OFFICIAL STATEMENT. Dated Date: February 15, 2014 SERIES 2014 CERTIFICATES OF OBLIGATION, SERIES 2014

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1 OFFICIAL STATEMENT Dated February 24, 2014 NEW ISSUE - Book-Entry-Only Ratings: Fitch: AA+ S&P: AA+ (See OTHER INFORMATION Ratings herein.) In the opinion of Bond Counsel, interest on the Obligations (defined below) will be excludable from the gross income of the owners thereof for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. $42,380,000 $11,850,000 CITY OF MCALLEN, TEXAS CITY OF MCALLEN, TEXAS (Hidalgo County) (Hidalgo County) GENERAL OBLIGATION BONDS, COMBINATION TAX AND REVENUE SERIES 2014 CERTIFICATES OF OBLIGATION, SERIES 2014 Dated Date: February 15, 2014 Due: February 15, as shown on inside cover PAYMENT TERMS... Interest on the $42,380,000 City of McAllen, Texas General Obligation Bonds, Series 2014 (the "Bonds") and $11,850,000 City of McAllen, Texas Combination Tax and Revenue Certificates of Obligation, Series 2014 (the Certificates ) will accrue from February 15, 2014 (the "Dated Date"), will be payable February 15 and August 15 of each year commencing February 15, 2015, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The Bonds and the Certificates are referred to collectively herein as the "Obligations." The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the book-entry-only system described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations. See "THE OBLIGATIONS - Book-Entry-Only System" herein. The initial Paying Agent/Registrar is Regions Bank, Houston, Texas, an Alabama banking corporation. See "THE OBLIGATIONS - Paying Agent/Registrar". AUTHORITY FOR ISSUANCE AND SECURITY FOR THE BONDS... The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, (the "State") including particularly, Texas Government Code, Chapters 1251 and 1331, as amended, and an election held on November 5, 2013, and are direct obligations of the City of McAllen, Texas (the "City") payable from a continuing ad valorem tax levied on all taxable property within the City, within the limits prescribed by law, all as provided in the ordinance authorizing the Bonds (the "Bond Ordinance") (see "THE OBLIGATIONS - Authority for Issuance of the Bonds and "- Security and Source of Payment for the Bonds"). AUTHORITY FOR ISSUANCE AND SECURITY FOR THE CERTIFICATES... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas (the "State"), particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and constitute direct obligations of the City, payable from a continuing ad valorem tax levied on all taxable property within the City, within the limits prescribed by law, and a limited pledge of the surplus revenues of the City s hotel occupancy tax levied pursuant to Chapter 351, Texas Tax Code, as amended, all as provided in the ordinance authorizing the Certificates (the "Certificate Ordinance"). The Bond Ordinance and the Certificate Ordinance are collectively referred to herein as the "Ordinances." See "THE OBLIGATIONS - Authority for Issuance of the Certificates" and "- Security and Source of Payment for the Certificates." PURPOSE FOR THE BONDS... Proceeds from the sale of the Bonds will be used for the purpose of: (1) constructing street, sidewalk and related drainage improvements in the City; (2) providing a portion of the funds required to construct and equip a new Performing Arts Center at the City s Convention Center; (3) acquiring land for parks and recreation purposes and constructing and equipping improvements to the City parks and other recreation facilities; and (4) to pay the costs associated with the issuance of the Bonds. PURPOSE FOR THE CERTIFICATES... Proceeds from the sale of the Certificates will be used for the purpose of: (1) providing a portion of the funds required to construct and equip a new Performing Arts Center at the City s Convention Center; and (2) to pay the costs associated with the issuance of the Certificates. CUSIP PREFIX: MATURITY SCHEDULES & 9 DIGIT CUSIP See Schedules on Page 2 LEGALITY... The Obligations are offered for delivery when, as and if issued and received by the Initial Purchaser and subject to the approving opinion of the Attorney General of Texas and the opinion of McCall, Parkhurst & Horton L.L.P., Bond Counsel, San Antonio, Texas (see APPENDIX C, "Forms of Bond Counsel's Opinions"). DATE OF DELIVERY... It is expected that the Obligations will be available for delivery through The Depository Trust Company on Thursday, March 20, 2014.

2 MATURITY SCHEDULE FOR THE BONDS CUSIP Prefix: (1) Initial Initial Stated Price Stated Price Principal M aturity Interest or Cusip Principal M aturity Interest or Cusip Amount (February 15) Rate Yield Number (1) Amount (February 15) Rate Yield Number (1) $ 600, % 0.180% QM1 $ 2,190, % 2.850% (2) QX7 1,480, % 0.330% QN9 2,260, % 3.000% (2) QY5 1,525, % 0.560% QP4 2,340, % 3.150% (2) QZ2 1,575, % 0.880% QQ2 2,435, % 3.350% (2) RA6 1,640, % 1.200% QR0 2,535, % 3.450% (2) RB4 1,720, % 1.640% QS8 2,635, % 3.600% RC2 1,810, % 2.000% QT6 2,735, % 3.680% (2) RD0 1,905, % 2.320% QU3 2,845, % 3.730% (2) RE8 2,000, % 2.530% QV1 2,960, % 3.850% (2) RF5 2,105, % 2.700% (2) QW9 3,085, % 3.900% (2) SC1 (Accrued Interest from February 15, 2014 to be Added) (1) CUSIP numbers are included solely for the convenience of owners of the Obligations. 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. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the City nor the Financial Advisor is responsible for the selection or correctness of the CUSIP numbers set forth herein. (2) Yield calculated based on the assumption that the Certificates denoted and sold at a premium will be redeemed on February 15, 2023, the first optional call date for such Certificates, at a redemption price of par plus accrued interest to the redemption date. OPTIONAL REDEMPTION FOR THE BONDS... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "THE OBLIGATIONS - Optional Redemption for the Bonds"). MATURITY SCHEDULE FOR THE CERTIFICATES CUSIP Prefix: (1) Initial Initial Stated Price Stated Price Principal Maturity Interest or Cusip Principal Maturity Interest or Cusip Amount (February 15) Rate Yield Number (1) Amount (February 15) Rate Yield Number (1) $ 205, % 0.250% RG3 $ 605, % 2.950% (2) RS7 430, % 0.380% RH1 630, % 3.120% (2) RT5 445, % 0.650% RJ7 650, % 3.346% RU2 465, % 0.950% RK4 675, % 3.512% RV0 480, % 1.260% RL2 695, % 3.620% RW8 495, % 1.700% RM0 720, % 3.720% RX6 515, % 2.060% RN8 750, % 3.831% RY4 535, % 2.380% RP3 775, % 3.906% RZ1 555, % 2.620% RQ1 805, % 4.000% SA5 580, % 2.750% (2) RR9 840, % 4.060% SB3 (Accrued Interest from February 15, 2014 to be Added) (1) CUSIP numbers are included solely for the convenience of owners of the Obligations. 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. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the City nor the Financial Advisor is responsible for the selection or correctness of the CUSIP numbers set forth herein. (2) Yield calculated based on the assumption that the Certificates denoted and sold at a premium will be redeemed on February 15, 2023, the first optional call date for such Certificates, at a redemption price of par plus accrued interest to the redemption date. OPTIONAL REDEMPTION FOR THE CERTIFICATES... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "THE OBLIGATIONS - Optional Redemption for the Certificates"). 2

3 This Official Statement, which includes the cover page, Schedule and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation, promise or guarantee of the Financial Advisor. 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 Financial Advisor. 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. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described herein. See "OTHER INFORMATION Continuing Disclosure of Information" for a description of the City's undertaking to provide certain information on a continuing basis. NEITHER THE CITY NOR ITS FINANCIAL ADVISOR, OR THE INITIAL PURCHASER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY ONLY SYSTEM. THE OBLIGATIONS 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 OBLIGATIONS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE OBLIGATIONS HAVE BEEN REGISTERED OR QUALIFIED, IF ANY, AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES, IF ANY, CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. THE OBLIGATIONS 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. THIS OFFICIAL STATEMENT CONTAINS "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENT. [The Remainder of this Page Intentionally Left Blank] 3

4 TABLE OF CONTENTS OFFICIAL STATEMENT SUMMARY... 5 CITY OFFICIALS, STAFF AND CONSULTANTS... 8 ELECTED OFFICIALS... 8 SELECTED ADMINISTRATIVE STAFF... 8 CONSULTANTS AND ADVISORS... 8 INTRODUCTION... 9 THE OBLIGATIONS... 9 TAX INFORMATION TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY TABLE 5 - TEN LARGEST TAXPAYERS TABLE 6 - TAX ADEQUACY TABLE 7 - ESTIMATED OVERLAPPING DEBT DEBT INFORMATION TABLE 8 - GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION TABLE 10 - COMPUTATION OF SELF- SUPPORTING DEBT TABLE 11 - AUTHORIZED BUT UNISSUED TAX DEBT TABLE 12 OTHER OBLIGATIONS FINANCIAL INFORMATION TABLE 13 - CHANGES IN NET POSITION TABLE 13-A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY TABLE 14 - MUNICIPAL SALES TAX FINANCIAL POLICIES INVESTMENTS TABLE 15 - CURRENT INVESTMENTS TAX MATTERS OTHER INFORMATION RATINGS LITIGATION REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS LEGAL OPINIONS AND NO-LITIGATION CERTIFICATE CONTINUING DISCLOSURE OF INFORMATION FINANCIAL ADVISOR INITIAL PURCHASER FOR THE BONDS INITIAL PURCHASER FOR THE CERTIFICATES FORWARD-LOOKING STATEMENTS DISCLAIMER MISCELLANEOUS APPENDICES GENERAL INFORMATION REGARDING THE CITY...A EXCERPTS FROM THE CITY OF MCALLEN, TEXAS ANNUAL FINANCIAL REPORT... B FORMS OF BOND COUNSEL'S OPINIONS... C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement. 4

5 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Obligations to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY... The City of McAllen, Texas (the "City" or Issuer ) is a political subdivision and municipal corporation of the State of Texas (the "State"), located in Hidalgo County. The City covers approximately square miles. See "INTRODUCTION - Description of the City." THE BONDS... The Bonds are issued as $42,380,000 City of McAllen, Texas General Obligation Bonds, Series The Bonds are issued as serial bonds maturing February 15, 2015 through February 15, 2034 (see "THE OBLIGATIONS - Description of the Bonds"). THE CERTIFICATES... The Certificates are issued as $11,850,000 City of McAllen, Texas Combination Tax and Revenue Certificates of Obligation, Series The Certificates are issued as serial certificates maturing February 15, 2015 through February 15, 2034 (see "THE OBLIGATIONS - Description of the Certificates"). PAYMENT OF INTEREST... Interest on the Obligations accrues from February 15, 2014 (the Dated Date ), and is payable February 15, 2015, and each August 15 and February 15 thereafter until maturity or, with respect to the Obligations, prior redemption (see "THE OBLIGATIONS - Description of the Bonds" and THE OBLIGATIONS Description of the Certificates). AUTHORITY FOR ISSUANCE FOR THE BONDS... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly, Texas Government Code, Chapters 1251 and 1331, as amended; an election held on November 5, 2013, and an ordinance passed by the City Commission of the City (the Bond Ordinance ) (see "THE OBLIGATIONS - Authority for Issuance for the Bonds"). AUTHORITY FOR ISSUANCE FOR THE CERTIFICATES... The Certificates are issued pursuant to the general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance passed by the City Commission of the City (the Certificate Ordinance and together with the Bond Ordinance, the Ordinances ) (see "THE OBLIGATIONS - Authority for Issuance of the Certificates"). SECURITY FOR THE BONDS... The Bonds constitute direct and voted obligations of the City, payable from the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property located within the City (see "THE OBLIGATIONS - Security and Source of Payment for the Bonds"). SECURITY FOR THE CERTIFICATES... The Certificates constitute direct obligations of the City payable from a continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City. The Certificates additionally are secured with a limited pledge of the surplus revenues of the City s hotel occupancy tax levied pursuant to Chapter 351, Texas Tax Code, as amended (see "THE OBLIGATIONS - Security and Source of Payment for the Certificates"). OPTIONAL REDEMPTION FOR THE BONDS... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "THE OBLIGATIONS - Optional Redemption for the Bonds"). OPTIONAL REDEMPTION FOR THE CERTIFICATES... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "THE OBLIGATIONS - Optional Redemption for the Certificates"). 5

6 TAX EXEMPTION... In the opinion of Bond Counsel, interest on the Obligations will be excludable from the gross income of the owners thereof for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. USE OF PROCEEDS FOR THE BONDS... Proceeds from the sale of the Bonds will be used for the purpose of: (1) constructing street, sidewalk and related drainage improvements in the City; (2) providing a portion of the funds required to construct and equip a new Performing Arts Center at the City s Convention Center; (3) acquiring land for parks and recreation purposes and facilities; and (4) to pay the costs associated with the issuance of the Bonds. USE OF PROCEEDS FOR THE CERTIFICATES... Proceeds from the sale of the Certificates will be used for the purpose of: (1) providing a portion of the funds required to construct and equip a new Performing Arts Center at the City s Convention Center; and (2) to pay the costs associated with the issuance of the Certificates. RATINGS... The Obligations and the presently outstanding tax supported debt of the City are rated "AA+" by Fitch and "AA+" by S&P without regard to credit enhancement (see "OTHER INFORMATION - Ratings"). BOOK-ENTRY-ONLY SYSTEM... The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the book-entry-only system described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see "THE OBLIGATIONS - Book-Entry-Only System"). PAYMENT RECORD... The City has not defaulted, due to a deficiency in Interest and Sinking Fund since 1935 when a par refunding at a reduced rate of interest was completed with consent of the bondholders. On September 15, 1943, the City began a series of defaults which were not corrected until the United States district Court in December, 1944 directed payment of matured principal and interest following which a majority of bondholders voluntarily accepted refunding bonds bearing 4.50% for their 5.75% and 6.00% noncallable bonds of the 1933 Series. The City has never defaulted on its revenue bonds. SELECTED FINANCIAL INFORMATION Ratio Fiscal Per Capita Per Tax Debt Year Estimated Taxable Taxable Capita to Taxable % of Ended City Assessed Assessed Tax Assessed Total Tax 9/30 Population (1) Valuation (2) Valuation Tax Debt Debt Valuation Collections (3) ,877 $ 7,032,559,952 $ 54,148 $ 32,130,000 $ % 98.87% ,206 7,003,237,801 52,574 26,860, % 98.76% ,978 6,990,879,362 52,179 33,850, % 98.35% ,119 7,038,672,572 52,092 21,735, % 96.21% ,507 7,342,031,955 53,785 61,375,000 (4) 450 (4) 0.84% (4) (5) (1) Source: City of McAllen, Texas. (2) As reported by the Hidalgo County Appraisal District on the City s annual State Property Tax Board Reports; subject to change during the ensuing year. (3) City allocates delinquent tax collections to the respective years in which the taxes were levied. (4) Includes the Obligations. (5) In process of collection. 6

7 CHANGE IN NET POSITION Unaudited Fiscal Year Ended September 30, Beginning Net Position $ 353,910,012 $ 361,989,769 $ 353,187,965 $ 344,131,328 $ 331,784,883 Total Revenue 124,110, ,702, ,387, ,812, ,634,275 Total Expenditures (118,326,885) (119,073,809) (113,878,419) (111,732,261) (110,218,703) Transfers 1,656,644 (13,708,822) 1,292,533 (610,088) 2,930,873 Prior Period Adjustment ,586,925 - Ending Net Position $ 361,350,597 $ 353,910,012 $ 361,989,769 $ 353,187,965 $ 344,131,328 GENERAL FUND CONSOLIDATED STATEMENT SUMMARY Unaudited Fiscal Year Ended September 30, Beginning Balance $ 45,810,264 $ 42,975,257 $ 50,872,591 $ 49,435,625 $ 51,489,403 Total Revenue 94,159,197 92,968,840 90,470,108 89,941,401 91,951,139 Total Expenditures (96,146,279) (94,802,869) (96,168,835) (96,497,769) (97,581,386) Other Sources 52,375 4,669,036 (2,198,607) 4,406,409 3,576,469 Net Funds Available (1,934,707) 2,835,007 (7,897,334) (2,149,959) (2,053,778) Prior Period Adjustment Ending Balance $ 43,875,557 $ 45,810,264 $ 42,975,257 $ 47,285,666 $ 49,435,625 For additional information regarding the City, please contact: Mr. Mike R. Perez Ms. Anne Burger Entrekin Mr. Cris Vela City Manager FirstSouthwest FirstSouthwest Mr. Jerry W. Dale, CPA, CGFO 70 Northeast Loop North McColl Finance Director or Suite 710 or Suite C City of McAllen, Texas San Antonio, Texas McAllen, Texas Houston Avenue Telephone Telephone McAllen, Texas Fax Fax Telephone anne.burgerentrekin@firstsw.com cris.vela@firstsw.com Fax mrperez@mcallen.net jdale@mcallen.net [The Remainder of this Page Intentionally Left Blank] 7

8 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Length City Commission of Service Term Expires Occupation James E. Darling (1) 6 Years May, 2017 Attorney Mayor Hilda Salinas, Mayor Pro-Tem 12 Years May, 2017 Educator Commissioner, District 3 Scott Crane 8 Years May, 2017 Business/Entrepreneur Commissioner, District 1 John J. Ingram 8 Years May, 2015 Attorney Commissioner, District 5 Trey Pebley 1 Year May, 2017 Contractor Commissioner, District 2 Aida Ramirez 12 Years May, 2015 County Court Administrator Commissioner, District 4 Veronica Vela Whitacre 8 Months May, 2015 Marketing Director/Pharmacy Commissioner, District 6 (1) Prior to being elected to serve as Mayor, Mr. Darling served as City Attorney, Assistant City Manager and Commissioner for 33 years. SELECTED ADMINISTRATIVE STAFF Length of Service Total Government Name Position to the City Service Mike R. Perez City Manager 21 Years 37 Years Brent Branham Deputy City Manager 20 Years 41 Years Jerry W. Dale, CPA, CGFO Finance Director 16 Years 21 Years Annette Villarreal City Secretary 21 Years 22 Years Kevin Pagan City Attorney 13 Years 19 Years CONSULTANTS AND ADVISORS Auditors... Long Chilton, LLP (1) McAllen, Texas Bond Counsel... McCall, Parkhurst & Horton L.L.P. San Antonio, Texas Financial Advisor... First Southwest Company Dallas, San Antonio and McAllen, Texas (1) Although the audit included as Appendix B was prepared by Padgett, Stratemann & Co., LLP, the City has appointed Long Chilton, LLP as new auditor for fiscal year ending September 30,

9 OFFICIAL STATEMENT RELATING TO $42,380,000 $11,850,000 CITY OF MCALLEN, TEXAS CITY OF MCALLEN, TEXAS (Hidalgo County) (Hidalgo County) GENERAL OBLIGATION BONDS, COMBINATION TAX AND REVENUE SERIES 2014 CERTIFICATES OF OBLIGATION, SERIES 2014 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $42,380,000 City of McAllen, Texas General Obligation Bonds, Series 2014 (the Bonds ) and the $11,850,000 City of McAllen, Texas Combination Tax and Revenue Certificates of Obligation, Series 2014 (the Certificates ). The Bonds and the Certificates are herein collectively referred to as the Obligations. The Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the ordinances authorizing the issuance of the Obligations, except as otherwise indicated herein. There follows in this Official Statement descriptions of the Obligations and certain information regarding the City of McAllen, Texas (the City or the Issuer ) and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor, First Southwest Company, Dallas and San Antonio, Texas. DESCRIPTION OF THE CITY... The City is a political subdivision and municipal corporation of the State of Texas (the "State"), duly organized and existing under the laws of the State, including the City s Home Rule Charter. The City was incorporated in 1911, and first adopted its Home Rule Charter in The City is located in South Texas along the United States - Mexico border and covers approximately square miles. The City operates under a Commission/Manager form of government with a City Commission comprised of the Mayor and six Commissioners elected for staggered four-year terms from single-member districts. The City Manager is the chief administrative officer for the City and is responsible for the day to day operations of the City. The 2010 Census population for the City was 129,877, while the estimated 2014 population is 136,507. The City covers approximately square miles. THE OBLIGATIONS DESCRIPTION OF THE BONDS... The Bonds are dated February 15, 2014 (the Dated Date ), and mature on February 15 in each of the years and in the amounts shown on the inside cover page hereof. Interest will accrue from the Dated Date, will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on February 15 and August 15, commencing February 15, 2015, until maturity. The definitive Bonds will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the book-entry-only system described herein. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See "THE OBLIGATIONS - Book-Entry-Only System" herein. DESCRIPTION OF THE CERTIFICATES... The Certificates are dated February 15, 2014 (the Dated Date ), and mature on February 15 in each of the years and in the amounts shown on the inside cover page hereof. Interest will accrue from the Dated Date, will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on February 15 and August 15, commencing February 15, 2015, until maturity. The definitive Certificates will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the book-entry-only system described herein. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "THE OBLIGATIONS - Book-Entry-Only System" herein. AUTHORITY FOR ISSUANCE OF THE BONDS... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly, Texas Government Code, Chapters 1251 and 1331, as amended; an election held November 5, 2013, and passed by a majority of the participating voters; and an ordinance approved by the City Commission authorizing the Bonds (the Bond Ordinance ). AUTHORITY FOR ISSUANCE OF THE CERTIFICATES... The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance approved by the City Commission authorizing the Certificates (the Certificate Ordinance and together with the Bond Ordinance, the Ordinances ). 9

10 SECURITY AND SOURCE OF PAYMENT FOR THE BONDS... In the Bond Ordinance, the City covenants that it will levy and collect an annual ad valorem tax, within the limitations prescribed by law, against all taxable property located within the City sufficient to meet the debt service requirements on the Bonds. SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES Ad valorem Tax Pledge: In the Certificate Ordinance, the City covenants that it will levy and collect an annual ad valorem tax, within the limitations prescribed by law, against all taxable property located within the City sufficient to meet the debt service requirements on the Certificates. Pledge of Surplus Hotel Occupancy Tax Revenues for Certificates: The Certificates are additionally secured by a lien on and limited pledge of the "Surplus Revenues" derived from the City s hotel occupancy tax levied pursuant to Chapter 351, Texas Tax Code, as amended, all as provided in the Certificates Ordinance. TAX RATE LIMITATION... All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City limits its tax rate to $2.50 per $100 Assessed Valuation for all City purposes. Administratively, the Attorney General of the State of Texas will permit allocation of $1.50 of the $2.50 maximum tax rate for all General Obligation debt service, as calculated at the time of issuance. OPTIONAL REDEMPTION FOR THE BONDS... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Bonds are to be redeemed, the City may select the maturities of Bonds to be redeemed. If less than all the Bonds of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Only form) shall determine by lot the Bonds, or portions thereof, within such maturity to be redeemed. If an Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. OPTIONAL REDEMPTION FOR THE CERTIFICATES... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2024, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Certificates are to be redeemed, the City may select the maturities of Certificates to be redeemed. If less than all the Certificates of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Certificates are in Book- Entry-Only form) shall determine by lot the Certificates, or portions thereof, within such maturity to be redeemed. If an Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. NOTICE OF REDEMPTION... Not less than 30 days prior to a redemption date for the Obligations, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE OBLIGATIONS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATIONS OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATIONS OR PORTION THEREOF SHALL CEASE TO ACCRUE. DEFEASANCE... The Ordinances provide for the defeasance of the Obligations when the payment of the principal of and premium, if any, on the Obligations, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities (as defined below) that mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Obligations. The Ordinances provide that "Defeasance Securities" means (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 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 are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, 10

11 and (d) any other then authorized securities or obligations under applicable state law that may be used to defease obligations such as the Obligations. The City has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the City moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Obligations shall no longer be regarded to be outstanding or unpaid. Provided, however, the City has reserved the option, to be exercised at the time of the defeasance of the Obligations, to call for redemption, at an earlier date, those Obligations which have been defeased to their maturity date, if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Obligations for redemption; (ii) gives notice of the reservation of that right to the owners of the Obligations immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. BOOK-ENTRY-ONLY SYSTEM... This section describes how ownership of the Obligations is to be transferred and how the principal of, premium, if any, and interest on the Obligations are to be paid to and accredited by DTC while the Obligations are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City and the Financial Advisor believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Obligations, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Obligations), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee). One fully registered certificate will be issued for each maturity of the Obligations in the aggregate principal amount of each such maturity and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTC s records. The ownership interest of each actual purchaser of each Obligations ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owners entered into the transaction. Transfers of ownership interest in the Obligations are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Obligations, except in the event that use of the book-entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC s records reflect only the identity of the Direct Participant to whose account such Obligations are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. 11

12 Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to DTC. If less than all of the Obligations within a maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Obligations unless authorized by a Direct Participant in accordance with DTC s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Obligations will be made to DTC. DTC s practice is to credit Direct Participants accounts, upon DTC s receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar on payable dates in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as in the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Paying Agent or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest to DTC is the responsibility of the City, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Obligations at any time by giving reasonable notice to the City and the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Obligations are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Obligations will be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Obligations are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinances will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City, the Financial Advisor or the Initial Purchaser. Effect of Termination of Book-Entry-Only System. In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the City, printed Obligations will be issued to the holders and the Obligations will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under "THE OBLIGATIONS- Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR... The initial Paying Agent/Registrar is Regions Bank, Houston, Texas, an Alabama banking corporation. In the Ordinances, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Obligations are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the affected Obligations by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. TRANSFER, EXCHANGE AND REGISTRATION... In the event the book-entry-only system should be discontinued, the Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Obligations issued in an exchange or transfer of Obligations will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Obligations to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Obligations registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount and series as the Obligations surrendered for exchange or transfer. See "THE OBLIGATIONS - Book-Entry-Only System" herein for a description of the 12

13 system to be utilized initially in regard to ownership and transferability of the Obligations. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Obligation called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of an Obligation. RECORD DATE FOR INTEREST PAYMENT... The record date ("Record Date") for the interest payable on the Obligations on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date," which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of an Obligation appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. AMENDMENTS... The City may amend, change, or modify the Ordinances without the consent of or notice to any registered owners, as may be required (i) by the provisions of the Ordinances; (ii) for the purpose of curing any ambiguity, inconsistency, or formal defect or omission therein; or (iii) in connection with any other change which is not to the prejudice of the registered owners. In addition, the City may, with the written consent of the holders of a majority in aggregate principal amount of the Obligations then outstanding and affected thereby, amend, change, modify, or rescind any of the provisions of the Ordinances; except that, without the consent of the registered owners of all of the Obligations affected, no such amendment, change, modification, or rescission may (i) change the date specified as the date on which the principal of or any installment of interest on the Obligations is due and payable, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of, redemption price, or interest on the Obligations; (ii) give any preference to any Obligations over any other Obligations; (iii) extend any waiver of default to subsequent defaults; or (iv) reduce the respective aggregate principal amount of Obligations required for consent to any amendment, change, modification, or rescission. OBLIGATIONHOLDERS REMEDIES... The Ordinances establish specific events of default with respect to the Obligations. If the City defaults in the payment of the principal of or interest on the Obligations when due or the City defaults in the observance or performance of any of the covenants, conditions, or obligations of the City, the failure to perform which materially, adversely affects the rights of the owners, including but not limited to, their prospect or ability to be repaid in accordance with the Ordinances, the Ordinances provide that any registered owner is entitled to seek a writ of mandamus from a court of proper jurisdiction requiring the City to make such payment or observe and perform such covenants, obligations, or conditions. The issuance of a writ of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Obligations in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinances do not provide for the appointment of a trustee to represent the interest of the holders upon any failure of the City to perform in accordance with the terms of the Ordinances, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court ruled in Tooke v. City of Mexia 197 S.W.3 rd 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Because it is unclear whether the Texas legislature has effectively waived the City s sovereign immunity from a suit for money damages, obligation holders may not be able to bring such a suit against the City for breach of the Obligations or covenants in the Ordinances. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City's property. Further, the registered owners cannot themselves foreclose on property within the City or sell property within the City to enforce the tax lien on taxable property to pay the principal of and interest on the Obligations. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general certificate of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinances and the Obligations are qualified with respect to the customary rights of debtors relative to their creditors. [The Remainder of this Page Intentionally Left Blank] 13

14 USE OF OBLIGATION PROCEEDS... Proceeds from the sale of the Obligations are expected to be expended as follows: The Bonds The Certificates Sources of Funds: Par Amount $ 42,380, $ 11,850, Net Premium 3,029, , Accrued Interest 165, , Total Sources of Funds $ 45,574, $ 12,357, Uses of Funds: Deposit to Project Construction Fund $ 45,000, $ 12,100, Underwriters' Discount 228, , Cost of Issuance 180, , Deposit to Debt Service Fund 165, , Total Uses of Funds $ 45,574, $ 12,357, TAX INFORMATION AD VALOREM TAX LAW... The appraisal of property within the City is the responsibility of the Hidalgo County Appraisal District (the "Appraisal District"). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount that would not exceed either the lesser of (1) the property's market value for the most recent tax year in which it was appraised or (2) the sum of (a) 10% of the property's appraised value for the preceding tax year, plus (b) the property's appraised value for the preceding tax year, plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to the Texas Property Tax Code for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant: (1) an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; and (2) an exemption of up to 20% of the market value of residence homesteads, subject to a minimum exemption under this provision of $5,000. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual s spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the certificate of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. Effective January 1, 2010, Section to the Tax Code provides that a disabled veteran who receives from the United States Department of Veterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. 14

15 Under Article VIII and State law, the City may freeze the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older to the amount of taxes imposed in the year such residence qualified for such exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the City, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or older or who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead and to a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repealed or rescinded. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section 1-j of the Texas Constitution provides for an exemption from ad valorem taxation for "freeport property," which is defined as goods detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Taxing units that took action prior to April 1, 1990 may continue to tax freeport property and decisions to continue to tax freeport property may be reversed in the future. However, decisions to exempt freeport property are not subject to reversal. In addition, effective for tax years 2008 and thereafter, Article VIII, Section 1-n of the Texas Constitution provides for an exemption from taxation for "goods-in-transit," which are defined as personal property acquired or imported into the state and transported to another location inside or outside the state within 175 days of the date the property was acquired or imported into the state. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. After holding a public hearing, a taxing unit may take action by January 1 of the year preceding a tax year to tax goods-in-transit during the following tax year. A taxpayer may obtain only a freeport exemption or a goods-in-transit exemption for items of personal property. The City and the other taxing bodies within its territory may agree to jointly create tax increment financing zones ("TIFZ"), under which the tax values on property in the zone are "frozen" at the value of the property at the time of creation of the zone. Other overlapping taxing units levying taxes in the TIFZ may agree to contribute all or part of future ad valorem taxes levied and collected against the value of property in the TIFZ in excess of the "frozen values" to pay or finance the costs of certain public improvements in the TIFZ. Taxes levied by the City against the values of real property in the TIFZ in excess of the "frozen" value are not available for general city use but are restricted to paying or financing "project costs" within the TIFZ. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. Cities are also authorized, pursuant to Chapter 380, Texas Local Government Code, as amended ("Chapter 380"), to establish programs to promote state or local economic development and to stimulate business and commercial activity in the city. In accordance with a program established pursuant to Chapter 380, a city may make loans or grants of public funds for economic development purposes, however no Obligations secured by ad valorem taxes may be issued for such purposes unless approved by voters of the city. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE... The City Commission adopts a tax rate per $100 taxable value for the current year. The City Commission will be required to adopt the annual tax rate for the City before the later of September 30 or the 60 th day after the date the certified appraisal roll is received by the City. If the City Commission does not adopt a tax rate by such required date the tax rate for that tax year is the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the City for the preceding tax year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and "rollback tax rate." A tax rate cannot be adopted by the City Commission that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings have been held on the proposed tax rate following notice of such public hearings (including the requirement that notice be posted on the City s website if the City owns, operates or controls an internet website and public notice be given by television if the City has free access to a television channel) and the City Commission has otherwise complied with the legal requirements for the adoption of such tax rate. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. 15

16 "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items for the purpose of reducing the ad valorem tax rate. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT... Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1. PENALTIES AND INTEREST... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March April May June July After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, an attorney's collection fee of up to 20% may be added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY APPLICATION OF TAX CODE... The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $10,000; the disabled are also granted an exemption of $10,000. The City has not granted an additional exemption of 20% of the market value of residence homesteads; minimum exemption of $5,000. See Table 1 for a listing of the amounts of the exemptions described above. The City has adopted the tax freeze for citizens who are disabled and/or 65 years of age or older, which became a local option and subject to local referendum on January 1, Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and the City collects its own taxes. The City does permit split payments, and discounts are not allowed. The City does not tax freeport property and the City does not tax goods-in-transit. The City does collect the additional one-half cent sales tax for reduction of ad valorem taxes. 16

17 The City does collect an additional one-half cent sales tax for economic development. The City has adopted a tax abatement policy. TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT 2013/2014 Market Valuation Established by Hidalgo County Appraisal District (excluding totally exempt property) $ 8,643,858,311 Less Exemptions/Reductions at 100% Market Value: Homestead Cap Adjustment $ 17,890,751 Disabled Veterans 29,367,081 Disabled Persons 8,511,101 Over 65 65,648,712 Historical 1,317,811 Pollution 362,323 Productivity Loss 284,270,125 House Bill ,687 Freeport Exemption 314,795,888 Charity Exemption 1,338,427 Value Lost to Freeze Adjustments 578,283,450 1,301,826, /2014 Net Taxable Assessed Valuation $ 7,342,031,955 General Obligation Debt Payable from Ad Valorem Taxes as of December 31, 2013 (1) Certificates of Obligation $ 30,860,000 The Bonds 42,380,000 The Certificates 11,850,000 General Obligation Debt Payable from Ad Valorem Taxes $ 85,090,000 (2) Less: Self-Supporting Debt $ 20,975,000 Net General Obligation Debt Payable from Ad Valorem Taxes $ 64,115,000 (2) General Obligation Interest and Sinking Fund as of December 31, 2013 $ 1,163,277 Ratio General Obligation Tax Debt to Taxable Assessed Valuation 1.16% 2014 Estimated Population - 136,507 Per Capita Taxable Assessed Valuation - $53,785 Per Capita General Obligation Debt Payable from Ad Valorem Taxes - $623 Per Capita Net General Obligation Debt Payable from Ad Valorem Taxes - $470 (1) The above statement of indebtedness does not include currently outstanding $100,937,000 waterworks and sewer system revenue bonds, as these bonds are payable solely from the net revenues of the Waterworks and Sewer System (the System ), as defined in the ordinances authorizing the bonds. (2) Portions of the City s previously issued general obligation debt are treated and administered by the City as selfsupporting debt. In recent years, the City has transferred amounts from its enterprise funds to service substantial portions of its general obligation debt. However, such transfers (including transfers in respect of self-supporting debt) derived from such enterprise funds and other special governmental funds are discretionary, and there is no guarantee that such discretionary payments from enterprise funds and other special governmental funds will be made in the future. In the event that such discretionary transfers cease or are insufficient to pay debt service on the City s ad valorem tax secured debt as such debt service becomes due, the City is obligated to provide funding for any shortfall through the levy of ad valorem taxes. See Table 13-A General Fund Revenues and Expenditure History. 17

18 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value for Fiscal Year Ended September 30, % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $ 3,804,854, % $ 3,684,441, % $ 3,580,213, % Real, Residential, Multi-Family 316,058, % 309,993, % 316,482, % Real, Vacant Lots/Tracts 310,312, % 283,853, % 311,928, % Real, Acreage (Land Only) 290,702, % 302,526, % 302,125, % Real, Farm and Ranch Improvements 26,666, % 22,753, % 24,023, % Real, Commercial and Industrial 2,490,970, % 2,305,527, % 2,266,651, % Real, Oil, Gas, and Other Mineral Reserves 12,130, % 18,521, % 12,576, % Real and Tangible Personal, Utilities 67,881, % 60,056, % 64,350, % Tangible Personal, Business 1,218,169, % 1,174,835, % 1,183,203, % Tangible Personal, Other 19,567, % 19,429, % 18,816, % Real Property, Inventory 37,297, % 29,961, % 33,977, % Special Inventory 47,865, % 40,026, % 34,433, % Other 1,379, % % 51, % Error 1, % % % Total Appraised Value Before Exemptions $ 8,643,858, % $ 8,251,928, % $ 8,148,834, % Less: Total Exemptions/Reductions 1,301,826,356 1,213,255,948 1,157,955,367 Taxable Assessed Value $ 7,342,031,955 $ 7,038,672,572 $ 6,990,879,362 Taxable Appraised Value for Fiscal Year Ended September 30, RESTATED % of % of Category Amount Total Amount Total Real, Residential, Single-Family $ 3,546,780, % $ 3,485,808, % Real, Residential, Multi-Family 330,576, % 329,670, % Real, Vacant Lots/Tracts 325,125, % 378,133, % Real, Acreage (Land Only) 305,457, % 313,475, % Real, Farm and Ranch Improvements 29,832, % 30,340, % Real, Commercial & Industrial 2,282,439, % 2,192,288, % Real, Oil, Gas, and Other Mineral Reserves 27,079, % 24,007, % Real and Tangible Personal, Utilities 73,418, % 77,320, % Tangible Personal, Business 1,144,424, % 1,245,093, % Tangible Personal, Other 16,784, % 17,474, % Real Property, Inventory 35,208, % 44,063, % Special Inventory 35,346, % 39,438, % Other 52, % 589, % Error % 1, % Total Appraised Value Before Exemptions $ 8,152,525, % $ 8,177,707, % Less: Total Exemptions/Reductions 1,149,287,995 1,145,147,767 Taxable Assessed Value $ 7,003,237,801 $ 7,032,559,952 NOTE: Valuations shown are certified taxable assessed values reported by the Hidalgo County Appraisal District to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. [The Remainder of this Page Intentionally Left Blank] 18

19 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY Ratio of Fiscal Taxable Net Tax Debt Net Tax Debt Net Tax Year Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9/30 Population (1) Valuation (2) Per Capita of Year Valuation Capita ,877 $ 7,032,559,952 $ 54,148 $ 32,130, % $ ,206 7,003,237,801 52,574 26,860, % ,978 6,990,879,362 52,179 33,850, % ,119 7,038,672,572 52,092 21,735, % ,507 7,342,031,955 53,785 61,375,000 (3) 0.84% (3) 450 (3) (1) Source: City of McAllen, Texas. (2) As reported by the Hidalgo County Appraisal District on the City's annual State Property Tax Board Reports; subject to change during the ensuing year. (3) Includes the Obligations. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Interest Year and Ended Tax General Sinking % Current % Total 9/30 Rate Fund Fund Tax Levy (1) Collections Collections (2) 2010 $ $ $ $ 32,024, % 98.87% ,477, % 98.76% ,996, % 98.35% ,234, % 96.21% (3) 33,760,812 (4) N/A N/A (1) Includes senior freeze tax levy amounts. Accounts for periodic changes in assessed values in subsequent years. (2) City allocates delinquent tax collections to the respective years in which the taxes were levied. (3) Portions of the City s previously issued general obligation debt are treated and administered by the City as selfsupporting debt. In recent years, the City has transferred amounts from its enterprise funds to service substantial portions of its general obligation debt. However, such transfers (including transfers in respect of self-supporting debt) derived from such enterprise funds and other special governmental funds are discretionary, and there is no guarantee that such discretionary payments from enterprise funds and other special governmental funds will be made in the future. In the event that such discretionary transfers cease or are insufficient to pay debt service on the City s ad valorem tax secured debt as such debt service becomes due, the City is obligated to provide funding for any shortfall through the levy of ad valorem taxes. See Table 13-A General Fund Revenues and Expenditure History. (4) Provided by City officials. [The Remainder of this Page Intentionally Left Blank] 19

20 TABLE 5 - TEN LARGEST TAXPAYERS 2013/14 % of Total Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation Simon Property Tax Department Real Estate $ 61,802, % Rio Grande Regional Hospital Healthcare 56,328, % Universal Health Services Healthcare 52,246, % Palms Crossing LP Real Estate 41,915, % GE Engine Services-McAllen, LP Aviation 35,988, % AEP Texas Central CO Utility 31,146, % H E Butt Grocery Company Retail 24,437, % Inland Western McAllen Trenton Real Estate 22,025, % McAllen M edical Center Healthcare 19,185, % Weingarten Las Tiendas JV Real Estate 17,952, % $ 363,029, % GENERAL OBLIGATION DEBT LIMITATION... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter. See "THE OBLIGATIONS - Tax Rate Limitation." TABLE 6 - TAX ADEQUACY (1) 2014 Net Principal and Interest Requirements (1) $3,507,424 $ Tax Rate at 95% Collection Produces $3,508,390 Average Annual Net Principal and Interest Requirements, (1) $4,164,299 $ Tax Rate at 95% Collection Produces $4,171,008 Maximum Annual Net Principal and Interest Requirements, 2018 (1) $6,653,825 $ Tax Rate at 95% Collection Produces $6,654,084 (1) Includes the Obligations and excludes the self-supporting debt. [The Remainder of this Page Intentionally Left Blank] 20

21 TABLE 7 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax debt ("Tax Debt") was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional bonds since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of taxing bodies with territory in the City. City's 2013/14 Total Overlapping Authorized Taxable 2013/14 G.O. Tax Estimated G.O. Tax But Unissued Assessed Tax Debt As of % Debt As of Debt As Of Taxing Jurisdiction Value Rate 12/31/2013 Applicable 12/31/ /31/2013 City of McAllen $ 7,342,031,955 $ $ 85,090,000 (1) % $ 85,090,000 48,200,000 Edinburg Consolidated Independent School District 5,095,912, ,086,045 (3) 1.89% 1,721,526 - Hidalgo County 28,090,951, ,385, % 45,678,901 - Hidalgo County Drainage District #1 27,301,836, ,535, % 45,004, ,000,000 Hidalgo Independent School District 415,606, ,805,445 (4) 19.63% 3,298,909 - McAllen Independent School District 6,286,719, ,550,080 (5) 92.34% 75,303,344 - Pharr-San Juan-Alamo Independent School District 3,612,061, ,702,528 (6) 13.11% 16,741,801 - Sharyland Independent School District 2,735,210, ,212,997 (7) 25.80% 24,822,953 - South Texas College 28,599,949, ,384, % 6,125, ,028,940 $ (2) Total Direct and Overlapping G. O. Tax Debt $ 303,787,395 Ratio of Direct and Overlapping G. O. Tax Debt to Taxable Assessed Valuation 4.14% Per Capita Overlapping G. O. Tax Debt $ 2,225 (1) Includes the Obligations. (2) These bonds were authorized in August 18, The City does not intend to issue these bonds. (3) Excludes approximately % as these bonds were awarded Instructional Facilities Allotment from the Texas Education Agency and/or Tier III allotment as a result of legislation enacted by the Texas Legislature which provides State Financial assistance for certain outstanding debt issued by school districts, excluding Maintenance Tax Notes. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. (4) Excludes approximately % as these bonds were awarded Instructional Facilities Allotment from the Texas Education Agency and/or Tier III allotment as a result of legislation enacted by the Texas Legislature which provides State Financial assistance for certain outstanding debt issued by school districts. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. (5) Excludes approximately % as these bonds were awarded Instructional Facilities Allotment from the Texas Education Agency and/or Tier III allotment as a result of legislation enacted by the Texas Legislature which provides State Financial assistance for certain outstanding debt issued by school districts. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. (6) Excludes approximately % as these bonds were awarded Instructional Facilities Allotment from the Texas Education Agency and/or Tier III allotment as a result of legislation enacted by the Texas Legislature which provides State Financial assistance for certain outstanding debt issued by school districts. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. (7) Excludes approximately % as these bonds were awarded Instructional Facilities Allotment from the Texas Education Agency and/or Tier III allotment as a result of legislation enacted by the Texas Legislature which provides State Financial assistance for certain outstanding debt issued by school districts, excluding Maintenance Tax Notes. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. [The Remainder of this Page Intentionally Left Blank] 21

22 DEBT INFORMATION TABLE 8 - GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS 22 Fiscal Year Less: Net % of Ending Outstanding Debt Service (1) The Bonds The Certificates Self-Supporting Tax-Supported Principal 9/30 Principal Interest Total Principal Interest Total Principal Interest Total Debt Service Debt Service Retired 2014 $ 3,115,000 $ 1,116,673 $ 4,231,673 $ - $ - $ - $ - $ - $ - $ 724,249 $ 3,507, ,250, ,949 4,233, ,000 2,545,763 3,145, , , ,028 1,585,677 6,653, ,395, ,549 4,237,549 1,480,000 1,662,975 3,142, , , ,469 1,582,343 6,653, ,525, ,149 4,233,149 1,525,000 1,617,900 3,142, , , ,119 1,579,993 6,651, ,645, ,999 4,229,999 1,575,000 1,571,400 3,146, , , ,919 1,579,493 6,653, % ,760, ,761 4,229,761 1,640,000 1,506,775 3,146, , , ,819 1,582,718 6,651, ,895, ,593 4,236,593 1,720,000 1,422,775 3,142, , , ,119 1,584,336 6,653, , , ,706 1,810,000 1,334,525 3,144, , , ,919 1,583,625 3,144, , , ,401 1,905,000 1,241,650 3,146, , , ,919 1,580,320 3,146, , , ,476 2,000,000 1,144,025 3,144, , , ,119 1,579,595 3,144, % , , ,019 2,105,000 1,041,400 3,146, , , ,419 1,581,438 3,146, , , ,986 2,190, ,925 3,145, , , ,719 1,585,705 3,145, , , ,191 2,260, ,350 3,146, , , ,019 1,582,210 3,146, , , ,709 2,340, ,825 3,142, , , ,856 1,578,565 3,142, , , ,324 2,435, ,325 3,142, , , ,903 1,584,228 3,142, % ,000 80, ,945 2,535, ,925 3,142, , , ,350 1,581,295 3,142, ,000 49, ,756 2,635, ,113 3,146, , , ,588 1,580,344 3,146, ,000 16, ,863 2,735, ,300 3,145, , , ,925 1,585,788 3,145, ,845, ,700 3,143, ,000 80, , ,331 3,143, ,960, ,600 3,142, ,000 49, , ,700 3,142, % ,085,000 61,700 3,146, ,000 16, , ,800 3,146, % $ 30,860,000 $ 6,746,049 $ 37,606,049 $ 42,380,000 $ 20,513,950 $ 62,893,950 $ 11,850,000 $ 5,289,038 $ 17,139,038 $ 30,188,750 $ 87,450,287 (1) "Outstanding Debt" does not include lease/purchase obligations. See Table 12 Other Obligations for details on other obligations. 22

23 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION Tax Supported Debt Service Requirements, Fiscal Year Ending 9/30/14 (1) $ 3,507,424 Interest and Sinking Fund, 9/30/2013 (2) $ 284,610 Budgeted Transfers 3,507,424 3,792,034 Estimated Balance, 9/30/14 $ 284,610 (1) Does not include self-supporting debt. TABLE 10 - COMPUTATION OF SELF-SUPPORTING DEBT Net Airport System Revenue Available as of 9/30/2013 (1) $ 1,815,640 Plus: PFC Revenue Available as of 9/30/2013 (1) 1,338,158 Less: Requirements for Airport System Revenue Debt - Balance Available for Other Purposes $ 3,153,798 Requirements for Airport System Supported General Obligation Debt $ 724,249 Percentage of Airport System General Obligation Debt Self-Supporting 100% Net Waterworks and Sewer System Revenue Available as of 9/30/2013 (1) $ 10,809,537 Less: Requirements for Waterworks and Sewer System Revenue Debt 7,441,659 Balance Available for Other Purposes $ 3,367,878 Requirements for Waterworks and Sewer System Supported General Obligation Debt $ - Percentage of Waterworks and Sewer System General Obligation Debt Self-Supporting 100% (1) Unaudited, provided by City Officials. TABLE 11 - AUTHORIZED BUT UNISSUED TAX DEBT Amount Amount Date Amount Previously Being Unissued Purpose Authorized Authorized Issued Issued Balance Fire Station 8/18/1979 $ 1,300,000 $ 300,000 $ - $ 1,000,000 Police Station 8/18/1979 1,000, , ,000 Park 8/18/1979 1,500, , ,000 Library 8/18/1979 1,000, ,000,000 Streets 11/5/ ,000,000-15,000,000 - Performing Arts Center 11/5/ ,000,000-15,000,000 - Parks and Recreation 11/5/ ,000,000-15,000,000 - $ 49,800,000 $ 1,600,000 $ 45,000,000 (1) $ 3,200,000 (1) Includes premium being paid by the Initial Bonds Purchaser (as defined hereafter) that counts towards voted authority. With the exception of approximately $3.2 million of remaining authorized but unissued bonds from a 1979 election that the City does not intend to issue, the City does not have any authorized but unissued bonds remaining. However, the City may incur nonvoted debt payable from or secured by its collection of taxes and other sources of revenue, including tax notes, certificates of obligation, public property finance contractual obligations, and leases for various purposes. ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT... The City does not intend to issue any additional general obligation debt in the next twelve months. TABLE 12 OTHER OBLIGATIONS The City no longer has other obligations outstanding. 23

24 PENSION FUND... The City provides pension benefits for all of its full time employees, except firefighters, through a nontraditional, joint contributory, hybrid defined pension plan in the state-wide Texas Municipal Retirement System ("TMRS"), an agent multiple-employer public employee retirement system. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. OTHER POST-EMPLOYMENT BENEFITS... Prior to the implementation of GASB 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, the City reported retiree health benefits in its Employee Benefits Fund. The City has created an internal services fund entitled Retiree Health Insurance Fund to accommodate the provisions of GASB 45. (1) Plan Description: The City provides post-employment health care benefits for eligible retirees and their dependents. To be eligible to elect retiree medical coverage, a City employee retiring at age 60 or over must have at least 10 years of service with the City. City employees retiring before age 60 must have at least 25 years of service with the City. Members of the City s Fire Department are eligible to retire on or after age 50 with at least 20 years of service with the City. Effective October 1, 2008, spouses must have been covered for at least three years prior to retirement. Retirees less than age 65 will have a one-time option to drop coverage and to be reinstated once the retiree reached age 65 and has enrolled in Medicare Parts A and B. Retirees are required to pay 100% of the blended (active and retiree) premium cost for both single and dependent coverage. However, police officers who retire prior to October 1, 2010 with 25 or more years of service will pay 50% of the blended premium cost for both single and dependent coverage. As of year-end, there were 106 employees who had retired; 52 with single coverage; 31 single coverage with one dependent; and 23 with family coverage. (2) Funding Policy: The policy of the City is to fund the plan on a pay-as-you go basis. (3) Annual OPEB and Net OPEB Obligation: The Retiree Health Insurance Fund s (Fund) ARC is actuarially determined in accordance with the parameters of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pension. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. The most current actuarial valuation was October 1, The following table shows the Fund s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the Fund s net OPEB obligation: 9/30/2013 Annual required contribution $ 859,964 Interest on net OPEB obligation 57,710 Adjustment to annual required contribution (72,214) Annual OPEB cost 845,460 Contributions made (763,275) Increase (decrease) in net OPEB obligation 82,185 Net OPEB obligation at beginning of year 1,049,270 Net OPEB obligation (asset) at end of year $ 1,131,455 The City s annual OPEB cost and the percentage cost contributed to the plan for the year ended September 30, 2013 is as follows: Annual Percentage of Net OPEB Year Ended OPEB Annual OPEB Obligation (Asset) September 30, Cost Cost Contributed at Year End 2009 $ 551, % $ (179,896) , % 248, , % 572, , % 1,049, , % 1,131,455 24

25 (4) Funded Status and Funding Progress: The funding of the plan was based on the actuarial valuation dated October 1, The study reported the unfunded actuarial accrued liability (UAAL) at $7,165,857 with an annual required cost of $859,964. The actuarial value of assets was $0, resulting in an UAAL of $7,165,857. The City will also be required to have an actuarial valuation performed at least every two years. (5) Actuarial Methods and Assumptions: Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefits costs between employer and the plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities consistent with the long-term perspective of the calculations. For the fiscal year ended September 30, 2013, the actuarial valuation date was October 1, The actuarial method used was the "projected unit credit" method, the amortization method used was the "level dollar open" method, and the remaining amortization period was 30 years. The asset valuation method was market value and the assumed investment rate of return was 5.5%. The healthcare initial inflation rate was 9.0%, with an ultimate goal of 5.0%. Assumptions such as projected salary increases and post-retirement benefit increases are not applicable to this plan. [The Remainder of this Page Intentionally Left Blank] 25

26 FINANCIAL INFORMATION TABLE 13 - CHANGES IN NET POSITION Unaudited Fiscal Year Ended September 30, REVENUES: Program Revenues: Charges for Services $ 9,112,048 $ 11,809,764 $ 9,143,814 $ 8,085,173 $ 8,574,470 Operating Grants and Contributions 3,592,660 2,579,065 3,326,439 1,955,046 2,016,915 Capital Grants and Contributions 4,306,512 5,065,923 7,152,106 7,871,082 3,984,011 General Revenues: Property Taxes 32,783,760 33,445,701 32,631,332 33,061,162 32,183,867 Hotel Occupancy Taxes 4,784,757 3,503,985 3,257,935 3,470,995 3,514,817 Sales Taxes 60,825,866 58,407,779 54,652,192 53,550,307 54,669,746 Franchise Taxes 6,457,397 6,348,331 6,349,157 6,130,317 6,266,684 Unrestricted Investment Earnings 123, , ,557 1,087,577 4,308,531 Royalties 936,278 1,138,925 2,706,824 2,217,798 1,864,867 Gain on sale of capital assets Miscellaneous 1,188,002 1,727,591 1,223, ,604 2,250,367 Total Revenues $ 124,110,826 $ 124,702,874 $ 121,387,690 $ 117,812,061 $ 119,634,275 EXPENSES: General Government $ 20,817,432 $ 22,505,316 $ 21,733,177 $ 17,117,884 $ 20,045,996 Public Safety 53,799,148 51,714,002 51,471,980 49,869,325 48,085,324 Highways and Streets 19,620,592 22,060,953 18,068,891 19,540,947 20,408,868 Health and Welfare 5,247,302 5,424,919 5,204,340 5,315,188 5,244,236 Culure and Recreation 18,061,633 16,468,099 16,291,072 19,345,749 16,141,618 Interest on Long-term Debt 780, ,520 1,108, , ,661 Total Expenditures $ 118,326,885 $ 119,073,809 $ 113,878,419 $ 111,732,261 $ 110,218,703 Increase in Net Position Before Transfers $ 5,783,941 $ 5,629,065 $ 7,509,271 $ 6,079,800 $ 9,415,572 Transfers 1,656,644 (13,708,822) 1,292,533 (610,088) 2,930,873 Increase in Net Position $ 7,440,585 $ (8,079,757) $ 8,801,804 $ 5,469,712 $ 12,346,445 Beginning Net Position 353,910, ,989, ,187, ,131, ,784,883 Prior Period Adjustment ,586,925 - Ending Net Position $ 361,350,597 $ 353,910,012 $ 361,989,769 $ 353,187,965 $ 344,131,328 [The Remainder of this Page Intentionally Left Blank] 26

27 TABLE 13-A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY Unaudited Fiscal Years Ended September 30, REVENUES Taxes $ 85,284,863 $ 83,293,338 $ 79,439,658 $ 78,495,950 $ 79,033,184 Licenses and Permits 1,415,836 1,522,912 1,362,515 1,318,643 1,381,625 Intergovernmental 598, , , , ,675 Charges for Services 3,995,475 3,836,385 3,708,508 4,217,966 4,233,634 Fine and Forfeitures 1,678,688 1,695,585 1,597,977 1,594,805 1,843,298 Investment Earnings 203, , ,237 1,017,997 1,661,167 Net decrease (increase) in the fair value of investments (171,926) 51,225 (48,672) (607,465) 532,356 Other 1,153,914 1,771,106 3,314,455 3,099,623 2,696,200 Total Revenues $ 94,159,197 $ 92,968,840 $ 90,470,108 $ 89,941,401 $ 91,951,139 EXPENDITURES Current Expenditures: General Government $ 17,428,661 $ 17,167,270 $ 18,878,871 $ 18,485,421 $ 18,593,810 Public Safety 49,552,263 48,994,483 48,758,093 47,960,560 47,092,657 Highways and Streets 12,009,923 11,902,801 12,523,648 13,698,329 14,990,209 Health and Welfare 1,751,660 2,061,310 1,596,347 1,981,806 1,647,917 Culture and Recreation 15,403,772 14,677,005 14,411,876 14,371,653 15,256,793 Debt Service: Principal Interest and Fiscal Charges Total Expenditures $ 96,146,279 $ 94,802,869 $ 96,168,835 $ 96,497,769 $ 97,581,386 EXCESS (DEFICIENCY) OF REVENUE OVER EXPENDITURES $ (1,987,082) $ (1,834,029) $ (5,698,727) $ (6,556,368) $ (5,630,247) OTHER FINANCING SOURCES (USES) Transfers In $ 10,502,701 $ 9,376,061 $ 9,857,327 $ 7,086,409 $ 12,269,122 Transfers Out (10,450,326) (4,707,025) (12,055,934) (2,680,000) (8,692,653) Net Other Financing Sources (Uses) $ 52,375 (1) $ 4,669,036 (2) $ (3) (2,198,607) $ 4,406,409 (4) $ 3,576,469 EXCESS (DEFICIENCY) OF REVENUE AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER USES $ (1,934,707) $ 2,835,007 $ (7,897,334) $ (2,149,959) $ (2,053,778) FUND BALANCES AT BEGINNING OF YEAR, AS PREVIOUSLY STATED $ 45,810,264 $ 42,975,257 $ 50,872,591 $ 49,435,625 $ 51,489,403 Add: Restatement of Prior Year Fund Balance ,586,925 - FUND BALANCES AT BEGINNING OF YEAR, AS RES TATED 45,810,264 42,975,257 50,872,591 53,022,550 51,489,403 FUND BALANCES AT END OF YEAR $ 43,875,557 $ 45,810,264 $ 42,975,257 $ 50,872,591 $ 49,435,625 (1) During the year, the general fund transferred $3,506,426 to the debt service fund and $6,943,900 to the capital improvement fund. The general fund received transfers of $4,608,653 from the McAllen International Toll Bridge, $1,103,965 from the McAllen International Airport, $4,093,426 from the McAllen Economic Development Corporation, $596,657 from the Downtown Parking Fund, and $100,000 from the EB-5 Fund. (2) During the year, the general fund transferred $3,507,025 to the debt service fund and $1,200,000 to the capital improvement fund. The general fund received transfers of $4,168,414 from the McAllen International Toll Bridge, $1,103,965 from the McAllen International Airport, $3,507,025 from the McAllen Economic Development Corporation, and $596,657 from the downtown parking fund. (3) During the year, the general fund transferred $6,384,694 to the debt service fund, $3,215,240 to the capital improvement fund, $100,000 to the McAllen EB-5 Regional Center Fund, and $2,356,000 to the Police Department Seized Funds. The general fund received transfers of $4,429,189 from the McAllen International Bridge, $1,103,965 from the McAllen International Airport, $3,508,578 from the McAllen Economic Development Corporation, $597,657 from the Downtown Parking Fund, and $218,938 from the Health Insurance Fund. (4) During the year, the general fund transferred 2,680,000 of surplus revenues to the capital improvement fund, while receiving $595,556 from nonmajor governmental funds, $4,886,888 from the McAllen International Toll Bridge, $1,103,965 from the McAllen International Airport and $500,000 from General Insurance. (5) During the year, the general fund transferred $5,400,000 of surplus revenues to the capital improvement fund, as well as a total of $3,292,653 to the debt service fund, and the information technology fund. The General Fund received transfers of $4,438,558 from the Capital Improvement Fund, $598,818 from nonmajor government funds, $6,127,781 from the McAllen International Toll Bridge and $ 1,103,965 from the McAllen International Airport. (5) 27

28 TABLE 14 - MUNICIPAL SALES TAX The City has adopted the Municipal Sales and Use Tax Act, VATCS, Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Obligations. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. In 1990, the voters of the City approved the imposition of an additional sales and use tax of one-half of one percent (½% of 1%) for property tax reduction. In 1997, the voters of the City approved the imposition of an additional sales and use tax of one-half of one percent (½% of 1%) for economic development. The sales tax for economic development is collected solely for the benefit of the McAllen Economic Development Corporation (the "Corporation"), and may be pledged to secure payment of sales tax revenue bonds issued by the Corporation. Fiscal Equivalent Year % of of Ended Total Ad Valorem Ad Valorem Per 9/30 Collected (1) Tax Levy Tax Rate Capita (2) 2009 $ 41,002, % $ $ ,162, % ,989, % ,805, % ,619, % (1) Excludes half-cent sales tax for economic development. (2) Population provided by the City of McAllen, Texas. The sales tax breakdown for the City is as follows: Property Tax Relief 0.50 Economic and Community Development 0.50 City Sales and Use Tax 1.00 State Sales and Use Tax 6.25 Total 8.25 FINANCIAL POLICIES Basis of Accounting... The City s accounting system is conducted on the modified accrual basis of accounting for all governmental fund types, expendable trust funds and agency funds. Under this basis, expenditures are recorded when liabilities are incurred; and revenues are recorded when they become measurable and available as net current assets. The accrual basis of accounting is followed for the proprietary and non-expandable trust funds. Under accrual basis, revenues are recognized in the accounting period in which they are earned and become measurable. Expenses are recorded in the accounting period incurred, if measurable. Enterprise funds are accounted for using the accrual basis of accounting. Revenues are recognized when earned, and expenses are recognized when incurred. Operating transfers to the City are recognized when paid. Debt Service Fund Balance... Money in the Interest and Sinking Funds is accumulated monthly and the Reserve Funds and Contingency Funds are fully established in the amounts required under the Ordinances authorizing the Obligations and the ordinances authorizing the outstanding parity bonds. Budgetary Procedures... The City Commission adheres to the following procedures in establishing the budgetary data reflected in the general purpose financial statements: 1. Prior to September 1 of each year, the City Manager is required to submit to the City Commission a proposed balanced budget for the fiscal year beginning on the following October 1. The operating budget includes proposed expenditures and the means of the financing them. 2. Public hearings are conducted to obtain taxpayer comments. 3. Prior to October 1, the budget is legally enacted by the City Commission through passage of an ordinance. 4. The City Manager is authorized to transfer budgeted amounts between accounts within any departments; however, any revisions that alter the total expenditures of any department must be approved by the City Commission. Budgeted amounts include transfers and revisions to the original appropriations ordinance. 28

29 INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Commission of the City. Both state law and the City's investment policies are subject to change. Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) (i) that are issued by or through an institution that has its main office or a branch office in Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits; or (ii) where (a) the funds are invested by the City through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the City as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the City; (b) the broker or the depository institution selected by the City arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the City; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the City appoints the depository institution selected under (a) above, a custodian as described by Section (d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section c3-3) as custodian for the City with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the City, held in the City s name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City s name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the City must do so by order, ordinance, or resolution. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 29

30 Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for City funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All City funds must be invested consistent with a formally adopted Investment Strategy Statement that specifically addresses each fund s investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the City s investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived. At least quarterly the City s investment officers must submit an investment report to the City Commission detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest City funds without express written authority from the City Commission. Under State law, the City is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt by written instrument a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Commission; (4) require the qualified representative of firms offering to engage in an investment transaction with the City to: (a) receive and review the City s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the City and the business organization that are not authorized by the City s investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the City s entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the City and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the City s investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in no-load mutual funds in the aggregate to no more than 15% of the City s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. TABLE 15 - CURRENT INVESTMENTS (1) As of September 30, 2013, the City's investable funds were invested in the following categories: % of Purchase Market Description Portfolio Price Value Certificates of Deposit 7.84% $ 19,775,631 $ 19,775,631 Certificates of Deposit Accounts Registry Services (CDARs) 0.00% - - TexPool 24.29% 61,280,758 61,286,273 Money Market Mutual Funds 4.47% 11,289,468 11,289,468 Government Securities 63.40% 159,979, ,680, % $ 252,325,843 $ 252,032,182 As of such date, 71% of the City's investment portfolio will mature within 701 days. The market value of the investment portfolio was 99.88% of its purchase price. (1) Unaudited. 30

31 TAX MATTERS OPINION... On the date of initial delivery of the Obligations (referred to collectively throughout this section as the Obligations ), Bond Counsel to the Issuer, will render their opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law") (i) interest on the Obligations will be excludable from the "gross income" of the holders thereof, and (ii) the Obligations will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Obligations. See Appendix C - Forms of Bond Counsel s Opinions. In rendering its opinion, Bond Counsel to the Issuer will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate, and (b) covenants of the Issuer contained in the Obligation documents relating to certain matters, including arbitrage and the use of the proceeds of the Obligations and the property financed or refinanced therewith. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Obligations to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Obligations in order for interest on the Obligations to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Obligations to be included in gross income retroactively to the date of issuance of the Obligations. The opinion of Bond Counsel to the Issuer is conditioned on compliance by the Issuer with such requirements, and Bond Counsel to the Issuer has not been retained to monitor compliance with these requirements subsequent to the issuance of the Obligations. Bond Counsel's opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Obligations. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Obligations or the property financed or refinanced with proceeds of the Obligations. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Obligations, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Obligationholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. FEDERAL INCOME TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT... The initial public offering price to be paid for one or more maturities of the Obligations may be less than the principal amount thereof or one or more periods for the payment of interest on the Obligations may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Obligation"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Obligation, and (ii) the initial offering price to the public of such Original Issue Discount Obligation would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the Obligations less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Obligation in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Obligation equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Obligation prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Obligation in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Obligation was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Obligation is accrued daily to the stated maturity thereof (in amounts calculated as described below for each accrual period and ratably within each such accrual period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Obligation for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. 31

32 The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Obligation. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Obligations which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Obligations should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Obligations and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Obligations. COLLATERAL FEDERAL INCOME TAX CONSEQUENCES... The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Obligations. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase Obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE OBLIGATIONS. Interest on the Obligations will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of Obligations, such as the Obligations, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of an Obligation, such as the Obligations, if such Obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. STATE, LOCAL AND FOREIGN TAXES... Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Obligations under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. RATINGS OTHER INFORMATION The Obligations and the presently outstanding tax supported debt of the City are rated "AA+" by Fitch and "AA+" by S&P without regard to credit enhancement. An explanation of the significance of such ratings may be obtained from the companies furnishing the ratings. The ratings reflect only the views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating companies, if in the judgment of such companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Obligations. LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. 32

33 REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE The sale of the Obligations has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Obligations have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Obligations under the securities laws of any jurisdiction in which the Obligations may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Obligations are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Obligations by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Obligations be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION - Ratings" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Obligations are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Obligations are legal investments for various institutions in those states. LEGAL OPINIONS AND NO-LITIGATION CERTIFICATE The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Obligations, including the unqualified approving legal opinion of the Attorney General of Texas approving the respective Initial Certificate and to the effect that the Obligations are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Obligations will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under "TAX MATTERS" herein. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Obligations, or which would affect the provision made for their payment or security, or in any manner questioning the validity of said Obligations will also be furnished. Bond Counsel was not requested to participate, and did not take part, in the preparation of this Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that, in its capacity as Bond Counsel, such firm has reviewed the information under the captions "THE OBLIGATIONS" (other than the information under the subcaption "Book-Entry-Only System"), "TAX MATTERS", "OTHER INFORMATION - Registration and Qualification of Obligations for Sale", "OTHER INFORMATION - Legal Investments and Eligibility to Secure Public Funds in Texas", "OTHER INFORMATION - Legal Opinions and No-Litigation Certificate", and "OTHER INFORMATION - Continuing Disclosure of Information" (other than the subcaption "Compliance with Prior Undertakings") in the Official Statement, and such firm is of the opinion that the information relating to the Obligations and the Ordinances contained under such captions is a fair and accurate summary of the information shown and that the information and descriptions contained under such captions relating to the provisions of applicable state and federal laws are correct as to matters of law. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Obligations is contingent on the sale and delivery of the Obligations. The legal opinion of Bond Counsel will accompany the Obligations deposited with DTC or will be printed on the Obligations in the event of the discontinuance of the book-entry-only system. The legal opinions to be delivered concurrently with the delivery of the Obligations express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. CONTINUING DISCLOSURE OF INFORMATION The City in the Ordinances have made the following agreement for the benefit of the holders and beneficial owners of the Obligations. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board ( MSRB ). This information will be available to the public at no charge via the MSRB s Electronic Municipal Market Access ( EMMA ) system at as described below under Availability of Information from MSRB. 33

34 ANNUAL REPORTS... Under Texas law, including, but not limited to, Chapter 103, as amended, Texas Local Government Code, the City must keep its fiscal records in accordance with generally accepted accounting principles, must have its financial accounts and records audited by a certified public accountant and must file each audit report within 180 days after the close of the Issuer's fiscal year. The City's fiscal records and audit reports are available for public inspection during the regular business hours, and the Issuer is required to provide a copy of the Issuer's audit reports to any bondholder or other member of the public within a reasonable time on request upon payment of charges prescribed by the Texas General Services Commission. The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in Tables 1 through 6 and 8 through 15 in this Official Statement and in Appendix B to this Official Statement. The City will update and provide this information within six months after the end of each fiscal year ending in or after The City will provide the updated information to the MSRB. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. The updated information will include audited financial statements for the City, if the City commissions an audit and it is completed by the required time. If audited financial statements are not provided by that time, the City will provide unaudited financial statements for the applicable fiscal year to the MSRB, with the financial information and operating data and will file the annual audit report when and if the same becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in the City's annual financial statements or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by the end of March in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change. NOTICE OF OCCURRENCE OF CERTAIN EVENTS, WHETHER OR NOT MATERIAL... The City will notify the MSRB through EMMA (in an electronic format as prescribed by the MSRB) within ten business days following the occurrence of any of the following events with respect to the Obligations, without regard to whether such event is material within the meaning of the federal securities laws: (1) principal and interest payment delinquencies; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) adverse tax opinions or 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-exempt status of the Obligations, or other events affecting the tax-exempt status of the Obligations; (6) tender offers; (7) defeasances; (8) rating changes; and (9) bankruptcy, insolvency, receivership or similar event of an obligated person. NOTICE OF OCCURRENCE OF CERTAIN EVENTS, IF MATERIAL... The City also will notify the MSRB through EMMA (in an electronic format as prescribed by the MSRB) within ten business days following the occurrence of any of the following events with respect to the Obligations, if such event is material within the meaning of the federal securities laws: (1) non-payment related defaults; (2) modifications to rights of Obligationholders; (3) Obligation calls; (4) release, substitution, or sale of property securing repayment of the Obligations; (5) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, 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; and (6) appointment of a successor or additional trustee or the change of name of a trustee. NOTICE OF FAILURE TO TIMELY FILE... The City also will notify the MSRB through EMMA, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with the provisions described above. AVAILABILITY OF INFORMATION FROM MSRB... Effective July 1, 2009 (the "EMMA Effective Date"), the SEC implemented amendments to the Rule which approved the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities information repositories with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the City in accordance with its undertaking made for the Obligations will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. With respect to debt of the City issued prior to the EMMA Effective Date, the City remains obligated to make annual required filings, as well as notices of material events, under its continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information repository (the SID )). Prior to the EMMA Effective Date, the Municipal Advisory Council of Texas (the MAC ) had been designated by the State and approved by the SEC staff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC has entered into a Subscription Agreement with the MSRB pursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documents and related information posted to EMMA s website simultaneously with such posting. Until the City receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the City has determined, in reliance on guidance from the MAC, that making its continuing 34

35 disclosure filings solely with the MSRB will satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to the EMMA Effective Date. LIMITATIONS AND AMENDMENTS... The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Obligations at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Obligations may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if the agreement, as amended, would have permitted an underwriter to purchase or sell Obligations in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Obligations consent or any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Obligations. The City may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City also may amend the applicable provisions of the Ordinances in its discretion in any other manner or circumstance, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Obligations in the primary offering of the Obligations giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the City 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 data provided. COMPLIANCE WITH PRIOR UNDERTAKINGS... For the past five years, the City has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Obligations. The Financial Advisor's fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. First Southwest Company, in its capacity as Financial Advisor, does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Obligations, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the City has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. INITIAL PURCHASER FOR THE BONDS After requested competitive bids for the Bonds, the City accepted the bid of Hutchinson, Shockey, Erley & Co. (the Initial Bonds Purchaser ) to purchase the Bonds at the interest rates shown on the inside cover page of the Official Statement at a price of par plus a cash premium of $2,800, The initial reoffering yields shown on the inside cover page were provided to the City by the Initial Bonds Purchaser and will produce compensation to the Initial Bonds Purchaser of approximately $228, The Initial Bonds Purchaser can give no assurance that any trading market will be developed for the Bonds after their sale by the City to the Initial Bonds Purchaser. The City has no control over the price at which the Bonds are subsequently sold and the initial yield at which the Bonds will be priced and reoffered will be established by and will be the responsibility of the Initial Bonds Purchaser. INITIAL PURCHASER FOR THE CERTIFICATES After requested competitive bids for the Certificates, the City accepted the bid of J.P. Morgan Securities LLC (the Initial Certificates Purchaser ) to purchase the Certificates at the interest rates shown on the inside cover page of the Official Statement at a price of par plus a cash premium of $341, The initial reoffering yields shown on the inside cover page were provided to the City by the Initial Certificates Purchaser and will produce compensation to the Initial Certificates Purchaser of approximately $123, The Initial Certificates Purchaser can give no assurance that any trading market will be developed for the Certificates after their sale by the City to the Initial Certificates Purchaser. The City has no control over the price at which the Certificates are subsequently sold and the initial yield at which the Certificates will be priced and reoffered will be established by and will be the responsibility of the Initial Certificates Purchaser. 35

36 FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. MISCELLANEOUS The financial data and other information contained herein have been obtained from the City's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Ordinances authorizing the issuance of the Obligations approved the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorized its further use in the reoffering of the Obligations by the Initial Purchaser. ATTEST: /s/ James E. Darling Mayor City of McAllen, Texas /s/ Annette Villarreal City Secretary City of McAllen, Texas 36

37 APPENDIX A GENERAL INFORMATION REGARDING THE CITY

38 THIS PAGE LEFT BLANK INTENTIONALLY

39 THE CITY The City is located in Hidalgo County at the intersection of U.S. Highways 83 and 281. The City was incorporated in 1911 and is the largest city in Hidalgo County. The City of San Antonio is approximately 230 miles north of McAllen; the City of Monterrey, Mexico is approximately 130 miles southwest of the City and Mexico City is approximately 490 miles southwest of the City. The City is located in South Texas in a region known as the Rio Grande Valley or the Valley situated within a ten minute drive of the United States - Mexico border. The City is locally known as the City of Palms because of the palm trees planted by the earliest residents of the community. Population samples include: Census Census Census Census McAllen 129, ,414 84,021 66,281 Hidalgo County 774, , , ,323 ECONOMY The City s economy is diversified having government, trade, transportation, utilities, education, health services, and hospitality, leisure, and international trade with Mexico. At one time the major industry in the City and the region was agriculture with various vegetables, sugar cane, and citrus groves. Since then, the economy has undergone a significant transformation characterized by decreasing reliance on agriculture. A large part of the growth can be attributed to the Maquiladora Twin Plant Program under which United States firms locate manufacturing facilities in Mexico and use warehousing facilities in the City s foreign trade zone. This program is intended to keep labor costs down and maintain the firms competitiveness in their respective markets. The McAllen Economic Development Corporation has helped bring hundreds of new companies and thousands of jobs into the City and Reynosa, the city immediately across the border in which the maquiladoras are primarily located. Additionally, the North American Free Trade Agreement has facilitated and supported the growth in trade as well as the growth and diversification of the City s economy. This growth has also helped to significantly reduce the unemployment rate in McAllen from 13.4% in 1996 to 6.4% in November The City has 18 financial institutions which include: BBVA Compass Bank, Banamex USA, Bank of America, N.A., Bank of South Texas, Border Capital Bank, N.A., Capitol One, N.A., Falcon International Bank, First National Bank, Frost Bank, Greater South Texas Bank, Inter National Bank, International Bank of Commerce, JPMorgan Chase Bank, N.A., Lone Star National Bank, Rio Bank, Texas Community Bank, N.A., Vantage Bank of Texas, N.A. and Wells Fargo Bank, N.A. [The Remainder of this Page Intentionally Left Blank] A - 1

40 TOP EMPLOYERS MCALLEN MSA (1) Employer Type of Business Approximate Number of Employees Edinburg Consolidated I.S.D. Education 3,600 McAllen Independent School District Education 3,595 Edinburg Regional Medical Center Healthcare 3,000 Edinburg Regional Medical Center Healthcare 3,000 University of Texas Pan American Education 2,850 McAllen Medical Center Healthcare 2,800 McAllen Medical Center Healthcare 2,800 Hidalgo County Government 2,211 Mission Consolidated I.S.D. Education 2,140 Doctor's Hospital at Renaissance Healthcare 2,000 City of McAllen Government 1,801 South Texas College Education 1,800 U.S. Customs & Border Protection Government 1,609 Wal-Mart Retail 1,000 Columbia Rio Grande Regional Hospital Healthcare 975 Mission Regional Medical Center Healthcare 950 T-Mobile Communications 900 Convergys Communications 900 H-E-B Grocery 500 Dillards Retail 354 (1) Source: TWC Tracer McAllen MSA reports for Hidalgo County 2011 HISTORICAL EMPLOYMENT DATA FOR CITY OF MCALLEN (1)(2) 2013 (2) 2012 (3) 2011 (3) 2010 (3) 2009 (3) Civilian Labor Force 61,772 61,419 61,303 60,081 61,567 Total Employed 57,790 56,863 56,301 55,120 57,283 Total Unemployed 3,982 4,556 5,002 4,961 4,284 Unemployment Rate 6.4% 7.4% 8.2% 8.3% 7.0% % Unemployed (Texas) 5.8% 6.8% 7.9% 8.2% 7.5% % Unemployed (U.S.) 6.6% 8.1% 8.9% 9.6% 9.3% (1) Source: Texas Workforce Commission. (2) As of November, EDUCATION McAllen Independent School District is comprised of 4 high schools (9-12), 7 middle schools (6-8), 20 elementary schools (EE-5) and 3 alternative schools, with a combined enrollment of 25,252. On September 1, 1993, the District officially began operations at the Pecan Campus located at 3201 West Pecan, McAllen, Texas. Estimated enrollment at the District in Fall 2012 was 29,812. There were many developments in the first year of operation. The first off-campus courses were offered in temporary facilities in Starr County in December This pilot effort was followed by the addition of courses in Mercedes in March Courses in other communities and facilities soon followed. A mission statement for South Texas College District was adopted by the Board of Trustees in April 1994, and in May 1994, the Board approved a Strategic Plan for the District. The first and founding president of the District, Dr. Shirley A. Reed, was officially appointed in June of A fundamental goal of developing facilities at South Texas College District is to provide access to educational opportunities for the residents of both Starr and Hidalgo counties which are served by the District. Since the combined area is almost 3,000 square miles, this obviously cannot be achieved by providing a single fixed delivery point. The master plan concept, therefore, comprises three key delivery components. A - 2

41 Although the District comprises two counties it can, from a demographic point-of view, be more appropriately divided into three general areas. One is the central part of Hidalgo County extending from the Rio Grande River in the south to the county line in the north and from Sullivan City in the west to Alamo in the east. This area is proposed to be served primarily by the Pecan Campus in McAllen. The Pecan Campus in McAllen is at the heart of the highest population concentration in the two county areas. The buildings themselves are in good condition and land is available for expansion. It is therefore proposed that this location continue to be the central campus serving the local central population and, through Distance Learning, the entire District. South Texas College District has experienced continuous growth since its inception in the Fall of South Texas College District s Fall 2011 enrollment had a 5% increase over the District s Fall 2010 enrollment. To meet the demands of its increasing enrollment, in May 2012, South Texas College District opened its newest addition, the Pecan Campus West Academic Building, a two-story, 50,000-square foot facility. The Pecan Campus provides a full range of academic, technical, and continuing education opportunities at the center of the greatest concentration of population. The Technology Campus (formerly Center for Advanced and Applied Technology) was established near the Foreign Trade zone in McAllen. The Center was developed to provide technical training to support the tremendous industrial growth which is occurring along the border and is being fueled by NAFTA. A donated 138,000 square foot industrial building was donated to house this state of the art training center. Renovation of the building has been completed and space was added to house additional workforce development programs. The Ramiro R. Casso Nursing and Allied Health Campus is located at 1101 E. Vermont. The campus was developed to provide a facility for the nursing and allied health programs. The City of McAllen donated four (4) acres of land and $1.2 million for the construction of the facility. The Economic Development Administration, United States Department of Commerce provided a $1.6 million grant for Phase I and a $1.7 million grant for the Phase II construction. The District funded the remainder of the construction costs, the furniture, fixtures, and equipment. The 53,100 square foot facility opened in August A second area is generally the same as the areas covered by Starr County in the west. It was proposed that because of the comparative remoteness of this area in relation to the central campus with driving times in excess of one hour that this campus be established to serve the Hidalgo and Starr counties population. A 30-acre location to the west of Rio Grande City was selected as the most appropriate location for the development of the Starr County Campus and is adjacent to the Rio Grande City High School. The campus opened in August The third distinct demographic area is the concentration of population in the eastern part of Hidalgo County extending north from the Rio Grande to the Delta area and the county line in the east. This area, although less remote from the Pecan Campus than Starr County, comprises a substantial concentration of population who has benefited from the opportunity of having a college facility close at hand. A 20 acre site was selected close to Highway 83 in Weslaco and is located across the street from the Weslaco High School. It is the site for the South Texas College District Mid-Valley Campus which opened in August The first phase of development was funded by a $20 million general obligation bond program and the $2.5 million per year new construction designated reserve fund. It was anticipated that this initial phase would accommodate the college district s facilities requirements through the year In 1999 the District began a District Wide Campus Expansion Master Plan for construction of new facilities. The Facilities Master Plan was developed to coincide with the projected student enrollment through the year 2010 at all campuses. With the passage of the $98.7 million bond construction program with issues in 2002 and 2003, 763,136 square feet of construction projects were proposed to be constructed to accommodate the facilities requirements through The proposed construction projects have been completed. The District purchased a 16,048 square foot building in September The building fit the needs of the information technology department. The building has since been renovated and houses the Human Resources Office and the Office of Institutional Research and Analytical Services. South Texas College District completed a second expansion of the Learning Resource Center at the Pecan Campus. The Phase II addition increased the total space at the Learning Resource Center to 65,919 square feet. During fiscal year 2009, South Texas College District completed construction of the Nursing Allied Health Pharmacy Technology lab improvements, Pecan Campus Memorial Garden Project, Pecan Campus Human Resources, Office of Institutional Research and Effectiveness, and the Office of Research and Analytical Services Building Renovation, Pecan Plaza Renovation, Pecan Campus Student Support Building K Faculty Offices Renovation, district wide site lighting improvements, district wide portable renovations, Mid-Valley Campus sidewalk for Building E and G and Starr County Building E steel frame improvements. South Texas College District also purchased an additional lot adjacent to its Pecan Campus for future expansion. South Texas College District s funding for these projects came from accumulated net assets. A - 3

42 In 2008, efforts began for developing an updated District Wide Campus Expansion Master Plan that would identify facilities needs for each campus through This master plan was completed in the spring of 2010 and identified an additional 1.3 million square feet of new facilities to accommodate the anticipated student enrollment growth. Major construction completed during fiscal year 2012 included Pecan South Boulevard Entrance and West Loop, Pecan West Loop Road Phase II, Pecan West Academic Building and Technology Building B Welding Ventilation System. Also, completed during fiscal year 2012 were the Pecan Building G Science Lab Improvements, Mid-Valley ADA Walkway Improvements, Mid- Valley Portable Buildings Infrastructure, Mid-Valley Child Development Covered Walkway and Nursing Allied Health Respiratory Therapy Lab Expansion. Source. South Texas College District Comprehensive Annual Financial Report, Fiscal Years Ended August 31, 2012 and Major construction completed during fiscal year 2013 included Pecan Building G Fume Hood Additions, Pecan South Academic Building J Science Lab Additional Seating Improvements, Pecan Plaza Re-Roofing, Mid-Valley Building G Science Lab Improvements, Mid-Valley Parking Lot Expansion, Technology Southwest Building E Renovations and Starr HVAC Additional Chiller Improvements. Also completed during fiscal year 2013 were the Mid-Valley Child Development Center Building L Re- Roofing, Technology Campus Southwest Building E Repairs, District Wide Safety Film Installation for Library Windows and James Property Demolition for Pecan Campus. Source. South Texas College District Comprehensive Annual Financial Report, Fiscal Years Ended August 31, 2013 and South Texas College District allows eligible high school students to enroll in college courses while attending high school and permits them to take courses in place of, or in addition to the normal course load at their high school through Dual Enrollment Program. High school junior and senior students are eligible to participate in this program and to receive college credit. Students admitted to the program must meet the same requirements as all other college students. College credit earned upon successful completion of the course may be applied towards an associate degree at South Texas College District or may transfer to other colleges and universities. South Texas College District has partnerships with 21 Independent School Districts: Donna Independent School District Edcouch-Elsa Independent School District Edinburg Independent School District Hidalgo Independent School District La Joya Independent School District La Villa Independent School District McAllen Independent School District Mercedes Independent School District Mid-Valley Academy Mission Consolidated Independent School District Pharr Oratory Athenaeum for University Preparation Premier Charter High School Progreso Independent School District Pharr-San Juan-Alamo Independent School District Rio Grande City Consolidated Independent School District Roma Independent School District Sharyland Independent School District South Texas Independent School District Valley View Independent School District Vanguard Academy Weslaco Independent School District The District has grown rapidly since Fall The Fall 2013 enrollment was 30,233 students and the estimated enrollment for Spring 2014 is 30,572. Source: South Texas College. A - 4

43 Another institution of higher learning in the area is The University of Texas-Pan American ( UTPA ), Edinburg, Texas. UTPA began operations in September of 1927 as a two-year junior college. On December 29, 1951 the Texas Legislature signed and passed into law the change to Pan American College in recognition of UTPA becoming a four-year institution. During the 1989 session of the Texas Legislature, a bill to merge UTPA into The University of Texas System was approved and then signed by the Governor of Texas. In addition, during the 1991 session of the Texas Legislature, the Brownsville, Texas campus of UTPA was established as an independent higher education institution of the University of Texas System. UTPA is the 10th largest university in the state and the fifth largest in the UT System. UTPA offers 54 bachelor s degree programs, 55 master s, 3 doctoral programs, and 2 cooperative doctoral programs within 7 colleges. Newer master s degree programs include those in mechanical, manufacturing and electrical engineering. UTPA opened its Rehabilitative Services Annex in August, 2003 serves the University, the community and the general public. The facility houses two projects supported by the Department of Rehabilitation Project Enhance and the Rehabilitation Research Initiative (RRI). Project Enhance is a three-year program funded by the United States Department of Education with its main goal being to work with disability support offices on university and college campuses across the country to ensure that no student is left behind as they pursue their post secondary education. The RRI is a project also funded by the Department of Education to help conduct research on ways to better serve Hispanics and other minorities with disabilities. After more than five years of planning, UTPA broke ground for its new $22 million Education Building on November 5, The project was completed in two phases that resulted in a state-of-the-art teaching facility. The first phase of the project involved the renovation of the old education building, and was completed fall The second phase included the construction of an 82,000 square-foot facility which was completed in fall 2005 and connects to the classroom section of the existing education building. The entire education complex is three times its original size and houses innovative classrooms, labs, bilingual and dual language research centers and instruction therapy facilities. For the school year, enrollment has surpassed 20,000. UTPA had a faculty of 836 and total staff of 1,136 as of Fall Source: The University of Texas-Pan American, and The University of Texas-Pan American website, GROWTH INDICES (1) Source: City of McAllen. Building Year Permits (1) 2009 $ 114,668, ,781, ,404, ,190, ,336,730 TRANSPORTATION McAllen-Miller International Airport is the primary business airport of the Rio Grande Valley of Deep South Texas and Northeast Mexico with frequent daily flights between McAllen-Miller International Airport and major airline transportation hubs in Dallas and Houston provide easy access to any destination in the world. McAllen-Miller International Airport has a 7,120- foot, grooved asphalt, lighted runway and a 2,638-foot, lighted asphalt runway. There are eighteen common-carrier truck lines operating daily schedules out of Hidalgo County. Greyhound Bus Co. and Valley Transit Co. provide bus service from McAllen to all parts of the United States as well as various cities in Mexico. Rio Valley Switching Co. maintains daily freight service out of the Hidalgo County. The McAllen-Hidalgo/Reynosa, Mexico International Bridge is located three miles from the McAllen Foreign Trade Zone and Industrial Park and seven miles from the McAllen Shopping and Business District. The Anzalduas International Bridge opened in 2009 and offers a direct route between the Rio Grande Valley and Mexican cities such as Monterrey and Mexico City. MEDICAL McAllen Medical Center is a 441-bed hospital which offers a comprehensive and broad range of community services. McAllen Medical Center s staff includes more than 400 physicians in over 50 specialties. McAllen Medical Center offers a full spectrum of services, including: Behavioral Health, Cancer/Oncology, Cardiology, Case Management Services, Diabetes Management, Diagnostic Services, Endocrinology, Emergency Medicine, Gastroenterology, Hyper baric Medicine, Infertility Services, Intensive/Critical Care, Laboratory Services, Neonatal Intensive Care Unit, Obstetric Services, Orthopedics, Outpatient Care, Pain Management, Pathology, Pediatrics, Physician Referral, Physical Rehabilitation Services, Pulmonology/Lung Disease, Renal/Kidney Disease, Sub acute Care and Surgery. Rio Grande Regional Hospital is a full service acute-care medical facility with 320 beds, over 500 physicians representing over 35 specialties, and is a 24 hour Emergency Center. Doctors Hospital at Renaissance opened in 1997 and is 506-bed full service acute care facility. The Doctors Hospital at Renaissance opened a major addition, which includes a new Medical Tower with an expanded Emergency Department, a new Pediatric Intensive Care Unit and a Pediatric Oncology services. Doctors Hospital at Renaissance has a medical staff of over 500 physicians providing a broad spectrum of medical and surgical services. A - 5

44 McAllen Heart Hospital is a 60-bed hospital that provides comprehensive inpatient and outpatient cardiac care, and staffs a 24- hour full service Emergency Center. RECREATION Recreational facilities in the McAllen area include 4 lakes/bays, 82 parks, 15 fitness centers, 18 golf courses, 4 country clubs, 70 tennis courts, 13 swimming pools, 9 museums, 14 performing arts companies and 2 symphony orchestras. Some of the popular sites visited include the McAllen International Museum in McAllen and in close proximity to McAllen the La Lomita Mission, Anzalduas Park and Dam, Bentsen-Rio Grande State Park, Hidalgo County Historical Museum, Shary Estate, Virgen De San Juan Del Valle Shrine, Laguna Atascosa, Audubon Sabal Palm Sanctuary, Falcon Dam and Santa Ana National Wildlife Refuge. For an avid outdoorsman, McAllen is considered a hunter s haven. Hunters are traditionally attracted to McAllen in the whitewinged dove season, however the surrounding areas provide land for lease hunting of wild turkey, javelina and wild pig as well. Fishing can be enjoyed at nearby Falcon Lake or Lake Guerrero, or deep sea fishing in the Gulf. Special events celebrated in McAllen annually are the Dias Festivos Marketplace, Candlelight Posada, Grapefruit Series, Texas Citrus Fiesta, Borderfest, Springfest and Texas Square Dance Jamboree, which has earned McAllen the title of Square Dance Capital of the World. HIDALGO COUNTY Hidalgo County was created in 1852 from Cameron and Starr Counties. The County is located in South Texas adjacent to the Republic of Mexico. The County s economy is diversified by tourism, shipping, mineral production, food processing, agribusiness and international trade with Mexico. Vegetables, sugar cane, livestock, grains, cotton, citrus and cattle are the principal sources of agricultural income. Stone, sand, oil, gravel and gas are the minerals produced in the County. The County is a tourist center located in the Lower Rio Grande Valley with access to Old Mexico, and with facilities to accommodate the summer and wither visitors. HISTORICAL EMPLOYMENT DATA FOR HIDALGO COUNTY (1) 2013 (2) 2012 (3) 2011 (3) 2010 (3) 2009 (3) Civilian Labor Force 318, , , , ,944 Total Employed 285, , , , ,912 Total Unemployed 32,802 34,702 38,404 37,451 31,032 Unemployment Rate 10.3% 11.0% 12.1% 12.1% 10.4% % Unemployed (Texas) 5.8% 6.8% 7.9% 8.2% 7.5% % Unemployed (U.S.) 6.6% 8.1% 8.9% 9.6% 9.3% (1) Source: Texas Workforce Commission. (2) As of November, EMPLOYMENT BY INDUSTRY AND WAGES (HIDALGO COUNTY) (1)(2) First Quarter Natural Resources and Mining 6,916 7,189 7,248 6,373 7,457 Construction 6,376 6,440 6,451 6,855 7,586 Manufacturing 6,519 6,288 6,106 6,294 6,635 Trade, Transportation & Utilities 49,710 47,623 45,767 44,258 44,717 Information 2,086 2,011 2,046 2,020 2,252 Financial Activities 8,649 8,508 8,171 7,628 8,047 Professional and Business Services 14,919 14,889 14,140 13,679 14,504 Education and Health Services 58,215 58,342 56,119 53,689 51,011 Leisure and Hospitality 20,886 19,483 19,564 19,198 18,970 Other Services 3,869 3,748 3,903 3,844 3,857 Unclassified State Government 6,217 6,104 6,203 6,249 5,937 Local Government 44,369 44,031 45,119 44,860 44,277 Total Employment 228, , , , ,362 Total Wages $ 1,687,077,664 $ 1,652,101,904 $ 1,562,247,278 $ 1,477,291,449 $ 1,479,505,782 (1) Source: Texas Workforce Commission. (2) Statistics do not include Federal employees or their wages. A - 6

45 APPENDIX B EXCERPTS FROM THE CITY OF MCALLEN, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2012 The information contained in this Appendix consists of excerpts from the City of McAllen, Texas Annual Financial Report for the Year Ended September 30, 2012, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information.

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65 CITY OF McALLEN, TEXAS STATEMENT OF NET ASSETS September 30, 2012 Governmental Activities Primary Government Business-type Activities Total ASSETS Cash $ 2,266,445 $ 3,335,090 $ 5,601,535 Certificate of deposits 23,940,080 3,305,962 27,246,042 Investments 106,200,321 21,979, ,180,283 Receivables, net 20,569,699 6,976,999 27,546,698 Internal balances (3,457,068) 3,457,068 - Inventories - 310, ,896 Notes receivable - 168, ,702 Deferred charges 279,664 2,520,990 2,800,654 Restricted assets - 82,715,938 82,715,938 Capital assets not being depreciated: Land 47,111,423 21,147,150 68,258,573 Construction in progress 43,662,463 61,699, ,361,560 Capital assets being depreciated: Buildings and systems 63,737, ,559, ,297,917 Equipment 72,472,450 48,944, ,417,018 Improvements 40,056, ,184, ,241,051 Infrastructure 179,561, ,561,099 Water rights - 7,123,100 7,123,100 Accumulated depreciation (188,078,556) (193,721,285) (381,799,841) Other long term assets 1,246, ,713 1,856,504 Total assets $ 409,569,111 $ 516,318,618 $ 925,887,729 LIABILITIES Accounts payable and accrued liabilities $ 16,135,243 $ 9,575,843 $ 25,711,086 Unearned revenues 558,431 2,118,705 2,677,136 Other 3,697, ,012 3,941,948 Non-current liabilities: Due within one year 7,281,970 6,618,000 13,899,970 Due in more than one year 26,660, ,519, ,180,580 Net OPEB obligation 1,049,270-1,049,270 Net pension obligation 275, ,507 Total liabilities 55,659, ,076, ,735,497 NET ASSETS Invested in capital assets, net of related debt 234,246, ,408, ,654,989 Restricted for: Economic Development 26,415,082-26,415,082 Capital projects - 20,349,242 20,349,242 Debt service 273,111 3,993,602 4,266,713 Distribution of net surplus revenues - 4,610,438 4,610,438 Other purposes 6,732,690-6,732,690 Unrestricted 86,242,300 62,880, ,123,078 Total net assets 353,910, ,242, ,152,232 Total liabilities and net assets $ 409,569,111 $ 516,318,618 $ 925,887,729 The notes to the financial statements are an intergral part of this statement. 19

66 CITY OF McALLEN, TEXAS STATEMENT OF ACTIVITIES For the Year Ended September 30, 2012 Program Revenues Charges for Services Operating Grants and Contributions Capital Grants and Contributions Expenses Functions/Programs Governmental activities: General government $ 22,505,316 $ 1,862,654 $ 1,033,797 $ 465,719 Public safety 51,714,002 7,358, ,718 1,320,808 Highways and streets 22,060,953 1,140,683-3,125,322 Health and welfare 5,424, ,620 1,185,997 - Culture and recreation 16,468,099 1,206,028 20, ,074 Interest on long-term debt 900, Total governmental activities 119,073,809 11,809,764 2,579,065 5,065,923 Business-type activities: Water services 16,492,817 15,964, ,502 Sewer services 12,704,012 14,568, ,695 Sanitation services 13,808,444 16,669,790-56,115 Golf course services 1,464,808 1,254, Civic center services 398, , Convention center services 4,970,522 1,946, Airport services 6,672,164 5,348,050-2,811,955 Transit services 1,155, , ,396 1,072 Bus services 2,553, , , ,043 Bridge services--anzalduas 4,140,909 2,648, Bridge services 6,004,265 11,911, Total business-type activities 70,366,294 71,299, ,314 4,323,382 Total primary government 189,440,103 83,109,063 3,363,379 9,389,305 General revenues: Property taxes Hotel occupancy tax Sales taxes Franchise taxes Unrestricted investment earnings Royalties Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets - beginning Net assets - ending The notes to the financial statements are an integral part of this statement

67 Net (Expenses) Revenues and Changes in Net Assets Primary Government Governmental Activities Business-type Activities Total $ (19,143,146) $ - $ (19,143,146) (42,695,697) - (42,695,697) (17,794,948) - (17,794,948) (3,997,302) - (3,997,302) (15,087,444) - (15,087,444) (900,520) - (900,520) (99,619,057) - (99,619,057) - 242, ,342-2,427,235 2,427,235-2,917,461 2,917,461 - (209,874) (209,874) - (144,451) (144,451) - (3,023,560) (3,023,560) - 1,487,841 1,487,841 - (657,559) (657,559) - (1,413,303) (1,413,303) - (1,492,490) (1,492,490) - 5,907,059 5,907,059-6,040,701 6,040,701 (99,619,057) 6,040,701 (93,578,356) 33,445,701-33,445,701 3,503,985-3,503,985 58,407,779-58,407,779 6,348,331-6,348, , ,604 1,132,414 1,138,925-1,138,925 1,727,591 1,001 1,728,592 (13,708,822) 13,708,822-91,539,300 14,166, ,705,727 (8,079,757) 20,207,128 12,127, ,989, ,035, ,024,861 $ 353,910,012 $ 361,242,220 $ 715,152,

68 CITY OF McALLEN, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30, 2012 Development General Corp. ASSETS Current assets: Cash $ 1,656,445 $ 26,554 Certificates of deposit 7,440,080 5,000,000 Investments 37,960,340 23,120,378 Receivables, net: Taxes 11,571,789 2,432,289 Accounts 1,840,304 - Accrued interest 69,894 42,448 Other 573,835 - Due from other funds 724,446 - Due from other governments 34,601 - Advances to other funds 150,000 - Board advances 1,246,791 - Total assets $ 63,268,525 $ 30,621,669 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 2,880,404 $ 2,432,299 Accrued liabilities 2,392, ,813 Due to other funds - - Deferred revenues 11,202,850 1,263,649 Other 982,435 - Total liabilities 17,458,261 4,201,761 Fund balances: Nonspendable 1,396,791 - Restricted 88,536 26,419,908 Committed - - Assigned 1,464,107 - Unassigned 42,860,830 - Total fund balances 45,810,264 26,419,908 Total liabilities and fund balances $ 63,268,525 $ 30,621,669 The notes to the financial statements are an intergral part of this statement

69 Capital Improvement Other Governmental Funds Total Governmental Funds $ 23,914 $ 278,196 $ 1,985,109-1,650,000 14,090,080 8,216,783 9,376,940 78,674,441-37,984 14,042, ,404 2,514,708 11,149 13, ,681 4, , , , ,638 1,966,757 2,297, , , ,246,791 $ 8,905,444 $ 14,406,215 $ 117,201,853 $ 689,027 $ 1,674,453 $ 7,676,183 58, ,987 3,419, , ,274-37,984 12,504,483-2,700,644 3,683, ,747 5,782,342 28,190, ,716-1,749,507-7,751,219 34,259, , ,989 7,804, ,760 9,932,848 - (9,095) 42,851,735 8,157,697 8,623,873 89,011,742 $ 8,905,444 $ 14,406,215 $ 117,201,

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71 CITY OF McALLEN, TEXAS Reconciliation of the Balance Sheet of the Governmental Funds to the Statement of Net Assets September 30, 2012 Total governmental fund balances (refer to page 23) $ 89,011,742 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. 252,493,086 Other long-term assets are not available to pay for current-period expenditures and therefore are deferred in the funds. The amount consists of the following: property taxes-$3,646,065; sales and franchise taxes-$5,054,594; weed and lot cleaning-$773,488; special assessments-$21,974; others; $1,203,139 and Mission repayment on Series B Bridge bonds, $1,246, ,946,051 Internal service funds are used by management to charge the costs of certain activities, such as fleet management and insurance, to individual funds. The assets and liabilities of certain internal service funds are included in governmental activities in the statement of net assets. 35,550,741 Some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds, including unpaid compensated absences, ($8,411,369), sales tax revenue bonds payable,($150,000), accrued interest, ($119,974), certificate of obligations, ($24,355,000), premium, ($1,010,152), discount, $164,494, issuance costs, $115,170, net pension obligation, ($275,507), and net OPEB obligation, ($1,049,270). (35,091,608) Net assets of governmental activities $ 353,910,012 The notes to the financial statements are an integral part of this statement

72 CITY OF McALLEN, TEXAS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2012 Development General Corp REVENUES Taxes $ 83,293,338 $ 14,601,944 Licenses and permits 1,522,912 - Intergovernmental 580,898 - Charges for services 3,836,385 - Fines and forfeitures 1,695,585 - Investment earnings 217, ,199 Net increase in the fair value of investments 51,225 29,017 Other 1,771,106 - Total revenues 92,968,840 14,744,160 EXPENDITURES Current: General government 17,167, ,266 Public safety 48,994, ,000 Highways and streets 11,902,801 8,331,863 Health and welfare 2,061,310 2,174,829 Culture and recreation 14,677,005 28,060 Debt service: Principal - 25,000 Interest and fiscal charges - 9,056 Total expenditures 94,802,869 11,276,074 Excess of revenues over (under) expenditures (1,834,029) 3,468,086 OTHER FINANCING SOURCES (USES) Transfers in 9,376,061 - Transfers out (4,707,025) (5,382,394) Net other financing sources (uses) 4,669,036 (5,382,394) Net change in fund balances 2,835,007 (1,914,308) Fund balances at beginning of year 42,975,257 28,334,216 Fund balances at end of year $ 45,810,264 $ 26,419,908 The notes to the financial statements are an integral part of this statement

73 Capital Improvement Other Governmental Funds Total Governmental Funds $ - $ 3,542,773 $ 101,438,055-13,990 1,536, ,015 5,896,357 6,734,270-1,190,240 5,026,625-3,727,043 5,422,628 51,521 30, ,223 15, ,260 83, ,399 2,686, ,649 15,233, ,353, ,682 3,328,205 21,410, ,388 2,770,371 52,605,242 1,913,217 2,834,978 24,982,859-1,166,454 5,402,593 2,636,207 5,127,978 22,469,250-2,505,000 2,530,000-1,003,200 1,012,256 5,597,494 18,736, ,412,623 (5,189,845) (3,503,046) (7,058,834) 2,181,997 4,412,566 15,970,624 (135,831) (3,624,503) (13,849,753) 2,046, ,063 2,120,871 (3,143,679) (2,714,983) (4,937,963) 11,301,376 11,338,856 93,949,705 $ 8,157,697 $ 8,623,873 $ 89,011,

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75 CITY OF McALLEN, TEXAS Reconciliation of the Statement of Revenues Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities For the year ended September 30, 2012 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances--total governmental funds (refer to page27) $ (4,937,963) Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays $21,842,876 exceeded depreciation, net of depreciation ($12,370,248) in the current period. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces longterm liabilities in the statement of net assets. 9,472, ,881 2,530,000 Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds of which ($383,575) is compensated absences, $12,686 accrued interest expense, bond amortization expense, $99,049, Firemen's Fund net pension obligation, ($92,877), and net OPEB obligation, ($1,049,270). Internal service funds are used by management to charge the costs of certain activities, such as fleet management and insurance, to individual funds. The net revenue (expense) of certain internal service funds is reported with governmental activities. (1,413,987) 1,651,824 In the statement of actitivies, only the loss on sale is reported, whereas in the governmental, the proceeds from the sale decrease financial resources. Thus the change in net assets differs from the change in fund balance by the cost of the capital assets transferred to a BTA fund, $15,829,693, and by the cost of other assets sold, $45,447. (15,875,140) Change in net assets of governmental activities $ (8,079,757) The notes to the financial statements are an integral part of this statement

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77 CITY OF McALLEN, TEXAS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended September 30, 2012 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) REVENUES Taxes: Property $ 32,651,201 $ 32,651,201 $ 33,139,172 $ 487,971 Sales 40,564,358 40,564,358 43,805,835 3,241,477 Franchise 6,304,000 6,304,000 6,348,331 44,331 Total taxes 79,519,559 79,519,559 83,293,338 3,773,779 Licenses and permits: Business licenses and permits 43,000 43,000 55,953 12,953 Occupational 201, , ,938 52,538 Non-business licenses and permits 1,013,800 1,013,800 1,213, ,221 Total licenses and permits 1,258,200 1,258,200 1,522, ,712 Intergovernmental revenues: State shared revenues 430, , , ,898 Total intergovernmental revenues 430, , , ,898 Charges for services: General government 1,368,602 1,368,602 1,342,629 (25,973) Public safety 696, , ,039 67,139 Highways and streets 1,000 1,000 - (1,000) Health 568, , ,220 22,120 Culture and recreation 1,013,460 1,013,460 1,139, ,037 Total charges for services 3,648,062 3,648,062 3,836, ,323 Fines and forfeitures: Corporations court 1,650,000 1,720,571 1,628,655 (91,916) Other fines 45,000 45,000 66,930 21,930 Total fines and forfeitures 1,695,000 1,765,571 1,695,585 (69,986) Investment earnings 265, , ,391 (47,609)

78 CITY OF McALLEN, TEXAS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended September 30, 2012 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) Net increase in fair value of investments $ - $ - $ 51,225 $ 51,225 Other: Royalties 2,500,000 2,500,000 1,138,925 (1,361,075) Rents and concessions 40,000 40,000 17,993 (22,007) Reimbursements ,463 76,463 Other 371, , , ,725 Total other revenues 2,911,000 2,911,000 1,771,106 (1,139,894) Total revenues 89,726,821 89,797,392 92,968,840 3,171,450 EXPENDITURES General government: City commission 168, , ,622 17,584 Special service 856, , ,805 (127,005) City manager 1,434,539 1,434,539 1,179, ,121 City secretary 405, , ,899 (2,334) Vital statistics 188, , ,783 43,864 Passport facility 63,550 63,550 58,602 4,948 Audit office 200, , ,919 (1,296) Municipal court 1,281,616 1,352,187 1,204, ,706 Finance 1,286,945 1,286,945 1,304,555 (17,610) Tax office 942, , ,215 (54,822) Purchasing and contracting 491, , ,416 70,955 Legal 999,617 1,309,617 1,490,140 (180,523) Grant administration 383, , ,775 23,996 Right of way 172, , ,801 19,690 Human resources 547, , ,150 8,402 Risk management 651, , ,761 - Planning 1,129,089 1,129, , ,134 Information technology 2,196,023 2,196,023 2,111,878 84,145 Public information office 644, , ,559 80,394 City hall 738, , ,338 83,214 Building maintenance 506, , ,667 (11,934) Non-departmental activities 2,159,435 2,159,435 2,099,531 59,904 Contingency (1,733,333) (1,733,333) - (1,733,333) Total general government 15,717,399 16,125,470 17,167,270 (1,041,800)

79 CITY OF McALLEN, TEXAS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended September 30, 2012 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) Public safety: Police $ 29,259,082 $ 29,259,082 $ 29,302,202 $ (43,120) Animal control 210, , ,681 26,972 Communication technology 199, , ,692 (44,850) Fire 15,959,012 15,959,012 16,191,498 (232,486) Traffic operations 2,146,745 2,146,745 2,179,112 (32,367) Building code compliance 971, , ,298 78,496 Total public safety 48,747,128 48,747,128 48,994,483 (247,355) Highways and streets: Engineering services 1,826,293 1,871,793 1,828,514 43,279 Street cleaning 424, , ,402 54,718 Street maintenance 6,898,047 6,898,047 5,710,159 1,187,888 Street lighting 1,977,001 1,977,001 2,414,288 (437,287) Sidewalk construction 306, , ,940 48,578 Drainage 1,451,711 1,451,711 1,322, ,213 Total highways and streets 12,883,690 12,929,190 11,902,801 1,026,389 Health and welfare: Health code compliance 1,100,898 1,100,898 1,041,252 59,646 Graffiti cleaning 171, , ,453 21,133 Other agencies 242, , ,605 (627,143) Total health and welfare 1,514,946 1,514,946 2,061,310 (546,364) Culture and recreation: Parks and recreation administration 540, , , Parks 5,409,583 5,409,583 5,722,790 (313,207) Recreation 1,145,052 1,145,052 1,337,214 (192,162) Pools 692, , ,909 (58,824) Las palmas community center 334, , ,631 18,610 Recreation center-lark 365, , ,414 11,281 Recreation center-palmview 390, , ,763 2,

80 CITY OF McALLEN, TEXAS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended September 30, 2012 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) Quinta mazatlan $ 459,754 $ 459,754 $ 483,759 $ (24,005) Library 3,041,082 3,041,082 2,649, ,728 Library branch-lark 401, , ,905 54,238 Library branch-palmview 417, , ,464 34,135 Other agencies 656, , , Museums 748, , ,112 - Total culture and recreation 14,602,630 14,602,630 14,677,005 (74,375) Total expenditures 93,465,793 93,919,364 94,802,869 (883,505) Excess of revenues over (under) expenditures (3,738,972) (4,121,972) (1,834,029) 2,287,943 OTHER FINANCING SOURCES (USES) Transfers in 9,261,430 9,261,430 9,376, ,631 Transfers out (6,007,025) (6,007,025) (4,707,025) 1,300,000 Net other financing sources (uses) 3,254,405 3,254,405 4,669,036 1,414,631 Net change in fund balances (484,567) (867,567) 2,835,007 3,702,574 Fund balances at begining of year 42,975,257 42,975,257 42,975,257 - Fund balances at end of year $ 42,490,690 $ 42,107,690 $ 45,810,264 $ 3,702,574 The notes to the financial statements are an integral part of this statement

81 CITY OF McALLEN, TEXAS DEVELOPMENT CORPORATION FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For Fiscal Year Ended September 30, 2012 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) REVENUES Sales tax $ 13,521,452 $ 13,521,452 $ 14,601,944 $ 1,080,492 Intergovernmental revenues 913, ,069 - (913,069) Investment earnings 50,000 50, ,199 63,199 Increase in the fair value of investments ,017 29,017 Total revenues 14,484,521 14,484,521 14,744, ,639 EXPENDITURES Current: General government 4,391,640 4,391, ,266 3,784,374 Public safety 112, , ,000 12,500 Highways and streets 12,258,401 12,924,124 8,331,863 4,592,261 Health and welfare 2,356,000 2,356,000 2,174, ,171 Culture and recreation 1,752,000 1,752,000 28,060 1,723,940 Debt service: Principal 25,000 25,000 25,000 - Interest and fiscal charges 8,506 8,506 9,056 (550) Total expenditures 20,904,047 21,569,770 11,276,074 10,293,696 Excess (deficiency) of revenues over expenditures (6,419,526) (7,085,249) 3,468,086 10,553,335 OTHER FINANCING SOURCES (USES) Transfers out (9,584,606) (9,584,606) (5,382,394) 4,202,212 Total other financing sources (uses) (9,584,606) (9,584,606) (5,382,394) 4,202,212 Net changes in fund balances (16,004,132) (16,669,855) (1,914,308) 14,755,547 Fund balances--beginning 28,334,216 28,334,216 28,334,216 - Fund balances--ending $ 12,330,084 $ 11,664,361 $ 26,419,908 $ 14,755,547 The notes to the financial statements are a integral part of this statement

82 CITY OF McALLEN, TEXAS PROPRIETARY FUNDS STATEMENT OF NET ASSETS September 30, 2012 Business Type Activities-Enterprise Funds Water Sewer Sanitation Convention Center McAllen International Airport ASSETS Current assets: Cash $ 290,735 $ 1,925,085 $ 150,672 $ 19,365 $ 70,822 Certificate of deposit 555, , , ,000 Investments 4,521,266 2,278,171 4,704,764 1,521,387 3,619,685 Receivables, net: Accounts 1,997,606 1,869,049 2,135,067 34, ,491 Accrued interest 11,009 4,253 6,629 2,876 3,888 Other 65 19, ,124 1,165 Due from other funds ,690 - Due from other governments ,157 Inventories, at cost 24, Restricted assets: Cash and cash equivalents 152,971 18,021 39, ,888 Total current assets 7,553,627 6,114,284 7,787,443 2,531,344 4,412,096 Noncurrent assets: Restricted assets: Investments 20,031,660 32,390,144 7,871, ,109 12,031,282 Other 108, , ,196,392 Total noncurrent restricted assets 20,139,995 32,521,074 7,871, ,109 13,227,674 Capital assets: Land 3,039,265 1,983, ,277 6,202,778 3,251,781 Buildings and systems 54,547,011 63,233,397 2,241,785 56,281,224 32,253,761 Improvements other than buildings 58,696,272 37,541, ,905 6,690,881 53,010,829 Machinery and equipment 5,799,024 6,969,665 20,349,487 2,651,356 2,378,037 Construction in progress 5,371,234 46,219,312 9,152-10,001,537 Water rights 7,123, Less accumulated depreciation and amortization (51,535,468) (51,458,948) (14,332,738) (8,966,424) (41,928,635) Total capital assets (net of accumulated depreciation and amortization) 83,040, ,489,157 9,578,868 62,859,815 58,967,310 Other noncurrent assets Loans receivable 84,351 84, Other assets, net 816, , ,798 Goodwill Board advances Total other noncurrent assets 900, , ,798 Total noncurrent assets 104,081, ,807,089 17,450,228 63,610,924 72,353,782 Total assets $ 111,634,742 $ 143,921,373 $ 25,237,671 $ 66,142,268 $ 76,765,878 The notes to the financial statements are an integral part of this statement

83 McAllen International Toll Bridge Business-type Activities-Enterprise Funds Anzalduas International Crossing Other Proprietary Funds Total Governmental Activities Internal Service Funds $ 222,984 $ 92,976 $ 129,404 $ 2,902,043 $ 714, ,050,000 3,305,962 9,850,000 1,938,119 1,023,644 2,372,926 21,979,962 27,525, ,448 6,481, , ,625 31,280 43, , , , , , , , ,204 56,393 94, ,734-2,285,307 1,173,013 4,094,815 35,951,929 38,990,972 6,130,581 1,106, ,056 80,779, ,435,657-6,130,581 1,106, ,056 82,215, ,798 2,936,598 2,230,658 21,147,150-10,698,086 10,415,086 7,285, ,955,521-2,415,376 40,357,634 9,560, ,656, ,823 1,784, ,393 7,486,053 48,348,541 21,132,558 77,642-20,220 61,699, ,123,100 - (8,765,774) (4,169,998) (12,225,892) (193,383,877) (14,843,845) 6,783,654 50,469,713 14,356, ,545,856 6,421, , ,354-2,520, , ,713-14,745, ,745,108-15,354, ,354-18,044,513-28,269,056 52,409,422 14,823, ,805,573 6,421,536 $ 30,554,363 $ 53,582,435 $ 18,918,772 $ 526,757,502 $ 45,412,508 Continued

84 CITY OF McALLEN, TEXAS PROPRIETARY FUNDS STATEMENT OF NET ASSETS September 30, 2012 Business Type Activities-Enterprise Funds Water Sewer Sanitation Convention Center McAllen International Airport LIABILITIES Current liabilities: Accounts payable $ 754,259 $ 417,357 $ 411,659 $ 137,437 $ 1,340,191 Accrued expenses 497,144 1,360, ,898 50, ,338 Due to other funds Due to other government agencies Customer deposits payable 2,359, ,515 - Compensated absences due one year 290, , ,000 50,000 50,000 Current portion of revenue bonds 1,448,903 2,771, ,000 Other 16, ,425 14,749 Total current liabilities 5,366,569 4,734, , ,667 2,113,278 Other noncurrent liabilities: Advances from other funds , Revenue bonds, net of current portion and discount 21,780,769 66,839, ,125,000 Accumulated unpaid compensated absences 70,575 91,228 66,937 30,978 15,749 Notes payable ,335 Bond premium 685,862 1,385, Deferred revenues 197,639 1,165, ,292 82,444 - Board advances Total other noncurrent liabilities 22,734,845 69,480, , ,422 9,249,084 Total liabilities 28,101,414 74,215,369 1,398, ,089 11,362,362 NET ASSETS Invested in capital assets, net of related debt 61,042,976 44,018,342 9,578,868 62,859,815 56,370,531 Restricted for: Capital projects 15,831,370 18,090,509 7,871, ,178 4,396,948 Debt service 482,969 1,996, ,884 Distribution of net surplus revenues Unrestricted 6,176,013 5,600,397 6,389,357 1,961,186 4,359,153 Total net assets 83,533,328 69,706,004 23,839,585 65,572,179 65,403,516 Total liabilities and net assets $ 111,634,742 $ 143,921,373 $ 25,237,671 $ 66,142,268 $ 76,765,878 The notes to the financial statements are an integral part of this statements

85 McAllen International Toll Bridge Business-type Activities-Enterprise Funds Anzalduas International Crossing Other Proprietary Funds Total Governmental Activities Internal Service Funds $ 113,467 $ 22,959 $ 275,406 $ 3,472,735 $ 763,267 42, ,597 82,017 2,702,539 4,445,687 1, , , , , ,380,094-52,000-50, , ,150,000-5,740, , ,012 14, ,817 1,333, ,277 16,250,680 5,223, , , ,645, ,390,002-42,122 9,120 89, ,342 47, , ,436-2,573, ,800-80,530 2,118, ,745,108-14,745, ,922 50,901, , ,854,755 47,803 1,178,739 52,235,220 1,044, ,105,435 5,271,614 6,783,654 14,005,631 14,356, ,016,718 6,421,536 1,066, , ,082 48,589, , ,795-3,993,602-4,608, ,608,653-16,414,162 (13,674,669) 3,217,633 30,443,232 33,719,358 29,375,624 1,347,215 17,874, ,652,067 40,140,894 $ 30,554,363 $ 53,582,435 $ 18,918,772 $ 526,757,502 $ 45,412,508 Concluded

86 ,

87 CITY OF MCALLEN, TEXAS Reconciliation of the Statement of Net Assets of the Proprietary Funds to the Government-Wide Statement of Net Assets September 30, 2012 Fund equity - total proprietary funds (page 39) $ 356,652,067 Some amounts reported for business-type activities in the statement of net assets are different because certain internal service fund assets and liabilities are included with business-type activities. 4,590,153 Net assets of business-type activities $ 361,242,220 The notes to the financial statements are an integral part of this statement

88 CITY OF McALLEN, TEXAS PROPRIETARY FUNDS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS For the Year Ended September 30, 2012 Business Type Activities-Enterprise Funds Water Sewer Sanitation Convention Center Operating revenues Charges for services $ 15,686,958 $ 14,076,842 $ 16,491,139 $ 921,344 Rentals ,822 Other 737, , , ,788 Total operating revenues 16,424,659 14,568,549 16,669,789 2,046,954 Operating expenses Salaries, wages and employee benefits 5,570,443 3,513,661 5,048,829 1,488,759 Supplies 3,337, , ,750 72,128 Contractual and other services 2,371,683 2,815,617 3,915,894 1,613,225 Repairs and maintenance 801, ,351 2,839, ,859 Depreciation and amortization 3,515,055 3,913,143 1,756,762 1,606,634 Self insurance claims Other Total operating expenses 15,596,982 11,305,807 13,827,688 5,093,605 Operating income (loss) 827,677 3,262,742 2,842,101 (3,046,651) Non operating revenues (expenses) Investment earnings 118, ,978 58,102 6,694 Net increase (decrease) in fair value of investments 29,778 32,706 18,136 1,008 Interest expense (1,345,463) (1,432,594) - - Interest on board advances Bond related charges (28,155) 27, Capitalized interest Gain (loss) on sale of capital assets Other Net non-operating revenues (expenses) (1,225,610) (1,249,226) 76,238 7,702 Income (loss) before contributions and transfers (397,933) 2,013,516 2,918,339 (3,038,949) Capital contributions 16,600, ,695 56,115 - Transfers in ,002,277 Transfers out Change in net assets 16,202,262 2,576,211 2,974,454 (1,036,672) Total net assets-beginning 67,331,066 67,129,793 20,865,131 66,608,851 Total assets--ending $ 83,533,328 $ 69,706,004 $ 23,839,585 $ 65,572,179 The notes to the financial statements are an integral part of this statement

89 McAllen International Airport McAllen International Toll Bridge Business Type Activites-Enterprise Funds Anzalduas International Crossing Other Proprietary Funds Total Governmental Activities Internal Service Funds $ 2,329,498 $ 10,211,452 $ 2,596,703 $ 1,838,498 $ 64,152,434 $ 5,915,826 2,727,851 1,558,127 11,111 61,704 5,330, , ,744 40, ,346 2,376,242 12,020,709 5,348,048 11,911,323 2,648,421 2,241,548 71,859,291 17,936,535 1,492,187 1,116, ,331 2,320,365 20,932,756 1,230,015 58,560 69,881 14, ,850 4,543,635 23,533 1,545, , , ,483 14,458,299 4,745, , ,250 90, ,934 5,952,592 63,094 3,337, ,073 1,538,249 1,424,602 17,665,513 1,973, ,664,502 (81,336) (81,336) 15,216 6,655,700 3,037,325 2,355,118 5,599,234 63,471,459 16,714,832 (1,307,652) 8,873, ,303 (3,357,686) 8,387,832 1,221,703 40,863 4,847 2,664 9, , ,747 11, ,018 24,586 (266,287) (6,026) (1,772,085) - (4,822,455) ,649 (486,649) (6,496) (3,987) (17,043) - (27,997) - 227, , ,001 1,001 30,076 - (2,970,293) - - (2,970,293) 370,744 7,107 (2,488,810) (2,273,113) 10,458 (7,135,254) 568,153 (1,300,545) 6,385,188 (1,979,810) (3,347,228) 1,252,578 1,789,856 2,811, ,429 20,937, ,868 1,577,168 4,251,313 - (1,103,965) (4,840,282) - (427,937) (6,372,184) - 407,445 1,544,906 (1,307,942) (1,291,568) 20,069,096 1,789,856 64,996,071 27,830,718 2,655,157 19,166, ,582,971 38,351,038 $ 65,403,516 $ 29,375,624 $ 1,347,215 $ 17,874,616 $ 356,652,067 $ 40,140,

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91 CITY OF MCALLEN, TEXAS Reconciliation of the Statement Revenues, Expenses and Changes in Fund Net Assets of the Proprietary Funds to the Government-Wide Statement of Activities For The Year Ended September 30, 2012 Change in net assets - total proprietary funds (page 43) $ 20,069,096 Some amounts reported for business-type activities in the statement of activity are different because the net revenue (expense) of certain internal service funds is reported with business-type activities. 138,032 Net assets of business-type activities $ 20,207,128 The notes to the financial statements are an integral part of this statement

92 CITY OF McALLEN, TEXAS PROPRIETARY FUNDS STATEMENT OF CASH FLOWS For the Year Ended September 30, 2012 Business Type Activities McAllen Convention Water Sewer Sanitation Center Cash flows from operating activities: Receipts from customers $ 16,251,811 $ 15,075,563 $ 16,530,374 $ 1,922,257 Payments to employees (5,530,109) (3,495,827) (5,018,490) (1,471,253) Payments to suppliers (6,404,771) (3,402,754) (6,990,784) (1,814,273) Net cash provided (used) by operating activities 4,316,931 8,176,982 4,521,100 (1,363,269) Cash flows from noncapital financing activities: Transfers from other funds 2,002,277 Transfers to other funds Advance to other funds - - (250,000) - Subsidy from federal grant Board advances Distribution of income to City of Hidalgo Net cash provided (used) by noncapital financing activities - - (250,000) 2,002,277 Cash flows from capital and related financing activities: Capital contributions - 314, Purchases of capital assets (4,523,354) (10,940,776) (1,989,406) (31,242) Proceeds from sale of capital assets Proceeds from capital debt - 7,160, Principal repayments-bonds and notes (1,392,378) (2,607,620) - - Interest paid (1,354,395) (1,442,467) - - Net cash provided (used) by capital and related financing activities (7,270,127) (7,516,367) (1,989,406) (31,242) Cash flows from investing activities: Proceeds from sales and maturities of investments 15,100,660 20,665,479 5,693,503 1,375,066 Purchase of investments (12,310,312) (20,016,643) (8,357,341) (2,122,336) Receipt of interest 202, ,679 83,363 5,301 Net cash provided (used) by investing activities 2,992, ,515 (2,580,475) (741,969) Net increase (decrease) in cash 39,739 1,526,130 (298,781) (134,203) Cash at beginning of year 403, , , ,637 Cash at end of year $ 443,706 $ 1,943,106 $ 190,116 $ 19,434 The notes to the financial statements are an integral part of this statement

93 Business Type Activities Governmental Activities McAllen McAllen Anzalduas Other Internal International International International Proprietary Service Airport Toll Bridge Crossing Funds Total Funds $ 5,326,732 $ 12,080,470 $ 2,648,422 $ 2,289,239 $ 72,124,868 $ 17,847,462 (1,388,885) (1,110,080) (374,978) (2,289,889) (20,679,511) (1,223,873) (1,812,518) (1,366,331) (499,471) (1,870,905) (24,161,807) (11,847,362) 2,125,329 9,604,059 1,773,973 (1,871,555) 27,283,550 4,776,227 (671,868) 671,868 1,577,168 3,579,445 - (1,103,965) (4,168,713) - (427,937) (5,700,615) (250,000) , , (326,283) 326, (2,949,936) - - (2,949,936) - (1,103,965) (8,116,800) 998,151 1,791,264 (4,679,073) - 1,712, ,026,861 - (4,242,097) (4,206) (3,608) (176,395) (21,911,084) (1,192,832) ,001 1,001 30,076 9,744, ,904,782 - (325,000) (285,000) (820,000) - (5,429,998) - (236,254) (7,130) (1,774,818) - (4,815,064) - 6,653,796 (296,336) (2,598,426) (175,394) (13,223,502) (1,162,756) 4,677,972 7,044,836 1,929,656 2,942,319 59,429,491 20,550,177 (12,521,237) (8,068,703) (2,129,999) (2,795,022) (68,321,593) (24,703,018) 64,285 5,525 3,004 12, , ,462 (7,778,980) (1,018,342) (197,339) 159,594 (8,299,061) (3,903,379) (103,820) 172,581 (23,641) (96,091) 1,081,914 (289,908) 189, , , ,239 2,320,863 1,004,291 $ 85,710 $ 347,188 $ 149,369 $ 224,148 $ 3,402,777 $ 714,383 Continued

94 CITY OF McALLEN, TEXAS PROPRIETARY FUNDS STATEMENT OF CASH FLOWS-(Continued) For the Year Ended September 30, 2012 Business Type Activities McAllen Convention Water Sewer Sanitation Center Reconciliation of operating income (loss) to net cash provided by operating activities Operating income (loss) $ 827,677 $ 3,262,742 $ 2,842,101 $ (3,046,651) Adjustment to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 3,515,055 3,913,143 1,756,762 1,606,634 (Increase) decrease in accounts receivable (172,781) 637,941 (138,549) (8,392) (Increase) decrease in intergovernmental receivables - (130,930) - - (Increase) decrease in due from other funds (111,189) (Increase) decrease in prepaid items (65) (867) (5,124) (Increase) decrease in inventories 13, Increase (decrease) in accounts payable 18,036 26,252 34,380 (20,745) Increase (decrease) in customer deposits payable 72, ,515 Increase (decrease) in compensated abscences payable 30,109 5,621 19,410 21,562 Increase (decrease) in accrued liabilities 10,225 12,213 10,929 (4,056) Increase (decrease) in due to other funds Increase (decrease) in other current liabilities 15, ,840 Increase (decrease) in deferred revenues (12,280) 450,000 (3,366) (1,663) Recovery of prior year expenses Total adjustments 3,489,254 4,914,240 1,678,999 1,683,382 Net cash provided by (used) by operating activities $ 4,316,931 $ 8,176,982 $ 4,521,100 $ (1,363,269) Noncash investing, capital and financing activities: Contributions of capital assets 16,600, ,199 56,115 - Decrease in fair value of investments 29,778 32,706 18,136 The notes to the financial statements are an integral part of this statement

95 Business Type Activities Governmental Activities McAllen McAllen Anzalduas Other Internal International International International Proprietary Service Airport Toll Bridge Crossing Funds Total Funds $ (1,307,652) $ 8,873,998 $ 293,303 $ (3,357,686) $ 8,387,832 $ 1,221,703 3,337, ,073 1,538,249 1,424,602 17,665,513 1,973,339 (28,714) 69,453 - (5,883) 353,075 (460,901) (130,930) ,104 (60,085) - (1,165) - - 2,473 (4,748) 1, ,013 (17,752) 89,642 (18,258) (57,579) 20,876 92,604 (211,415) ,611-9,175 4,009-23, ,946 2,517 12,786 - (34,483) 7,614 1,911, ,098 46,098-4,700 2, , ,562 99,694 - (41,716) 499, ,743 3,432, ,061 1,480,670 1,486,131 18,895,718 3,554,524 $ 2,125,329 $ 9,604,059 $ 1,773,973 $ (1,871,555) $ 27,283,550 $ 4,776, ,904, ,856 24,586 Concluded

96 CITY OF McALLEN, TEXAS STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS September 30, 2012 Pension Trust Agencies Firemen's Relief Communications and Retirement Developer's Group Fund Fund Fund ASSETS Cash and cash equivalents $ 2,950,188 $ 2,705 $ 53,376 Receivables: Interest 116,127 4,159 - Investments, at fair value: TexPool - 382,523 - Certificate of deposit - 1,000,000 - Domestic and international equities 20,640,889 1,250,815 - Treasury and corporate bonds 10,997, Alternate investments 3,603, Total investments 35,241,999 2,633,338 - Total assets 38,308,314 2,640,202 53,376 LIABILITIES Accounts payable 2, Due agency ,376 Escrow payables - 2,640,202 - Total liabilities 2,303 $ 2,640,202 $ 53,376 NET ASSETS Held in trust for pension benefits $ 38,306,011 The notes to the financial statements are an integral part of this statement

97 CITY OF McALLEN, TEXAS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FIDUCIARY FUNDS For the Year Ended September 30, 2012 Pension Trust Firemen's Relief and Retirement Fund ADDITIONS Contributions: Member $ 1,027,430 Employer 1,287,288 Total contributions 2,314,718 Investment earnings: Interest and dividends 1,013,874 Loss on sale of investments (872,929) Net appreciation in fair value of investments 6,064,633 Total investment earnings 6,205,578 Less: investment expense 253,100 Net investment earnings 5,952,478 Total additions 8,267,196 DEDUCTIONS Benefits 2,001,400 Refund of contributions 357,669 Administrative expense 28,686 Total deductions 2,387,755 Changes in net assets 5,879,441 Net assets--beginning 32,426,570 Net assets--ending $ 38,306,011 The notes to the financial statements are an intergral part of this statement

98 ,

99 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 I. Summary of significant accounting policies (A) Reporting entity The City of McAllen, Texas (the City) is a municipal corporation, which was incorporated February 20, 1911 under Article XI, Section 5 of the Texas Constitution. The City operates under the commission-manager form of government and provides a full range of municipal services as authorized by its charter. The governing body consists of an elected mayor and a sixmember commission. Services provided include those typically provided by general-purpose local governments, namely public safety (principally police and fire,) highways and streets, health and welfare, culture and recreation (principally library, parks and recreation). Other services provided include water and sewer utilities, sanitation, civic center, convention center, international airport, international toll bridge linking Hidalgo, Texas with downtown Reynosa, Tamaulipas, Mexico, international toll bridge linking south of the City of Mission with the west side of Reynosa, Tamaulipas, Mexico, golf course, bus transit system, and intermodal transit terminal. The accompanying financial statements present the reporting entity, which consists of the primary government. Financial reporting standards also require the City to include, if any, legally-separate entities or organizations for which the primary government is financially accountable and other organizations for which the primary government is not accountable, but for which the nature and significance of their relationship with the primary government are such that exclusion could cause the City s basic financial statements to be misleading or incomplete. Financial accountability exists if a primary government appoints a voting majority of an organization s governing Board and either is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations with a separately elected governing Board, a governing Board appointed by another government, or a jointly appointed Board that is fiscally dependent on the primary government. Applying these tests to other entities and activities for possible inclusion in the reporting entity, the City has determined that the Development Corporation meets the financial accountability tests and, therefore is included as a blended component unit. Its Board is appointed by the City Commission and serves as an advisory board to the City Commission. The City of McAllen issues separate publicly available audited financial statements of the McAllen International Toll Bridge and the Anzalduas International Crossing, which may be obtained by writing to City of McAllen Finance Department, 1300 Houston, P.O. Box 220, McAllen, Texas

100 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The Firemen s Relief and Retirement Fund is included as a pension trust fund, and reported as a fiduciary fund in the accompanying financial statements. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) applicable to states and local governments. US GAAP for local governments include those principles prescribed by the Governmental Accounting Standards Board ( GASB ), the American Institute of Certified Public Accountants in the publication entitled Audits of State and Local Governments, and by the Financial Accounting Standards Board (when applicable). The City has elected not to apply pronouncements of the Financial Accounting Standards Board (FASB) issued after November 30, 1989 as permitted by GASB Statement No. 20. Governmental Accounting Standards Board has issued the following pronouncements, which are relevant to the City, became effective this fiscal year and have been implemented: GASB Statement No. 59, Financial Instruments Omnibus and amendments of Statement No.4, No. 25, No. 31, No. 40, and No. 53. The objective of this Statement is to update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The provisions of this Statement are effective for financial statements for periods beginning after June 15, The adoption of this standard did not have a significant impact on the City s financial statements. The following statements will become effective in future years. Management does not believe these statements will have a significant impact on the City s financial statements. GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or publicpublic partnership. As used in this Statement, an SCA is an arrangement between a transferor (a government) and an operator (government on nongovernmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a facility ) in exchange for significant consideration and (2) the operator collects and is compensated by fees from third parties. The requirements of this Statement are effective for financial statements for periods beginning after December 15, The provisions of this Statement generally are required to be applied retroactively for all periods presented. The adoption of this standard will not have a significant impact on the City s financial statements

101 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 GASB Statement No. 61, The Financial Reporting Entity: Omnibus an amendment of GASB Statements No. 14 and No. 34. The objective of this Statement is to improve financial reporting for a governmental financial reporting entity. The requirements of Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, were amended to better meet user needs and to address reporting entity issues that have arisen since the issuance of those Statements. The provisions of this Statement are effective for financial statements for periods beginning after June 15, Earlier application is encouraged. GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The objective of this Statement is to incorporate into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: 1. Financial Accounting Standards Board (FASB) Statements and Interpretations 2. Accounting Principles Board Opinions 3. Accounting Research Bulletins of the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure. Hereinafter, these pronouncements collectively are referred to as the FASB and AICPA pronouncements. The requirements of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. The provisions of this Statement generally are required to be applied retroactively for all periods presented. GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position. The Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net assets by the government that is applicable to a future reporting period, and an acquisition of net assets by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statements, which are distinct from assets and liabilities. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged

102 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. GASB Statement No. 66, Technical Corrections 2012 an amendment of GASB Statements No. 10 and No. 62. The objective of this Statement is to improve accounting and financial reporting for a governmental financial reporting entity by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. GASB Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No.25 The objective of this Statement is to improve financial reporting by state and local governmental pension plans. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 50, Pension Disclosures, as they relate to pension plans that are administered through trusts, or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 25 and 50 remain applicable to pension plans that are not administered through trusts covered by the scope of this Statement and to defined contribution plans that provide postemployment benefits other than pensions. This Statement is effective for financial statements for fiscal years beginning after June 15, Earlier application is encouraged. GASB Statement No. 68, Accounting and Financial Reporting for Pension Plans an amendment of GASB Statement No

103 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement is effective for fiscal years beginning after June 15, Earlier application is encouraged. The more significant accounting policies of the City are described below. (B) Government-wide and fund financial statements Government-wide Financial Statements The government-wide financial statements consist of the statement of net assets, a statement of financial position and the and the statement of activities, a statement of results of operations. These statements report information on all the activities of the reporting entity with the exception of fiduciary activity. Generally, the effect of inter-fund activity has been eliminated from these statements. Governmental activities, normally supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which primarily rely on fees and charges. The statement of activities reflects the extent to which direct expenses of each function are offset by program revenues. Direct expenses are those that are attributable to a specific function and are clearly identifiable. Program revenues include charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a specific function as well as grants and contributions that are restricted to meeting the operational or capital requirements of a specific function. Taxes and other items not appropriately included with program revenues are shown as general revenues. Fund Financial Statements In addition to and apart from the government-wide financial statements, fund financial statements are presented for governmental funds, proprietary funds and fiduciary funds. In each of these financial statements, major funds are presented in separate columns. (C) Measurement focus, basis of accounting and financial statement presentation The government-wide financial statements are presented using the economic resources measurement focus and the accrual basis of accounting; consistent with the presentation of the proprietary fund and fiduciary fund financial statements, with the exception that agency funds

104 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 do not have a measurement focus. Revenues are recorded when earned and expenses are recorded when a liability is incurred, without regard to the timing of the related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. The City considers revenues to be available if they are collected within 30 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, consistent with accrual accounting. However, debt service expenditures, as well as those related to compensated absences and claims and judgments are recognized only when payment is made. Property taxes, sales taxes, franchise taxes, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when cash is received by the government. The City reports the following governmental fund types and related major governmental funds: The General Fund is the primary operating fund. It accounts for all of the financial resources of the general government, except those required to be accounted for in another fund. The Special Revenue Funds are used to account for and report the proceeds of specific revenue sources, other than for debt service or major capital projects that are legally restricted or committed to expenditure for specified purposes. The only special revenue fund reported as a major fund is the Development Corp. Fund, a blended component unit. It is used to account for the additional ½ sales tax for economic development. The Debt Service Fund is used to account for and report financial resources that are restricted, committed or assigned for the payment of principal, interest and related costs on general long-term debt paid primarily from taxes levied by the City. The fund balance of the Debt Service fund is restricted to signify the amounts that are restricted exclusively for debt service expenditures. The Capital Projects Funds are used to account for and report financial resources that are restricted, committed or assigned expenditure for the acquisition and/or construction of capital facilities except those financed by proprietary fund types. The Capital Improvement Fund is the only fund of this type that is reported as a major fund

105 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The governing body has adopted the policy that the Development Corp. Fund and the Capital Improvement Fund are to be considered major funds, without regard to the major fund criteria, due to them being particularly important to the users of these financial statements. The City reports the following major proprietary fund types and related funds: The following enterprise funds are used to account for City operations for which a fee is charged to external users for goods or services. These funds must be used for activities, whose debt is backed solely by fees and charges or there is a legal requirement to recover cost, including capital cost, or a policy decision has been made to recover cost, including capital cost. Enterprise funds, which are reported as major funds include: The Water Fund, which accounts for the activities of the City s water system. The Sewer Fund, which accounts for the activities of the City s sewer system. The Sanitation Fund, which accounts for the activities of the City-owned residential and commercial garbage and brush collection as well as recycling systems. The Convention Center Fund, which accounts for the activities of the City s convention center. The McAllen International Airport Fund, which accounts for the activities of the Cityowned international airport. The McAllen International Toll Bridge Fund, which accounts for the operations of the City-owned international bridge connecting the City of Hidalgo, Texas with downtown Reynosa, Mexico. The Anzalduas International Crossing Fund, which accounts for the operations of the international bridge connecting south of the City of Mission, Texas with the west side of Reynosa, Mexico. The City also reports, although not as major funds, the internal service funds as proprietary funds. These fund types were established to finance and account for goods and services provided to various departments of the City, and on a limited basis to other local agencies, on a cost-reimbursement basis. They account for fleet management, health insurance, retiree health insurance, and general insurance services provided to other operating funds of the City as well as a capital replacement fund for rolling stock used within departments of the General Fund. The City reports fiduciary fund types, in which the City accounts for assets received and held by the City in the capacity of trustee, agent or custodian. Expenditures are made only in

106 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 accordance with the purpose for which the assets are received and cannot be used to support the City s programs. Within this category of fund types, the pension trust fund accounts for the activities of the Firemen s Relief and Retirement Fund, this accumulates resources for pension benefit payments to qualified firefighters. It also accounts for developers contributions for future infrastructure development in the Developers Fund, an agency fund. Additionally, it accounts for Communications Group Fund, an agency fund, which was established for the purpose of accounting the operations and maintenance of a consolidated regional public safety services communication system. Generally, with regard to enterprise funds, the City follows private-sector standards of accounting and financial reporting issued prior to December 1, 1989 to the extent that those standards do not conflict with or contradict guidance of the (GASB). Governments also have the option of following subsequent private-sector guidance for the business-type activities and enterprise funds, subject to the same limitation. As previously discussed, the City has elected not to follow subsequent private-sector guidance. Generally, the effect of inter-fund activity has been eliminated from the government-wide financial statements. Exceptions to this general statement are charges between the City s water and sewer function and various other functions of the City. Eliminating these charges would distort the direct costs and program revenues reported by the respective functions. Amounts reported in program revenues include 1) charges to customers or applicants for goods, services or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues, which include all taxes, as opposed to program revenues. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses typically are the result from activities specific to a particular proprietary fund s operations. Operating revenues include charges for services. Operating expenses include costs of services as well as materials, contracts, personnel and depreciation. All other revenues and expenses are reported as non-operating revenues and expenses. When an expense is incurred for purposes for which both restricted and unrestricted net assets are available, the City typically first applies restricted resources, as appropriate opportunities arise, but reserves the right to selectively defer the use thereof to a future project or replacement equipment acquisition

107 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 (D) Assets, liabilities, and net assets or equity (1) Deposits and investments The City s cash and cash equivalents are considered to be cash on hand and demand deposits. The Public Funds Investment Act for the state of Texas allows municipalities to invest in the following: Obligations of, or guaranteed by governmental entities, including: o Obligations of the United States or its agencies or instrumentalities o Direct obligations of this state or its agencies and instrumentalities o 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. o Other obligations, the principal and interest of which are unconditionally guaranteed or insured by or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities o 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 o Bonds issued, assumed, or guaranteed by the State of Israel Certificates of deposit Fully collateralized repurchase agreements Bankers acceptances Commercial paper No-load mutual funds Guaranteed investment contracts Investment pools The City s investment policy further restricts investments to the following: U.S. Treasury obligations and government agency securities, specifically those issued by the Federal Home Land Bank, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Farm Credit Bank, excluding mortgage-backed securities (i.e., those issued by the Government National Mortgage Association (Ginnie Mae), Student Loan Marketing Association (Sallie Mae) and Tennessee Valley Authority (TVA). Certificates of Deposit Local government investment pools

108 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The City s investments are reported at fair value. (2) Receivables and payables Lending/borrowing between funds that results in amounts outstanding at the end of the fiscal year are referred to as either due to/from other funds or advances to from other funds. Due to/from other funds represents the current portion of interfund loans. Advances to/from other funds represents the non-current portion of interfund loans. With respect to the government-wide financial statements, any residual balances outstanding between the governmental activities and business-type activities are reported as internal balances. Advance receivables between funds, reported in the fund financial statements, are offset by a restricted category of fund balance in the applicable governmental fund(s) to indicate that they are not available for appropriation and are not expendable available financial resources. All trade and property tax receivables are shown net of an allowance for uncollectible. Property taxes are levied on October 1 based on the assessed value of property as listed on the previous January 1, on which date a tax lien attaches. Assessed values are an approximation of market value. A valuation of all property must be made at least every three (3) years. However, due to growth, the appraisal district conducts annual valuation by property category. (3) Inventories and prepaid items Inventories for all governmental funds are valued at the lower of cost or market on the first-in, first-out basis. The consumption method is used to account for inventories. Under the consumption method, all inventory purchases are recorded as inventory acquisitions (current assets) at the time of purchase and expended when used. Inventories of proprietary funds are valued at the lower of cost or market on the first-in, firstout basis as well. Payments to vendors, reflecting costs applicable to future accounting periods, are recorded as prepaid items in both government-wide and fund financial statements. (4) Restricted assets Proceeds from the issuance of bonds, primarily related to enterprise funds and sales tax revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet due to their use being limited by applicable bond covenants. The revenue bond current debt service account is used to report segregated assets accumulated for debt service payments over the next twelve months. The revenue

109 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 bond contingency account is used to report resources set aside to subsidize potential deficiencies from the McAllen International Toll Bridge Fund and/or the Anzalduas International Crossing Fund operation that could adversely affect debt service payments. In addition to assets restricted by bond covenants, others are restricted by enabling legislation for replacement and/or acquisition of capital assets. (5) Capital assets Capital assets, which includes property, plant, equipment and infrastructure assets (e.g., roads, bridges, sidewalks and similar items), are reported in the applicable governmental or businesstype activities columns in the government-wide financial statements. Capital assets are defined by the City as assets with an initial, individual cost of $2,500 or more and an estimated useful life in excess of one year. Such assets are recorded at historical cost. Donated assets are reflected at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of an asset or materially extend the assets life are not capitalized. Gains or losses on dispositions of capital assets are included in income within the proprietary fund financial statements and in the governmental activities and business-type activities columns of the government-wide financial statements. In the governmental fund financial statements only the proceeds from the disposition are reported. Within the proprietary funds, interest cost, less interest earned on investments acquired with proceeds of related borrowing, is capitalized during the construction of capital projects when material. Interest expense is not capitalized on general capital assets. Depreciation of capital assets used by proprietary funds, including those acquired by contributed capital, is charged as an expense against their operations in the fund financial statements as well as the government-wide financial statements. Depreciation of general capital assets used by funds categorized as governmental activities is not provided in the fund financial statements, however is included in the gross expense by function in the governmentwide Statement of Activities. Capital assets, accumulated depreciation as well as the net amount are reported on proprietary fund balance sheets and in both the governmental activities and business-type activities column of the government-wide statement of net assets. Depreciation has been provided over the estimated useful lives using the straight-line method. The estimated useful lives are as follows: Buildings and improvements Equipment Infrastructure years 5 15 years years

110 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 (6) Compensated absences Accumulated unpaid compensated absences are accrued when incurred in all funds reported within the proprietary fund financial statements as well as the governmental activities and business-type activities columns of the government-wide statements. The expense is recognized in the governmental fund financial statements when paid or expected to be paid with current financial resources. Compensated absences are reported in governmental funds only if they have matured. (7) Long-term obligations In the government-wide financial statements and the proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the governmental/business-type activities or the specific proprietary fund to which each relates, as applicable. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. Premiums received on debt issuances are reported as other financing sources and discounts are reported as other financing uses. Issuance costs, whether or not withheld from debt proceeds, are reported as debt service expenditures. (8) Fund balances Fund balance, reported in governmental funds, which has some level of constraint placed on it, is classified as nonspendable, restricted, committed, or assigned. The amount remaining, which can be spent for any lawful purpose is classified as unassigned. Amounts classified as restricted have constraints placed on the use by law, regulations of other governments, creditors, grantors or by enabling legislation. Those classified as committed are constrained by the City Commission through an ordinance for specific purposes, but are neither restricted nor committed. Non-spendable is amounts that cannot be spent because they are either (a) not in spendable form, or (b) legally or contractually required to be maintained intact. The City Commission has delegated the authority to make assignments to the City Manager with Commission direction. For the purposes of classifying governmental fund balances, the City typically considers expenditure to be made from the most restrictive first when more than one classification is available, however reserves the right to selectively defer the use thereof to future expenditure. During the budget process, the City Manager designates the assignment of fund balances and makes recommendations to the City Commission for their consent and approval

111 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 At September 30, 2012, the McAllen EB-5 Regional Center fund, a non-major governmental fund, reflects a fund deficit of $9,095. The City intends to cover this shortfall by providing resources in the upcoming year. The table in the following page outlines the composition of the City s governmental fund balances classifications. Major Funds Non-major Development Capital Funds General Corp. Improvements Other Total Fund balances: Nonspendable: Interfund advances $ 1,396,791 $ - $ 352,716 $ - $ 1,749,507 Restricted for: Law enforcement ,822,461 5,822,461 Debt service , ,285 Economic development - 26,419, ,419,908 Tourism ,873 24,873 Capital improvements , ,138 Public access network 88, ,536 Parks , ,462 Committed to: Downtown services parking , ,989 Assigned to: Future bridge assistance 1,464, ,464,107 Information technology projects , ,760 Other capital projects - - 7,804,981-7,804,981 Unassigned 42,860, (9,095) 42,851,735 Total fund balances $ 45,810,264 $ 26,419,908 $ 8,157,697 $ 8,623,873 $ 89,011,742 (9) Minimum fund balance policy In order to maintain a margin of safety in the General Fund fund balance in anticipation of economic downturns or natural disasters, the City Commission has adopted an ordinance, requiring a minimum fund balance of 140 days of expenditures

112 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 II. Stewardship, compliance and accountability (A) Budgetary information The City adheres to the following procedures in establishing the budgetary data reflected in the basic financial statements: 1. Prior to August 1 of each year, the City Manager is required to submit to the City Commission a proposed budget for the fiscal year beginning on the following October 1. The operating budget includes proposed expenditures and the means of financing them. 2. Public hearings are conducted to obtain taxpayer comments. 3. Prior to October 1, the budget is legally enacted by the City Commission through passage of an ordinance. 4. The City Manager is authorized to transfer budgeted amounts between accounts within any department; however, any revisions that alter the total expenditures of any department must be approved by the City Commission. Budgeted amounts include transfers and revisions to the original appropriations ordinance. 5. Annual appropriated budgets are adopted for all governmental funds with the exception of less significant grants. 6. The budget and actual comparisons include the General Fund, and the Development Corp Fund. Budgets for these funds are adopted on a basis consistent with accounting principles generally accepted in the United States of American (US GAAP) applicable to state and local governments. Budgets for proprietary funds have been prepared on a non-us GAAP basis, which excludes depreciation but includes capital outlay and debt principal payments. 7. Annual budgeted expenditures are adopted at the department level within funds. As previously noted, the City Manager is authorized to make transfers within a department. Accordingly, the level at which expenditures cannot legally exceed appropriations is the department level. During the year, several supplementary appropriations were necessary. (B) Excess of expenditures over appropriations

113 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 For the year ended September 30, 2012, expenditures in certain general fund departments exceeded appropriations. The related departments and the excess of expenditures over appropriations are reflected in the following page: Department: Special service $ 127,005 City secretary 2,334 Audit office 1,296 Finance 17,610 Tax office 54,822 Legal 180,523 Building maintenance 11,934 Police 43,120 Communication technology 44,850 Fire 232,486 Traffic operations 32,367 Street lighting 437,287 Other agencies 627,143 Parks 313,207 Recreation 192,162 Pools 58,824 Quinta Mazatlan 24,005 Total general fund $ 2,400,975 III. Detailed notes on all funds (A) Deposits and investments It is the City s policy as well as a requirement in its Depository Agreement for deposits plus accrued interest thereon to be 110% secured by collateral valued at fair value, less the amount of the Federal Deposit Insurance Corporation insurance. At September 30, 2012, the City s deposits were entirely covered by federal deposit insurance or were secured by collateral held by the City s agent in the City s name pursuant to the City s Investment Policy and its Depository Agreement. Investments at fair value, including accrued interest, as of September 30, 2012 are reflected in the table that follows:

114 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Investment Maturities (in Years) Fair Value 1 or less Tex Pool $ 52,808,197 $ 52,808,197 $ - $ - $ - Certificates of deposit 44,492,841 32,081,938 12,410, U.S. Government securities 139,115,823 10,178,438 57,909,216 71,028,169 - $ 236,416,861 $ 95,068,573 $ 70,320,119 $ 71,028,169 $ - Public funds investment pools Public funds investment pools in Texas ( Pools ) are established under the authority of the Interlocal Cooperation Act, Chapter 79 of the Texas Government Code and are subject to the provisions of the Act, Chapter 2256 of the Texas Government Code. In addition to other provisions of the Act designed to promote liquidity and safety of principal, the Act requires Pools to: (1) have an advisory board composed of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool; (2) maintain a continuous rating of no lower than AAA or AAAm or an equivalent rating by at least one nationally recognized rating service; and (3) maintain the fair value of its underling investment portfolio within one half of one percent of the values of its shares. The City s investments in Pools are reported at an amount determined by the fair value per share of the pool s underlying portfolio, unless the pool is 2a7-like, in which case they are reported at amortized cost. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission ( SEC ) as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC s Rule 2a7 of the Investment Company Act of TexPool is a public funds investment pool created pursuant to the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code, and the Act. The State Comptroller of Public Accounts exercises oversight responsibility over TexPool. Oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller of Public Accounts has established an Advisory Board composed both of participants in TexPool and of other persons who do not have a business relationship with TexPool. The Advisory Board members review the investment policy and management fee structure. The City believes TexPool operates in a manner consistent with the SEC s Rule 2a-7 of the Investment Company Act of As such, TexPool uses amortized cost to report net assets and share prices since that amount approximates fair value. The City believes that TexPool

115 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 operates as a 2a-7 like pool as described in GASB Statement No. 59, Financial Instrument Omnibus. Interest rate risk. The investment policy states that no investment shall exceed seven years in maturity. By limiting the exposure of its investments by no more than three years as reflected in the schedule below, the City reduces its risk to rising interest rates. The table that follows reflects the allocation of the investment portfolio. Government Agencies Certificates of Deposit < 1 Year $ 10,178,438 $ 32,081, Years 128,937,385 12,410,903 4 Years - - Total $ 139,115,823 $ 44,492,841 Weighted Average Maturity 709 Days 108 Days Credit risk. As of September 30, 2012, the investments in the State s investment pool was rated AAAm by Standards and Poor s. Available funds were invested in certificates of deposit, all of which are under the Federal Deposit Insurance Corporation limit, as well as with the City s depository bank, First National Bank, a privately owned bank. However, the collateral pledged against the certificates of deposit with First National Bank is comprised of government securities, which carry AAA rating. The government securities consist of instruments issued by the Federal Home Loan Bank and Federal Home Loan Mortgage Corporation, both of which are rated AAA by the rating agencies: Moody s Investors Service and Fitch Ratings. The City s investment policy limits authorized investments to TexPool, certificates of deposits, U.S. Treasuries and federal government agencies, excluding Student Loan Marketing Association and Tennessee Valley Authority and mortgage backed securities. Concentration of credit risk. The certificate of deposits holdings at September 30, 2012 represents 18.8% of the total portfolio. The U.S. government agencies category represents 58.8% of the total portfolio. Within this category, securities issued by the Federal Home Loan Bank represent 36% of the portfolio, those issued by the Federal Home Loan Mortgage represent 22%, those issued by Federal Farm Credit Bank represent 14%, and those issued by Federal National Mortgage Association represent 28%. The investment policy is silent in the concentration of holding in the various types of securities and investments

116 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Firemen s Relief and Retirement Fund Investments The Firemen s Relief and Retirement Fund Investments (Plan) are recorded at fair value as of September 30, The table in the following page reflects the composition of these investments. Investment Policy Asset Fair Value % of Portfolio Allocation Equities: Domestic $ 17,365, % 30-60% International 3,275, % 10-30% Equities total 20,640,889 Fixed income Treasury/corporate bonds 10,997,816 Fixed income total 10,997, % 30-50% Alternative investments 3,603, % 0-20% Total portfolio $ 35,241, % Because of the complexity of the portfolio, the firemen s board of trustees relies on its consultant to provide the necessary guidance to accomplish the Plan s objectives. The Board also understands that return objectives can be achieved while assuming market volatility. The Board is willing to forgo potential return in strong markets in return for protection against a severe decline during weak periods. Concentration of credit risk. As noted in the above schedule, none of the sectors exceed their percentage of asset allocation. The Plan is well diversified; with no one issue exceeding 5%. With the exception of the alternative investments, the portfolio can be liquidated within one to two days if so desired. Alternative investments can only be liquidated quarterly. Interest rate risk. Only the fixed income securities of the Plan are subject to interest rate risk due to the possibility that prevailing interest rates could change before the securities reach maturity. Securities that are subject to interest rate risk as of September 30, 2012 amount to $6,205,448 and have weighted-average duration of 6.64 years. Durations is

117 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 defined as the change in the value of a fixed income security that will result from a 1% change in interest rates. Duration is stated in years. For example, 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. Securities that are subject to interest rate risk are shown in the following table. The investment policy is silent on the subject. Weighted-Average Percentage Duration Investment Type Fair Value of Total (Years) Corporate bonds $ 797, % 5.69 Government agencies 1, % 2.34 Government bonds 5,394, % 6.78 Government MBS % 3.73 Sub-pranationals 10, % 8.05 Municipal & derivatives % Total interest rate sensitive bonds $ 6,205, % 6.64 Credit risk. Using Standard and Poor s rating system for fixed income securities as of September 30, 2012 the Plan s bonds were rated as noted below. The investment policy is silent on the subject. Percentage S&P Fair Value of Total Rating $ 24, % AAA 61, % AA 335, % A 2,861, % BBB 1,478, % BB 1,155, % B 14, % CCC 272, % Not rated Total credit sensitive bonds $ 6,205, % Foreign currency risk. The Plan has one equity investment manager that has direct foreign currency exposure. The table that follows represents a summary of the country/currency allocations as of September 30, The investment policy is silent on the subject

118 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Percentage Country Fair Value of Total Brazil $ 127, % Canada 147, % China 255, % Denmark 98, % Europe (forwards) 1, % France 232, % Germany 412, % Hong Kong 68, % Ireland 75, % Israel 104, % Japan 291, % Mexico 45, % Netherlands 75, % Russia 16, % South Korea 91, % Sweden 88, % Switzerland 252, % United States 150, % United Kingdom 737, % Totals $ 3,275, % (B) Receivables Receivables for the City s governmental activities and business type activities at year end are reflected in the following table:

119 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Inter- Net Accounts Taxes Interest governmental Other Receivables Governmental activities: General $ 1,840,304 $ 11,571,789 $ 69,894 $ 34,601 $ 573,835 $ 14,090,423 Development corp. - 2,432,289 42, ,474,737 Capital Improvement , ,638 4, ,031 Nonmajor governmental and internal services 1,222,766 37,984 56,257 1,966, ,744 3,692,508 Total governmental $ 3,063,070 $ 14,042,062 $ 179,748 $ 2,297,996 $ 986,823 $ 20,569,699 Business-type activities: Water $ 1,997,606 $ - $ 11,009 $ - $ 65 $ 2,008,680 Sewer 1,869,049-4,253-19,705 1,893,007 Sanitation 2,135,067-6, ,142,563 Convention center 34,833-2,876-5,124 42,833 McAllen international airport 434,491-3,888 17,157 1, ,701 Nonmajor enterprise and fleet 32,845-2, , ,215 Total business type $ 6,503,891 $ - $ 31,280 $ 414,902 $ 26,926 $ 6,976,999 Within the City s water, sewer, and sanitation funds, an estimated amount has been recorded for services rendered but not yet billed as of the close of the year. The receivable was determined by prorating the cycle billings sent to customers in October 2012 based on the number of days applicable to the prior fiscal year. The receivable balances in the water, sewer, and sanitation have been reduced by estimated allowances for doubtful accounts. Water accounts were reduced by $71,067; sewer accounts by $65,814; and sanitation accounts by $91,204. Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue and unearned revenue reported in the fund financial statements are reflected in the following page

120 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Unavailable Unearned Governmental funds: Delinquent property taxes receivable (general fund) $ 3,646,065 $ - Sales tax (general fund) 5,054,594 - Sales tax (development corp fund) 1,263,649 - Other 3,245, ,431 Total deferred/unearned revenues for governmental funds $ 13,209,701 $ 558,431 (C) Capital assets Capital asset activity for the year ended September 30, 2012 was as follows: Beginning Retirement/ Ending Governmental activities: Balance Increases Decreases Balance Capital assets, not being depreciated: Land $ 48,031,171 $ 641,237 (1,560,985) $ 47,111,423 Construction in progress 53,244,610 4,732,006 (14,314,153) 43,662,463 Total capital assets, not being depreciated 101,275,781 5,373,243 (15,875,138) 90,773,886 Capital assets, being depreciated: Buildings and improvements 96,654,471 7,139, ,794,300 Equipment 67,231,249 5,611,508 (370,307) 72,472,450 Infrastructure 174,824,090 4,737, ,561,099 Total capital assets being depreciated 338,709,810 17,488,346 (370,307) 355,827,849 Less accumulated depreciation for: Buildings and improvements (32,014,194) (3,124,233) - (35,138,427) Equipment (45,156,769) (5,187,002) 370,307 (49,973,464) Infrastructure (96,976,634) (5,990,031) - (102,966,665) Total accumulated depreciation (174,147,597) (14,301,266) 370,307 (188,078,556) Total capital assets being depreciated, net 164,562,213 3,187, ,749,293 Governmental activities capital assets net $ 265,837,994 $ 8,560,323 $ (15,875,138) $ 258,523,179 (1) (1) $15,520,0138 represents a project, Boeye Reservior, that was transferred to the Water Fund

121 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Depreciation expense, exclusive of $370,307 in depreciation retirement, was charged to governmental functions as follows: General government $ 1,622,332 Public safety 2,212,136 Highways and streets, which includes the depreciation of general infrastructure assets 6,303,618 Health and welfare 24,673 Culture and recreation 2,207,489 In ad dition, depreciation on capital assets held by the City's internal service funds is charged to the various functions based on their usage of the assets 1,931,018 Total depreciation-governmental activities $ 14,301,

122 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Beginning Retirement/ Ending Business-type activities: Balance Increases Decreases Balance Capital assets, not being depreciated: Land $ 20,464,078 $ 7,000 $ 676,072 $ 21,147,150 Construction in progress 48,344,717 6,165,649 (29,034) 54,481,332 Water rights (perpetual) 4,923, ,923,100 Capitalized interest 6,989, ,891-7,217,764 To tal capital assets, not being depreciated 80,721,768 6,400, ,038 87,769,346 Capital assets, being depreciated: Buildings and improvements 416,993,322 13,878,246 14,873, ,744,668 Equipment (1) 45,287,244 3,660,825 (3,500) 48,944,569 Water rights (non-perpetual) 2,200, ,200,000 Total capital assets being depreciated 464,480,566 17,539,071 14,869, ,889,237 Less accumulated depreciation for: Buildings and imp rovements (149,979,740) (13,655,607) - (163,635,347) Equipment (25,624,714) (3,942,224) 3,500 (29,563,438) Water rights (412,500) (110,000) - (522,500) Total accumulated depreciation (176,016,954) (17,707,831) 3,500 (193,721,285) To tal capital assets being depreciated, net 288,463,612 (168,760) 14,873, ,167,952 Business-type activities Capital assets net $ 369,185,380 $ 6,231,780 $ 15,520,138 $ 390,937,298 (1) (1) During the year, previous construction in progress known as Boeye Reservior project, in the governmental funds were transferred to the Water Fund in the net amount of $15,520,138. This project added more water capacity and would serve its current customer base as well as in the future

123 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Depreciation expense, exclusive of $3,500 in depreciation retirement, was charged to business type activity functions as follows: Water $ 3,515,055 Sewer 3,913,143 Sanitation 1,756,762 Golf course 354,025 Civic center 75,173 Convention center 1,606,634 McAllen international airport 3,337,995 McAllen express 676,276 Transit terminal 319,126 McAllen international toll bridge 573,073 Anzalduas international crossing 1,538,249 In addition, depreciation on capital assets held by the City's internal service funds is charged to the various functions based on their usage of the assets 42,320 Total depreciation-business type activities $ 17,707,

124 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 At September 30, 2012, the City had the following significant remaining contractual commitments for various construction and improvement projects: Remaining Project Description Commitment Financing Sources Paving and drainage $ 5,118,508 Local and grant Boye reservior relocation 10,228 Local and bond fund Bentsen road canal replacement 10,147 Local Sewer improvements (1) 682,766 Local and bond fund Water improvements 1,200,411 Local Airport improvements 15,250,714 Local and bond fund Toll bridge improvements 678,876 Local and grant NWWT plant improvements 57,198 Local $ 23,008,848 (1) $682,766 is related to improvement financed by the Texas Water Development Board (Stimulus Funds) an interest free loan, which is funded on expense-reimbursement basis

125 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 (D) Interfund receivables, advances and transfers The compositions of inter-fund balances as of September 30, 2012 are reflected below. Receivable Fund: Payable Fund: Amount General Fund Miscellaneous Grants Fund $ 159,453 Community Development Fund 563,208 McAllen Bridge Fund 1,785 Total Governmental Funds $ 724,446 Civic Center Fund Hotel Occupancy Tax Fund $ 36,923 Convention Center Fund Hotel Occupancy Tax Fund $ 147,690 Convention Center Fund Civic Center Fund $ 100,000 Total Proprietary Funds $ 284,613 Combined totals $ 1,009,059 The due to/from other funds primarily represent temporary short-term borrowings for working capital, which are intended to be satisfied soon after year end. Advances to/from other funds: Receivable Fund Payable Fund Amount General Fund Sanitation Fund $ 150,000 Capital Improvement Fund Transit Terminal Fund 352,716 Total $ 502,716 The General Fund advance to the Sanitation Fund was to finance that fund s construction of a recycling center. It is expected to be repaid with the sales proceeds of improved property owned by the debtor fund. During the year, a payment of $250,000 was made from earnings of the fund, thus reducing the advance amount to $150,

126 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The Capital Improvement Fund advanced the Transit Terminal Fund $352,716 to assist in funding the acquisition and construction of the transit terminal building. Transfers are used to 1) provide unrestricted revenues collected in the general fund to finance various programs accounted for in other funds, and 2) move revenues from the fund that the budget requires to collect them to the fund that the budget requires to expend them. The table below reflects the transfer activity at year end. Transfer In: Anzalduas Int'l General Capital Convention Nonmajor Nonmajor Crossing Fund Imprv. Center Governmental Proprietary Fund Total Transfer out: General fund $ - $ 1,200,000 $ - $ 3,507,025 $ - $ - $ 4,707, 025 Development corp. 3,507,025 29, ,710 1,076,5 99-5,382, 394 Capital impv. Fund , , 831 Nonmajor prop. funds - 427, , 937 Nonmajor gov. funds 596, ,000 2,002, ,5 69-3,624, 503 McAllen int'l toll bridge 4,168, ,8 68 4,840,282 McAllen int'l airport 1,103, ,103, 965 Total $ 9,376,061 $ 2,181,997 $ 2,002,277 $ 4,412,566 $ 1,577,1 68 $ 671,8 68 $ 20,221,937 During the year, the General Fund transferred $1,200,000 of surplus revenues to the Capital Improvement Fund to assist in funding some major projects contemplated in next year s budget. It also provided funding in the amount of $3,507,025 to the Debt Service Fund, a non major governmental fund. This funding is to cover the debt service requirements of the existing Tax and Revenue Certificates of Obligation Series The Development Corporation provided funding for operating costs to the McAllen Express Fund in the amounts of $1,076,599, as reflected in the non-major proprietary column. It also transferred $3,507,025 to the General Fund for operating expenditures associated with the public safety building, which was originally a project of the development corporation fund. It also transferred $769,710 to the Certificate of Obligation Reservior, a non-major governmental fund, towards the completion of the Boeye Reservior project. A lesser amount of $29,060 was transferred to the Capital Improvement Fund. The transfers of $2,002,277 and $500,269 from the Hotel Occupancy Tax Fund, a non-major governmental fund, to the Convention Center and Civic Center respectively represent the use of the former fund as a conduit to these funds. The transfer of $596,657 from the Downtown Service Parking Fund, a non-major governmental fund, to the General Fund is a reimbursement

127 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 for debt service requirements on the debt related to the downtown parking garage. The transfer of $1,103,965 from the Airport Fund to the General Fund represents reimbursement for public safety personnel assigned to the airport. The amount reflected from the McAllen International Toll Bridge Fund to the General Fund of $4,168,414 represents the City s share of surplus net revenue from operation of the international toll bridge. Additionally, it transferred $671,868 to the Anzalduas International Crossing Fund for debt service requirements on the International Toll Bridge System Revenue Bonds, Series 2007B. (E) Long-term debt (1) General obligation bonds and other The City issues general obligation bonds to finance the acquisition and construction of major capital facilities, generally for governmental activities and are direct obligations, for which the City has pledged the full faith and credit of the government. These bonds generally are serial bonds and carry a term of 20 years or more with varying amounts of principal maturing each year. All outstanding general obligation bonds have been retired, leaving only sales tax revenue bonds and combination of tax and revenue certificates of obligation bond indebtedness. The schedule that follows presents an analysis of general long-term debt outstanding, followed by a schedule of the debt service requirements on those bonds

128 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Governmental activities $25,000,000 Development Corporation of McAllen, Inc. Sales Tax Revenue Bonds, Series 1998 due in annual installments of $25,000 per year through February 15, 2018; interest at 4.80% to 5.25% $ 150,000 $25,030,000 Combination Tax and Revenue Certificates of Obligation, Series 2010 due in annual installments ranging from $2,170,000 to $3,450,000 per year through February 15, 2020, with a final installment of $3,450,000; interest at 2.00% to 5.00% 24,355,000 Net OPEB obligation 1,049,270 Net pension obligation 275,507 Bond premium 1,010,152 Unpaid accumulated compensated absences 8,427,560 Total general long-term debt $ 35,267,489 The annual debt service requirements to maturity on sales tax bonds payable and combination tax and revenue certificates of obligation as of September 30, 2012, including interest, are reflected in the table below: Year Ending Principal Interest ,645, , ,765, , ,890, , ,025, , ,145, , ,035, ,319 Totals $ 24,505,000 $ 3,731,

129 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 (2) Revenue bonds and other The City also issues bonds, for which it pledges revenue, derived from the activity using the bondfinanced assets, to pay debt service. The following schedule is an analysis of the business-type activity long-term debt, including related revenue bonds. Payable from Water Fund: $14,263,200 Waterworks and Sewer System Improvement Revenue and Refunding Bonds, Series 2005 due in annual installments from $30,000 to $2,005,000 through February 1, 2030: interest at 3.00% to 5.25% $ 12,471,200 $12,029,050 Waterworks and Sewer System Improvement Revenue and Refunding Bonds, Series 2006 due in annual installments from $685,000 to $1,960,000 through February 1, 2031: interest at 3.00% to 5.00% 10,758,472 Bond premium 685,862 Unpaid accumulated compensated absences 360,575 Total water fund $ 24,276,

130 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Payable from Sewer Fund: $11,206,800 -Waterworks and Sewer System Improvement Revenue $ 9,798,800 and Refunding Bonds, Series 2005 due in annual installments from $30,000 to $2,005,000 through February 1, 2030: interest at 3.00% to 5.25% $26,525,950 Waterworks and Sewer System Improvement Revenue and Refunding Bonds, Series 2006 due in annual installments from $685,000 to $1,960,000 through February 1, 2031: interest at 3.00% to 5.00% $ 23,766,530 $39,485,000 Waterworks and Sewer System Revenue Bonds, Series 2009 due in annual installments from $1,090,000 to $1,350,000 through February 1, 2040: with no interest 37,305,000 $1,190,000 Waterworks and Sewer System Improvement Revenue Series 2012 due in annual installments from $95,000 to $1,135,000 through February 1, 2022: interest at 0.240% to 0.850%; with interest commencing February 1, ,190,000 Bond premium 1,385,249 Unpaid accumulated compensated absences 277,228 Total sewer fund $ 73,722,807 Payable from Sanitation Fund: Unpaid accumulated compensated absences $ 266,937 Payable from Palm View Golf Course Fund: Unpaid accumulated compensated absences $ 70,362 Payable from Convention Center Fund: Unpaid accumulated compensated absences $ 80,

131 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Payable from McAllen International Airport Fund: $9,820,000 Combination Tax and Revenue Certificate of Obligation Bonds, Series 2011 due in annual installments from $325,000 to $710,000 through September 30, 2031: interest at 2.00% to 4.75% $ 9,495,000 Note payable due Water Fund at 4% 108,335 Unpaid accumulated compensated absences 65,479 Total airport fund $ 9,668,814 Payable from McAllen Express Fund: Unpaid accumulated compensated absences $ 53,113 Payable from Transit System Fund: Unpaid accumulated compensated absences $ 41,158 Payable from McAllen International Toll Bridge Fund: Unpaid accumulated compensated absences $ 94,122 Payable from Anzalduas International Crossing Fund: $26,000,000 International Toll Bridge System Revenue Bonds, Series 2007A due in annual installments from $415,000 to $1,895,000 through March 1, 2032: interest at 4.50% to 4.65% $ 24,700,000 Payable from Anzalduas International Crossing Fund (Continued): $13,160,000 International Toll Bridge System Revenue Bonds, Series 2007B due in annual installments from $340,000 to $915,000 through March 1, 2032: interest at 4.00% to 5.00% 12,095,000 Unpaid accumulated compensated absences 9,120 Bond premium 502,436 Total Anzalduas International Crossing Fund $ 37,306,

132 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Payable from Fleet Materials Management Fund (an internal service fund treated as BTA): Unpaid accumulated compensated absences $ 31,612 Total Proprietary Fund Debt $ 145,504,233 Repayment for the $39,485,000 Waterworks and Sewer System Revenue Bonds, Series 2009, which were sold to the Texas Water Development Board is on a cash reimbursement basis. To-date the total amount received for the construction phase is $37,035,000. With principal payments made in the amount of $1,090,000, the current outstanding principal balance is $34,855,000. The table below reflects the revenue bond debt service requirements to maturity. Year Ending Principal Interest 2013 $ 5,740,000 $ 4,761, ,940,000 4,564, ,360,000 4,363, ,650,000 4,143, ,895,000 3,893, ,930,000 15,552, ,760,000 9,075, ,500,000 2,707, ,755, ,050,000 - Total bonds outstanding $ 141,580,000 $ 49,060,345 (1) (2,450,000) - Net bonds outstanding $ 139,130,000 $ 49,060,345 (1) At September 30, 2012, this amount was not available. The draws on the 2009-Waterworks and Sewer System Revenue Bonds are on a "cost reimbursement basis"

133 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 (3) Changes in long-term liabilities Long-term liability activity for the year ended September 30, 2012 is shown in the table below: Governmental activities: Additional Balance at Obligations Retirement Balance at Amounts September 30, and Net and Net September 30, Due Within 2011 Increases Decreases 2012 One Year Sales tax revenue bonds $ 175,000 $ - $ (25,000) $ 150,000 $ 25,000 Combination tax and revenue Certificate of obligation 26,860,000 - (2,505,000) 24,355,000 2,620,000 Bond premium 1,147,122 - (136,970) 1,010, ,970 Compensated absences 8,044,122 4,883,438 (4,500,000) 8,427,560 4,500,000 Net OPEB obligation - 1,049,270-1,049,270 - Net pension obligation 182,630 92, ,507 - Total general long-term 36,226,244 6,025,585 (7,166,970) 35,267,489 7,281,970 Business-Type activities: Revenue bonds payable 127,580,000 16,980,000 (5,429,998) 139,130,002 5,740,000 Note payable - 108, ,335 - Compensated absences 1,205, ,224 (870,000) 1,325, ,000 Bond premium 2,714,649 - (141,102) 2,573,547 - Total proprietary fund debt 131,500,379 18,078,559 (6,441,100) 143,137,838 6,618,000 Total debt $ 167,726,623 $ 24,104,144 $ (13,608,070) $ 178,405,327 $ 13,899,970 With respect to governmental activities, claims and judgments, net OPEB obligation, and compensated absences are generally liquidated by the General Fund. The exception to this is net pension obligation, which is reflected as $275,507. (4) Debt covenants The City is required to comply with various provisions included in the trust indenture for issued bonds (including bonds issued through the Texas Water Development Board). The City has complied with all significant provisions of the trust indenture

134 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 IV. Other information (A) Risk Management The City is exposed to various risks or torts; theft of, damage to, and destruction of assets; injuries to employees, citizens and the general public; and natural disasters. During fiscal year 2012, the City self-funded group health insurance, life insurance, general liability insurance, and workmen s compensation insurance. The City purchased insurance coverage for fire and extended coverage on buildings and contents; and fire, lightning, and windstorm insurance for its vehicles for damages in excess of certain limits. The group health insurance program is reported in the Employee Benefits Fund, an internal service fund. General liability and workmen s compensation insurance programs are reported in the General Insurance Fund, an internal service fund, and the Retiree Health Insurance Fund, an internal service fund. The health insurance excess coverage policy covers individual claims in excess of $150,000. Third-party coverage is currently maintained for workmen s compensation claims in excess of $400,000. Third-party coverage is also currently maintained for general liability claims in excess of $10,000. The City estimates the liabilities for its self-funded insurance programs on a case-by-case basis based on historical claims experience. A liability for a claim is established if information indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss is reasonably estimable. Accruals for claims are adjusted on a regular basis based on the latest information available on each case. Claims incurred but not reported have been considered in determining the accrual for claims, and City management believes adequate accruals have been provided at September 30, Interfund premiums are based primarily on claims experience and are reported as quasi-external transactions. There were no significant reductions in insurance coverage from coverage in the prior year by major category of risk. In addition, there were no insurance settlements exceeding insurance coverage in any of the past three years. Changes in claims payable amounts for the most recent two years are reflected in the following page

135 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Retiree Employee Health General Benefits Insurance Insurance Total Claims payable at September 30, 2010 $ (1,000,000) $ (240,000) $ (572,957) $ (1,812,957) Current period claims and changes in estimate (8,777,808) (945,076) (1,853,197) (11,576,081) Current period claims paid 8,027, ,076 1,923,159 10,896,043 Claims payable at September 30, 2011 (1,750,000) (240,000) (502,995) (2,492,995) Current period claims and changes in estimate (7,325,477) (791,488) (1,274,642) (9,391,607) Current period claims paid 7,325, ,488 1,410,162 9,527,127 Claims payable at September 30, 2012 $ (1,750,000) $ (240,000) $ (367,475) $ (2,357,475) (B) Contingent liabilities Amounts received or receivable from grant agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any of expenditures that may be disallowed by the grantor cannot be determined at this time, although the City expects such amounts, if any to be immaterial. The City is a defendant in various lawsuits. Although the outcome of these lawsuits is not presently determinable, in the opinion of the City s management and legal counsel the resolution of these matters will not have a material adverse effect on the financial condition of the City. The City has been granted authority from U.S. Citizenship and Immigration Service to operate an EB-5 Visa (also known as the Employment Based 5 th Preference Visa) Regional Center, which attracts foreign investment for jobs creation in exchange for expediting applicants for permanent residency. This activity is accounted for in a non-major governmental fund. Under this program a foreign national deposits with the City in addition to $10,000 application fee, $540,000, which is held in deposit pending approval of permanent residency, at which time $40,000 is released to the City as an administrative fee and the remaining $500,000 to the investment project selected by applicant. As of September 30, 2012 the account deposited amounted to $2,700,

136 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30,20\2 (C) Accounting for post-employment benefits other than pensions Prior to the implementation of GASB 45 ''Accounting and Financial Reporting by Employers for Pos/employment Benefits Other Than Pensions ", the City reported retiree's health benefits in the Employee Benefits Fund. The City created an internal service fund entitled " Retiree Health Insurance Fund" to accommodate the provisions ofgasb 45. (\) Plan Description: The City provides post-employment health care benefits for eligible retirees and their dependents. To be eligible to eject retiree medical coverage, a City employee retiring at age 60 or over must have at least 10 years of service with the City. City employees retiring before age 60 must have at least 25 year of service with the City. Members of the City's Fire Department are eligible to retire on or after age 50 with at least 20 years of service with the City. Effective October I, 2008, spouses must have been covered for at least three years prior to retirement, Retirees less than age 65 will have a one-time option to drop coverage and to be reinstated once the retiree reached age 65 and has enrolled in Medicare Parts A and B. Retirees are required to pay 100% of the blended (active and retiree) premium cost for both single and dependent coverage. However, police officers who retire prior to October I, 20 I 0 with 25 or more years of service will pay 50% of the blended premium cost for both single and dependent coverage. As of yearend, there were 118 employees who had retired: 47 with single coverage; 31 single coverage with one dependent; and 40 with family coverage. (2) Funding Policy: The policy of the City is to fund the plan on a pay-tls-you-go basis. (3) Annual OPES Cost and Net OPES Obligation: The Retiree Health Insurance Fund's (Fund) ARC is ac(uarially determined in accordance with the parameters of GASB Statement No. 45, Accounling and Financial Reporting by Employers for Poslemploymenl Benefits Other Than Pension. The ARC represent s a level o f funding thal, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. The most curren! actuarial valuation was October I, 20 I O. The following table shows the Fund's annual OPEB cost for the year. the amouill actually contributed to the plan, and changes in the Fund 's net OPEB obligation. - 90

137 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Net OPEB Obligation 09/30/12 Annual required contribution $ 859,964 Interest on net OPEB obligation (10,591) Adjustment to annual required contribution 13,253 Annual OPEB cost 862,626 Contributions made (385,550) Increase (decrease) in net OPEB obligation 477,076 Net OPEB obligation (asset) at beginning of year (revised) 572,194 Net OPEB obligation (asset) at end of year $ 1,049,270 The City s annual OPEB cost and the percentage cost contributed to the plan for the year ended September 30, 2012 is as follows: Annual Percentage of Net OPEB Year Ended OPEB Annual OPEB Obligation (Asset) September 30, Cost Cost Contributed at Year End 2008 $ 548, % $ (201,098) , % (179,896) , % 248, , % 572, , % 1,049,270 (4) Funded Status and Funding Progress: The funding of the plan was based on the actuarial valuation dated October 1, The study reported the unfunded actuarial accrued liability (UAAL) at $8,076,583 with an annual required cost of $859,964. The actuarial value of assets was $0, resulting in an UAAL of $8,076,583. The City will also be required to have an actuarial valuation performed at least every two years. The table in the following page reflects the funding progress

138 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Actuarial Actuarial Accrued Unfunded UAAL as a Actuarial Value of Liability AAL Funded Covered rercentage of Vnluation Assets (AAL) (UAAL) Ratio Payroll Covered Payroll Date (a) (b) (b-a) (a/b) (,) «b-,)',) 10/01106 $ $ 4,568,795 $ 4,568, % $ 5 1,690, % 10/01/08 7,253,404 7,253, %. 60,443, % 10/ ,076,583 8,076, , % (5) Actuarial Methods and Assu mptions: Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefits costs between the employer and the plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volati lity in actuarial accrued liabil ities consistent with the long-term pe rspective of the calculations. For the fi scal year ended Se ptember , the ac tuarial valuation date was October I, 20 I O. The actuarial method used was the "projected unit credit" method, the amortization method used was the " le ve l do llar open" method, and (he remaining amoniza ti on period was 30 years. The asse t va hmtion method was market va lue and the assumed in vestment rate of return was 5.5%. The healthcare initial inflation rate was 10%, with an ultimate goal o r 5.00/0. Assumptions such as projected salary increases and post-retirement bene fit increases are not applicable 10 the plan. (D) Reliremenl Plans ( I) Texas Municipal Retirement System a}. Plan Description The City provides pension benefits for all of its eligible employees, except City Fire Depanment personnel, for whom there is a separate retirement plan. th rough a non-traditional, joint contributory, hybrid defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS). an agent multiple-employer public employee retirement system. The plan provisions th at have been adopted by the City are within the options available in the governing slate statutes oftmrs. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the repon also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used the System. This report may be obtained by writing to Texas Municipal Retirement System, P.O. Box , - 92

139 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Austin, Texas or by calling ; in addition, the report is available on TMRS website at The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City were as follows: Plan Year 2011 Plan Year 2012 Employee deposit rate 7.0% 7.0% Matching ratio (city to employee) 2 to 1 2 to 1 Years required for vesting Service retirement eligibility 60/10,0/20 60/10,0/20 (expressed as age/years of service) Updated Service Credit 0% 0% Annuity Increase (to retirees) 0% of CPI 0% of CPI b). Contributions Under the state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using the Projected Unit Credit actuarial cost method. This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to-year. The normal cost contribution rate finances the portion of an active member s projected benefit allocated annually; the prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity increases. The City contributes to the TMRS Plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect. In meeting its fiscal responsibility, the City issued a lump sum contribution of $250K for fiscal year It was an effort to reduce potential unfunded actuarial liability. Additionally, the City s contribution rate was 8.64% and 8.52% for 2010 and 2011 respectively. For the current year the contribution rate was 5.22% The annual pension cost and the net pension obligation/ (asset) are reflected in the following page

140 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Fiscal Year Ended Annual Pension Cost Actual Contribution Percentage of APC Contributed Net Pension Obligation/(Asset) 09/30/2010 $4,693,532 $4,693, % $0 09/30/2011 $5,101,423 $5,101, % $0 09/30/2012 $3,414,628 $3,414, % $0 The required contribution rates for fiscal year 2012 were determined as part of the December 31, 2008 and 2009 actuarial valuations. Additional information as of the latest actuarial valuation, December 2011, is reflected below. Actuarial Valuation Date 12/31/11 Actuarial cost method Projected Unit Credit Amortization method Level P ercent of P ayroll GASB 25 Equivalent Single 25.5 Years Amortization period Closed period Asset valuation method 10-yr Smoothed Market Actuarial assumptions: Investment rate of return 7.0% Projected salary increases Varies by age and service includes inflation at 3.0% cost-of-living adjustments None Actuarial value of assets $161,885,479 Actuarial accrued liability $159,194,692 Percentage funded 101.7% Unfunded actuarial accrued liability (asset) (UAAL) ($2,690,787) Annual covered payroll $56,625,910 UAAL as a percentage of covered payroll -4.8% The funded status as of December 31, 2011, the most recent actuarial valuation date is as follows (unaudited): Actuarial accrued liability (AAL) $159,194,692 Actuarial value of Assets 161, Unfunded actuarial accrued liability (Asset) $ (2,690,787) (UAAL) Funded ratio (actuarial value of Assets/AAL) 101.7% Annual covered payroll $59,840,444 UAAL as a percentage of covered payroll (4.8)%

141 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. (2) Firemen s Fund a). Plan Description Firemen s Fund, a single-employer defined benefit plan (the Plan ), was created pursuant to the Texas Local Fire Fighter s Retirement Act ( TLFFRA ) and is administered by the Board of Trustees of the fund. The fund provides pension, disability, death, and severance benefits to employees of the City s fire department and former volunteer firemen eligible to receive benefits. The City issues a publicly-available financial report that includes financial statements and required supplementary information for the Firemen s Fund. This financial report may be obtained by writing to the City of McAllen Finance Director, P.O. Box 220, McAllen, Texas or by calling (956) b). Summary of Significant Accounting Policies Basis of Accounting The financial statements of the Firemen s Fund are prepared using the accrual basis of accounting. Employee and employer contributions are recognized as revenues when due, pursuant to formal commitments, as well as statutory or contractual requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plan document. Plan Benefits Benefit provisions are established under authority of the TLFFRA. Specific plan provisions are governed by a Plan document and a trust agreement executed by the Board of Trustees. The Plan document may be amended as provided in Section 7 of the TLFFRA (Article 6243e. V.T.C.S.) Amending the Plan requires approval of any proposed change by an eligible actuary and a majority of the participating members of the Plan. Both the City and the members of the Plan have specific authority to appoint members of the Board under TLFFRA. Pension Benefits Pension benefits become fully vested after 20 years of credited service. Employees may retire at age 50 with 20 years of service ( normal retirement age ). A partially vested benefit is also provided for employees who

142 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 terminate employment with at least 10 but less than 20 years of service. The monthly benefit at normal retirement age, payable in an annuity, is equal to 58% of the compensation base, as defined, plus $58.00 per month for each year of service in excess of 20 years. Death Benefits Duty related death benefits payable to a member s spouse equals the sum of 38.67% of the member s compensation base, as defined, plus two-thirds of the member s accrued retirement benefit at death. Non-duty related benefits will equal the duty related death benefit to which the member s beneficiary was eligible multiplied by the member s vested percentage based on the member s years of service at death. In addition to the spouse s benefit, each unmarried child of the member under age 18 will receive a monthly benefit of 7.73% of the firefighter s average monthly salary. The sum of all benefits payable as a result of the death of an active plan member may not exceed the disability or retirement benefit such member had earned as of the date of death. Severance Benefits Members who terminate employment with less than 10 years of service will be entitled to the return of the excess of his/her contributions to the fund over the amount of any benefits received from the Plan. Such refunds will not include any interest on the member s contribution. If a member terminates on or after the date of completing 10 years of service but prior to the date of completing 20 years of service, he/she will be entitled to receive a monthly benefit, starting on the date he/she would have both completed 20 years of service and attained age 50, had he/she remained in the service of the fire department. The amount the member will receive will equal the monthly service retirement benefit accumulated on the date the member separated from service with the fire department, multiplied by the member s vested percentage. Method Used to Value Investments Fund investments are reported at fair value. Short-term investments are reported at cost, which approximates fair value. The fair value of the Fund s investments is based on the quoted value of each investment on the last business day of the Fund year. The Plan s investments are stated at fair value and, accordingly, unrealized appreciation and depreciation are reported in the statements of changes in plan net assets. The fair values of United States Government securities, corporate and foreign bonds, common stocks, and foreign equities are based on quoted market prices. Plan values in investments in hedge funds based on its percentage investment in each such fund. The estimated fair value of each fund is based on market conditions and information reported by the fund managers, and is generally based on the estimated fair value of each funds underlying investments at the end of the reporting period. No investment in any one organization (other than the U.S. Government or mutual funds) represents 5% or more of Fund assets

143 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Purchases and sales of investments are recorded on a trade-date basis and, accordingly, the related receivables and payables for any unsettled trades are recorded. Interest income and dividends are recorded on the accrual basis. c). Annual Pension Cost For 2010, the City s annual pension cost was equal to the City s actual and required contributions. The required contribution was established as part of the September 30, 2010 actuarial valuation using the entry-age actuarial cost method. The actuarial assumptions included (a) 8% investment rate of return, compounded annually (b) projected salary increases of 4.25% per year, compounded annually, (c) inflation rate of 3.00% and (d) the amortization period is calculated from the rate contributed by the City. The plan receives a fixed percentage of pay contribution from the City each year. Thus, the City s contribution is not expressed as a dollar amount. This procedure is permitted under the Guide to Implementation of GASB Statements 25, 26 and 27 on Pension Reporting and Disclosure by State and Local Government Plans and Employers. The investment rate of return and the projected salary increases both used the same assumptions with regard to inflation. The actuarial value of assets was determined using the smoothed market value technique, a technique that smoothes the effect of short-term volatility in the market value over a four-year period. The unfunded actuarial liability is being amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at September 30, 2010 was 39.6 years. The most recent actuarial valuation was done as of September 30, The amounts of the actuarial value of assets represent estimates based upon the assumptions described above. Changes in those estimates will result in changes in such estimates in the future. The amount of benefits ultimately to be paid could differ materially from the current estimates. The schedule of actuarial funding progress is presented in the following page

144 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Schedule of Actuarial Funding Progress Actuarial Valuation Date 09/30/10 Entry Age Normal Level Percent of Projected Payroll 39.6 Years open period 5yr Smooth Market Value Actuarial cost method Amortization method Remaining amortization period Asset valuation method Actuarial assumptions: Investment rate of return 8% Projected salary increases includes inflation at 4.25% cost-of-living adjustments None Actuarial value of assets $36,651,357 Actuarial accrued liability $51,565,906 Percentage funded 71.1% Unfunded actuarial accrued liability (UAAL) $14,914,549 Annual covered payroll $8,996,407 UAAL as a percentage of covered payroll 165.8% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the profitability of occurrence of events far into the future. Examples include assumptions about future rates of retirement, mortality, and salary increases. Actuarially determined amounts are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The Schedule of Funding Progress, presented as required supplementary information following the notes to financial statements, presents multi-year trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. The accompanying Schedule of Employer Contributions presents trend information about the amount contributed to the Plan by the employer in comparison to the annual required contributions ( ARC ), an amount that is actuarially determined

145 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 Schedule of Employer Contributions Annual pension cost 09/30/12 09/30/11 09/30/10 Annual required contribution (ARC) $ 1,376,033 $ 1,315,456 $ 1,071,252 Interest on NPO 14,610 7,968 13,524 Adjustments to the ARC 10,478 5,714 9,699 Total annual pension cost (APC) $ 1,380,165 $ 1,317,710 $ 1,075,077 Percentage of annual pension cost contributed 93.3% 93.7% 106.5% Contributions made $ 1,287,288 $ 1,234,674 $ 1,144,532 Increase in NPO $ 92,877 $ 83,036 $ (69,455) NPO at the end of the period $ 275,507 $ 182,630 $ 99,594 d). Contributions The Plan s minimum required contribution provisions are established under Title 8, Subtitle A, Chapter 802, Subchapter B, Section of the Texas Government Code and under Texas Pension Review Board Guidelines for Actuarial Soundness. Specific Plan contribution rates are governed by the Plan document. Changes in the members or the City s contribution rate requires a plan amendment. The contribution rates of the Plan members and the City are established under the terms of the Plan. An actuarial valuation is performed biennially to verify that Plan benefits and Plan contributions are in balance. Costs of administering the fund are paid from Plan assets. Pursuant to the Plan document, a legal instrument binding both the City and its firefighters, the City of McAllen is required to match employee contributions. Benefits paid to former volunteer firefighters are funded by the City when paid to the former volunteer firefighters or beneficiaries. The City s contribution rate for the fiscal year ended September 30, 2012 was 12.5% of annual compensation. Contributions required and paid into the fund as of September 30, 2012 were members, $1,027,430 and employer, $1,287,288. e). Other pension information In September 2003 Texas voters approved an amendment to the Texas Constitution, which provided that once certain benefits are granted to retirees, those benefits may

146 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 not be subsequently reduced. It was codified as Article XVI, Section 66, of the Texas Constitution. The amendment applies only to the City of McAllen Firefighters Relief and Retirement Plan. It further provided that the City and the retirement system that finance benefits under the retirement system are jointly responsible for ensuring that benefits are not reduced or otherwise impaired, which could potentially require the City to involuntarily increase its funding due to under-performing investments, plan improvements as well as other factors outside the control of the City. The amendment also permitted the City to be exempt from its requirements upon holding an election in which the majority of the votes favored the exemption. On May 15, 2004, a special City election was held, in which the majority of the voters voted in favor of exempting the City of McAllen and the McAllen Firefighters Relief and Retirement plan from the application of this amendment, Article XVI, Section 66 of the Texas Constitution. (D) Subsequent events During the year, the City and the McAllen Fire Fighter s Association were in discussions concerning the collective bargaining agreement. This agreement was approved by the City Commission on January 14, 2013, and all parties signed on January 17, This is a four year agreement covering the period of October 1, 2012 through September 30, Aside from special labor conditions, some of the key provisions covered by the agreement are: Base salary increase of 0.5% per year from FY FY 2015 with no increase in FY Subject to the approval of the plan participants, employees shall contribute up to 11% of their pay to the Firemen s Retirement Fund. The Employer (City) shall increase its contribution to the Firemen s Retirement Fund, from its current rate of 12.50%, for all employees in accordance with the following: i. Effective as of the signing of this Agreement the City shall increase its contribution to the Firemen s Retirement Fund to an amount equal to 12.75% of annual salaries. ii. Effective October 1, 2013, the City shall increase its contribution to 13.00% of annual salaries. iii. Effective October 1, 2014, the City shall increase its contribution to 13.25% of annual salaries. iv. Effective October 1, 2015 through September 29, 2016, the City shall increase its contribution to 13.50% of annual salaries. v. Effective September 30, 2016, the City shall decrease its contribution to 13.00% of annual salaries

147 CITY OF McALLEN, TEXAS NOTES TO FINANCIAL STATEMENTS September 30, 2012 The City Commission in its December 10, 2012 meeting adopted an ordinance, which updated service credits with transfers, from 0% to 100%, for all qualifying members of the Texas Municipal Retirement System. The ordinance became effective January 1, The most significant impact was the reduction of the City s funded ratio from 101.7% to 98.8%

148 ,