a U.S. Holder. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, PROSPECTIVE HOLDERS OF THE TAXABLE BONDS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR TAX SITUATIONS AND AS TO ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE TAXABLE BONDS. Certain U.S. Federal Income Tax Consequences to U.S. Holders This section describes certain U.S. federal income tax consequences to U.S. Holders. Non-U.S. Holders should see the discussion under the heading Certain Federal Income Tax Consequences to Non-U.S. Holders below for a discussion of certain tax consequences applicable to them. Interest. Interest on the Taxable Bonds will generally be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder s method of accounting for U.S. federal income tax purposes. Premium. A U.S. Holder who purchases a Taxable Bond at a cost greater than the Taxable Bond s remaining redemption amount will be considered to have purchased the Taxable Bond at a premium, and may elect to amortize the premium as an offset to interest income, using a constant-yield method, over the remaining term of the Taxable Bond. If the Taxable Bond is redeemable prior to maturity, the amount of amortizable premium is determined with reference either to the amount payable on maturity or, if it results in a smaller premium attributable to the earlier redemption period, with reference to the amount payable on the earlier redemption date. If a U.S. Holder makes the election to amortize the premium, it generally will apply to all debt instruments held by such U.S. Holder at the time of the election, as well as any debt instruments that are subsequently acquired by such U.S. Holder. In addition, a U.S. Holder may not revoke the election without the consent of the Internal Revenue Service. If such U.S. Holder elects to amortize the premium, such U.S. Holder will be required to reduce its tax basis in the Taxable Bond by the amount of the premium amortized during the holding period of the U.S. Holder. If such U.S. Holder does not elect to amortize premium, the amount of premium will be included in its tax basis in the Taxable 31

42 Bond. Therefore, if a U.S. Holder does not elect to amortize premium and holds the Taxable Bond to maturity, such U.S. Holder generally will be required to treat the premium as capital loss when the Taxable Bond matures. Market Discount. A Taxable Bond purchased by a U.S. Holder at a price that is lower than the Taxable Bond s remaining redemption amount by 0.25% or more of the remaining redemption amount (or adjusted issue price) of such Taxable Bond, multiplied by the number of remaining whole years to maturity of such Taxable Bond, will be considered to bear market discount in an amount equal to such difference in the hands of the U.S. Holder. In this case, any gain realized by a U.S. Holder on the disposition of the Taxable Bond generally will be treated as ordinary interest income to the extent of the market discount that accrued on the Taxable Bond during period it was held by such U.S. Holder. In addition, a U.S. Holder may be required to defer the deduction of all or a portion of the interest paid on any indebtedness that such U.S. Holder incurred or continued to purchase or carry the Taxable Bond. In general, market discount will be treated as accruing ratably over the term of the Taxable Bond, or, at election of the U.S. Holder, under a constant-yield method. A U.S. Holder may elect to include market discount in gross income currently as it accrues (on either a ratable or constant-yield basis), in lieu of treating a portion of any gain realized on a sale of the Taxable Bond as ordinary income. If a U.S. Holder elects to include market discount on a current basis, the interest deduction deferral rule described above will not apply. If a U.S. Holder does make such an election, it will apply to all market discount debt instruments that a U.S. Holder acquires on or after the first day of the first taxable year to which the election applies. The election may not be revoked without the consent of the IRS. Disposition of the Taxable Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange, redemption (including pursuant to an offer by the Institution) or other disposition of a Taxable Bond, will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of Taxable Bonds will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the Taxable Bonds which will be taxed in the manner described above under Interest ) and (ii) the U.S. Holder s adjusted tax basis in the Taxable Bonds (see discussion of tax basis below). Any such gain or loss generally will be long-term capital gain or loss, provided the Taxable Bonds have been held for more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations. Tax Basis. Initially, the tax basis of a U.S. Holder in a Taxable Bond generally will equal the amount paid for the Taxable Bond by such U.S. Holder. Subsequently, the basis will increase by any amounts that such U.S. Holder is required to include in income under the rules governing original issue discount and market discount, and will decrease by the amount of any amortized premium and any payments other than qualified stated interest made on the Taxable Bond. The rules for determining these amounts are described above. Retirement, Sale or Exchange of Taxable Bonds. When a Taxable Bond is sold or exchanged, or if a Taxable Bond is retired, the U.S. Holder of such Taxable Bond generally will recognize gain or loss equal to the difference between the amount it realized on the transaction (less any accrued and unpaid qualified stated interest, which will be subject to tax in the manner described above) and its tax basis in the Taxable Bond. A U.S. Holder may be deemed to have sold or exchanged a Taxable Bond if certain changes are made to the rights or remedies of the Taxable Bondholders or the Institution, including if the liability of the Institution in respect of such Taxable Bond ceases as a result of an election by the Institution to pay and discharge the indebtedness on such Taxable Bond by depositing with the Trustee sufficient cash and/or United States government obligations to pay or redeem and discharge the indebtedness on such Taxable Bond (a legal defeasance ). In the event of a legal defeasance, a U.S. Holder generally will recognize gain or loss on the deemed exchange of the Taxable Bonds. Ownership of the Taxable Bonds after a deemed sale or exchange as a result of a legal defeasance may have tax consequences different than those described in this CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS section and each U.S. Holder should consult its own tax advisor regarding the consequences to such U.S. Holder of a legal defeasance of the Taxable Bonds. Nature of Gain or Loss on Sale, Exchange or Retirement of Taxable Bonds. Except for market discount, the gain or loss that a U.S. Holder recognizes on the sale, exchange or retirement of a Taxable Bond generally will be capital gain or loss. The gain or loss on the sale, exchange or retirement of a Taxable Bond will be long-term capital gain or loss of the U.S. Holder has held the Taxable Bond for more than one year on the date of disposition. 32

43 Net long-term capital gain recognized by an individual U.S. holder generally will be subject to tax at a lower rate than net short-term capital gain or ordinary income. The ability of U.S. holders to offset capital losses against ordinary income is limited. Information Reporting and Backup Withholding. The Institution or its paying agent, if any (the payor ) must report annually to the IRS and to each U.S. Holder any interest that is payable to the U.S. Holder, subject to certain exceptions. Under Section 3406 of the Code and applicable Treasury Regulations, a non-corporate U.S. Holder of the Taxable Bonds may be subject to backup withholding with respect to reportable payments, which include interest paid on the Taxable Bonds and the gross proceeds of a sale, exchange, redemption or retirement of the Taxable Bonds. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a taxpayer identification number ( TIN ) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a notified payee underreporting described in Section 3406(c) of the Code or (iv) there has been a failure of the payee to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules do not constitute an additional tax and will be credited against the U.S. Holder s federal income tax liabilities (and possibly result in a refund), so long as the required information is timely provided to the IRS. Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders This section describes certain U.S. federal income and estate tax consequences to Non-U.S. Holders. Interest. If, under the Code, interest on the Taxable Bonds is effectively connected with the conduct of a trade or business within the United States by a Non-U.S. Holder, such interest will be subject to U.S. federal income tax in a similar manner as if the Taxable Bonds were held by a U.S. Holder, as described above, and in the case of Non-U.S. Holders that are corporations may be subject to U.S. branch profits tax at a rate of up to 30%, unless an applicable tax treaty provides otherwise. Such Non-U.S. Holder will not be subject to withholding taxes, however, if it provides a properly executed Form W-8ECI to the payor. Interest on the Taxable Bonds held by other Non-U.S. Holders may be subject to withholding taxes of up to 30% of each payment made to the Non-U.S. Holders unless the portfolio interest exemption applies, or, as discussed below, such withholding taxes are eliminated by an applicable treaty. In general, interest paid on the Taxable Bonds to a Non-U.S. Holder may qualify for the portfolio interest exemption, and thus will not be subject to U.S. federal withholding tax, if (1) such Non-U.S. Holder is not a controlled foreign corporation (within the meaning of Section 957 of the Code) related, directly or indirectly, to the Institution; (2) the Non-U.S. Holder is not a bank receiving interest on an extension of credit made in the ordinary course of its trade or business described in Section 881(c)(3)(A) of the Code; (3) the interest is not effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States under Section 871(b) or Section 882 of the Code; (4) the Non-U.S. Holder is not an individual who ceased being a U.S. citizen or long-term resident of the United States for tax avoidance to which Section 877 of the Code applies; and (5) either (A) the payor receives from the Non-U.S. Holder who is the beneficial owner of the obligation a statement signed by such person under penalties of perjury, on IRS Form W-8BEN (or successor form), certifying that such owner is not a U.S. Holder and providing such owner s name and address or (B) a securities clearing organization, bank or other financial institution that holds the Taxable Bonds on behalf of such Non-U.S. Holder in the ordinary course of its trade or business certifies to the payor, under penalties of perjury, that such an IRS Form W-8BEN (or a successor form) has been received from the beneficial owner by it and furnishes the payor with a copy thereof. Alternative methods may be applicable for satisfying the certification requirement described above. Foreign trusts and their beneficiaries are subject to special rules, and such persons should consult their own tax advisors regarding the certification requirements. If a Non-U.S. Holder does not claim, or does not qualify for, the benefit of the portfolio interest exemption, the Non-U.S. Holder may be subject to a 30% withholding tax on interest payments on the Taxable Bonds. However, the Non-U.S. Holder may be able to claim the benefit of a reduced withholding tax rate under an applicable income tax treaty between the Non-U.S. Holder s country of residence and the U.S. Non-U.S. Holders are urged to consult their own tax advisors regarding their eligibility for treaty benefits. The required information for claiming treaty benefits is generally submitted on Form W-8BEN. In addition, a Non-U.S. Holder may under certain circumstances be required to obtain a U.S. taxpayer identification number. 33

44 Disposition of the Taxable Bonds. A Non-U.S. Holder will generally not be subject to U.S. federal income tax or withholding tax on gain recognized on a sale, exchange, redemption or other disposition of a Taxable Bond. (Such gain does not include proceeds attributable to accrued but unpaid interest on the Taxable Bonds, which will be treated as interest). A Non-U.S. Holder may, however, be subject to U.S. federal income tax on such gain if: (1) the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more in the taxable year of the disposition; or (2) the gain is effectively connected with the conduct of a U.S. trade or business, as provided by applicable U.S. tax rules (in which case the U.S. branch profits tax may also apply), unless an applicable tax treaty provides otherwise. Information Reporting and Backup Withholding. The payor must report annually to the IRS and to each Non-U.S. Holder any interest that is subject to U.S. withholding taxes or that is exempt from U.S. withholding taxes pursuant to an income tax treaty or certain provisions of the Code. Copies of these information returns may also be made available under the provisions of a specific tax treaty or agreement with the tax authorities of the country in which the Non-U.S. Holder resides. A Non-U.S. Holder generally will not be subject to backup withholding with respect to payments of interest on the Taxable Bonds as long as the Non-U.S. Holder (i) has furnished to the payor a valid IRS Form W-8BEN certifying, under penalties of perjury, its status as a non-u.s. person, (ii) has furnished to the payor other documentation upon which it may rely to treat the payments as made to a non-u.s. person in accordance with Treasury regulations, or (iii) otherwise establishes an exemption. A Non-U.S. Holder may be subject to information reporting and/or backup withholding on a sale of the Taxable Bonds through the United States office of a broker and may be subject to information reporting (but generally not backup withholding) on a sale of the Taxable Bonds through a foreign office of a broker that has certain connections to the United States, unless the Non-U.S. Holder provides the certification described above or otherwise establishes an exemption. Non-U.S. Holders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Amounts withheld under the backup withholding rules may be refunded or credited against the Non-U.S. Holder s U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS. U.S. Federal Estate Tax. A Taxable Bond held or beneficially owned by an individual who, for estate tax purposes, is not a citizen or resident of the United States at the time of death will not be includable in the decedent s gross estate for U.S. estate tax purposes, unless (1) at the time of such individual s death, payments in respect of the Taxable Bonds would have been effectively connected with the conduct by such individual of a U.S. trade or business, or (2) the Non-U.S. Holder was an individual who ceased being a U.S. citizen or long-term resident of the United States for tax avoidance purposes to which Section 877 of the Code applies. In addition, the U.S. estate tax may not apply with respect to such Taxable Bond under the terms of an applicable estate tax treaty. THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF TAXABLE BONDS IN LIGHT OF THE HOLDER S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO ANY TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAXABLE BONDS, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ( ERISA ), imposes certain fiduciary obligations and prohibited transaction restrictions on employee pension and welfare benefit plans subject to Title I of ERISA ( ERISA Plans ). Section 4975 of the Code imposes essentially the same prohibited transaction restrictions on tax-qualified retirement plans described in Section 401(a) and 403(a) of the Code, which are exempt from tax under Section 501(a) of the Code, other than governmental and church plans as defined herein ( Qualified Retirement Plans ), and on Individual Retirement Accounts ( IRAs ) described in Section 408(b) of the Code (collectively, Tax-Favored Plans ). Certain employee benefit plans such as governmental plans (as defined in Section 3(32) of ERISA), and, if no election has been made under Section 410(d) of the Code, church plans (as 34

45 defined in Section 3(33) of ERISA), are not subject to ERISA requirements. Additionally, such governmental and non-electing church plans are not subject to the requirements of Section 4975 of the Code. Accordingly, assets of such plans may be invested in the Taxable Bonds without regard to the ERISA and Code considerations described below, subject to the provisions of applicable federal and state law. In addition to the imposition of general fiduciary obligations, including those of investment prudence and diversification and the requirement that a plan s investment be made in accordance with the documents governing the plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions involving assets of ERISA Plans and Tax-Favored Plans and entities whose underlying assets include plan assets by reason of ERISA Plans or Tax-Favored Plans investing in such entities (collectively, Benefit Plans ) and persons who have certain specified relationships to the Benefit Plans ( Parties In Interest or Disqualified Persons ), unless a statutory or administrative exemption is available. The definitions of Party in Interest and Disqualified Person are expansive. While other entities may be encompassed by these definitions, they include, most notably: (1) fiduciary with respect to a plan; (2) a person providing services to a plan; and (3) an employer or employee organization any of whose employees or members are covered by the plan. Certain Parties in Interest (or Disqualified Persons) that participate in a prohibited transaction may be subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of the Code) unless a statutory or administrative exemption is available. Certain transactions involving the purchase, holding or transfer of the Taxable Bonds might be deemed to constitute prohibited transactions under ERISA and Section 4975 of the Code if assets of the Institution were deemed to be assets of a Benefit Plan. Under final regulations issued by the United States Department of Labor (the Plan Assets Regulation ), the assets of the Institution would be treated as plan assets of a Benefit Plan for the purposes of ERISA and Section 4975 of the Code only if the Benefit Plan acquires an equity interest in the Institution and none of the exceptions contained in the Plan Assets Regulation is applicable. An equity interest is defined under the Plan Assets Regulation as an interest in an entity other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there can be no assurances in this regard, it appears that the Taxable Bonds should be treated as debt without substantial equity features for purposes of the Plan Assets Regulation. However without regard to whether the Taxable Bonds are treated as an equity interest for such purposes, though, the acquisition or holding of Taxable Bonds by or on behalf of a Benefit Plan could be considered to give rise to a prohibited transaction if the Institution or the Trustee, or any of their respective affiliates, is or becomes a Party in Interest or a Disqualified Person with respect to such Benefit Plan. Most notably, ERISA and the Code generally prohibit the lending of money or other extension of credit between an ERISA Plan or Tax-Favored Plan and a Party in Interest or a Disqualified Person, and the acquisition of any of the Taxable Bonds by a Benefit Plan would involve the lending of money or extension of credit by the Benefit Plan. In such a case, however, certain exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the plan fiduciary making the decision to acquire a Taxable Bond. Included among these exemptions are: Prohibited Transaction Class Exemption ( PTCE ) 96-23, regarding transactions effected by certain in-house asset managers ; PTCE 90-1, regarding investments by insurance company pooled separate accounts; PTCE 95-60, regarding transactions effected by insurance company general accounts ; PTCE 91-38, regarding investments by bank collective investment funds; and PTCE 84-14, regarding transactions effected by qualified professional asset managers. Further, the statutory exemption in Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provides for an exemption for transactions involving adequate consideration with persons who are Parties in Interest or Disqualified Persons solely by reason of their (or their affiliate s) status as a service provider to the Benefit Plan involved and none of when is a fiduciary with respect to the Benefit Plan assets involved (or an affiliate of such a fiduciary). There can be no assurance that any class or other exemption will be available with respect to any particular transaction involving the Taxable Bonds, or that, if available, the exemption would cover all possible prohibited transactions. Any ERISA Plan fiduciary considering whether to purchase the Taxable Bonds on behalf of an ERISA Plan should consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code to such in investment and the availability of any of the exemptions referred to above. Persons responsible for investing the assets of Tax-Favored Plans that are not ERISA Plans should seek similar counsel with respect to the prohibited transaction provisions of the Code and the applicability of any similar state or federal law. 35

46 LEGAL PROCEEDINGS The delivery of the Bonds is subject to receipt of the legal opinions of the Attorney General of Texas and of Greenberg Traurig, LLP, Houston, Texas, Bond Counsel, as to the validity of the issuance of the Bonds under the Constitution and laws of the State of Texas. See APPENDIX B FORMS OF BOND COUNSEL OPINION. The opinions of Bond Counsel will be based upon an examination of transcripts of certain proceedings taken by the County incident to the issuance and authorization of the Bonds. The payment of the fees of Bond Counsel for its services with respect to the Bonds is contingent upon the sale and delivery of the Bonds. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect hereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, but said firm has reviewed the statements and information contained under the captions and sub-captions, PURPOSE AND PLAN OF FINANCE, THE BONDS, CONSTITUTIONAL TAX RATE LIMITATIONS, LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS, REGISTRATION AND QUALIFICATION OF BONDS, TAX MATTERS FOR THE TAX-EXEMPT BONDS, CERTAIN UNITED STATES FEDERAL CONSIDERATIONS IN RESPECT OF THE TAXABLE BONDS, ERISA CONSIDERATIONS, LEGAL PROCEEDINGS (first and second paragraphs only), CONTINUING DISCLOSURE OF INFORMATION (except for the subcaption Compliance with Prior Undertakings as to which no opinion will be expressed), APPENDIX B and APPENDIX C and such firm is of the opinion that the information relating to the Bonds and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such information conforms to the provisions of the Order. Certain legal matters will be passed upon for the County by Fulbright & Jaworski, L.L.P., Disclosure Counsel and Vince Ryan, County Attorney for Harris County, Texas and for the Underwriters by their co-counsel, Andrews Kurth LLP, Houston, Texas and Bates & Coleman, P.C., Houston, Texas. The payment of legal fees to Greenberg Traurig LLP, Fulbright & Jaworski L.L.P., Andrews Kurth LLP and Bates & Coleman, P.C. for their services is contingent upon the sale and delivery of the Bonds. Greenberg Traurig LLP and Fulbright & Jaworski L.L.P. represent the various underwriters from time to time in transactions unrelated to the Bonds. Andrews Kurth LLP and Bates & Coleman, P.C. represent the County from time to time on matters unrelated to the Bonds. FINANCIAL ADVISOR First Southwest Company has been retained by the County as its Financial Advisor in connection with the issuance of the Bonds and, in such capacity, has assisted the County in the preparation of documents. The Financial Advisor s fee for services rendered with respect to the sale of the Bonds is not contingent upon the issuance of the Bonds. Additionally, First Southwest Company has been retained by the County to act as its Swap Advisor in connection with employment of financial management products in accordance with the Financial Management Product Policies of the County. Although the Financial Advisor has read and participated in the preparation of this Official Statement, such firm has not independently verified any of the information set forth herein. The information contained in this Official Statement has been obtained primarily from the records of the County and from other sources that are believed to be reliable, including financial records of the County and other entities that may be subject to interpretation. No guarantee is made as to the accuracy or completeness of any such information. No person, therefore, is entitled to rely upon the participation of the Financial Advisor as an implicit or explicit expression of opinion as to the completeness and accuracy of the information contained in this Official Statement. CONTINUING DISCLOSURE OF INFORMATION The Municipal Securities Rulemaking Board (the MSRB ) is the sole information repository and all continuing disclosure documents are required to be provided solely to the MSRB. Access to such information will be made available to the public without charge by the MSRB on its Electronic Municipal Market Access ( EMMA ) website at 36

47 In the Order, the County has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The County is required to observe this agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the Order, the County will be obligated to provide certain updated financial information and operating data annually and timely notice of specified material events to the MSRB. Annual Reports The County will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the County of the general type included in this Official Statement in APPENDIX A, as applicable, and under the schedules listed in APPENDIX C. The County will update and provide this information within six months after the end of each Fiscal Year. The County will provide the updated information to the MSRB. Such information will be available free of charge via EMMA at The County may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by the United States Securities and Exchange Commission (the SEC ) Rule 15c2-12 (the Rule ). The updated information will include audited financial statements, if the County commissions an audit and the audit is completed by the required time. If audited financial statements are not available by the required time, the County will provide unaudited financial information and operating data which is customarily prepared by the County 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 A, as applicable, or such other accounting principles as the County may be required to employ from time to time pursuant to state law or regulation. The County s current Fiscal Year end is the last day of February. Accordingly, the County is required to provide updated information by August 31 in each year, unless the County changes its Fiscal Year. If the County changes its Fiscal Year, it will notify the MSRB. Certain Event Notices The County will provide to the MSRB timely notice, 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) Bonds 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 County; (13) the consummation of a merger, consolidation or acquisition involving the County or the sale of all or substantially all of the assets of the County, 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) the appointment of a successor or additional trustee or the change in the name of the trustee, if material. In addition, the County will provide timely notice of any failure by the County to provide information, data or financial statements in accordance with its agreement described above under CONTINUING DISCLOSURE OF INFORMATION Annual Reports. For these purposes, any event described in the immediately preceding paragraph (12) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the County in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the County, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the County. 37

48 Limitations and Amendments The County has agreed to update information and to provide notices of material events only as described above. The County 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 County 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 County disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the County to comply with its agreement. Nothing in this paragraph is intended or will act to disclaim, waive or limit the County s duties under federal or state securities laws. The County may amend its continuing disclosure agreement with respect to a series of Bonds 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 County, if the agreement, as amended, would have permitted an underwriter to purchase or sell such Bonds in the offering made hereby in compliance with the Rule, and either the holders of a majority in aggregate principal amount of the outstanding Bonds of such series consent or any person unaffiliated with the County (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The County may also amend or repeal the agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid, and the County may amend the agreement in its discretion in any other circumstance or manner, but in either case only to the extent that its right to do so would not prevent the Underwriters from purchasing the Bonds of such series in the offering described herein in compliance with the Rule, giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the County amends its agreement, it must 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 information and operating data so provided. See APPENDIX C CONTINUING DISCLOSURE SCHEDULES. Compliance with Prior Undertakings For the past five years, the County has complied in all material respects with all continuing disclosure agreements made in accordance with the Rule with respect to the County s bonds and other obligations subject to the Rule, except as described in this paragraph. The annual financial information and operating data of the County which was due by August 31, 2007, was not provided by such date. The delayed filing resulted from the Fiscal Year 2006 annual financial report for the County being reissued, which resulted in a delay until November 2007, in the completion and filing of the County s annual audited financial information for Fiscal Year The Fiscal Year 2006 annual financial report for the County was reissued in order to identify and test a major grant program and make certain corrections and restatements primarily related to fixed asset balances. The County has consulted with its Financial Advisor, Bond Counsel and Disclosure Counsel for advice relating to continuing disclosure compliance matters in an effort to develop and institute recommended practices and procedures to help ensure that required filings are made in a timely manner in the future. Audited Financial Report of the County The County requires that an annual audit be performed by an independent public accounting firm in accordance with generally accepted auditing standards. The Fiscal Year 2012 audited financial report and additional financial information are available for public inspection, or copies may be obtained to the extent permitted by law, by written request, addressed to the County Auditor. INDEPENDENT AUDITOR APPENDIX A to this Official Statement contains the basic financial statements of the County for the Fiscal Year ended February 29, The basic financial statements of the County as of and for the Fiscal Year ended February 29, 2012 included in this Official Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in its report (which includes a reference to other auditors and a reference to the County s implementation of new accounting standards) included with such financial statement in APPENDIX A. 38

49 The basic financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and, in addition to financial information with respect to the County, include financial information with respect to the Harris County, Flood Control District, Harris County Juvenile Board, the Harris County Sports & Convention Corporation, Hospital District, Harris County Housing Finance Corporation, Mental Health and Mental Retardation Authority of Harris County, Harris County Industrial Development Corporation, Children s Assessment Center Foundation, Inc., Friends of County Pets, Harris County Health Facilities Development Corporation, Harris County Cultural Education Facilities Finance Corp., separate entities which are not obligated for the payment of the Bonds. Accordingly, financial and statistical information with respect to such separate entities is generally not included in this Official Statement. FORWARD-LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the County, that are not purely historical are forward-looking statements, including statements regarding the County 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 County on the date hereof, and the County assumes no obligation to update any such forward-looking statements. It is important to note that the County s actual results could differ materially from those in such forward-looking statements. The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the County. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The information set forth herein has been obtained from records, financial reports and other sources of the County which are considered to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will ever be realized. All of the summaries of the statutes, documents and the orders contained in this Official Statement are made subject to all of the provisions of such statutes, documents and orders. These summaries do not purport to be a complete statement of such provisions and reference is made to such summarized documents for further information. Reference is made to official documents in all respects. MISCELLANEOUS All information contained in this Official Statement is subject, in all respects, to the complete body of information contained in the original sources thereof. In particular, no opinion or representation is rendered as to whether any forecast will approximate actual results, and all opinions, estimates and assumptions, whether or not expressly identified as such, should not be considered statements of fact. Statements made herein regarding the Bonds are qualified in their entirety by reference to the forms thereof and the information with respect thereto included in the Order, copies of which are available upon request from William Jackson, Executive Director, Budget Management Department, Harris County Administration Building, 1001 Preston, 6th Floor, Houston, Texas 77002, (713) , upon the payment of reasonable reproduction and postage costs. The County s annual audited financial statements are available from Barbara Schott, CPA, County Auditor, Harris County Administration Building, 1001 Preston, 8th Floor, Houston, Texas 77002, (713) , upon the payment of reasonable reproduction and postage costs. Copies can also be obtained from the Harris County website at The information on the website of the County Auditor is not incorporated into this Official 39

50 Statement and is dated as indicated therein. The County makes no assurances that the information will be updated in the future. The County disclaims any responsibility regarding other internet sites that may be accessed through the website of the County Auditor. This Official Statement was approved, and the delivery of this Official Statement authorized on behalf of the County by the Commissioners Court on the date set forth on the front cover page of this Official Statement. 40

51 SCHEDULE I SCHEDULE OF REFUNDED BONDS Harris County, Texas Criminal Justice Center Refunding Bonds, Series 2004 Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2017 $4,845, % XD8 October 1, ,090, XE6 October 1, ,345, XF3 October 1, ,595, XG1 October 1, ,860, XH9 October 1, ,140, XJ5 October 1, ,435, XK2 October 1, 2014 Harris County, Texas Permanent Improvement and Refunding Bonds Series 2002 Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2013 $3,745, % NV9 December 14, ,590, NW7 December 14, ,780, NX5 December 14, ,980, NY3 December 14, ,005, NZ0 December 14, ,105, PA3 December 14, ,210, PB1 December 14, ,320, PC9 December 14, ,425, PD7 December 14, ,535, PE5 December 14, ,425, PF2 December 14, ,485, PG0 December 14, 2012 [Remainder of Page Intentionally Left Blank] - 1 -

52 Harris County, Texas Permanent Improvement and Refunding Bonds Series 2004A Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2023 $2,230, % B91 October 1, ,100, C25 October 1, 2014 Harris County, Texas Unlimited Tax Road Refunding Bonds Series 2003A Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2013 $1,290, % UW ,280, UX7 October 1, ,270, UY5 October 1, 2013 Harris County, Texas Unlimited Tax Road Refunding Bonds Series 2004A Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2013 $4,960, % XT ,520, XV8 October 1, ,890, XW6 October 1, ,175, XX4 October 1, 2014 Harris County, Texas Unlimited Tax Road and Refunding Bonds Series 2004B Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2022 $15,165, % D57 October 1, ,350, D65 October 1, ,755, D73 October 1, 2014 [Remainder of Page Intentionally Left Blank] - 2 -

53 Harris County, Texas Unlimited Tax Road Refunding Bonds Series 2005A Maturity October 1 Principal Amount Interest Rate CUSIP No. (1) Redemption Date 2014 $4,090, % K ,070, K67 October 1, ,280, K75 October 1, ,490, K83 October 1, ,715, K91 October 1, ,200, L25 October 1, 2015 (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard and Poor s on behalf of The American Bankers Association, and is included solely for convenience of the registered owners of the Bonds. 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 County, the Financial Advisor, nor the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein

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55 APPENDIX A AUDITED BASIC FINANCIAL STATEMENTS OF THE COUNTY

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57 HARRIS COUNTY, TEXAS Basic Financial Statements For The Fiscal Year Ended February 29, 2012 Prepared By: Barbara J. Schott, C.P.A. County Auditor 1001 Preston, Suite 800 Houston, Texas 77002

58 F I N A N C I A L S E C T I O N

59 INDEPENDENT AUDITORS' REPORT County Judge Ed Emmett and Members of Commissioners Court of Harris County, Texas: We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of Harris County, Texas (the County ), as of and for the year ended February 29, 2012, which collectively comprise the County's basic financial statements. These financial statements are the responsibility of the County's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of discretely presented component units, which statements reflect 100% of the assets, net assets, and revenues of the aggregate discretely presented component units. 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 discretely presented component units, is based solely on the report of the other auditors. We also did not audit the financial statements of the Harris County Clerk Registry Fund and the Harris County District Clerk Registry Fund agency funds, which statements reflect 31% percent of the assets of the agency funds at February 29, Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the agency funds, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the County's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the reports of the other auditors provide a reasonable basis for our opinions. In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, business-type activities, aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of Harris County, Texas as of February 29, 2012, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1.C. to the County s basic financial statements, the County implemented Governmental Accounting Standards Board Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions. Deloitte & Touche LLP Suite Bagby Street Houston, TX USA Tel: Fax: Member of Deloitte Touche Tohmatsu

60 Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis on pages 13-26, Schedule of Available Resources Budget and Actual Budgetary Basis General Fund, and the Schedule of Expenditures and Other Uses Budget and Actual Budgetary Basis General Fund, and the Other Post Employment Benefits Schedule of Funding Progress, and the Texas County and District Retirement System Schedule of Funding Progress on pages be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. August 14, 2012

61 Harris County, Texas Management s Discussion and Analysis (Unaudited) This section of the Harris County, Texas (the County ) Comprehensive Annual Financial Report ( CAFR ) presents a narrative overview and analysis of the financial activities of the primary government for the fiscal year ended February 29, Please read it in conjunction with the County s basic financial statements following this section. FINANCIAL HIGHLIGHTS Government-wide The total government-wide assets of the County exceeded the liabilities at February 29, 2012 by $10,397,131,909. This is an increase of $34,676,993 from the previous year when assets exceeded liabilities by $10,362,454,916. Total net assets of the primary government are comprised of the following: (1) Capital assets, net of related debt, of $9,149,350,633 include land, improvements, buildings, infrastructure, intangible assets, construction in progress, and other capital assets, net of accumulated depreciation/amortization, and is reduced by outstanding debt, net of unspent proceeds, related to the purchase or construction of capital assets. (2) Net assets of $1,259,697,793 are restricted by constraints imposed from outside the County such as debt obligations, laws, or regulations, including restrictions related to Toll Road and Mobility funds. (3) Unrestricted net assets of negative $11,916,517. Unrestricted net assets in Governmental Activities was negative $20,355,293, which was primarily due to an increase in bonds payable and OPEB. These long-term liabilities are not generally paid with current resources. Governmental Fund Financial Statements As of February 29, 2012, County governmental funds reported combined fund balances of $1,033,142,447. This reflects an increase of $77,789,015 from the previous fiscal year. The current year total consists of combined nonspendable fund balance of $23,035,337, restricted fund balance of $837,742,929, committed fund balance of $49,366,205, assigned fund balance of $33,491,342, and unassigned fund balances of $89,506,634 for fiscal year The General Fund is used to account for the general operations of the County, limited-tax permanent improvement debt service of the County, public improvement contingencies, and the mobility program. At the end of the fiscal year, the unassigned fund balance of the County s General Fund was $91,926,420. The General Fund had a nonspendable fund balance of $4,839,967, restricted fund balance of $280,566,166, committed fund balance of $2,120,070 and assigned fund balance of $33,491,342 at February 29, During the fiscal year, the Harris County Toll Road Authority transferred $120 million of surplus toll road revenue to the mobility program which is accounted for within the General Fund. Mobility program monies are restricted by Section of the Texas Transportation Code for the study, design, construction, maintenance, repair or operation of roads, streets, highways, or other related facilities. The mobility program may not be used for the general operations of the County. The General Fund s cash and investment balance at February 29, 2012 includes $165.9 million that belongs to the mobility program. Because of the legal restrictions imposed on the mobility program, $158,660,973 of the General Fund balance is restricted for mobility at February 29, The nonmajor governmental funds had total combined fund balances of $620,198,482 at February 29, Of this amount, $18,195,370 is nonspendable, $557,176,763 is restricted ($177,450,156 for special revenue funds, $64,429,923 for debt service and $315,296,684 for capital projects funds), $47,246,135 is committed, and negative $2,419,786 is unassigned. 13

62 Harris County, Texas Management s Discussion and Analysis (Unaudited) Long-Term Debt The County issues debt to finance an ongoing capital improvement program. During fiscal year , the County issued $71 million in commercial paper and $415 million in bonds primarily to defease and refund outstanding bonds. Note 10 to the financial statements provides details of long-term debt. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the County s basic financial statements, which are comprised of the following three components: 1) government-wide financial statements; 2) fund financial statements; and 3) notes to the basic financial statements. Required supplementary information is included in addition to the basic financial statements. This report also contains other supplementary information. Government-wide Financial Statements are designed to provide readers with a broad overview of County finances, in a manner similar to a private-sector business. The Statement of Net Assets presents information on all County assets and liabilities, with the difference between the two representing net assets. Over time, increases or decreases in net assets may serve as a useful indicator of the financial condition of the County. The Statement of Activities presents information that indicates how net assets changed during the fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods. Both of the government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include administration of justice, parks, county administration, health and human services, flood control, tax administration, and roads and bridges. The business-type activities of the County include toll road, subscriber access, parking facilities, and sheriff s commissary fund activities. Component units are included in the basic financial statements. Component units are legally separate organizations for which the elected officials of the County are financially accountable, or the relationship to the County is such that exclusion would cause the County s financial statements to be misleading or incomplete. The County s component units have been reported as blended with the County as the primary government or as discrete (separate) component units, as appropriate. The following component units have been included in this year s report: Harris County Flood Control District, Harris County Juvenile Board, Harris County Sports and Convention Corporation, Harris County Hospital District, Harris County Housing Finance Corporation, Mental Health and Mental Retardation Authority of Harris County, Harris County Industrial Development Corporation, Children s Assessment Center Foundation, Inc., Harris County Health Facilities Development Corporation, Harris County Cultural Education Facilities Finance Corporation, and Friends of Countypets. For more detailed information on these component units, refer to Note 1A of the basic financial statements. Fund Financial Statements are groupings of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate finance-related legal compliance. All of the funds of the County can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. 14

63 Harris County, Texas Management s Discussion and Analysis (Unaudited) Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows 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 the County s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The County reports 67 governmental funds, which in some cases are aggregated individual funds (e.g., grant 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 major governmental funds. Data from other governmental funds are combined into a single aggregated presentation. Proprietary funds are used for two purposes: Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. Also, the County uses enterprise funds to account for toll road operations, computer access to certain District Clerk records, acquisition, operation and maintenance of parking facilities, and operation of a commissary for jail inmates. Internal service funds are used to accumulate and allocate costs internally among the County s various functions. The County uses internal service funds to account for its maintenance of County vehicles, operation of County radios, operation of the printing shop services provided by inmates, workers compensation, health insurance and other risk management activities. Because these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The Toll Road Authority fund is considered to be a major fund of the County. The Subscriber Access, Parking Facilities, and Sheriff s Commissary funds are combined as nonmajor enterprise funds for the basic financial statements, but are presented individually in the fund financial statements that follow the required supplementary information. The County s internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County s own programs. The County s fiduciary funds are comprised of 18 agency funds. Agency funds are used to report resources held by the County in a purely custodial capacity (assets equal liabilities) and therefore do not involve measurement of results of operations. Notes to the Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes can be found beginning on page 39 of this report. Required Supplementary Information for the County s General Fund budgetary schedule is presented herein. The County adopts an annual budget for this fund. A budgetary comparison schedule, which includes the original and final amended budget and actual figures, has been provided to demonstrate compliance with this budget. Also presented in this section are the Schedule of Funding Progress for Other Post Employment 15

64 Harris County, Texas Management s Discussion and Analysis (Unaudited) Benefits and the Schedule of Funding Progress for the Texas County and District Retirement System. Required supplementary information can be found beginning on page 95 of this report. GOVERNMENT-WIDE FINANCIAL STATEMENTS As noted earlier, net assets may serve over time as a useful indicator of a government s financial position. In the case of the County, assets exceeded liabilities by $10,397,131,909 for fiscal year 2012 and $10,362,454,916 for fiscal year Revenues exceeded expenses during the current year, increasing net assets by $34,676,993. Condensed Statement of Net Assets February 29, 2012 (Amounts in thousands) Primary Government Governmental Business-type Activities Activities Total Current and other assets $ 1,468,687 $ 1,470,136 $ 2,938,823 Capital assets 11,901,142 2,003,104 13,904,246 Total assets 13,369,829 3,473,240 16,843,069 Current and other liabilities 322,302 67, ,131 Long-term liabilities (including current portion) 3,332,767 2,723,039 6,055,806 Total liabilities 3,655,069 2,790,868 6,445,937 Net assets: Invested in capital assets, net of related debt 9,406,205 (256,855) 9,149,350 Restricted net assets 328, ,788 1,259,698 Unrestricted net assets (20,355) 8,439 (11,916) Total net assets $ 9,714,760 $ 682,372 $ 10,397,132 Condensed Statement of Net Assets February 28, 2011 (Amounts in thousands) Primary Government Governmental Business-type Activities Activities Total Current and other assets $ 1,436,426 $ 1,367,462 $ 2,803,888 Capital assets 11,941,803 2,090,127 14,031,930 Total assets 13,378,229 3,457,589 16,835,818 Current and other liabilities 366,097 76, ,857 Long-term liabilities (including current portion) 3,268,550 2,761,956 6,030,506 Total liabilities 3,634,647 2,838,716 6,473,363 Net assets: Invested in capital assets, net of related debt 9,488,369 (211,636) 9,276,733 Restricted net assets 301, ,320 1,124,234 Unrestricted net assets (46,701) 8,189 (38,512) Total net assets $ 9,743,582 $ 618,873 $ 10,362,455 16

65 Harris County, Texas Management s Discussion and Analysis (Unaudited) $11,000 Change in Net Assets $10,000 Millions $9,000 $8,000 $7,000 $6,000 Total Net Assets Business-Type Activities Net Assets Governmental Activities Net Assets $5, The largest portion of the County s current fiscal year net assets, $9,149,350,633, is invested in capital assets (e.g. land, improvements, buildings, equipment, and infrastructure) less any related outstanding debt used to acquire those assets. The primary use of these capital assets is to provide services to citizens; therefore, these assets are not available for future spending. Although the County s investment in its capital assets is reported net of related debt, it should be noted that resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. The decrease of $127,382,184 in the County s net assets invested in capital assets, net of related debt, is comprised of $127,685,292 decrease in capital assets with an offsetting decrease of $75,194,063 in debt related to capital assets and a decrease of unspent debt proceeds of $74,890,955. Another portion of the County s current fiscal year net assets, negative $11,916,517, represents unrestricted net assets, which because of the negative balance are not available to meet the County s ongoing unrestricted obligations to citizens and creditors. The remaining balance of net assets represents resources that are subject to external restrictions on how they may be used. A large portion of the restricted net assets, $605,663,600 is for use for the ongoing obligations of the Toll Road Authority. Restricted net assets of $158,816,251 are related to the mobility program and are restricted because of legal constraints imposed by the Texas Transportation Code; these funds can only be used for mobility purposes. Other restrictions include $401,992,465 for debt service payments, $88,171,475 for capital projects, $493,653 for grant programs and $4,560,349 for legislative restricted net assets. At the end of the current fiscal year, the County reported positive net assets in two of the three categories of net assets for its governmental activities and positive net assets in two of the three categories for its business-type activities. Net assets invested in capital assets, net of related debt for business-type activities was negative $256,854,799 primarily due to the refunding of debt extending the repayment of the debt beyond the useful life of the assets. The following table indicates changes in net assets for governmental and business-type activities: 17

66 Harris County, Texas Management s Discussion and Analysis (Unaudited) Condensed Statement of Activities (In Thousands) For the Year Ended February 29, 2012 Primary Government Governmental Business-type Activities Activities Total REVENUES Program revenues: Charges for Services $ 248,708 $ 527,579 $ 776,287 Operating Grants and Contributions 198,455 6, ,511 Capital Grants and Contributions 236, ,003 General revenues: Taxes-levied for General Purposes 1,015,050-1,015,050 Taxes-levied for Debt Services 161, ,528 Hotel Occupancy Tax 26,815-26,815 Investment Earnings 14,143 39,563 53,706 Miscellaneous 57, ,028 Total revenues 1,958, ,357 2,532,928 EXPENSES Administration of Justice 882, ,196 Parks 95,479-95,479 County Administration 308, ,346 Health and Human Services 191, ,253 Flood Control 92,793-92,793 Tax Administration 32,951-32,951 Roads and Bridges 390, ,220 Interest and Fiscal Charges 127, ,403 Toll Road - 368, ,627 Subscriber Access Parking Facilities Sheriff's Commissary - 7,503 7,503 Total expenses 2,120, ,610 2,498,251 Excess (deficiency) before other items and transfers (162,070) 196,747 34,677 Transfers 133,248 (133,248) - Change in net assets (28,822) 63,499 34,677 Net assets - beginning 9,743, ,873 10,362,455 Net assets - ending $ 9,714,760 $ 682,372 $ 10,397,132 18

67 Harris County, Texas Management s Discussion and Analysis (Unaudited) Condensed Statement of Activities (In Thousands) For the Year Ended February 28, 2011 Primary Government Governmental Business-type Activities Activities Total REVENUES Program revenues: Charges for Services $ 255,893 $ 489,097 $ 744,990 Operating Grants and Contributions 236, ,711 Capital Grants and Contributions 280,755 3, ,818 General revenues: Taxes-levied for General Purposes 976, ,341 Taxes-levied for Debt Services 151, ,337 Hotel Occupancy Tax 23,312-23,312 Investment Earnings 6,796 13,542 20,338 Miscellaneous 45, ,222 Total revenues 1,976, ,507 2,484,069 EXPENSES Administration of Justice 929, ,889 Parks 94,145-94,145 County Administration 326, ,162 Health and Human Services 199, ,518 Flood Control 99,305-99,305 Tax Administration 36,152-36,152 Roads and Bridges 387, ,325 Interest and Fiscal Charges 127, ,520 Toll Road - 363, ,266 Subscriber Access Parking Facilities Sheriff's Commissary - 7,439 7,439 Total expenses 2,200, ,677 2,571,693 Excess (deficiency) before other items and transfers (223,454) 135,830 (87,624) Transfers 123,657 (123,657) - Change in net assets (99,797) 12,173 (87,624) Net assets - beginning 9,843, ,700 10,450,079 Net assets - ending $ 9,743,582 $ 618,873 $ 10,362,455 19

68 Harris County, Texas Management s Discussion and Analysis (Unaudited) Program Revenues and Expenses - Governmental Activities $1,000 $882 $800 $600 Millions $400 $200 $226 $308 $191 $95 $5 $87 $87 $63 $93 $26 $33 $191 $390 $0 $127 $0 Program Revenues Expenses Administration of Justice Parks County Administration Health and Human Services Flood Control Tax Administration Road and Bridges Interest and Fiscal Charges Revenues For fiscal year ended February 29, 2012, revenues for the primary government totaled $2,532,928,118. The revenues are categorized by activity type: governmental activities totaled $1,958,570,694 and business-type activities totaled $574,357,424. Property and Hotel Occupancy Taxes of $1,203,392,926 were one of the largest revenue sources for governmental activities and 48% of total revenues, which is a $52M increase from prior year taxes of $1,150,989,577, primarily due to more taxes being collected in the year levied. The tax rate was $ per $100 of assessed value for fiscal year The taxable assessed value increased in fiscal year 2012 to $276,716,398,000 from the taxable assessed value in the prior fiscal year of $273,032,156, Historical Comparison of the Property Tax Rate versus Taxable Assessed Valuation Tax Levy Year $300,000 $250,000 $200,000 $150,000 Millions Property Tax Rate Taxable Assessed Valuation Program revenues are derived from the program itself and reduce the cost of the function to the County. Total program revenues were $1,217,801,198 or 48% of total revenues, which decreased $48,718,945 compared to the prior year, primarily due to a decrease in Capital Grants and Contributions. The largest portion of program revenues is Charges for Services of $776,287,034 (31%). Of that $248,707,634 is from governmental activities, which includes fees collected by the tax collector, automobile registration, and charges for patrol services. The business-type Charges for Services were $527,579,400 (an increase of $38,482,171 from the prior year), which are primarily toll road receipts. The other portions of program revenues are Operating 20

69 Harris County, Texas Management s Discussion and Analysis (Unaudited) Grants and Contributions of $204,510,770 (8%) and Capital Grants and Contributions of $237,003,394 (9%). Capital Grants and Contributions decreased $46,814,984 from the prior year, partially due to a decrease in insurance recoveries in the current year. General revenues are revenues that cannot be assigned to a specific function. They consist of taxes (previously discussed), Earnings on Investments of $53,706,060 (2% of total revenues), and Miscellaneous income of $58,027,934 (2% of total revenues). Property Taxes - General Purposes 40% REVENUES BY SOURCE Year ended February 29, 2012 Property Taxes - Debt Service 7% Charges for Services 31% Hotel Occupancy Tax 1% Investment Earnings 2% Miscellaneous 2% Capital Grants and Contributions 9% Operating Grants and Contributions 8% Expenses For fiscal year ended February 29, 2012, expenses for the primary government totaled $2,498,251,125. These expenses are divided by activity type: governmental activities of $2,120,640,592 and business-type activities of $377,610,533. The County s largest governmental activities function is Administration of Justice. The main components of this function are the civil and criminal courts and the Sheriff s Office. Total expenses for this activity were $882,195,617 and were 35% of total expenses. The expenses can be attributed to salaries, fringe benefits, costs of housing and trial of inmates, and fuel costs for patrol vehicles. The expenses for the Roads and Bridges governmental activities function were $390,219,554 or 16% of total expenses. The County owns and maintains over six thousand miles of roads and bridges. The County Administration governmental activities function expenses were $308,346,182 or 12% of total expenses. This is a decrease of $18 million from the prior fiscal year which is partially due to closer monitoring of expenditures throughout the year. The Toll Road business-type activities function expenses were $368,627,153 or 15% of total expenses. 34% is attributable to interest and fees incurred on outstanding debt balances. Expenses for other business-type activities were $8,983,380 and were less than 1% of total expenses. These activities are for Subscriber Access, Parking Facilities and Sheriff s Commissary. The Interest and Fiscal Charges governmental activities functional expenses of $127,403,125 constituted 5% of total expenses and decreased $117,

70 Harris County, Texas Management s Discussion and Analysis (Unaudited) The remaining governmental activities functions are Health and Human Services with expenses of $191,252,690 or 8%, which includes operation of the County libraries, Flood Control with expenses of $92,793,032 or 4%, Parks with expenses of $95,479,059 or 4%, and Tax Administration with expenses of $32,951,333 or 1%. Administration of Justice 35% Roads and Bridges 16% EXPENSES BY FUNCTION Year ended February 29, 2012 Toll Road 15% County Administration 12% Health and Human Services 8% Other 0% Tax Administration 1% Parks 4% Interest and Fiscal Charges 5% Flood Control 4% FINANCIAL ANALYSIS OF MAJOR FUNDS The General Fund is the County s chief operating fund and major governmental fund. For the year ended February 29, 2012, the General Fund reported a net fund balance increase of $84,472,959, largely due to the reclassification of funds that did not meet the criteria for special revenue funds as defined under Governmental Accounting Standards Board, Statement No. 54 and an increase in the fund balance of the mobility sub-fund. The General Fund total fund balance is $412,943,965 for the fiscal year of which $4,839,967 is nonspendable, $280,566,166 is restricted, $2,120,070 is committed, $33,491,342 is assigned, and the remaining $91,926,420 is unassigned and available the County s current and future needs. General Fund Components of Fund Balance Unassigned Thousands Assigned Committed Restricted Nonspendable - 50, , , , , ,000 The Toll Road Fund was the County s only major proprietary fund at February 29, This fund is used to account for the acquisition, operation, and maintenance of County toll roads. As of February 29, 2012, net assets invested in capital assets, net of related debt was a negative $275,281,450, and restricted net assets were $930,788,023. Net assets invested in capital assets, net of related debt decreased from a February 28,

71 Harris County, Texas Management s Discussion and Analysis (Unaudited) balance of negative $231,001,927. Net assets invested in capital assets net of related debt for both years was negative, primarily due to the refunding of debt which extended the repayment of the debt beyond the useful life of the assets. Restricted net assets are considered restricted due to debt obligations and capital projects. 800,000 Toll Road Net Assets Comparison 600,000 Thousands 400, , (200,000) (400,000) Invested in capital assets, net of related debt Restricted net assets for capital projects and debt Restricted net assets for Toll Road GENERAL FUND BUDGETARY HIGHLIGHTS Differences between the original budget and the final amended budget reflected an increase of $385,756,493 in available resources. This increase is primarily due to issuance of refunding bonds. Differences between the original budget and the final amended budget resulted in $384,887,726 increase in appropriations; this increase is primarily due to issuance of refunding bonds. During the year, actual available resources exceeded budgetary estimates by $56,385,505. This is primarily due to an increase in tax revenues. Actual expenditures were $403,915,186 less than budgetary estimates. This difference is primarily due to a decrease in expenditures as a result of the carry forward of budget for capital projects for roads and bridges and maintenance funds in the precincts. Budget variances are not expected to impact future services or liquidity. Millions $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- BUDGETED EXPENDITURES TO ACTUAL Cash Basis Analysis Budgeted Actual CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets. The County s capital assets, net of accumulated depreciation/amortization, for its governmental and business-type activities as of February 29, 2012, was $13,904,245,106, a decrease of $127,685,292 from capital assets reported February 28, 2011 of $14,031,930,398. These capital assets include land, construction in progress, land improvements, buildings, park improvements and facilities, infrastructure, equipment, other tangible assets, as well as intangible assets such as easements and the County s license agreement to operate toll facilities on the Katy Freeway. 23

72 Harris County, Texas Management s Discussion and Analysis (Unaudited) Major capital asset events during the current fiscal year included the following: The County has several ongoing capital improvement projects, including renovations to the Administration Building and other buildings as well as improvements to County roads. The Flood Control District participated in ongoing flood damage reduction and mitigation projects in cooperation with the Federal Emergency Management Agency and the United States Army Corps of Engineers. The Harris County Toll Road Authority has several ongoing projects, including the Hardy Toll Road Downtown Connector and the Sam Houston Tollway North/East. Capital Assets Balance Balance February 29, 2012 February 28, 2011 Governmental Activities: Land $ 4,020,306,158 $ 3,972,031,927 Construction in progress 289,347, ,793,216 Intangible assets - water rights 2,400,000 2,400,000 Intangible assets - software & licenses 35,973,946 33,418,586 Land improvements 6,319,499 5,684,597 Infrastructure 10,540,880,238 10,324,050,791 Park facilities 164,521, ,753,616 Flood control projects 719,064, ,436,470 Buildings 1,710,736,440 1,612,268,711 Equipment 321,730, ,804,773 17,811,280,495 17,468,642,687 Less: Accumulated depreciation (5,910,138,982) (5,526,839,237) Total governmental activities $ 11,901,141,513 $ 11,941,803,450 Balance Balance February 29, 2012 February 28, 2011 Business-type Activities: Land $ 304,519,156 $ 309,521,182 Construction in progress 114,790, ,450,760 Intangible assets - license agreement 238,615, ,140,451 Land improvements 5,092,974 4,346,766 Infrastructure 2,217,134,429 2,098,798,007 Other tangible assets 22,058,242 22,052,955 Buildings 36,609,870 36,970,545 Equipment 69,516,674 62,967,047 3,008,337,678 3,021,247,713 Less: Accumulated depreciation (1,005,234,085) (931,120,765) Total business-type activities $ 2,003,103,593 $ 2,090,126,948 For further information regarding capital assets, see Note 6 to the financial statements. Long-term Liabilities. At February 29, 2012, the County had total long-term liabilities outstanding of $6,055,805,595. County officials, citizens and investors will find the ratio of bonded debt to taxable value of property and the amount of bonded debt per capita as useful indicators of the County's debt position. General 24

73 Harris County, Texas Management s Discussion and Analysis (Unaudited) bonded debt represented 1.00% and 0.96% of taxable value of property for fiscal year 2012 and 2011, respectively. Debt per capita was $1,359 and $1,408 for fiscal year 2012 and 2011, respectively. Long-term Liabilities Outstanding at Outstanding at February 29, 2012 February 28, 2011 Governmental Activities: Bonds payable $ 2,759,938,412 $ 2,616,505,031 Commercial paper payable 214,463, ,163,000 Compensatory time payable 29,248,411 35,620,091 Obligations under capital leases 17,040,468 19,448,103 Judgments payable 5,650,000 4,900,000 Loan payable 12,654,182 5,619,676 OPEB obligation 291,651, ,428,712 Pollution remediation obligation 2,120,936 2,864,732 Total governmental activities $ 3,332,767,198 $ 3,268,549,345 Business-type Activities: Bonds payable $ 2,621,849,324 $ 2,704,676,608 Derivative instruments - interest rate swaps 83,949,874 42,580,963 Compensatory time payable 1,008,329 1,231,038 Obligations under capital leases 124, ,001 OPEB obligation 16,106,869 13,281,172 Total business-type activities $ 2,723,038,397 $ 2,761,955,782 The County has a continuing goal to sustain the County s debt rating. The bond rating services of Moody s Investors Service, Inc., Standard & Poor s Ratings Services, and Fitch IBCA, Inc. have assigned the County long term bond ratings of Aaa, AAA, and AAA, respectively. Please refer to Note 10 to the financial statements for further information on the County s long-term liabilities. See Note 13 to the financial statements for further information on the County s Other Post Employment Benefits (OPEB) plan. Bonds Payable by Type as of February 29, 2012 Toll Road Tax Bonds 10% Road 16% Permanent Improvement 19% Flood Control 13% Toll Road Senior Lien Revenue 38% Tax & Subordinate Lien 4% 25