PRELIMINARY OFFICIAL STATEMENT November 21, 2018

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1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment without notice. These securities may not be sold, nor may offers to buy them be accepted, prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of, these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, qualification or filing under the securities laws of any such jurisdiction. NEW ISSUE BOOK-ENTRY-ONLY PRELIMINARY OFFICIAL STATEMENT November 21, 2018 Ratings: S&P: A+ (See BOND INSURANCE, BOND INSURANCE RISK FACTORS, and RATINGS herein) In the opinion of Bond Counsel (identified below), assuming continuing compliance by the City (defined below) after the date of initial delivery of the Certificates (defined below) with certain covenants contained in the Ordinance (defined below) authorizing the Certificates and subject to the matters set forth under TAX MATTERS herein, interest on the Certificates for federal income tax purposes under existing statutes, regulations, published rulings, and court decisions (1) will be excludable from the gross income of the owners thereof pursuant to section 103 of the Internal Revenue Code of 1986, as amended to the date of initial delivery of the Certificates, and (2) will not be included in computing the alternative minimum taxable income of the owners thereof. (See TAX MATTERS herein.) THE CERTIFICATES WILL BE DESIGNATED "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $9,515,000* CITY OF MERCEDES, TEXAS (A political subdivision of the State of Texas located in Hidalgo County, Texas) COMBINATION TAX AND LIMITED PLEDGE REVENUE CERTIFICATES OF OBLIGATION, SERIES 2018 Dated: December 1, 2018 (interest to accrue from the Delivery Date) Due: February 15, as shown on inside cover The City of Mercedes, Texas (the City ) Combination Tax and Limited Pledge Revenue Certificates of Obligation, Series 2018 (the "Certificates") are being issued pursuant to the Constitution and general laws of the State of Texas, particularly the Certificate of Obligation act of 1971, as amended, Texas Local Government Code, Section 271, as amended, Chapter 1502, Texas Government Code, as amended, the City s Home Rule Charter, and an ordinance (the Ordinance ) to be passed by the City Commission on December 4, 2018 authorizing the issuance of the Certificates. See THE CERTIFICATES Authority for Issuance herein. The Certificates constitute direct obligations of the City payable from the proceeds of an ad valorem tax levied against all taxable property within the City, within the limits prescribed by law, and from a limited pledge (not to exceed an aggregate total of $1,000) of the Net Revenues of the City s combined utility system (the System ), as provided in the Ordinance, such lien and pledge of the limited amount of Net Revenues (as defined in the Ordinance) being subordinate and inferior to the lien on and pledge of the Net Revenues which are or may be pledged to the payment of the currently outstanding Prior Lien Obligations and any Additional Prior Lien Obligations, Junior Lien Obligations, or Subordinate Lien Obligations hereafter issued by the City (each as described and defined in the Ordinance). The City previously authorized the issuance of the currently outstanding Limited Pledge Obligations that are payable from and secured by a lien on and pledge of certain Pledged Revenues as described in the ordinances authorizing the issuance of the currently outstanding Limited Pledge Obligations. In the Ordinance, the City has reserved the right to issue Additional Prior Lien Obligations, Junior Lien Obligations, Subordinate Lien Obligations, and Additional Limited Pledge Obligations without limitation as to principal amount but subject to any terms, conditions, or restrictions as may be applicable thereto under law or otherwise. See THE CERTIFICATES - Authority for Issuance herein. Interest on the Certificates will accrue from the Delivery Date (defined below) and will be payable February 15 and August 15 of each year, commencing August 15, 2019, until maturity or earlier redemption, and will be calculated on the basis of a 360-day year of twelve 30-day months. The definitive Certificates will be issued as fully registered bonds in denominations of $5,000 or integral multiples thereof. When issued, the definitive Certificates will be registered in the name of Cede & Co., as registered holder and nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Certificates. Purchases of beneficial ownership interests in the Certificates will be made in book-entry form. Purchasers will not receive certificates representing their beneficial interest in the Certificates purchased. So long as DTC or its nominee is the registered owner of the Certificates, the principal of, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrar, which initially is U.S. Bank, N.A., Houston, Texas, 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. Proceeds from the sale of the Certificates will be used for (i) constructing street improvements (including utilities repair, replacement, and relocation), curbs, gutters, and sidewalk improvements, including drainage incidental thereto; (ii) constructing, acquiring, purchasing, renovating, enlarging, and improving the City s utility system; (iii) constructing drainage and storm drainage improvements; (iv) purchase of public safety vehicles and equipment, ambulances, emergency medical services vehicles and equipment, and public works vehicles and equipment; (v) the purchase of materials, supplies, equipment, machinery, landscaping, land, and rights-of-way for authorized needs and purposes relating to the aforementioned capital improvements; and (vi) the payment of professional services related to the design, construction, project management, and financing of the aforementioned capital improvements. See THE CERTIFICATES Purpose herein. Application has been made to municipal bond insurance companies to have the payment of principal of and interest on the Certificates insured by a municipal bond insurance policy. See BOND INSURANCE and BOND INSURANCE RISK FACTORS herein. SEE MATURITY SCHEDULE ON INSIDE COVER The Certificates are offered when, as and if issued and received by the initial purchaser thereof named below (the Underwriter ), and are subject to the approval of legality by the Attorney General of the State of Texas and Norton Rose Fulbright US LLP, San Antonio, Texas, Bond Counsel. Certain legal matters will be passed upon for the Underwriter by its counsel, The Perez Law Firm, PLLC, Pharr, Texas. The Certificates are expected to be available for initial delivery to the Underwriter through the services of DTC on or about December 20, 2018 (the Delivery Date ). *Preliminary, subject to change. ESTRADA HINOJOSA & COMPANY, INC.

2 CERTIFICATES MATURITY SCHEDULE CUSIP Base Number (1) : $9,515,000 * CITY OF MERCEDES, TEXAS COMBINATION TAX AND LIMITED PLEDGE REVENUE CERTIFICATES OF OBLIGATION, SERIES 2018 Maturity Date (2/15) Principal Amount* 2019 $155, , , , , , , , , , , , , , , , , , , ,000 Interest Rate Initial Yield CUSIP Suffix (1) (Interest to accrue from the Delivery Date) The City reserves the right, exercisable at its option, to redeem Certificates having stated maturities on and after February 15, 2029, in whole or in part in principal amount of $5,000 or any integral multiple thereof, on February 15, 2028 or any date thereafter, at par value thereof plus accrued interest to the date of redemption. (See THE CERTIFICATES Redemption. ) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Global Market Intelligence 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. CUSIP numbers are included herein solely for the convenience of the owners of the Certificates. None of the City, the Financial Advisor, or the Underwriter shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. * Preliminary, subject to change. ii

3 USE OF INFORMATION IN THE OFFICIAL STATEMENT For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission ( Rule 15c2-12 ), as amended and in effect on the date of the Preliminary Official Statement, this document constitutes an Official Statement with respect to the Certificates described herein that has been "deemed final" by the City as of the date hereof (or of any supplement or correction) except for the omission of no more than the information permitted by Rule 15c2-12. This Official Statement, which includes the cover page and 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. This Official Statement does not constitute an offer to sell Certificates in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. 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 sources which are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Underwriter. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. Each of the Underwriter and Financial Advisor have provided the following sentence for inclusion in this Official Statement. The Underwriter and Financial Advisor have reviewed the information in this Official Statement in accordance with their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but neither the Underwriter nor the Financial Advisor guarantees the accuracy or completeness of such information. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of the 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 CONTINUING DISCLOSURE OF INFORMATION for a description of the undertaking of the City to provide certain information on a continuing basis. THIS OFFICIAL STATEMENT IS INTENDED TO REFLECT FACTS AND CIRCUMSTANCES ON THE DATE OF THIS OFFICIAL STATEMENT OR ON SUCH OTHER DATE OR AT SUCH OTHER TIME AS IDENTIFIED HEREIN. NO ASSURANCE CAN BE GIVEN THAT SUCH INFORMATION MAY NOT BE MISLEADING AT A LATER DATE. CONSEQUENTLY, RELIANCE ON THIS OFFICIAL STATEMENT AT TIMES SUBSEQUENT TO THE ISSUANCE OF THE CERTIFICATES DESCRIBED HEREIN SHOULD NOT BE MADE ON THE ASSUMPTION THAT ANY SUCH FACTS OR CIRCUMSTANCES ARE UNCHANGED. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE CERTIFICATES ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE CERTIFICATES IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE CERTIFICATES HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. NONE OF THE CITY, ITS FINANCIAL ADVISOR, OR THE UNDERWRITER MAKE 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 OR THE INSURER, IF ANY, AND ITS MUNICIPAL BOND INSURANCE POLICY DESCRIBED HEREIN UNDER THE HEADING BOND INSURANCE. SEE BOND INSURANCE AND BOND INSURANCE RISK FACTORS HEREIN. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this final official statement for purposes of, and as that term is defined in, Rule 15c2-12. iii

4 SELECTED DATA FROM THE OFFICIAL STATEMENT The selected data is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Certificates to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this page from this Official Statement or to otherwise use it without the entire Official Statement. The City The Issue Use of Proceeds Authorization and Security Optional Redemption Tax Matters Relating to the Certificates Qualified Tax-Exempt Obligations Bond Insurance *Preliminary, subject to change. The City of Mercedes, Texas (the City ) is a home rule municipality operating under its own Home Rule Charter. The charter provides that the City will operate under the City Commission/Manager form of government pursuant to the laws of the State of Texas. The City is comprised of the Mayor and four Commissioners which are elected for staggered three year terms. The City Commission formulates operating policy for the City while the City Manager is the chief administrative officer. The 2010 Census population for the City was 15,570. $9,515,000* City of Mercedes, Texas, Combination Tax and Limited Pledge Revenue Certificates of Obligation, Series 2018, dated December 1, 2018, maturing as described on the inside cover page of this Official Statement. Proceeds from the sale of the Certificates will be used for (i) constructing street improvements (including utilities repair, replacement, and relocation), curbs, gutters, and sidewalk improvements, including drainage incidental thereto; (ii) constructing, acquiring, purchasing, renovating, enlarging, and improving the City s utility system; (iii) constructing drainage and storm drainage improvements; (iv) purchase of public safety vehicles and equipment, ambulances, emergency medical services vehicles and equipment, and public works vehicles and equipment; (v) the purchase of materials, supplies, equipment, machinery, landscaping, land, and rights-of-way for authorized needs and purposes relating to the aforementioned capital improvements; and (vi) the payment of professional services related to the design, construction, project management, and financing of the aforementioned capital improvements. The Certificates will constitute a direct obligation of the City issued pursuant to the laws of the State of Texas, particularly the Certificate of Obligation act of 1971, as amended, Texas Local Government Code, Section 271, as amended, Chapter 1502, Texas Government Code, as amended, the City s Home Rule Charter, and an ordinance (the Ordinance ) to be passed by the City Commission on December 4, 2018 authorizing the issuance of the Certificates. The Certificates are payable from the proceeds of an ad valorem tax levied against all taxable property within the City, within the limits prescribed by law, and from a limited pledge (not to exceed an aggregate total of $1,000) of the Net Revenues of the City s combined utility system (the System ), as provided in the Ordinance, such lien and pledge of the limited amount of Net Revenues (as defined in the Ordinance) being subordinate and inferior to the lien on and pledge of the Net Revenues which are or may be pledged to the payment of the currently outstanding Prior Lien Obligations and any Additional Prior Lien Obligations, Junior Lien Obligations, or Subordinate Lien Obligations hereafter issued by the City (each as described and defined in the Ordinance). The City previously authorized the issuance of the currently outstanding Limited Pledge Obligations that are payable from and secured by a lien on and pledge of certain Pledged Revenues as described in the ordinances authorizing the issuance of the currently outstanding Limited Pledge Obligations. In the Ordinance, the City has reserved the right to issue Additional Prior Lien Obligations, Junior Lien Obligations, Subordinate Lien Obligations, and Additional Limited Pledge Obligations without limitation as to principal amount but subject to any terms, conditions, or restrictions as may be applicable thereto under law or otherwise. (See THE CERTIFICATES - Authority for Issuance ). The City reserves the right at its option, to redeem Certificates having stated maturities on and after February 15, 2029, in whole or in part in principal amount of $5,000 of or any integral multiple thereof, on February 15, 2028 or any date thereafter, at par value thereof plus accrued interest to the date of redemption. (See THE CERTIFICATES Redemption. ) In the opinion of Bond Counsel, interest on the Certificates (1) will be excludable from gross income for federal income tax purpose and (2) will not be included in computing the alternative minimum taxable income of the owners thereof. (See TAX MATTERS herein.) The City will designate the Certificates as "Qualified Tax-Exempt Obligations" for financial institutions. See "TAX MATTERS - Qualified Tax-Exempt Obligations" herein. Application has been made to municipal bond insurance companies to have the payment of principal and interest on the Certificates insured by a municipal bond insurance policy. (See BOND INSURANCE and BOND INSURANCE RISK FACTORS herein.) iv

5 Ratings Payment Record The Certificates have been assigned an unenhanced rating of A+ by S&P Global Ratings ( S&P ). The Official Statement shall disclose any relevant information relating to the municipal bond insurance policy, if any. (See RATINGS herein.) The City has never defaulted on general obligation bonds since refunding bonds were issued at par for original indebtedness under a forced refunding which involved a reduction in interest rate. However in 1941, all bonds were again refunded at par pursuant to a Federal Court decree entered in a proceeding filed under the Municipal Composition Act, such decree providing for the settlement of 3% interest coupons due May 1, 1941 on the basis of 1½ %. Since the 1941 refunding, the City retired $582,000 in principal at varying discounts pursuant to bonds tendered in accordance with the plan of refunding. On April 24, 1961, the Federal Court decree covering this issue was dismissed and the balance of $475,000 refunded by an issue dated May 1, 1961 is now retired. Delivery When issued, anticipated on or about December 20, v

6 CITY OF MERCEDES, TEXAS 400 South Ohio Mercedes, Texas Tel: (956) ELECTED OFFICIALS CITY COMMISSION Name Mr. Henry Hinojosa Mayor Mr. Ruben Guajardo Mayor Pro-Tem, Place #4 Mr. Leo Villarreal Commissioner, Place #1 Mr. James Howard Wade, Jr. Commissioner, Place #2 Ms. Cristella de Leon Hernandez Commissioner, Place #3 Term Expires (May) Occupation 2020 Retired 2019 Home Health 2020 Retired 2019 Retired 2020 Business Owner Name APPOINTED OFFICIALS Position Tenure With City Length of Service in Current Position Mr. Sergio Zavala City Manager 1 Year 1 Year Ms. Nereida Perez Finance Director 1 Year 1 Year Ms. Arcie Felix City Secretary 27 Years 27 Years CONSULTANTS AND ADVISORS Norton Rose Fulbright US LLP San Antonio, Texas RBC Capital Markets, LLC San Antonio, Texas Luis C. Orozco, CPA Pharr, Texas Bond Counsel Financial Advisor Independent Auditor vi

7 Official Statement: TABLE OF CONTENTS COVER PAGE i CERTIFICATES MATURITY SCHEDULE ii USE OF INFORMATION IN THE OFFICIAL STATEMENT iii SELECTED DATA FROM THE OFFICIAL STATEMENT iv CERTAIN CITY OFFICIALS vi TABLE OF CONTENTS vii INTRODUCTORY STATEMENT 1 THE CERTIFICATES 1 BOOK-ENTRY-ONLY-SYSTEM 4 DEFAULT AND REMEDIES 6 BOND INSURANCE 6 BOND INSURANCE RISK FACTORS 6 REGISTRATION, TRANSFER AND EXCHANGE 7 INVESTMENTS 8 TAX INFORMATION 10 TAX RATE LIMITATIONS 14 PENSION PLANS AND RETIREMENT FUND 14 TAX MATTERS 15 LITIGATION 16 REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE 17 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS 17 LEGAL MATTERS 17 RATINGS 18 AUTHENTICITY OF FINANCIAL INFORMATION 18 USE OF INFORMATION IN OFFICIAL STATEMENT 18 UNDERWRITING 18 FINANCIAL ADVISOR 18 FORWARD LOOKING STATEMENTS 18 CONTINUING DISCLOSURE OF INFORMATION 19 MISCELLANEOUS 20 Page Financial Information Regarding the City of Mercedes, Texas General Information Regarding the City of Mercedes, Texas and Hidalgo County, Texas Excerpts from the City of Mercedes Annual Financial Report Form of Bond Counsel s Opinion Appendix A Appendix B Appendix C Appendix D The Cover Page, Table of Contents, and Appendices attached hereto are part of the Official Statement [The remainder of this page intentionally left blank] vii

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9 PRELIMINARY OFFICIAL STATEMENT relating to $9,515,000* CITY OF MERCEDES, TEXAS (A political subdivision of the State of Texas located in Hidalgo County, Texas) Combination Tax and Limited Pledge Revenue Certificates of Obligation, Series 2018 INTRODUCTORY STATEMENT All financial and other information presented in this Official Statement, which includes the Appendices attached hereto, has been provided by the City of Mercedes, Texas (the City ) from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience will necessarily continue or be repeated in the future. There follows in this Official Statement a description of the Certificates and certain information about the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. A copy of such documents may be obtained upon request from the City and, during the offering period, from the Financial Advisor, upon request and upon payment of reasonable copying, handling, and delivery charges. Certain capitalized terms used in the Official Statement have meanings assigned to them in the ordinance authorizing issuance of the Certificates (the Ordinance ), to be adopted by the City Commission of the City (the City Commission ) on December 4, 2018, except as otherwise indicated herein. This Official Statement speaks only as to its date, and the information contained herein is subject to change. A copy of the final Official Statement pertaining to the Certificates will be deposited by the Underwriter with the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access ( EMMA ) system. See CONTINUING DISCLOSURE OF INFORMATION for a description of the City s undertaking to provide certain information on a continuing basis. General Description THE CERTIFICATES The Certificates will be dated December 1, 2018 (the Dated Date ), and will be issued in fully-registered form, in denominations of $5,000 or any integral multiple thereof within a maturity. Interest on the Certificates will accrue from the date of initial elivery of the Certificates and interest will be paid semiannually on February 15 and August 15 of each year, commencing August 15, 2019, until stated maturity or prior redemption. Interest on the Certificates will be calculated on the basis of a 360-day year composed of twelve 30-day months. The Certificates will mature on the dates and in the amounts as set forth on the inside cover page hereof. Principal and interest will be paid by U.S. Bank, N.A., Houston, Texas (the Paying Agent/Registrar ). Subject to the requirements associated with the use of the book-entry only system, interest will be paid by check dated as of the interest payment date and mailed first class, postage paid, on or before each interest payment date by the Paying Agent/Registrar to the registered owners (the Registered Owners ) appearing on the registration books of the Paying Agent/Registrar on the Record Date (herein defined), or by such other method acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense, of such Registered Owner. Principal will be paid to the Registered Owners at maturity or redemption upon presentation and surrender of the Certificates to the Paying Agent/Registrar. If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. The City will initially use the book-entry-only system of The Depository Trust Company ( DTC ), New York, New York, in regard to the issuance, payment and transfer of the Certificates. Such system will affect the timing and method of payment of the Certificates. See BOOK-ENTRY-ONLY SYSTEM herein. Purpose Proceeds from the sale of the Certificates will be used for (i) constructing street improvements (including utilities repair, replacement, and relocation), curbs, gutters, and sidewalk improvements, including drainage incidental thereto; (ii) constructing, acquiring, purchasing, renovating, enlarging, and improving the City s utility system; (iii) constructing drainage and storm drainage improvements; (iv) purchase of public safety vehicles and equipment, ambulances, emergency medical services vehicles and equipment, and public works vehicles and equipment; (v) the purchase of materials, supplies, equipment, machinery, landscaping, land, and rights-of-way for authorized needs and purposes relating to the aforementioned capital improvements; and (vi) the payment of professional services related to the design, construction, project management, and financing of the aforementioned capital improvements Authority for Issuance The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas, particularly the Certificate of Obligation act of 1971, as amended, Texas Local Government Code, Section 271, as amended, Chapter 1502, Texas Government Code, as amended, the City s Home Rule Charter, and the Ordinance. *Preliminary, subject to change. 1

10 Legality The Certificates are offered when, as and if issued, subject to the approval of legality by the Attorney General of the State of Texas and Norton Rose Fulbright US LLP, San Antonio, Texas, Bond Counsel (see LEGAL MATTERS herein). Security and Source of Payment The Certificates will constitute direct obligations of the City payable from the proceeds of an ad valorem tax levied against all taxable property within the City, within the limits prescribed by law, and from a limited pledge (not to exceed an aggregate total of $1,000) of the Net Revenues of the City s combined utility system (the System ), as provided in the Ordinance, such lien and pledge of the limited amount of Net Revenues (as defined in the Ordinance) being subordinate and inferior to the lien on and pledge of the Net Revenues which are or may be pledged to the payment of the currently outstanding Prior Lien Obligations and any Additional Prior Lien Obligations, Junior Lien Obligations, or Subordinate Lien Obligations hereafter issued by the City (each as described and defined in the Ordinance). The City previously authorized the issuance of the currently outstanding Limited Pledge Obligations that are payable from and secured by a lien on and pledge of certain Pledged Revenues as described in the ordinances authorizing the issuance of the currently outstanding Limited Pledge Obligations. In the Ordinance, the City has reserved the right to issue Additional Prior Lien Obligations, Junior Lien Obligations, Subordinate Lien Obligations, and Additional Limited Pledge Obligations without limitation as to principal amount but subject to any terms, conditions, or restrictions as may be applicable thereto under law or otherwise. See TAX RATE LIMITATIONS herein. Redemption The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2029, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2028, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. Selection of Certificates to be Redeemed 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. Notice of Redemption Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar 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 CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH CERTIFICATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. All notices of redemption will (i) specify the date of redemption for the Certificates, (ii) identify the Certificates to be redeemed and, in the case of a portion of the principal amount to be redeemed, the principal amount thereof to be redeemed, (iii) state the redemption price, (iv) state that the Certificates, or the portion of the principal amount thereof to be redeemed, will become due and payable on the redemption date specified, and the interest thereon, or on the portion of the principal amount thereof to be redeemed, will cease to accrue from and after the redemption date, and (v) specify that payment of the redemption price for the Certificates, or the principal amount thereof to be redeemed, will be made at the designated corporate trust office of the Paying Agent/Registrar only upon presentation and surrender thereof by the Registered Owner. If a Certificate is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given or waived as provided in the Ordinance, such Certificates (or the principal amount thereof to be redeemed) so called for redemption will become due and payable, and on the redemption date designated in such notice, interest on said Certificates (or the principal amount thereof to be redeemed) called for redemption will cease to accrue and such Certificates will not be deemed to be outstanding. The Paying Agent/Registrar and the City, so long as a Book-Entry-Only System is used for the Certificates, will send any notice of redemption, notice of proposed amendment to the Ordinance or other notices with respect to the Certificates only to DTC. Any failure by DTC to advise any DTC participant, or of any Direct Participant (defined herein) or Indirect Participant (defined herein) to notify the beneficial owner, shall not affect the validity of the redemption of the Certificates called for redemption or any other action premised on any such notice. Redemption of portions of the Certificates by the City will reduce the outstanding principal amount of such Certificates held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Certificates held for the account of DTC participants in accordance with its rules or other agreements with Direct Participants and then Direct Participants and Indirect Participants may implement a redemption of such Certificates from the beneficial owners. Any such selection of Certificates to be redeemed will not be governed by the Ordinance and will not be conducted by the City or the Paying Agent. Neither the City nor the Paying Agent/Registrar will have any responsibility to Direct Participants, Indirect Participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Certificates or the providing of notice to Direct Participants, Indirect Participants, or 2

11 beneficial owners of the selection of portions of the Certificates for redemption. (See THE CERTIFICATES Book-Entry-Only-System herein.) Defeasance of Certificates The Ordinance provides for the defeasance of the Certificates when payment of the principal of and premium, if any, on such Certificates, plus accrued interest thereon to the due date thereof (whether such due date be by stated maturity, redemption or otherwise), is provided for by irrevocably depositing with the paying agent or otherwise authorized escrow agent, in trust (1) money in an amount sufficient to make such payments and/or (2) Government Securities (hereinafter defined) certified, in the event of a net defeasance, by an independent public accounting firm of national reputation to be of such maturities and interest payment dates to bear interest at such rates as will, without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom (likewise to be held in trust and committed, except as hereinafter provided), be sufficient to make such payments; provided however, that no certification by an independent accounting firm of the sufficiency of deposits shall be required in connection with a gross defeasance of the Certificates. The City has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Government Securities for the Government Securities originally deposited, to reinvest the uninvested money on deposit for such defeasance and to withdraw for the benefit of the City money in excess of the amount required for such defeasance. The Ordinance provides that the term Government Securities means (i) direct noncallable obligations of the United States, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; or (iv) any additional securities and obligations hereafter authorized by the laws of the State as eligible for use to accomplish the discharge of obligations such as the Certificates. City officials are authorized to restrict such eligible securities as deemed appropriate. There is no assurance that the ratings for United States Treasury securities acquired to defease any Certificates, or those for any other Government Securities, will be maintained by any particular rating category. Further, there is no assurance that current State law will not be amended in a manner that expands or contracts the list of permissible Government Securities (such list consisting of those securities identified in clauses (i) through (iii) above), or any rating requirement thereon, that may be purchased with defeasance proceeds relating to the Certificates ( Defeasance Proceeds ), though the City has reserved the right to utilize any additional securities for such purpose in the event the aforementioned list is expanded. Because the Ordinance does not contractually limit such permissible Government Securities and expressly recognizes the ability of the City to use lawfully available Defeasance Proceeds to defease all or any portion of the Certificates, Registered Owners of Certificates are deemed to have consented to the use of Defeasance Proceeds to purchase such other Government Securities, notwithstanding the fact that such Government Securities may not be of the same investment quality as those currently identified under State law as permissible Government Securities. Upon such deposit as described above, such Certificates shall no longer be regarded to be outstanding or unpaid for purposes of applying any limitation on indebtedness or for purposes of taxation. After firm banking and financial arrangements for the discharge and final payment of the Certificates have been made as described above, all rights of the City to initiate proceedings to call the Certificates for redemption or take any other action amending the terms of the Certificates are extinguished; provided, however, that the City s right to redeem Certificates defeased to stated maturity is not extinguished if the City has reserved the option, to be exercised at the time of the defeasance of the Certificates, to call for redemption, at an earlier date, those Certificates which have been defeased to their stated maturity date, if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Certificates for redemption; (ii) gives notice of the reservation of that right to the Owners of the Certificates 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. Amendments The City may amend the Ordinance without the consent of or notice to any registered owners in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, or formal defect or omission therein. In addition, the City may, with the written consent of the holders of a majority in aggregate principal amount of the Certificates then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Ordinance; except that, without the consent of the registered owners of all of the Certificates affected, no such amendment, addition, or rescission may (1) change the date specified as the date on which the principal of or any installment of interest on any Certificate is due and payable, reduce the principal amount thereof, or the rate of interest thereon, change the place or places at or the coin or currency in which any Certificate or interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Certificates, (2) give any preference to any Certificate over any other Certificate, or (3) reduce the aggregate principal amount of Certificates required for consent to any amendment, addition, or waiver. Record Date The record date ("Record Date") for determining the person to whom the interest is payable on the Certificates on any interest payment date means the last business day of the month next preceding the date that each interest payment is due. 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. 3

12 Notice of the Special Record Date and of the scheduled payment date of the past due interest (the "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 owner of a Certificate appearing on the books of the Paying Agent/Registrar at the close of business on the last day next preceding the date of mailing of such notice. Limitation on Transfer of Certificates Neither the City nor the Paying Agent/Registrar shall be required to make any such transfer, conversion or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date or (ii) with respect to any Certificate or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date; provided, however, that such limitation shall not apply to uncalled portions of a Certificate redeemed in part. Payment Record The City has never defaulted on general obligation bonds since refunding bonds were issued at par for original indebtedness under a forced refunding which involved a reduction in interest rate. However in 1941, all bonds were again refunded at par pursuant to a Federal Court decree entered in a proceeding filed under the Municipal Composition Act, such decree providing for the settlement of 3% interest coupons due May 1, 1941 on the basis of 1½ %. Since the 1941 refunding, the City retired $582,000 in principal at varying discounts pursuant to bonds tendered in accordance with the plan of refunding. On April 24, 1961, the Federal Court decree covering this issue was dismissed and the balance of $475,000 refunded by an issue dated May 1, 1961 is now retired. Sources and Uses of Funds The following table shows the estimated sources and uses of the proceeds of the Certificates: Sources: Uses: Principal Amount of the Certificates [Net] Original Issue Reoffering Premium/Discount on the Certificates Total Sources of Funds Deposit to Project Fund Costs of Issuance and Underwriter s Discount Total Uses of Funds BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ( DTC ), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the book-entry-only system has been provided by DTC for use in disclosure documents such as this Official Statement. The City, the Financial Advisor and the Underwriter 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 Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Certificate will be issued for each maturity of the Certificates, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 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 whollyowned 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 industries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and 4

13 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 S&P Global Ratings rating of AA+. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC s records. The ownership interest of each actual purchaser of each Certificate ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Certificates representing their ownership interests in Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC s records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, defaults, and proposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within 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. (nor any other DTC nominee) will consent or vote with respect to Certificates 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 Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). All payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the City or Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments on the Certificates to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Certificates 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 Certificates are in the Book Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book Entry Only-System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Information concerning DTC and DTC s book entry 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 Underwriter. 5

14 DEFAULT AND REMEDIES If the City defaults in the payment of principal or interest on the Certificates when due, or if it fails to make payments into any fund or funds created in the Ordinance, or defaults in the observation or performance of any other covenants, conditions, or obligations set for in the Ordinance, the registered owners may seek a writ of mandamus to compel City officials to carry out their legally imposed duties with respect to the Certificates if there is no other available remedy at law to compel performance of the Certificates or Ordinance and the City s obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, and with the discretion of the court, but may not be arbitrarily refused There is no acceleration of maturity of the Certificates in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinance does not provide for the appointment of a trustee to represent the interest of the certificateholders upon any failure of the City to perform in accordance with the terms of the Ordinance, 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. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia 197 S.W.3d 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in clear and unambiguous language. Furthermore, Tooke, and subsequent jurisprudence, held that a municipality is not immune from suit for torts committed in the performance of its proprietary functions, as it is for torts committed in the performance of its governmental functions (the Proprietary-Governmental Dichotomy ). Governmental functions are those that are enjoined on a municipality by law and are given by the State as a part of the State s sovereignty, to be exercised by the municipality in the interest of the general public, while proprietary functions are those that a municipality may, in its discretion, perform in the interest of the inhabitants of municipality. In Wasson Interests, Ltd., v. City of Jacksonville, 489 S.W.3d (Tex. 2016) ( Wasson ) the Texas Supreme Court (the Court ) addressed whether the distinction between governmental and proprietary acts (as found in tort-based causes of action) applies to breach of contract claims against municipalities. The Court analyzed the rationale behind the Proprietary-Governmental Dichotomy to determine that a city s proprietary functions are not done pursuant to the will of the people and protecting such municipalities via the [S]tate s immunity is not an efficient way to ensure efficient allocation of [S]tate resources. While the Court recognized that the distinction between government and proprietary functions is not clear, the Wasson opinion held that Proprietary-Governmental Dichotomy applies in contract-claims context. The Court reviewed Wasson again in June 2018 and clarified that to determine whether governmental immunity applies to a breach of contract claim, the proper inquiry is whether the municipality was engaged in a governmental or proprietary function when it entered into the contract, not at the time of the alleged breach. Therefore, in regard to municipal contract cases (as in tort claims), it is incumbent on the courts to determine whether a function was proprietary or governmental based upon the statutory guidance at the time of inception of the contractual relationship. Therefore, in regard to municipal contract cases (as in tort claims), it is incumbent on the courts to determine whether a function was proprietary or governmental based upon the statutory guidance and definitions found in the Texas Civil Practice and Remedies Code. Notwithstanding the foregoing new case law issued by the Court, such sovereign immunity issues have not been adjudicated in relation to bond matters (specifically, in regard to the issuance of municipal debt). Each situation will be prospectively evaluated based on the facts and circumstances surrounding the contract in question to determine if a suit, and subsequently, a judgment, is justiciable against a municipality. 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 Certificates. 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 obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or certificateholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors and general principles of equity that permit the exercise of judicial discretion. BOND INSURANCE The City has applied for a bond insurance policy to guarantee the scheduled payment of principal of and interest on the Certificates. The City has yet to determine whether an insurance policy will be purchased on the Certificates. If an insurance policy is purchased from a bond insurance company (the Insurer ), the following are risk factors relating to bond insurance. BOND INSURANCE RISK FACTORS In the event of default of the scheduled payment of principal of or interest on the Certificates when all or a portion thereof becomes due, any owner of the Certificates shall have a claim under the Policy for such payments. The payment of principal and interest in connection with mandatory or optional prepayment of the Certificates by the City which is recovered by the City from the beneficial owners as a voidable preference under applicable bankruptcy law is covered by the Policy; however, such payments will be made by the Insurer at such time and in such amounts as would have been due absent such prepayment by the City (unless the Insurer chooses to pay such amounts at an earlier date). Payment of principal of and interest on the Certificates is not subject to acceleration, but other legal remedies upon the 6

15 occurrence of non-payment do exist (see DEFAULT AND REMEDIES ). The Insurer may reserve the right to direct the pursuit of available remedies and, in addition, may reserve the right to consent to any remedies available to and requested by the beneficial owners. In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Certificates are payable from the ad valorem tax levied, within the limitations prescribed by law, on all taxable property located within the City, as further described under THE CERTIFICATES Security and Source of Payment. In the event the Insurer becomes obligated to make payments with respect to the Certificates, no assurance is given that such event will not adversely affect the market price or the marketability (liquidity) of the Certificates. If a Policy is acquired, the enhanced long-term rating on the Certificates will be dependent on the financial strength of the Insurer and its claims paying ability. The Insurer s financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance can be given that the long-term ratings of the Insurer and of the rating on the Certificates, whether or not subject to the Policy, will not be subject to downgrade and such event could adversely affect the market price or the marketability (liquidity) for the Certificates. See the disclosure described in RATINGS herein. The obligations of the Insurer under the Policy are general obligations of the Insurer and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or other laws related to insolvency. Claims-Paying Ability and Financial Strength of Municipal Bond Insurers Moody s Investors Services, Inc., S&P Global Ratings, and Fitch Ratings, Inc. (the Rating Agencies ) have, in recent years, downgraded and/or placed on negative watch the claims-paying and financial strength of most providers of municipal bond insurance. Additional downgrades or negative changes in the rating outlook for all bond insurers are possible. In addition, recent events in the credit markets have had substantial negative effects on the bond insurance business. These developments could be viewed as having a material adverse effect on the claims-paying ability of such bond insurers, including any bond insurer of the Certificates. Thus, when making an investment decision, potential investors should carefully consider the ability of the City to pay principal and interest on the Certificates and the claimspaying ability of any such bond insurer, particularly over the life of the Certificates. None of the City, the Financial Advisor, or the Underwriter have made an independent investigation into the claims paying ability of the Insurer and no assurance or representation regarding the financial strength or projected financial strength of the Insurer is given. Successor Paying Agent/Registrar REGISTRATION, TRANSFER AND EXCHANGE The initial Paying Agent/Registrar is U.S. Bank, N.A., Houston, Texas. In the Ordinance, the City retains the right to replace the Paying Agent/Registrar for the Certificates. If a Paying Agent/Registrar is replaced by the City, such Paying Agent/Registrar, promptly upon the appointment of its successor, is required to deliver the registration records to the successor Paying Agent/Registrar. Any successor Paying Agent/Registrar selected by the City shall be a commercial bank, trust company or other entity duly qualified and legally authorized to serve as and perform the duties of Paying Agent/Registrar. Upon any change in the Paying Agent/Registrar for the Certificates, the City shall promptly cause a written notice of such change to be sent to each registered owner of the Certificates affected by the change, by United States mail, first class postage prepaid, which notice shall give the address for the new Paying Agent/Registrar. Principal of the Certificates will be payable to the registered owner at maturity or prior redemption upon presentation at the principal office of the Paying Agent/Registrar. Interest on the Certificates shall be paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (see THE CERTIFICATES-Record Date herein), and such interest shall be paid (i) by check sent by United States Mail, first class postage prepaid to the address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, legal holiday or day when banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday or day when banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. So long as Cede & Co. is the registered owner of the Certificates, payments of principal and interest on the Certificates will be made as described in BOOK-ENTRY-ONLY SYSTEM herein. Future Registration In the event the use of the Book-Entry-Only System for the Certificates should be discontinued, printed security certificates will be delivered to the Registered Owners of the Certificates affected thereby and thereafter such Certificates may be transferred, registered and assigned on the registration books only upon presentation and surrender of such printed security certificates to the Paying Agent/Registrar, and such registration and transfer 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 and transfer. The Certificates may be assigned by the execution of an assignment form on the Certificates or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Certificates will be delivered by the Paying Agent/Registrar in lieu of the Certificates being transferred or exchanged at the designated office of the Paying Agent/Registrar, or sent by United States registered mail to the new Registered Owner at the Registered Owner s 7

16 request, risk and expense. To the extent possible, new security certificates issued in an exchange or transfer of Certificates will be delivered to the Registered Owner or assignee of the owner in not more than three (3) business days after the receipt of the Certificates to be canceled in the exchange or transfer and the written instrument of transfer or request for exchange duly executed by the owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New security certificates registered and delivered in an exchange or transfer shall be in denominations of $5,000 of principal amount for any one maturity or any integral multiple thereof and for a like aggregate principal amount as the Certificates surrendered for exchange or transfer (see BOOK-ENTRY-ONLY SYSTEM herein). Limitation on Transfer of Certificates Neither the City nor the Paying Agent/Registrar shall be required to make any such transfer, conversion or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date or (ii) with respect to any Certificate or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date; provided, however, that such limitation shall not apply to uncalled portions of a Certificate redeemed in part. Mutilated, Destroyed, Lost, or Stolen Certificates If any Certificate is mutilated, destroyed, stolen or lost, a new Certificate in the same principal amount as the Certificate so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Certificate, such new Certificate will be delivered only upon surrender and cancellation of such mutilated Certificate. In the case of any Certificate issued in lieu of and in substitution for a Certificate which has been destroyed, stolen or lost, such new Certificate will be delivered only (a) upon filing with the City and the Paying Agent/Registrar evidence satisfying to them that such Certificate has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the City and the Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication and delivery of a new Certificate must pay such expenses as the Paying Agent/Registrar may incur in connection therewith. INVESTMENTS The City invests its investable funds in investments authorized by Texas law, including Chapter 2256, as amended, Texas Government Code (the Texas Public Funds Investment Act ), and 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. See Table 10 Current Investments in Appendix A. Legal Investments Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (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) interest-bearing banking deposits that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund or their respective successors, or otherwise meeting the requirements of the Texas Public Funds Investment Act; (8) certificates of deposit and share certificates that (i) are issued by or through an institution that has its main office or a branch in Texas and (a) are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund or their respective successors, (b) are secured as to principal by obligations described in clauses (1) through (7) above, or (c) secured in any other manner and amount provided by law for City deposits, or (ii) certificates of deposit where (a) the funds are invested by the City through 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 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, an entity as described by Section (d) of the Texas Government Code, or a clearing brokerdealer registered with the United States Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 as custodian for the City with respect to the certificates of deposit issued for the account of the City; (9) fully collateralized repurchase agreements that (i) have a defined termination date, (ii) are fully secured by a combination of cash and obligations described in clause (1), (iii) require the securities being purchased by the City or cash held by the City to be pledged to the City, held in the City s name and deposited at the time the investment is made with the City or with a third party selected and approved by the City, and (iv) are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (10) 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 (7) 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 (7) above and clauses (12) through (15) below, (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; (11) certain bankers acceptances if the bankers acceptance (i) has a stated maturity of 270 days or fewer from the date of issuance, (ii) will be, in accordance with its terms, liquidated in full at maturity, (iii) 8

17 is eligible for collateral for borrowing from a Federal Reserve Bank, and (iv) is accepted by a State or Federal bank, if the short-term obligations of the accepting bank or its holding company (if the accepting bank is the largest subsidiary) are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency; (12) commercial paper with (i) a stated maturity of 270 days or less from the date of issuance, and (ii) a rating of 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; (13) no-load money market mutual funds that are (i) registered with and regulated by the United States Securities and Exchange Commission, (ii) provide the City with a prospectus and other information required by the Securities and Exchange Act of 1934; and (iii) comply with Federal Securities and Exchange Commission Rule 2a-7; (14) no-load mutual funds that are (i) registered with the United States Securities and Exchange Commission, (ii) have an average weighted maturity of less than two years, and (iii) either (a) have a duration of one year or more and are invested exclusively in obligations described in this paragraph, or (b) have a duration of less than one year and the investment portfolio is limited to investment grade securities, excluding asset- backed securities; (15) investment pools if the City has authorized investment in the particular pool and the pool invests solely in investments permitted by the Texas Public Funds Investment Act, and is continuously rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service; and (16) guaranteed investment contracts that (i) have a defined termination date, (ii) are secured by obligations which meet the requirements of the Texas Public Funds Investment Act in an amount at least equal to the amount of bond proceeds invested under such contract, and (iii) are pledged to the City and deposited with the City or with a third party selected and approved by the City. 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 final stated maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Investment Policies Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that 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. 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 investment officers of the City 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, and any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) the investment strategy expressed in the City s investment policy, and (b) the Public Funds Investment Act. No person may invest City funds without express written authority from the City Commission. Additional Provisions Under Texas law, the City is additionally required to: (1) annually review its adopted policies and strategies, (2) adopt an 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 said order or resolution, (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the City to disclose the relationship and file a statement with the Texas Ethics Commission and the City; (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, or other 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 repurchase agreement; (8) restrict the investment in mutual funds in the aggregate to no more than 80% of the City s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in non-money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no 9

18 more than 15% of the City s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in no-load money market mutual funds of any portion of bond proceeds reserves and funds held for debt service to no more than 15% of the entity s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to confirm 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. Property Tax Code and County-Wide Appraisal District TAX INFORMATION The Texas Property Tax Code (the Tax Code ) provides for county wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district and an appraisal review board responsible for appraising property for all taxable units within the county. The Hidalgo County Appraisal District (the Appraisal District ) is responsible for appraising property within the City generally as of January 1 of each year. The appraisal values set by the Appraisal District are subject to review and change by the Hidalgo County Appraisal Review Board (the Appraisal Review Board ) which is appointed by the Appraisal District. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the City in establishing its tax roll and tax rate. Property Subject to Taxation by the City Except for certain exemptions provided by Texas law, all real and certain tangible personal property with a tax situs in the City are subject to taxation by the City. Principal categories of exempt property (including certain exemptions which are subject to local option by the City Commission) include property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which the City has agreed to abate ad valorem taxes, certain household goods, family supplies and personal effects; farm products owned by the producers; certain property of a non-profit corporation used in scientific research and educational activities benefiting a college or university, and designated historical sites. Other principal categories of exempt property include tangible personal property not held or used for production of income, solar and wind-powered energy devices; most individually owned automobiles; certain varying amounts of valuation attributable to residential homesteads of persons ages 65 or over and property of disabled veterans or their surviving spouses or children; and certain classes of intangible property. Owners of agricultural and open space land, under certain circumstances, may request valuation of such land on the basis of productive capacity rather than market value. Valuation of Property for Taxation Generally, property in the City must be appraised by the Appraisal District at market value as of January 1 of each year. In determining the 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. Oil and gas reserves are assessed on the basis of pricing information in either the standard edition of the Annual Energy Outlook or, if the most recently published edition of the Annual Energy Outlook was published before December 1 of the preceding calendar year, the Short-Term Energy Outlook report published in January of the current calendar year. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the City in establishing its tax rolls and tax rate. Assessments under the Tax Code are to be based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied. Article VIII of the Texas Constitution and the Tax Code permits land designated for agricultural use (Section 1-d), open space or timberland (Section 1-d-1) to be appraised at the lesser of its value based on the land s capacity to produce agricultural or timber products or its market value. Landowners wishing to avail themselves of the agricultural use designation must apply for the designation, and the appraiser is required by the Tax Code to act on each claimant s right to the designation individually. If a claimant receives the agricultural use designation and later loses it by changing the use of the property or selling it to an unqualified owner, the City can collect taxes based on the new value, including three (3) years for agricultural use and five (5) years for agricultural open space land and timberland prior to the loss of the designation. The same land may not be qualified under both Section 1-d and 1-d-1. State law requires the appraised value of a residence homestead to be based solely on the property s value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. State law further limits the appraised value of a residence homestead for a tax year to be an amount not to exceed the lesser of (1) the market value of the property or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property. The Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three (3) years. The City, at its expense, has the right to obtain from the Appraisal District a current estimate of appraised values within the City or an estimate of any new property or improvements within the City. While such current estimate of appraised values may serve to indicate the rate and extent of growth of taxable values within the City, it cannot be used for establishing a tax rate within the City until such time as the Appraisal District chooses to formally include such values on its appraisal roll. 10

19 Under Article VIII and State Law the governing bodies of counties, cities, towns or junior college districts are authorized to establish an ad valorem tax freeze on residence homesteads of the disabled and persons sixty-five years of age or older. This tax freeze can be implemented by official action of a governing body, or pursuant to an election called by the governing body upon receipt of a petition signed by 5% of registered voters of the political subdivision. If the tax limitation is established, the total amount of ad valorem taxes imposed by the City on a homestead that receives the exemption may not be increased while it remains the residence homestead of that person or that person s spouse who is disabled or sixty-five years of age or older, except to the extent the value of the homestead is increased by improvements other than repairs. If a disabled or elderly person dies in a year in which the person received a residence homestead exemption, the total amount of ad valorem taxes imposed on the homestead by the taxing unit may not be increased while it remains the residence homestead of that person s surviving spouse if (i) the taxpayer died in a year in which he qualified for the exemption, (ii) the surviving spouse was at least 55 years of age when the taxpayer died, and (iii) the property was the residence homestead of the surviving spouse when the taxpayer died and the property remains the residence homestead of the surviving spouse. In addition, the Texas Legislature by general law may provide for the transfer of all or a proportionate amount of the tax limitation applicable to a person s homestead to be transferred to the new homestead of such person if the person moves to a different residence within the taxing unit. Once established, the governing body of the taxing unit may not repeal or rescind the tax limitation. Residential Homestead Exemptions Under Section 1-b, Article VIII of the Texas Constitution, 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. 2. An exemption of up to 20% of the market value of residence homesteads; minimum exemption $5,000. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. 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. Furthermore, the surviving spouse of a deceased veteran who had received a disability rating of 100% is entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. A partially disabled veteran or the surviving spouse of a partially disabled veteran is entitled to an exemption equal to the percentage of the veteran s disability, if the residence was donated to the disabled veteran by a charitable organization at no cost to the disabled veteran, or at some cost to the disabled veteran in the form of a cash payment, a mortgage, or both in an aggregate amount that is not more than 50% of the good faith estimate of the market value of the residence homestead made by the charitable organization as of the date the donation is made. Such exemption is transferable to a different property of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on the prior residence in the last year in which such exemption was received. The surviving spouse of a member of the armed forces who is killed in action is entitled to a property tax exemption for all or a part of the market value of such surviving spouse s residence homestead, if the surviving spouse has not remarried since the service member s death and said property was the service member s residence homestead at the time of death. Such exemption is transferable to a different property of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on the prior residence in the last year in which such exemption was received. The surviving spouse of a first responder who is killed or fatally injured in the line of duty is entitled to a property tax exemption for all or part of the market value of such surviving spouse s residence homestead, if the surviving spouse has not remarried since the service member s death and said property was the service member s residence homestead at the time of the death. Such exemption is transferable to a different property of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on the prior residence in the last year in which such exemption was received. Exemptions for Freeport Goods and Goods-in-Transit 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 11

20 years 2008 and thereafter, Article VIII, Section 1- n of the Texas Constitution provides for an exemption from taxation for "goods-intransit", 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-intransit during the following tax year. A taxpayer may obtain only a freeport exemption or a goods-in-transit exemption for items of personal property. Senate Bill 1, passed by the 82nd Texas Legislature, 1st Called Session, requires again that the governmental entities take affirmative action prior to December 31, 2011 to continue its taxation of goods-in-transit in the 2012 tax year and beyond. Pollution Control Article VIII, Section 1-l, provides for the exemption from ad valorem taxation of certain property used to control the pollution of air, water, or land. A person is entitled to an exemption from taxation of all or part of real and personal property that the person owns and that is used wholly or partly as a facility, device or method for the control of air, water or land pollution. Tax Abatement The City may designate areas within the City as a reinvestment zone. Thereafter, the City may enter into tax abatement agreements with owners of property within the zone. Prior to entering into a tax abatement agreement, each entity must adopt guidelines and criteria for establishing tax abatement, which each entity with taxing authority over the property will follow in granting tax abatement to owners of property. The tax abatement agreement may exempt from ad valorem taxation by each of the applicable taxing jurisdictions, including the City, for a period of up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with the terms of the tax abatement. The terms of all tax abatement agreements must be substantially the same. Cities are also authorized, pursuant to Chapter 380, Texas Local Government Code ( 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, the 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. Tax Increment Financing Reinvestment Zones The City may create one or more tax increment financing reinvestment zones within the City ( TIRZ ), 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 TIRZ. Other overlapping taxing units levying taxes in the TIRZ may agree to contribute all or part of future ad valorem taxes levied and collected against the value of property in the TIRZ in excess of the frozen values to pay or finance the costs of certain public improvements in the TIRZ. Taxes levied by the City against the values of real property in the TIRZ in excess of the frozen value are not available for general City use but are restricted to paying or financing project costs within the TIRZ. City and Taxpayer Remedies Under certain circumstances, taxpayers and taxing units, including the City, may appeal the orders of the Appraisal Review Board by filing a timely petition for review in district court within 45 days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury, if requested by any party, or through binding arbitration, if requested by the taxpayer. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Tax Code. The Tax Code sets forth notice and hearing procedures for certain tax rate increases by the City and provides for taxpayer referenda that could result in the repeal of certain tax increases. The Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property value, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. The Financial Institutions Act of 1989 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ( FIRREA ), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ( FDIC ). Under FIRREA, real property held by the FDIC is still subject to ad valorem taxation, but such act states that (i) no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary lien shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real property tax when due, (iii) no personal property owned by FDIC is subject to ad valorem taxation, and (iv) notwithstanding failure of a person to challenge an appraisal in accordance with State law, such value shall be determined as of the period for which such tax is imposed. As of the date hereof, the City is not aware of any significant properties in the City which are under the control of the FDIC, however, real property could come under their control while acting as the receiver of an insolvent financial institution. Accordingly, to the extent the 12

21 FIRREA provisions are valid and applicable to property in the City, and to the extent that the FDIC attempts to enforce the same, the provisions may affect the time at which the City can collect taxes on property owned by the FDIC, if any, in the City. Levy and Collection of Taxes The City is responsible for the levy and collection of its taxes unless it elects to transfer such functions to another governmental entity. By the later of September 30 or 60 days after the certified appraisal roll is delivered to the City, the rate of taxation is set by the City based upon the valuation of property within the City as of the preceding January 1. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs a penalty of six percent (6%) of the amount of the tax for the first calendar month it is delinquent, plus one percent (1%) for each additional month or portion of a month the tax remains unpaid prior to July 1 of the year in which it becomes delinquent. If the tax is not paid by July 1 of the year in which it becomes delinquent, the tax incurs a total penalty of twelve percent (12%) regardless of the number of months the tax has been delinquent and incurs an additional penalty of up to twenty percent (20%) if imposed by the City. The delinquent tax also accrues interest at a rate of one percent (1%) for each month or portion of a month it remains unpaid. The Tax Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances. The City does not allow split payments or discounts. City s Rights in the Event of Tax Delinquencies Taxes levied by the City are a personal obligation of the owner of the property as of January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the City, having power to tax the property. The City s tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the City is determined by applicable federal law. Personal property, under certain circumstances, is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the City may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the City must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two (2) years after the purchaser s deed issued at the foreclosure sale is filed in the City records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. Federal bankruptcy law provides that an automatic stay of actions 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. Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Month Penalty Interest Total February 6% 1% 7% March April May June July An additional 20% penalty to defray attorneys fees is added each month commencing July 1. 2 Interest continues to accrue after July 1 at a rate that increases 1% per month until paid. After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 20% attorney s collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City s lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. 13

22 City Application of Property Tax Code The City has implemented a tax freeze for persons 65 years of age or older and the disabled. 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 City has not granted an additional exemption of 20% of the market value of residence homesteads. See Table 1 in Appendix A for a listing of the amounts of the exemptions described above. 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. The City does not permit split payments, and discounts are not allowed. The City does not tax freeport property. On December 6, 2011, the City Commission adopted a resolution authorizing the continued taxation of goods-in-transit for the 2012 tax year and beyond. The City does not collect the additional one-half cent sales tax for reduction of ad valorem taxes. TAX RATE LIMITATIONS 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 assessed valuation for all City purposes. The City operates under a Home Rule Charter which does not further limit the constitutional provisions. Administratively, the Attorney General of the State of Texas will permit allocation of $1.50 of $2.50 maximum tax rate for all general obligation debt service calculated at the time of issuance based upon 90% tax collections. The issuance of the Certificates does not violate this constitutional provision or the Texas Attorney General's administrative policy. Section of the Texas Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Furthermore, Section provides the City Commission may not adopt a tax rate that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings are held on the proposed tax rate following a notice of such public hearing (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. Effective tax rate means the rate that will produce last year s total taxes for maintenance and operations and debt service (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 total taxes for maintenance and operations (adjusted from this year s values) 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 Texas Tax Code provides that certain cities and counties in the state may submit a proposition to the voters to authorize an additional onehalf cent sales tax on retail sales or taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. The City has not authorized the additional onehalf cent sales tax. Reference is made to the Texas Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PENSION PLANS AND RETIREMENT FUND All qualified employees of the City are members of the Texas Municipal Retirement System ( TMRS ). Covered employees of the City contribute 7% of gross covered salary. The City s contribution is determined annually by actuarial study as a percent of gross covered payroll. 14

23 For the calendar year 2017, the rate was 19.31%. For additional information, refer to the notes to the Financial Statements for the year ended September 30, 2017, in Appendix C herein. In June 2012, Government Accounting Standards Board (GASB) Statement No. 68 (Accounting and Financial Reporting for Pensions) was issued to improve accounting and financial reporting by state and local governments regarding pensions. GASB Statement No. 68 requires reporting entities, such as the City, to recognize their proportionate share of the net pension liability and operating statement activity related to changes in collective pension liability. This means that reporting entities, such as the City, that contribute to the TMRS pension plan will report a liability on the face of their government-wide financial statements. Such reporting began with the City s fiscal year ended September 30, GASB Statement No. 68 applies only to pension benefits and does not apply to Other Post-Employment Benefits. Tax Exemption TAX MATTERS The delivery of the Certificates is subject to the opinion of Norton Rose Fulbright US LLP, San Antonio, Texas, Bond Counsel, to the effect that interest on the Certificates for federal income tax purposes (1) is excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof (the Code ), of the owners thereof pursuant to section 103 of the Code and existing regulations, published rulings, and court decisions, and (2) will not be included in computing the alternative minimum taxable income of the owners thereof. The statute, regulations, rulings, and court decisions on which such opinion is based are subject to change. A form of Bond Counsel s opinion appears in Appendix D hereto. In rendering the foregoing opinions, Bond Counsel will rely upon representations and certifications of the City made in a certificate of even date with the initial delivery of the Certificates pertaining to the use, expenditure, and investment of the proceeds of the Certificates and will assume continuing compliance with the provisions of the Ordinance by the City subsequent to the issuance of the Certificates. The Ordinance contains covenants by the City with respect to, among other matters, the use of the proceeds of the Certificates and the facilities and equipment financed or refinanced therewith by persons other than state or local governmental units, the manner in which the proceeds of the Certificates are to be invested, if required, the calculation and payment to the United States Treasury of any arbitrage profits and the reporting of certain information to the United States Treasury. Failure to comply with any of these covenants may cause interest on the Certificates to be includable in the gross income of the Registered Owners thereof from the date of the issuance of the Certificates. Except as described above, Bond Counsel will express no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Bond Counsel s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Internal Revenue Service (the IRS ) with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel s opinion is not binding on the IRS. The IRS has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the IRS is likely to treat the City as the taxpayer, and the owners of the Certificates would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Certificates, the City may have different or conflicting interests from the owners of the Certificates. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit, regardless of its ultimate outcome. Tax Changes Existing law may change to reduce or eliminate the benefit to certificateholders of the exclusion of interest on the Certificates from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Certificates. Prospective purchasers of the Certificates should consult with their own tax advisors with respect to any proposed or future changes in tax law. Ancillary Tax Consequences Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations such as the Certificates may result in collateral federal tax consequences to, among others, financial institutions (see Qualified Tax-Exempt Obligations herein), property and casualty insurance companies, life insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of an interest in a FASIT, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Tax Accounting Treatment of Discount Certificates The initial public offering price to be paid for certain Certificates may be less than the amount payable on such Certificates at maturity (the Discount Certificates ). An amount equal to the difference between the initial public offering price of a Discount Certificate (assuming that a substantial amount of the Discount Certificates of that maturity are sold to the public at such price) and the amount payable at maturity constitutes original issue discount to the initial purchaser of such Discount Certificates. A portion of such original issue discount, allocable to the holding period of a Discount Certificate by the initial purchaser, will be treated as interest for federal income tax purposes, excludable from 15

24 gross income on the same terms and conditions as those for other interest on the Certificates. Such interest is considered to be accrued actuarially in accordance with the constant interest method over the life of a Discount Certificate, taking into account the semiannual compounding of accrued interest, at the yield to maturity on such Discount Certificate and generally will be allocated to an initial purchaser in a different amount from the amount of the payment denominated as interest actually received by the initial purchaser during his taxable year. However, such accrued interest may be required to be taken into account in determining the amount of the branch profits tax applicable to certain foreign corporations doing business in the United States, even though there will not be a corresponding cash payment. In addition, the accrual of such interest may result in certain other collateral federal income tax consequences to, among others, financial institutions (see Qualified Tax-Exempt Obligations herein), property and casualty insurance companies, life insurance companies, S corporations with subchapter C earnings and profits, owners of an interest in a FASIT, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. In the event of the sale or other taxable disposition of a Discount Certificate prior to maturity, the amount realized by such owner in excess of the basis of such Discount Certificate in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Discount Certificate was held) is includable in gross income. Purchasers of Discount Certificates should consult with their own tax advisors with respect to the determination for federal income tax purposes of accrued interest upon disposition of Discount Certificates and with respect to the state and local tax consequences of owning Discount Certificates. It is possible that, under applicable provisions governing determination of state and local income taxes, accrued interest on the Discount Certificates may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment. Tax Accounting Treatment of Premium Certificates The initial public offering price to be paid for certain Certificates may be greater than the stated redemption price on such Certificates at maturity (the Premium Certificates ). An amount equal to the difference between the initial public offering price of a Premium Certificate (assuming that a substantial amount of the Premium Certificates of that maturity are sold to the public at such price) and its stated redemption price at maturity constitutes premium to the initial purchaser of such Premium Certificates. The basis for federal income tax purposes of a Premium Certificate in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium with respect to the Premium Certificates. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Certificate. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser s yield to maturity. Purchasers of Premium Certificates should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Certificates for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Certificates. Qualified Tax-Exempt Obligations Section 265 of the Code provides, in general, that interest expense to acquire or carry tax-exempt obligations is not deductible from the gross income of the owner of such obligations. In addition, section 265 of the Code generally disallows 100% of any deduction for interest expense which is incurred by financial institutions described in such section and is allocable, as computed in such section, to tax-exempt interest on obligations acquired after August 7, Section 265(b) of the Code provides an exception to this interest disallowance rule for financial institutions, stating that such disallowance does not apply to interest expense allocable to tax-exempt obligations (other than private activity bonds that are not qualified 501(c)(3) bonds) which are properly designated by an issuer as qualified tax-exempt obligations. An issuer may designate obligations as qualified tax-exempt obligations only if the amount of the issue of which they are a part, when added to the amount of all other tax-exempt obligations (other than private activity bonds that are not qualified 501(c)(3) obligations and other than certain current refunding bonds) issued or reasonably anticipated to be issued by the issuer during the same calendar year, does not exceed $10,000,000. The City will designate the Certificates as qualified tax-exempt obligations within the meaning of section 265(b) of the Code. In furtherance of that designation, the City will covenant to take such action that would assure, or to refrain from such action that would adversely affect, the treatment of the Certificates as qualified tax-exempt obligations. LITIGATION In the opinion of various officials of the City, there is no litigation or other proceeding pending against or, to their knowledge, threatened against the City in any court, agency, or administrative body (either state or federal) wherein an adverse decision would materially adversely affect the financial condition of the City. At the time of the initial delivery of the Certificates, the City will provide the Underwriter with a certificate to the effect that no litigation of any nature has been filed or is then pending challenging the issuance of the Certificates or that affects the payment and security of the Certificates or in any other manner questioning the issuance, sale or delivery of the Certificates. 16

25 REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE The sale of the Certificates has not been registered under the Securities Act of 1933, as amended, in reliance upon exemptions provided in such Act; the Certificates have not been qualified under the Securities Act of Texas in reliance upon exemptions contained therein; nor have the Certificates been qualified under the securities acts of any other jurisdiction. The City assumes no responsibility for qualification of the Certificates under the securities laws of any jurisdiction in which they may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions. It is the obligation of the Underwriter to register or qualify the sale of the Certificates under the securities laws of any jurisdiction which so requires. The City has agreed to cooperate, at the Underwriter s written request and sole expense, in registering or qualifying the Certificates or in obtaining an exemption from registration or qualification in any state where such action is necessary; provided, however, that the City shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Securities Procedures Act (Chapter 1201, Texas Government Code) provides that the Certificates 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 Certificates by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Certificates be assigned a rating of at least A or its equivalent as to investment quality by a national rating agency. See RATINGS herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Certificates are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. The Certificates 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. The City has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Certificates for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Certificates for such purposes. The City has made no review of laws in other states to determine whether the Certificates are legal investments for various institutions in those states. LEGAL MATTERS The delivery of the Certificates is subject to the approval of the Attorney General of Texas to the effect that the Certificates are valid and legally binding obligations of the City and the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Certificates 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 form of Bond Counsel s opinion is attached hereto as Appendix D. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates are contingent upon the sale and delivery of the Certificates. The legal opinion of Bond Counsel will accompany the Certificates deposited with DTC or will be printed on the definitive bonds in the event of the discontinuance of the Book-Entry-Only System. Certain legal matters will be passed upon for the Underwriter by The Perez Law Firm, PLLC, Pharr, Texas, counsel for the Underwriter. The legal fee of such firm is contingent upon the sale and delivery of the Certificates. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Certificates, Bond Counsel has been engaged by and only represents the City in connection with the issuance of the Certificates. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect 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 appearing under captions THE CERTIFICATES (except under the subcaption Purpose, the third paragraph under the subcaption Notice of Redemption, and the subcaptions "Sources and Uses of Funds" and Payment Record, as to which no opinion is expressed), REGISTRATION, TRANSFER AND EXCHANGE, TAX MATTERS, REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE, LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS, LEGAL MATTERS (except for the last two sentences of the first paragraph thereof, as to which no opinion is expressed) and CONTINUING DISCLOSURE OF INFORMATION (except under the subcaption Compliance With Prior Undertakings, as to which no opinion is expressed) and such firm is of the opinion that the information relating to the Certificates and legal matters contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Certificates, such information conforms to the Ordinance. The various legal opinions to be delivered concurrently with the delivery of the Certificates express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. 17

26 RATINGS The Certificates have been assigned an unenhanced rating of A+ by S&P Global Ratings ( S&P ). An explanation of the significance of such rating may be obtained from S&P. See BOND INSURANCE and BOND INSURANCE RISK FACTORS herein. The rating of the Certificates reflects only the view of S&P at the time the rating is given, and the City makes no representations as to the appropriateness of the rating. There is no assurance that the rating will continue for any given period of time, or that the rating will not be revised downward or withdrawn entirely by S&P, if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Certificates. AUTHENTICITY OF FINANCIAL INFORMATION 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. USE OF INFORMATION IN OFFICIAL STATEMENT No person has been authorized to give any information or to make any representations other than those contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer of solicitation. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Official Statement for purposes of, and as that term is defined in, SEC Rule 15c2-12. UNDERWRITING The Underwriter has agreed, subject to certain conditions, to purchase the Certificates from the City at a price equal to the initial public offering price set forth on the inside front cover of this official statement, less an underwriting discount of $. The Underwriter s obligations are subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Certificates if any Certificates are purchased. The Certificates to be offered to the public may be offered and sold to certain dealers (including the Underwriter and other dealers depositing the Certificates into investment trusts) at prices lower than the public offering prices of such Certificates, and such public offering prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibility to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. FINANCIAL ADVISOR RBC Capital Markets, LLC (the Financial Advisor ) is employed as Financial Advisor to the City. The fees paid the Financial Advisor for services rendered in connection with the issuance and sale of the Certificates are based on the amount of Certificates actually issued, sold and delivered, and therefore such fees are contingent on the sale and delivery of the Certificates. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information in this Official Statement. FORWARD LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date thereof, and the City assumes no obligation to update any such forward-looking statements. It is important to note that the City s actual results could differ materially from those in such forward-looking statements. The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future 18

27 economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually and timely notice of specified events to the Municipal Securities Rulemaking Board (the MSRB ). The information provided to the MSRB will be available to the public free of charge via the Electronic Municipal Market Access ( EMMA ) system at Annual Reports The City shall provide annually to the MSRB within six months after the end of each fiscal year of the City, financial information and operating data with respect to the City of the general type included in the final Official Statement, being information described in Appendix A (Tables 1-5 and Tables 7-10). The City will additionally provide audited financial statements within 12 months after the end of each fiscal year ending in or after Any financial statements so to be provided shall be (i) prepared in accordance with the accounting principles described in Appendix C or such other accounting principles as the City may be required to employ, from time to time, by State law or regulation, and (ii) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within 12 months after any such fiscal year end, then the City shall file unaudited financial statements within such 12-month period and audited financial statements for the applicable fiscal year, when and if the audit report on such statements becomes available. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12, as amended (the Rule ). The City s current fiscal year end is September 30. Accordingly, it must provide updated the required financial information and operating data described above by the last day of March in each year, and the required information in Appendix C by the last day of September 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. Event Notices The City also will provide timely notices of any of the following events with respect to the Certificates (not in excess of ten (10) business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions 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 status of the Certificates, or other materials events affecting the tax status of the Certificates; (7) modifications to rights of holders of the Certificates, if material; (8) Certificate calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) the appointment of a successor or additional trustee or change of name of the trustee, if material. Neither the Certificates nor the Ordinance require the funding of debt service reserves, credit enhancement (although the City has made application for municipal bond insurance) or liquidity enhancement. For these purposes, any event described in the immediately preceding paragraph (12) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. In addition, the City will provide timely notice of any failure by the City to provide annual financial information, data or financial statements in accordance with its agreement described above under Annual Reports. The City will provide each notice described in this subcaption to the MSRB in an electronic format, as prescribed by the MSRB. Availability of Information 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 19

28 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 Certificates 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 depository (the SID )). Prior to 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 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 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 certain 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 the Certificates at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of the Certificates may seek a writ of mandamus to compel the City to comply with its agreement. No default by the City with respect to its continuing disclosure agreement shall constitute a breach of or default under the Ordinance for purposes of any other provision of the Ordinance. Nothing in this paragraph is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. The City's undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions. The City s continuing disclosure agreement may be amended by the City from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell the Certificates in the primary offering of the Certificates in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the registered owners of a majority in aggregate principal amount (or any greater amount required by any other provision of the Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (b) a person that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the registered owners and beneficial owners of the Certificates. The City may also amend or repeal the provisions of the continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling the Certificates in the primary offering of the Certificates. 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 During 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. MISCELLANEOUS The Ordinance will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the re-offering of the Certificates by the Underwriter. This Official Statement has been approved by the City Commission of the City for distribution in accordance with the provisions of the United States Securities and Exchange Commission's rule codified at 17 C.F.R. Section c2-12, as amended. ATTEST: /s/ Mayor City of Mercedes, Texas /s/ City Secretary City of Mercedes, Texas 20

29 APPENDIX A FINANCIAL INFORMATION REGARDING THE CITY OF MERCEDES, TEXAS

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31 Table 1-Valuations, Exemptions and Tax Supported Debt FINANCIAL INFORMATION REGARDING THE CITY OF MERCEDES, TEXAS 2018/19 Market Valuation Established by Hidalgo County Appraisal District $ 671,274,836 (Net of Totally Exempt Property) Less: Exemptions/Reductions at 100% Market Value Veterans Exemption $ 5,648,966 10% Lost to Cap Adjustment 2,612,305 Over 65/Disabled 4,791,266 Productivity Loss/Other 60,483,038 Total $ 73,535, /19 Net Taxable Assessed Valuation $ 597,739,261 City Funded Debt Payable from Ad Valorem Taxes (as of December 1, 2018): Combination Tax & Subordinate Lien Revenue Certificates of Obligation, Series 2006 $ 500,000 Combination Tax & Subordinate Lien Revenue Certificates of Obligation, Series ,100,000 Limited Tax Refunding Bonds, Series 2010A 1,340,000 Public Property Finance Contractual Obligations, Series ,765,000 General Obligation Refunding Bonds, Series ,000 Combination Tax & Limited Pledge Revenue Certificates of Obligation, Series ,395,000 General Obligation Refunding Bonds, Series ,795,000 Limited Tax Refunding Bonds, Series ,805,000 The Certificates Total General Obligation Debt Payable From Ad Valorem Taxes $ 9,515,000 (1) 18,120,000 Less: Self Supporting General Obligation Debt Combination Tax & Subordinate Lien Revenue Certificates of Obligation, Series 2006 $ 500,000 Combination Tax & Subordinate Lien Revenue Certificates of Obligation, Series ,100,000 Limited Tax Refunding Bonds, Series 2010A 1,009,422 General Obligation Refunding Bonds, Series ,000 Limited Tax Refunding Bonds, Series ,038,854 Total Self-supporting General Obligation Debt $ 7,068,276 Net General Obligation Debt $ 11,051,725 (1) Preliminary, subject to change. Interest and Sinking Fund Balance as of September 30, 2018 (unaudited) $ 850,743 Ratio Total General Obligation Debt to 2017/18 Taxable Assessed Valuation Estimated Population Per Capita Net General Obligation Funded Debt Per Capita Net Taxable Assessed Valuation $ $ 1.85% 16, ,956 A-1

32 Table 2 - Taxable Assessed Valuation by Category (1) Taxable Appraised Value for Fiscal Year Ended September 30: % of % of % of Category Value Total Value Total Value Total Real, Residential, Single Family $ 243,748, % $ 238,739, % $ 217,421, % Real Residential, Multi-Family 19,108, % 15,965, % 17,343, % Real, Vacant Lots/Tracts 27,379, % 29,073, % 26,235, % Real, Acreage (Land Only) 61,840, % 61,430, % 62,592, % Real, Farm and Ranch Improvements 6,297, % 6,614, % 6,106, % Real, Commercial and Industrial 206,086, % 191,441, % 172,589, % Real, Tangible Personal, Utilities 13,950, % 13,431, % 12,166, % Tangible Personal, Commercial and Industrial 79,092, % 83,569, % 90,633, % Mobile Homes 9,251, % 9,466, % 9,682, % Tangible Personal Other 4,114, % 3,888, % 2,475, % Real Inventory % % % Special Inventory 406, % 442, % 378, % Total Appraised Value Before Exemptions $ 671,274, % $ 654,063, % $ 617,626, % Less: Total Exemptions/ Reductions (73,535,575) (76,086,427) (72,310,504) Taxable Assessed Value $ 597,739,261 $ 577,976,681 $ 545,316,010 Taxable Appraised Value for Year Ended September 30: % of % of Category Value Total Value Total Real, Residential, Single Family $ 213,232, % $ 206,909, % Real Residential, Multi-Family 16,086, % 15,971, % Real, Vacant Lots/Tracts 27,581, % 28,425, % Real, Acreage (Land Only) 61,569, % 56,200, % Real, Farm and Ranch Improvements 5,632, % 9,975, % Real, Commercial and Industrial 162,811, % 160,356, % Real, Tangible Personal, Utilities 11,598, % 10,750, % Tangible Personal, Commercial and Industrial 83,904, % 86,271, % Mobile Homes 10,057, % 10,289, % Tangible Personal Other 2,575, % 3,174, % Real Inventory % % Special Inventory 325, % 190, % Total Appraised Value Before Exemptions $ 595,375, % $ 588,516, % Less: Total Exemptions/ Reductions (72,662,787) (66,628,236) Taxable Assessed Value $ 522,712,943 $ 521,888,570 (1) Obtained from property tax reports provided by the Hidalgo County Appraisal District and the State of Texas Comptroller of Public Accounts. A-2

33 Table 3 - Valuation and Tax Supported Debt History Fiscal Ratio of Year Taxable Percent Tax Supported Direct Debt Ended Assessed Increase Over Debt at End to Assessed 9/30 Valuation Prior Year of Year Valuation 2010 $ 456,672, % $ 12,881, % ,479, % 12,064, % ,675, % 11,141, % ,593, % 10,544, % ,451, % 11,343, % ,888, % 15,843, % ,712, % 22,920, % ,316, % 20,475, % ,976, % 18,120, % ,739, % 25,650, % Source: City Records. Table 4 - Tax Rate, Levy and Collection History Fiscal Total Year General Interest and Tax Total % Current % Total Ending 9/30 Fund Sinking Fund Rate Tax Levy Collections Collections 2009 $ $ $ $ 3,282, % 95.55% ,607, % 99.81% ,574, % 98.84% ,587, % 98.80% ,537, % 99.95% ,537, % % ,975, % % ,975, % % ,062, % 99.53% ,305, % (1) % (1) ,453,157 (In Process of Collection) Source: City Records. (1) Unaudited. A-3

34 Table 5 - Ten Largest Taxpayers (1) 2018/19 Percent Name of Taxpayer Assessed Valuation of Total CPG Mercedes LP (2) $ 89,891, % Woodcrafters Home Products LLC 14,425, % Llano Grande Holdings 5,604, % AEP Texas Central Co. 5,584, % Llano West Mobile Home Park & Golf Course 4,703, % OA Mercedes Health Realty LLC 4,554, % Magic Valley Electric Coop 4,138, % HE Butt Grocery Company 3,390, % Rpobuild Co LLC 3,261, % Raybec Herencia LLC 3,050, % $ 138,604, % Source: Hidalgo County Appraisal District. (1) As shown in the table above, the top ten taxpayers in the City account for in excess of 23% of the City s tax base. Adverse developments in economic conditions in any particular industry in which any one of these large taxpayers participates, or any could adversely impact these businesses and, consequently, the tax values in the City, resulting in less local tax revenue. If any major taxpayer, or a combination of top taxpayers, were to default in the payment of taxes, the ability of the City to make timely payment of debt service on the Certificates may be dependent on its ability to enforce and liquidate its tax lien, which is a time consuming process that may only occur annually. See DEFAULT AND REMEDIES and AD VALOREM TAX PROCEDURES City s Rights in the Event of Tax Delinquencies in this Official Statement. (2) CPG Mercedes LP is the owner of a retail outlet mall located in the Mercedes city limits. The Development Corporation of Mercedes, Inc. issued it s $3,500,000 Sales Tax Revenue Bonds, Series 2007 to finance infrastructure improvements for the benefit of this retail mall. The City and mall's owners had previously entered into an agreement pursuant to which the City, for a period of ten years, provided rebates to such owners of a portion of the City's sales tax revenue generated at the mall. This prior agreement expired in A new agreement is currently under negotiation. No abatement or similar rebate agreement exists with respect to ad valorem taxes owed by the mall's owners. Table 6 - Estimated Overlapping Debt Statement Expenditures of the various taxing bodies within the territory of the City are paid out of ad valorem taxes levied by these taxing bodies on properties within the City. These political taxing bodies are independent of the City and may incur borrowings to finance their expenditures. The following statement of direct and estimated overlapping ad valorem tax-supported debt obligations 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 as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional ad-valorem tax-supported debt obligations since the date stated in the table, and such entities may have programs requiring the issuance of substantial amounts of additional ad valorem tax-supported debt obligations the amount of which cannot be determined. The following table reflects the estimated share of overlapping funded debt of these various taxing bodies. Percentage Amount Taxing Body Amount As of Overlapping Overlapping Mercedes Independent School District (1) $ 52,150,000 12/01/ % $ 42,053,760 Hidalgo County Drainage District #1 119,805,000 12/01/ % 2,252,334 Hidalgo County 340,970,000 12/01/ % 6,137,460 South Texas College 142,685,000 12/01/ % 2,225,886 Weslaco Independent School District (2) 44,815,000 12/01/ % 1,962,897 Total Overlapping Debt $ 54,632,337 City of Mercedes (3) $ 11,051,725 12/01/ % $ 11,051,725 Total Direct and Overlapping Debt $ 65,684,062 Ratio Direct and Overlapping Net Tax Debt to Net Taxable Assessed Valuation 10.99% Ratio Direct and Overlapping Net Tax Debt to Total Assessed Valuation 9.78% Per Capita Direct and Overlapping Debt $3,951 (1) Approximately 67.36% of Mercedes ISD's debt is funded by either the Instructional Facilities Allotment or Existing Debt Allotment program of the Texas Education Agency. (2) Approximately 8.61% of Weslaco ISD's debt is funded by either the Instructional Facilities Allotment or Existing Debt Allotment program of the Texas Education Agency. (3) Includes the Certificates. Preliminary, subject to change. Source: Municipal Advisory Council of Texas. A-4

35 Table 7 - Pro-Forma Outstanding General Obligation Debt Service Requirements Debt Net Fiscal Outstanding Service Outstanding Year General Paid from General Ended Obligation The Certificates (1) Other Obligation 9/30 Debt Service Principal Interest Total Sources Debt Service 2019 $ 2,537,449 $ 155,000 $ 244,874 $ 399,874 $ 1,211,717 $ 1,725, ,379, , , ,000 1,214,319 1,755, ,384, , , ,200 1,213,408 1,752, ,922, , , , ,513 1,994, ,923, , , , ,213 1,991, ,916, , , , ,960 1,988, ,844, , , , ,586 1,988, ,815, , , , ,916 1,986, ,533, , , , ,439 1,743, ,531, , , , ,889 1,743, , , , , ,851 1,283, , , , ,300 36, , , , , ,300 34, , , , , ,500 36, , , , , ,800 34, , , , , ,100 35, , , ,000 94, ,400 36, , , ,000 68, ,700 35, , ,000 42, , , ,000 14, , ,200 TOTAL $ 21,401,883 $ 9,515,000 $ 4,348,674 $ 13,863,674 $ 8,279,028 $ 26,986,528 Authorized but Unissued General Obligation Bonds: The City has no voter-authorized but unissued general obligation bonds; however, the City may issue other debt obligations payable from ad valorem taxes without voter approval, including certificates of obligation, tax notes with a maturity of seven years or less, capital lease obligations, and public property finance contractual obligations. (1) Preliminary, subject to change. Interest calculated at an assumed rate for illustrative purposes only. Table 8 - Tax Adequacy for General Obligation Debt 2018/19 Taxable Assessed Valuation (less exemptions) $ 597,739,261 Estimated Maximum Net Debt Service for the Fiscal Year Ending September 30, 2019 $ 1,725,605 Indicated Interest and Sinking Fund Tax Rate $ Indicated Interest and Sinking Fund Tax Levy $ 1,410,067 Estimated 95% Tax Collections $ 1,339,564 Interest and Sinking Fund Balance as of September 30, 2018 (unaudited) $ 850,743 A-5

36 Table 9 - General Fund Revenues and Expenditures CITY OF MERCEDES, TEXAS GENERAL FUND REVENUE AND EXPENDITURE HISTORY Fiscal Years Ended September 30: Revenues: Property Taxes $ 2,400,933 $ 2,846,358 $ 2,894,793 $ 2,493,911 $ 2,466,004 Non Property Taxes 5,001,229 5,855,548 6,023,235 6,151,219 6,049,376 Licenses and Permits 146, , , , ,553 Fines and Forfeitures 1,778,676 1,777,209 1,724,663 1,714,252 1,695,724 Intergovernmental 59, ,470 56, , ,012 Miscellaneous 281, , , , ,324 Total Revenues $ 9,668,532 $ 11,275,787 $ 11,104,426 $ 10,997,315 $ 10,892,993 Expenditures: Current: General Government $ 3,242,961 $ 3,481,417 $ 4,097,803 $ 4,430,042 $ 3,891,069 Public Safety 3,130,042 2,973,826 3,049,713 3,144,776 3,490,315 Public Works 418, , , , ,190 Highway and Streets 387, , , , ,189 Health and Welfare 1,498,357 1,450,374 1,462,496 1,260,601 1,252,777 Culture and Recreation 1,303,540 1,119,862 1,109,572 1,168,178 1,077,302 Non-Departmental Capital Outlay 97, , ,782 1,479,033 - Debt Service 239,987 1,249, ,406 1,300 - Total Expenditures $ 10,317,834 $ 11,247,408 $ 11,445,020 $ 12,163,585 $ 10,641,842 Excess/(Deficiency) of Revenues Over Expenditures $ (649,302) $ 28,379 $ (340,594) $ (1,166,270) $ 251,151 Other Financing Sources/Uses: Operating Transfers In 23, , ,040 Operating Transfers Out (71,388) (1,636,409) (43,047) (457,925) - Proceeds from debt refunding - - 2,265, Proceeds from debt issuance 6,034, Payment to bonds escrow agent - - (2,220,281) - - Tax Note Proceeds - - 1,200, Capital and Bond Outlays (6,034,337) Miscellaneous Total Other Financing Sources/Uses $ (48,270) $ (1,403,018) $ 1,201,672 $ (457,925) $ 600,040 Beginning Fund Balance 5,467,788 6,842,427 5,981,349 7,605,544 6,754,353 Residual Equity Transfers In/(Out) Ending Fund Balance - Sept. 30 (1) $ 4,770,240 $ 5,467,788 $ 6,842,427 $ 5,981,349 $ 7,605,544 Source: City's Audited Financial Statements for the Fiscal Years Ended September 30, (1) The City's unaudited General Fund balance for the Fiscal Year Ended September 30, 2018 is approximately $4,378,636. Table 10 - Current Investments (unaudited, as of September 30, 2018) Source: The City. Investment Description Total Invested Percent Cash $ 919, % TX Class 2,773, % Total $ 3,692, % A-6

37 APPENDIX B GENERAL INFORMATION REGARDING THE CITY OF MERCEDES, TEXAS AND HIDALGO COUNTY, TEXAS

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39 General Information GENERAL INFORMATION REGARDING THE CITY OF MERCEDES, TEXAS AND HIDALGO COUNTY, TEXAS The City of Mercedes, Texas (the City or Mercedes ) is a commercial center located approximately 20 miles east of McAllen, 250 miles south of San Antonio, Texas and 5 miles north of Mexico on U.S. Highway 83. The City s 2010 census was 15,570, an increase of 14.1% over The City is the heart of a rich cotton, citrus and winter garden area which is one of the Rio Grande Valley s largest irrigation districts. History The site of Mercedes was first settled by Spanish Colonial ranchers in the late 1770s and was part of the Llano Grande Spanish land grant issued May 29, 1790 to Juan Jose Hinojosa. During the 1850s it was the location of the Anacuitas Ranch, owned by Ramon and Manuel Cavazos descendants of Juan Jose Hinojosa. Lon C. Hill, Jr. a local land developer owned acreage extending sixteen miles from the Rio Grande River, which including the future site of Mercedes. In 1904 he formed the Capisallo Town and Improvement Company to establish a town one mile east of Mercedes, to be named Lonsboro, which did not develop. Railroad builder B.F. Yoakum saw the agricultural potential along the Rio Grande, and in 1905 he found investors for an irrigation project. This became the American Rio Grande Land and Irrigation Company, developers of the largest privatelyowned surface irrigation system in the world at the time. They purchased 250,000 acres from Lon C. Hill and began to build a large canal system and their own townsite. Early on, a boxcar served as a station and home to the family of Judge S.P. Silver, who was active in the development of early Mercedes. The railroad depot was built in The City of Mercedes was founded September 15, It was the first town built along the Hidalgo Branch of the St. Louis, Brownsville & Mexico Railroad. After considering several names (including Diaz, with the hope the Mexican President would help protect the town from border raids), the developers decided to call the new town Mercedes. By 1908 Mercedes had a hotel, a school, a lumberyard, a feed store and a local newspaper, still in existence today, the Enterprise. Mercedes incorporated in 1909, that same year it was devastated by floodwaters. After the irrigation system built, there was large scale production of citrus fruits and vegetable crops. The livestock industry is important in Mercedes. The Rio Grande Valley Livestock Show, held in March of each year, began as a hometown event that grew to one of area-wide importance. The first annual Livestock Show was held in The once famous Confederate Air Force was started in Mercedes by a group of World War II pilots from the area. In 1965 they established the museum of World War II airplanes at Rebel Field in Mercedes. The museum was later relocated and became the Commemorative Air Force. Other major industries include meat packing, custom boot-making and the manufacture of produce boxes and farm chemicals. Climate The climate is temperate, with 300 days of sunshine annually. Average temperatures range from 50 in winter and 97 degrees in the summer. Average rainfall is inches. Snowfall is rare. The County Hidalgo County was created in 1852 from Cameron County. It was organized in the same year and at the time had an area of 2,356 square miles. When first organized, the County extended almost as far north as Nueces County; however, later reductions to form counties to its north and east have reduced the County to its present area of 1,541 square miles. B-1

40 Hidalgo County is bordered on the east by Kenedy, Willacy and Cameron Counties. Brooks County is to its north. Starr County lies on its western boundary. On its southern boundary, the Rio Grande River separates Hidalgo County from the Republic of Mexico. Hidalgo County Labor Force Statistics 2018 (1) Labor Force 339, , , , ,989 Employed 316, , , , ,916 Unemployed 22,527 25,255 26,265 26,299 29,073 Unemployment Percentage 6.6% 7.4% 7.8% 7.9% 8.8% Source: Texas Workforce Commission. (1) As of August Comparative Unemployment Rates 2018 (1) Hidalgo County 6.6% 7.4% 7.8% 7.9% 8.8% State of Texas 3.9% 4.3% 4.6% 4.5% 5.1% United States of America 3.9% 4.4% 4.9% 5.3% 6.2% Source: Texas Workforce Commission. (1) As of August B-2

41 APPENDIX C EXCERPTS FROM THE CITY OF MERCEDES ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2017 The information contained in this Appendix consists of excerpts from the City of Mercedes, Texas Report for the Year Ended September 30, 2017, 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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43 CITY OF MERCEDES, TEXAS ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED SEPTEMBER30, 2017 Lu_is C. Orozco Certified Public Accountant 808 Del Oro Lane Pharr, TX

44 City of Mercedes, Texas Table of Contents September 30, 2017 INTRODUCTORY SECTION Page No. City Officials 1 FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS 2 INDEPENDENT AUDITORS' REPORT 10 BASIC FINANCIAL STATEMENTS Government-wide Financial Statements Statement of Net Position Statement of Activities Fund Financial Statements Governmental Fund Financial Statements Balance Sheet 18 Reconciliation of the Balance Sheets of Governmental Funds to the Statement of Net Position 19 Statement of Revenues, Expenditures and Changes in Fund Balances 20 Reconciliation of the Statements of'revenues, Expenditures and Changes in Fund Balance of Governmental Funds to the Statement of Activities 21 Proprietary Fund Financial Statements Statement of Net Position 22 Statement of Revenues, Expenses and Changes in Net Position 24 Statement of Cash Flows 25 Notes to Financial Statements 26 REQUIRED SUPPLEMENTARY INFORMATION General Fund Statement of Revenues, Expenditures and Changes in Fund Balance - Budget {GAAP Basis) and Actual Schedule of Changes in Net Pension Liability and Related Ratios Schedule of Contributions Notes to Schedule of Contributions Notes to Required Supplementary Information

45 City of Mercedes, Texas Table of Contents September 30, 2017 OTHER SUPPLEMENTARY INFORMATION Nonmajor Governmental Funds Balance Sheet Statement of Revenues, Expenditures and Changes in Fund Balances General Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Debt Service Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Special Revenue Funds Municipal Court Technology/Special Expense Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Urban County Grant Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Library Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Special Revenue Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Keep America Beautiful Fund Comparabve Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances 88 89

46 City of Mercedes, Texas Table of Contents September 30, 2017 Special Revenue Funds - Continued Hotel/Motel Tax Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances TIRZFund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Capltal Projects Funds VBLF Grant Comparative Balance Sheets Comparati. ve Statements of Revenues, Expenditures and Changes in Fund Balances Dome Shelter Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances 2013 PPFCO Bond Series Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Walking Trail Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances

47 City of Mercedes, Texas Table of Contents September 30, 2017 Enterprise Funds Water and Sewer (UtiUty) Fund Comparative Statements of Net Position Comparative Statements of Revenues, Expenditures and Changes in Net Position COMPONENT UNITS Combining Balance Sheet 107 Reconciliation of the Combining Balance Sheets of the Component Units to the Component Units Combining Statement of Net Position 108 Statement of Revenues, Expenditures and Changes in fund Balances 109 Reconciliation of the Combining Statements of Revenues, Expenditures and Changes In Fund Balance of the Component Units to the Component Units Combining Statements of Activities 110 Mercedes Economic Development Corporation Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Mercedes Economic Development Corporation R.B.E.G. Grant Fund Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Mercedes Economic Development Corporation /RP Loan Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances Mercedes Industrial Foundation Comparative Balance Sheets Comparative Statements of Revenues, Expenditures and Changes in Fund Balances

48 City of Mercedes, Texas Table of Contents September 30, 2017 Page No. ADDITIONAL SUPPLEMENTARY INFORMATION Tax Rates and Net Taxable Values Property Tax Levies and Collections Top 20 Taxpayers Property Value, Construction and Bank Deposits Top 20 Water Consumers Miscellaneous Statistical Data Debt Service Schedule COMPLIANCE SECTION Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 146 Schedule of Findings and Questioned Costs 148 Schedule of Status of Prior Audit Findings 149

49 City of Mercedes, Texas City of Officials September 30, 2017 Mayor Henry Hinojosa Mayor Pro-tem Ruben Guajardo Commissioners James H. Wade,Jr. Leo Villarreal Cris De Leon Hernandez Interim City Manager Sergio Zavala Finance Director Nereida Perez

50 City of Mercedes, Texas Management's Discussion and Anatysis September 30, 2017 This section of the Annual Financial and Compliance Report presents our discussion and analysis of the City's financial performance for the fiscal year ended September 30, Please read it in conjunction with the independent auditors' report on page 9, and the City's financial statements, which begin on page 25. FINANCIAL HIGHLIGHTS The City's net position decreased by $1,955,207 as a result of this year's operations. Net position of our governmental activities decreased by $1,342,680. Revenues for the City's business-type charges for services increased from $4,094,019 to $4,490,053, while expenses increased from $5,149,382 to $5,338,763. The General Fund ended the year with a fund balance of $4,770,240 a $697,548 decrease from prior year's balance of $5,467, 788. In comparing the General Fund's final budget to actual, revenues were $797,009 less than the final budget and expenses were $147, 707 less than final budget. This is a total negative variance of $649,302. CJTY HIGHLIGHTS The 140 store Outlet Mall opened for service in November of The city agreed to rebate 50% of the sales tax collections back to the Outlet Mall for the first 10 years of its existence. The first round of sales taxes came into the City from the State comptroller's office sometime in January of The ten-year mark for Phase I of the mall expired in December of 2016 and is now collecting 100% of phase l sales taxes. Total being refunded right now to the mall is approximately $450,000 for phase II, which is set to expire in June The city will collect approximately an additional $450,000 in safes taxes after the rebate agreement for phase II expires in June Amount of collections will depend on the amount of sales in any given year. The City continued with its initiative of street construction. Street construction that began in fiscal year continues through and will continue during fiscal year The City also began construction on two smaller projects; an amphitheater and walking trail. The amphitheater is to be used for concerts and other outdoor events. The city received a $500,000 grant for the walking trail and will be for recreational use. The walking trail was completed at the end of FY

51 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Position and the Statement of Activities on pages These statements provide information about the activities of the City as a whole and present a longer-term view of the City's property and debt obligations and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. fund financial statements starting on page 28; report the City's operations in more detail than the government-wide statements by providing information about the City's most significant funds. For governmental activities, these statements tell how services were financed in the short term as well as what resources remain for future spending. They reflect the flow of current financial resources, and supply the basis for tax levies and the appropriations budget. For proprietary activities, fund financial statements tell how goods or services of the City were sold to external customers and how the sales revenues covered the expenses of the goods or services. The remaining statements provide financial information about activities for which the City acts solely as a trustee or agent for the benefit of those outside of the City. The notes to the financial statements provide narrative explanations or additional data needed for full disclosure in the government-wide statements and the fund financial statements. Required supplementary information, other supplementary information and additional supplementary information presents additional information such as a budgetary comparison schedule for the general fund, pension supplementary information, combining and individual fund statements for non-major and major governmental funds, enterprise funds, and aggregate discretely presented component units as well as other statistical information. REPORTING THE CITY AS A WHOLE The Statement of Net Position and the Statement of Activities One of the central concerns in assessing any City's finances is determining whether the City is better off or worse off as a result of the year's activities. The analysis of the City's overall financial condition and operations begins on page 25. The Statement of Net Position includes all the City's assets, deferred outflows of resources, liabilities and deferred inflows of resources and liabilities at the end of the year while the Statement of Activities includes all the revenues and expenses generated by the City's operations during the year. These statements are presented much like private-sector companies, including all assets and liabilities using the accrual basis of accounting. All of the current year's revenues and expenses are reported without regard to when the cash is received or paid. These statements report both the net position and changes in them. The City's net position, which is the difference between assets, and deferred outflows from liabilities and deferred inflows, is one indicator of the City's financial health or financial position. To fully assess the overall health of the City one needs to consider non-financial factors as well, such as changes in the City's property tax base and the condition of the City's facilities and infrastructure. In the Statement of Net Position and Statement of Activities, we divided the City into three kinds of Activities: : :! Governmental activities - Most of the City's basic services are reported here, including the police, fire, public works, culture and recreation, economic development and general administration. Property taxes, sales taxes, franchise taxes, charges for services, and state and federal grants finance most of these activities. Business-type activities - These are services such as water and sewer services, which the City charges a fee to "customers" to help it cover all or most of the costs of providing these services. Component units - This consists of two separate legal entities, which are, The Economic Development Corporation of Mercedes, Inc. and the Mercedes Industrial Foundation, Inc. These are other governmental units over which the City (the City Commission, acting as a group) can exercise influence. 3

52 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 REPORTING THE CITY'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements begin on page 28 and provide detail information about the most significant funds - not the City as a whole. Some funds are required to be established by law, bond covenants or by contracts. Still other funds are established by the City Commission to assist in managing money that is to be spent for particular purposes. The Oty's two kinds of funds - governmental and proprietary- use different accounting approaches.! : Governmental funds - Most of the City's basic services are reported in governmental funds, which focus on how money flows in and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can be readily converted to cash. The governmental fund statements provide a detailed short-term view of the City's general government operations and the basic services it provides. Governmental fund information helps you determine whether there are more or less financial resources that can be spent in the near future to finance the City's programs. We describe the differences between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and the governmental funds in reconciliation schedules following each of the fund financial statements. Proprietary funds - The City reports the activities for which it charges users (whether outside customers or other units of the City). The proprietary funds use the accrual basis, the same accounting method employed in the Statement of Net Position and the Statement of Activities. In fact, the City's enterprise funds (a component of proprietary funds) are the business-type activities reported in the government wide statements but provide more detail and additional information, such as cash flows. The Governmental Accounting Standard Board (GASB) Statement No "Fund Balance Reporting and Governmental Fund Type Definitions" provides for a hierarchy of five possible classjfications as follows: Non spendable fund balances are balances that cannot be spent because they are not expected to be converted to cash or they are legally or contractually required to remain intact. The spendable fund balances include restricted, committed, assigned and unassigned based upon the hierarchy of spending constraints. RestrJcted: fund balances that are constrained by external parties, constitutional provisions or enabling legislation; Committed: fund balances that contain self-imposed constrains of the government from its highest level of decision making authority (the City Commissioners); Assigned: fund balances that contained selfimposed constraints of the government to be used for a particular purpose (the City Manager has the authority to assign funds for specific purposes); and Unassigned: fund balance of the general fund that has not been constrained for any particular purpose. In fiscal year 2017, the City adopted new statements of financial accounting standards issued by the Governmental Accounting Standards Board: Statement No. 72, Fair Value Measurement and Application Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and local Governments Statement No. 79, Certain External Investment Pools and Pool Participants 4

53 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 GASB Statement No. 72 requires disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. Governments should organize these disclosures by type of asset or liability reported at fair value. It also requires additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). GASS Statement No. 73 extends the approach to accounting and financial reporting established in Statement 68 to all pensions, with modifications as necessary to reflect that for accounting and financial reporting purposes, any assets accumulated for pensions that are provided through pension plans that are not administered through trusts that meet the criteria specified in Statement 68 should not be considered pension plan assets. It also requires that information similar to that required by Statement 68 be included in notes to financial statements and required supplementary information by all similarly situated employers and nonemployer contributing entities. GASB Statement No. 76 reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and nonauthoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. GASB Statement No. 79 establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized cost for financial reporting purposes and for governments that participate in those pools. Those disclosures for both the qualifying external investment pools and their participants include information about any limitations or restrictions on participant withdrawals. GOVERNMENT-WIDE FINANCIAL ANALYSIS This analysis focuses on the net position {Table I) and changes in net position (Table II} of the City's governmental and business-type activities. Net position of the City's governmental activities decreased from $13,927,634 to $12,584,977. Unrestricted net position - the part of net posiuon that can be used to finance day to day operations without constraints from debt covenants, legislation or other legal requirements was $3,130,706 at September 30, In 2017, net position of business-type activities decreased from $31,371,668 to $30,509,141. 5

54 City of Mercedes, Texas Management's Discussion and Anarysis September 30, 2017 Table I Net Position Governmental Activities Current and other assets 8,614,934 9,147,928 Capital assets 25,856,202 26,863,590 Other noncurrent assets 1,043,050 Total assets 34,471,136 37,054,568 Business-type Activities Total ,984 1,751,043 $ 9,310, $10,898,971 40,717,309 42,229,208 66,573, ,092,798 1,043,050 41,413,293 43,980,251 75,884, ,034,820 Deferred outflow related to pensions 525,755 1,079,454 Deferred charge for refu ndl ng 282,603 86,618 Total deferred outflows of resources 808,358 1,166,072 Total assets and deferred outflows of resources 35,279,494 38,220,640 53, , , ,210, ,333 15, , , , , , ,312,711 41,Ei03,296 44,126,890 s 76,882, $82,347,530 Other 11 abilities 2,429,362 1,192,263 Long-term liabilities 19,818,572 22,844,217 Total liabilities 22,247,934 24,036, , ,3n $ 3,014, $1,896,640 10,488,707 12,017,940 30,307, , ,074,320 12,722,317 33,322, ,758,797 Deferred inflows related to pensions 446, ,526 19, , , ,431 Net investment In capital assets 9,454,271 11,522,221 Restricted 2,130,224 Unrestricted 3,130, ,189 Total net position 12,584,978 13,927,634 Total llabllitles, deferred inflows of resources and net position 35, 279,494 38, 220, ,641,048 31,295,437 40,095, ,817,658 2,130,224 ( 131, 90 7 ) 76,231 2,998, ,420 30,509,141 31,371,668 43,094, ,299,302 41,603,296 44,126,890 76, 882, ,34 1,s30 6

55 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 Table II Changes in Net Position Ga11emmental Actl11ltles Business-type Activities Total Revenues Program revenues Charges for servloes Operating grants and co ntrl butions ca pita I grants and contributions 2,247,388 2,003,923 4,490,0S3 4,094,019 6,737,441 6,097, , , , ,982 1,219,266 2SO,OOO 366, ,000 l,sss,339 General revenues Pro pe rtv taxes Sales taxes F 111 nchi se ta x:es Hotel taxes Other taxes Investment ea minss Miscellaneous Total l'ft'erw. 4,047,327 4,116,645 4,047,327 4,l16,64S 4,400,401 5,263,550 4,400,401 5,263, , , , ,347 Ul, ,418 U9,643 28, ,643 28,651 54,428 51,530 2,331 1,264 56,759 52,794 (69,429) 405,177 6, ,902 (62,459) 548,079 12,337,6SS 14,612,489 4,749,354 4,604,258 17,087,009 19,216,747 Expenses General government Public nfetv Publlcworks Highways and streets Hea Ith and welfare Qi I tu re and recreation Interest on long-term debt Capital Outlay Utl I lty services 5,032,842 6,841,307 5,032,842 6,841,307 3,743,195 3,489,939 3,743,195 3,489, , , , , , , , ,134 1,712.,599 1,618,205 1,7U,599 1,618,205 1,538,013 1,252,784 1,538,013 1, , , , , , , ,618 S,338,763 4,834,591 5,338,763 4,834,591 Total 111penses 13,753,116 14,s.&2,793 S,338,763 5,149,382 19,091,879 19,732,175 Increase (Deaease) in net position before transfer.; Transfer.; Olange in net position Net position - beginnl n1 Prior Period Adjustment Net poslti on - endl "I (l,415,461) 29,696 (589,409) (545,124) (2,004,870) (515,428) 72, (23,118) (661) 49,663 ( 1,342,680) 30,357 (612,527) (545,785) (1,955,207) (515,428) 13,927,634 13,897,277 31,371,668 31,917,453 45,299,302 45,814, ,584,978 13,927,634 30,759,141 31,371,668 43,344,119 45,299,302 The cost of all governmental activities this year was $13,753, 728. However, as shown in table II the amount that the City's taxpayers paid to finance these activities was $8,447, 728 consisting mainly of $4,047,327 in property taxes and $4,400,401 in sales taxes. The remaining costs were paid by those who directly benefited from the programs or by other governments and organizations that subsidized certain programs with grants and contributions. 7

56 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 THE CITY'S FUNDS Being that the city is a governmental entity it tracks all transactions using fund accounting. What this means is that it isolates different types of activity into funds, which it then tracks separately. Each fund essentially becomes its own entity which then interacts with other funds. This allows for separate management of governmental funds, grants, enterprise funds (utility fund) and any other restricted funds. As a result of this year's operations, all combined governmental funds, including capital projects funds (as presented in the balance sheet on page 28) reported a combined fund balance of $6,742,731, which is below last year's total of $7,493,957. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the end of the fiscal year, the City had $66,573,511 (net of depreciation) invested in capital assets, including facilities, land, infrastructure, vehicles, and equipment, as further discussed in Note 5. This is a decrease of $2,519,287 from the previous fiscal year. Debt By the end of the fiscal year, the City had $25,904,912 in bonds and notes outstanding versus $29,186,684 at the end of last year, a decrease of $3,281,772. The City also recognized a net pension liability of $5,552,111. Fitch ratings has reviewed and assigned an A+ rating to the limited tax bonds and certificates of obligation debt. More detailed information about the City's debts is presented in Note 7 as well as the Debt Service Schedules that are presented in the additional supplementary information. ECONOMIC FACTORS ANO NEXT YEAR'S BUDGET AND RATES During the budget process for fiscal year the City manager, the City commission and the staff, as it does every year, looked at the anticipated needs of the City based on many factors. These factors are drivers and/or indicators of economic growth and include new housing and business developments, job growth, increases in commercial construction, decreases in federal funding, staffing needs as well as historical revenue and expenditure trends. As a result of those factors, the City felt the tax rate should remain the same as fiscal year at

57 City of Mercedes, Texas Management's Discussion and Analysis September 30, 2017 Total revenues and other financing sources for the City's General Fund are budgeted at $10,382,758 which is $82,783 lower than last year's budget. This can be attributed to the one cent reduction in the property tax rate. Expenditures and other financing uses are budgeted at $10,465,541 which is the same as last year's budget. Tnls can be attributed to conservative budgeting as a result of a decrease in budgeted revenues. Within the Utility Fund, rates did not increase in CONTACTING THE CITY'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the City's finances and to show the City's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City's Finance Director, at City of Mercedes, P. 0. Box 837, Mercedes, Texas

58 LUIS C C>R-C>ZCC> CERTIFIED PUBLIC ACCOUNTANT 808 Del Oro Lane Pharr, TX lcocpa@lcocpa.corn Independent Auditor's Report Honorable Mayor and The Board of Aldermen/ A1de1women City of Mercedes, Texas Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund infonnation of the City of Mercedes, Texas (the City), as of and for the year ended September 30, 2017, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibility for the Fi11a11cial Statements The City's management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted om audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves perfouning procedlu'es to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or euor. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used aud the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. (956) Member of AICPA & TSCPA (956)

59 LUIS C OROZCO CERTIFIED PUBLIC ACCOUNTANT 808 Del Oro Laue Phan, TX lcocpa@lcocpa.com We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements refe1ted to above present fairly, in all mate1ial respects, the respective financial position of the govemmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Mercedes, Texas as of September 30, 2017, and the respective changes in financial position aud, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted iu the United States of America require that the management's discussion and analysis, budgetary comparison schedule, schedule of employer Contributions TMRS, schedule of changes in net position liability and related ratios TMRS, and related notes to the required supplementary information be presented to supplement the basic financial statements. Such information, although not a prut of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial repo1ting for placing the basic financial statements in au approp1iate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, whi ch consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our.inquiries, the basic financial statements, and other knowledge we obtained during ow audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Ow: audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining and individual nomnajor fund.financial statements and component nnit financial statements are presented for purposes of additional analysis and are not a required pru1 of the basic financial statements. The combining and individual nomnajor fund financial statements and component unit financial statements ru e the responsibility of management and were dedved from and relates directly to the underlying accounting and other records used to prepru e the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic (956) Member of AICPA & TSCPA (956)

60 LUIS C OROZCO CERTIFIED PUBLIC ACCOUNTANT 808 Del Oro Lane Pharr, TX lcocpa@lcocpa.com. financial statements and certain additional procedw es, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedw es in accordance with auditing standards generally accepted in the United States of America. Io ow opinion, the combining and individual nollll1ajor fund financial statements and component unit financial statements are fairly stated, in alj material respects, in relation to the basic financial statements as a whole. The introductory and additional supplementary information have not been subject to the auditing procedtu es applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our repo1t dated June 7, 2018 on our consideration of the City's internal control over fmancial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to desc1ibe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in conside1ing the City of Mercedes, Texas's internal control over financial reporting and compliance. Pharr, Texas June 7, 2018 (956) Member of AICPA & TSCPA (956)

61 BASIC FINANCIAL STATEMENTS 13

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63 CITY OF MERCEDES, TEXAS STATEMENT OF NETPOSmON SEPTEMBER30,2017 EXHIBIT A-I Data Control Codes Primary Government Compouent Uuit Water and N omnajor Governmental Sewer Component Activities Ftmd Total Uuits ASSETS 1010 Cash and Casb Equivalents $ 3,444,991 $ 800$ 3,44.5,791 $ 487, Investments - Current 144, ,612 4,740, Taxes Rcee1vable, Net 649, , , Accouuts Receivable (Net) 1,040, ,810 1,405,810 2,171, Due from Other Governments 75,692 75, Due from Other Funds 2,958,843 (2,729,225) 229, Due from Compoueut Urut 199, , , Inventocies 6,262 6,262 Reslricted A sets: 1611 Cash stricted 95,580 2,928,962 3,024, ,924 Capital Assets: 1710 Land 1,277, ,100 1,477, Water System, Net 29,475,565 29,475, Buildings, Net 13,933, ,933, Improven1ents 926, , Sewer System, Net 27,461,446 27,461, Furniture and Equipment, Net 5,264,999 (17,149,171) (11,884,172) 1760 Infrastn1cture, Net 16,137, ,269 16,761, Cousttuctioo in Progress 2,291, ,100 2,397, Accumulated Depreciation (13,975,612) (13,975,612) 7, Total Assets 34,471,136 41,413,293 75,884,429 7,949,251 DEFERRED OUTFLOW OF RESOURCES 1996 Deferred Charge for Refunding 282, , , Deferred Outflow Related to Pension Plan 525,755 53, ,425 19, Total Deferred Outflows of Resources 808, , ,361 19,384 Total assets and deferred oultlows 35,279,493 41,603,296 76,882,790 7,968,634 LIABILITIES 2010 Accounts Payable 330, , ,249 48, Wages and Sa.lanes Payable 173,576 1, , Co111peusated Absences Payable (33,106) 6,228 (26,878) httergoverumental Payable 8,144 8, ,.. Due to Others 616, Accrued Interest Payable 47,091 47,091 7, Uneamed Revenues 254, , Notes Payable - Cuirent 20?, , , , Bonds Payable - Current 1,441,085 1,441, , Other Current Liabilities 182 (230) Noncurrent L iabilities : 2501 Debt Due Within One Year 1,109,200 1,109, Bonds Payable - Noncurrent 14,861,836 8,806,173 23,668,009 5,708, Net Pension Liability 4,956, ,334 5,530, , Total Liabilities 22,247,934 11,074,320 33,322,254 6,994,736 DEFERRED INFLOW OF RESOURCES 2602 Deferred Inflow Related to Pension Plan 171,139 19, ,934 9, Deferred Refunding 275, , Tolal Deferred Inflows of Resources 446,581 19, ,416 9,272 NETPOSffiON 3200 Net Investment in Capital Assets 9,454,271 30,641,048 40,095,319 7, Unrestricted Net Position 3,130,706 (131,907) 2,998, , Total Net Position $ 12,584,978 $ 30,509,141 $ 43,094,119 $ 964,626 Total liabilities, deferred inflows, and net po.sitiou 35,279,493 41,603,296 76,882,790 7,968,634 (48) The notes to Ute financial statements are an integral part oftbis state'.&nt.

64 CTIY OFMERCEDES, TEXAS STATEMENTOFACTIVITIES FOR TIIE YEARENDEDSEPTENIBER30,2017 Program Revenues Data Contrnl Codes Expenses Charges f Services Operating Orrum and Contributions Primary Goverument: GOVERNMENTAL ACTIVITIES: 110 Legislative l.20 JudtCUll 130 Execuhve tso Financ.aal Admirustration 160 Planning 190 Other General Government Fooctions 200 Public Safety 210 Police 220 Fire Protection 300 Public Works 310 Highways and Streets 320 Sanitation 400 Health and Welfare 510 Recreation 520 Parks SAID Library no Iuterest on Debt 800 Capital Outlay s 73, , , , ,755 3,8S9,S54 3,164, , , ,933 1,578, , , , , , ,618 $ - 2,068, ,080 $ 889,891 7,940 I I,2S9 Total Governmental Activities 13,753,116 2,247, ,090 BUSINESS-TYPE ACTIVITIES: 701 Water and Sewer Services 5,338,763 4,490,0:53 Total Business-Type Activities 5,338,763 4,490,053 TOTAL PRIMARY GOVERNMENT $ 19,091,879 $ 6,737,441 $ 909,090 ComponeDt Unit: 991 NolllWljor Component Uwt 2,700,965 TOTAL COMPONENT UNITS $ 2,700,965 $ - $ Data control Codes General Revenues: Taxes: Property Taxes: 5010 Property Taxes, Levied for General Purposes 5011 Property Taxes, Levied for Debt Service 5120 General Sales and Use Taxes Sl 70 Franclllse Tax 5180 Other Taxes 5190 Penalty and Interest on Taxes 5300 Grants and Contributions Not Restricted 5600 Iuvestment Enruings 5700 Miscellaneous Revenue Transfers In (Out) Total General Revenues and Transfers Change in Net Position Net Position - Beginning Prior Period Adjusbnent Nel Position-Ending The notes to the financial st11te111ents are au integral part of tltis statement. 16

65 EXHIBITB-1 Net (Expeose) Revenue and Changes w Net Position Primary Government Component Unit Governmental Activities Business-Type Activities Total Noumajor Component Units (73,868) {139,859) {373,782) (198,024) {387,755) (901,355) 187,020 (3, 164,651) (578,544) (474,742) (452,933) (1,578,957) (133,642) (634,974) (444,849) (458,190) (398,915) (388,618) (73,868) (139,859) (373,782) (198,024) (387, 755) (901,355) 187,020 (3,164,651) (578,544) (474,742) (452,933) (1,578,957) (133,642) (634,974) (444,849) (458,190) (398,915) (388,618) (I 0,596,638) (10,596,638) (848,710) (848,710) (848,710) (848, 710) (10,596,6JB) {848,710) (11,445,348) (2,700,965) (2,700,965) 2,444,354 1,602,973 4,400, ,807 6, ,386 15,000 54,428 (69,429) 72,781 2,331 6,910 (23,118) 2,444,354 1,602,973 4,400, ,807 6, ,386 15,000 56,759 (62,459) 49,663 1,562,367 58, ,217 9,253,958 (13,817) 9,240,141 2,109,045 (1,342,680) 13,927, (862,527) 31,371,668 (2,205,207) 45,299, (591,920) 1.556,546 $ 12,584,978 s 30,509,141 s 43,094,119 s 964,626 17

66 CI1Y OF MERCEDES, TEXAS BALANCE SHEET EXHIBITC-1 GOVERNMENfALFUNDS SEPTEMBER30,2017 Data Total Control General Debt Service Other ()(Jvemmental Codes FUDd FUDd Funds Fwlds ASSETS 1010 Cash and Cash Equivalents $ 1,734,711 $ 572,634 $ l,137,646 $ 3,444, Investments - Current 144, , Taxes Receivable 685, , , Allowauce for Uncollectible Taxes (credit) (198,717) (91,143) (289,860) 1150 Accow1ts Receivable (Net) 621, , Due from Other Govenunents 75,692 75, Due from Other Funds 2,795, ,113 2,960, Due from Component Unit 199, , Inventories 6,262 6, Cash Restricted 95,580 95, Total Assets $ 5,988,216 $ 736,208 $ 1,474,031 $ 8,198,455 LIABILITlES 2010 Accounts Payable 329,592 $ s 920 $ 330, Accrued Liabilities 164,723 8, , Intel'goverumental Payable 8,144 8, Due to Other Funds , Unearned Revenues 714, , , Other Current Liabilities Total Liabilities 1,217, ,672 10,384 1,380,032 DEFERRED INFLOWS OF RESOURCES 2603 Deferred Resou..ce Inflow 75,692 75, Total Defe1Ted Inflows ofresources 75,692 75,692 FUND BALANCES 3590 Other Assigned Fund Balance 584,536 1,387,955 1,972, Unassigned Fw1d Balance 4,770,240 4,770, Total Fund Balances 4,770, ,536 1,387,955 6,742, Total Liabilities, Deferred Inflows & Fund Balances $ 5,988,216 $ 736,208 $ 1,474,031 $ 8,198,455 The notes lo tj1e financial statements are au integral part of this statement. 18

67 CITY OF MERCEDES, TEXAS RECONCILIATIONOFTHEGOVERNMENTALFUNDS BALANCESHEETTOTHE STATEMENTOFNETPOSITION SEPTEMBER30,2017 EXHilllTC-2 Total Fund Balances - Governmental Funds $ 6,742,731 Capital assets used in governmental activities are not financial resources and therefore are not reported io governmental funds. In addition, loog-term liabilities,.including bouds payable, are not due and payable io the ctment period, and, therefore are not reported as liabilities in the funds. The net effect of includi.ug the begin.u.ing balances for capital assets (net of depreciation) and long-tenn debt in the governmental activities is to increase (decrease) net position. 8,807,959 Cturent year capital outlays and long-term debt principal payments are expenditures in the fund financial statemeuts,but they should be shown as increases ill capital assets and reductions io long-tenn debt in the government-wide fi.uancial statements. The net effect of i.ucluding the 2015 capital outlays and debt principal payments is to increase (decrease) net position. 1,892,149 Tile implementation of GASB 68 for the TMRS Pension plan. this fiscal year required that the City repo1t their net pension liabijity in the Govenunent Wide Statement of Net Position. The items repo1ted as a result of tl1is implementation included a net pension liability of $4,956,736 and a Deferred ResolU'ce Iutlow of $275,442. Tile net effect of these was to decrease the ending net position (4,602,120) The 2017 depreciation expense increases accumujated depreciacion. The net effecc of the cwtent year's depreciation is to decrease net position. (1,240,409) Vatious other reclassifications and eliminations are necessary to convert from the modified accmal basis of accounting to accrnal basis of accounting. These include recognizing deferred revenue as revenue, eliminating interfund transactions, reclassifying the proceeds of bond sales as an increase in bonds payable, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to increase (decrease) net position. Net Position of Governmental Activities $ 984,668 12,584,978 The notes to the financial statements are an integral part of this statement. 19

68 CITY OF MERCEDES. TEXAS STATEMENT OFREVENUES,EXPENDITURES.ANDCHANGESINFUNDBALANCES GOVERNMENTALFUNDS FORTHEYEARENDEDSEPTEMBER EXHIBITC-3 Data Total Control Oenenl Debt Service Other Gcvernmental Codes Fund Fuod Fllllds Funds REVENUES: Taxes: 5110 Property Truces s 2,400,933 $ 1,602,973 $ - $ 4,003, General Sales and Use Taxes Franchise Tax 618, OUierTaxes 6,257 6, Penalty and Interest 011 Taxes 71,674 36, , Licenses and Permits , Intergovernmental Revenue aud Grants 59, , , , Charges for Services 1,745,647 1,745, Fwes Investment Eanuugs 34,716 5,951 13,761 54, Rents and Royalties 14,698 14, Contributi.ons & Donations from Private Sources 15,000 15, Other Revenue 232,304 6, , Total Revenues 9,668,532 1,790, ,847 12,294,234 EXPENDITURES: CWTent: General Government: 0110 Lem tanve Judicial 132, , Executive 354, , Financial Administration 187, , Plnnrun,R 367, , Other General Govenunent fwicti.ons 2,129, ,428 2,Hl,993 Public Safetv: 0210 Police Fire Protection 549, , Public Worlcs 418, Highways and Streets 387, , Sanitation 1,498,357 1,498,357 Culture and Recreation: 0510 Recreation Parks 422, Library 432,318 2, ,801 Debt Service: 0710 Principal on Debt 201, , Interest on Debt 38, , ,706 Caoital Outlav: 0800 Cal>illll Outl av Total Expenditures 10,317,834 1,831, ,892 13,124, 102 lloo Excess (Deficiency) of Revenues Over (Un.dee) Expenditures (649,302) (40,.521) (140,045) (829,868) OTiiER FINANCING SOURCES (USES): 7911 Issuance of Bonds 5,527,389 5,527, Trausfers In S, Premium or Discount oa Isswmce of Bonds 506, , Transfers Out (Use) (71,388) (71,388) 7960 Escrow Payment and Expenses ( } (6, ) 7080 Total OU1er Financing Sources (Uses) (48,270) 65,155 61,133 78, Net Change in Fund Balances (697,572) 25,234 (78,912) (751,250) 0100 Fund Balance - October I (Beginning) 5,467, ,302 1,466,867 7,493, Prior Period Adjusbnent Fund Balance - September 30 (Ending) s 4,770,240 $ 584,536 s l,387,955 $ 6,742,731 TI1e notes to the financial statements are an integral part of this statement. 20

69 EXHIBITC-4 CITY OF MER CEDES. TEXAS RE CONCU.IA TIONOFTHEGOVERNMENTALFUNDSSTATEMENTOF REVENUES,EXPENDITURES. AND CHANGESINFUNDBALANCESTOTHESTATEMENTOFACTIVITIES FOR TIIEYEARENDED SEP'IEMBER30, 2017 Total Net Change tu Fund Balances - Goverwnental Funds The city uses some iuternal se1vice funds to charge the costs of certain activities prima1ily to the govenuneutal fwlds. The net iucome (loss) of these internal service funds are repo1ted with governmental activities. The net effect of this consolidation is to increase (decrease) the change in net position. $ (751,250) -0- Current year capital outlays and long-te1m debt principal payments are expenditures in the fund financial statements, but they should be shown as increases in capital assets and reductions in lo11g-tenn debt in tbe government-wide fmancial statements. The net e fect of removing the 2015 capital outlays and debt principal payments is to increase (decrease) the change in net position. The imlementatiou of the requirements of GASB 68 for this fiscal year resulted in recognition of Pension Liability, net pension expense, and defened inflows andoutflows. The entries required by GASB 68 did require that some expenses on B-1 be adjusted. The net effect on the change in net position on Exhibit B-1 is decrease of 1,892,149 (636,462) Depreciation is not recognized as an expense in govenuneutal funds since it does not require the use of cunent financial resources. The net effect of the cuuent year's depreciation is to decrease the change in net position. (1,240,4-09) Various other reclassifications and eliminations are necessary to conve1t from the modified accrual basis of accounting to accmal basis of accounting. These include recognizing deferred revenue as revenue, adjusting current year revenue to show the revenue earned from the cunent year's tax levy. eliminating interfund transactions, reclassifying the proceeds of bond sales, and recognizing the liabilities associated with maturing long-tellli debt and interest. The net effect of these reclassifications and recognitions is to increase (decrease) the change in net position. ( ) Change in Net Position of Governmental ActivHies $ (1,342,680) The notes to rhe financial statemeuts are an integral part of this statement. 21

70 CITY OF MERCEDES, TEXAS STATEMENT OF NETPOSITION PROPR.IETARYFUNDS SEPTEMBER30,2017 EXHIBIT D l (Cont'd) Bu.gocss Type Activities ASSETS CtuTent Assets: Cash and Cash Equivalents Restricted Assets - Current: Cash Restricted Accowits Receivable (Net) Due from Other Funds Due from Component Unit Total C1.m eot Assets Noncurrent Assets: Capital Assets: Land Water System Sewer System Ftuuiture and Equipment Accumulated Depl'eciation - Furniture & Equipment Vehicles Construction in Progress Total Noncurrent Assets $ 800 2,928, , ,637 3,425, ,100 29,475,565 27,461,446 2,709,475 (19,858,646) 624, ,100 40,717,309 Total Assets DEFERRED OUTFLOWS OF RESOURCES Defei1 ed Charge for Retimding Deferred Outflow Related to Pension Plan Total Deferred Outflows of Resources 44,143, ,333 53, ,003 Total assets and deferred outflows of resources 44,333,278 The notes to Ute financial statements ru e an integral part of this statement. 22

71 CTIY OF rv!ercedes, TEXAS STATEMENT OF NETPOSIDON PROPRIETARYFUNDS SEPTEMBER30,2017 EXHIBITD-1 Busin<:ss T)pe AcliYities LIABil.ITIES Current Liabilities: Accounts Payable Accrued Liabilities Compensated Absences Payable Due to Other Fwids Notes Payable - Cun-eut Bonds Payable - Cw-rent Other CwTent Liabilities Total CluTeut Liabilities Noncun-ent Liabilities: Bonds Payable - NoncWTent Capital Leases Payable - No11cWYent Unamortized Premiums (Discowits) on Bonds Payable from Restricted Assets - Noncurrent: Net Pension Liability Total Noncurrent Liabilities Total Liabilities DEFERRED INFLOWS OF RESOURCES Deferred Inflow Related to Pension Plan Oefened Resow-ce Inflow Total Deferred Inflows ofresources NETPosmoN Net Investment in Capital Assets Uru estricted Net Position Total Net Position 416,739 1,988 6,228 2,729, ,888 1,109,200 (230) 4,424,795 8,786,696 l3,4l8 6, ,334 9,379,507 13,804,302 19, ,835 30,641,048 (131,907) $ 30,509,141 Total liabilities, defen ed inflows of resow ces. and net position 44,333,278 The uotes to the finaucial statements are an integrnl part of this statement. 23

72 CTIY OF MERCEDES. TEXAS STATEMENTOFREVENUES.EXPENSES,ANDCHANGESlNFUNDNETPOSmON PROPRIET ARYFUNDS FOR THEYEARENDEDSEPTEMBER30,2017 EXHIBITD-2 Business T Activities OPERATING REVENUES: Water Revenue Sewer Revenue Total Operating Revenues $ 2,625,306 1,864,747 4,490,053 OPERATING EXPENSES: Other Operating Cost Personnel & Related Services Materials and Supplies Repairs and Maintenance Other Service Charges Total Other Operating Costs Depreciation Debt Service Total Operating Expeuses Operating Income (Loss) 616,133 30,289 2,179, ,005 3,581,591 1,511, ,273 5,338,763 { l NONOPERATING REVENUES (EXPENSES): Investment Earnings Gain on Refunding Other Non-Operating Revenues Total NouOperating Revenue (Expenses) Income (Loss) Before Transfers Transfers Out (Use) Change i.n Net Position Total Net Position - October 1 (Beginning) 2,331 5,110 1,860 9,301 (839,409) (23,118) (862,527) 31,371,668 Total Net Position - September 30 (Ending) $ 30,509,141 The notes to the fiuancial statements are au integral part of tl1is statement. 24

73 CITY OF MERCEDES, TEXAS STATEMENT OF CASH FLOWS PROPRIETARYFUNDS FOR THE YEAR ENDED SEPTEMBER30, 2017 EXHIBITD-3 Business-Type Activities Cash Flows from_ Operating Activities: Cash Received from User Charges Cash Payments to Employees for Services Cash Payments for Suppliers Net Cash Provided by Operating Activities Ca h Flows from Non-Capital Finauci.ug Activities: Operating Transfer Out Cash Flows from Ca ital and Related Financing Activities: Acquisition of Capital Assets Cash Flows from Investing Activities: Interest and Dividends on Investments Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Year $ 4,490,053 (573, 69 0) (2,625,266) 1,291,09? (23, l 18) (81,757) 4,191 3,130 2,926,632 Cash and Cash Equivalents at tl1e Eud of the Year Reconciliation of OQerating Income (Loss) to Net Cash Provided By Operating Activities: Operating Income (Loss) Adjustments to Reconcile Operating Income To Net Cash Provided by Operating Acbvities: Depreciation Effect of Increases and Decreases in Current Assets and Liabilities: Decrease (Increase) in Receivables Decrease (Increase) in Inventories Decrease (Increase) in Prepaid Expenses rncrease (Decrease) in Accounts Payable Increase (Decrease) in Payroll Deductions Increase (Decrease) in Accrued and Other Increase (Decrease) in Meter Deposits Increase (Decrease) in Due to Other Funds Increase (Decrease) in Deferred Inflows Net Cash Provided by Operating Activities $ $ $ 2,929,762 (848,710) 1,511,899 (74,361) 146,639 (757) (289,419) (11,697) (12,936) 16,475 1,132,507 (278,543) 1,291,097 The notes to the financial statements are an integral part of this statemeut. 25

74 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Mercedes, Texas (the "City") have been prepared in conformity with accounting p ri nci pies gen era I ly accepted in the United States of America ( GAAP) as applied to governm en ta I units. The Governmental Accounting Standards Board (GASBJ is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The more significant ofthe City's accounting policies are described below. Reporting Entity City of Mercedes, Texas (the "City") was incorporated in 1909, under the Article XI, Section 5 of the Constitution of the State of Texas. The City operates under a City Commission-Manager form of government and provides the following services as authorized by its charter. The services include public safety (police and fire), public works, sanitation, hea Ith and soci a I services, culture-recreation, public improvements, planning and zoning, and genera I administrative services. Other services include utilities (water, sewer services and solid waste collection). As required by accounting principles generally accepted in the United States of America, these financial statements present the City of Mercedes, Texas and its component units, entities for which the City is considered to be financially accountable. The component units discussed below are included in the City's reporting entity because of the significance of their operational or financial relationships with the City. Discretely presented component units - Discretely presented component units are reported in a separate column in the combined financial statements to emphasize that they are legally separate from the City. Discretely presented component units include the following: Development Corporation of Mercedes - This component unit was organized pursuant to the Development Corporation Act of 1979, as amended by Section 4A and 48 of the act. It was established for the purpose of promoting, assisting, and enhancing economic and industrial development within the City of Mercedes and the State oft exas. The City of Mercedes appoints seven (7) directors to the Corporation's Board who in turn designate management. The corporation is authorized to negotiate the issuance of bonds which are payable solely from the revenues of said corporation. The City is not in any event liable for the payment of any obligations or agreements created or incurred by the corporation. Mercedes Industrial Foundation Inc. -The non-profit corporation acts as an agent or agency empowered to enter into contracts with political subdivisions in Mercedes. Its purpose is to encourage, promote, solicit, and assist new or expanding industries to fully utilize the existing Mercedes Industrial Park or other appropriate business or industrial sites with the approval of the governing body. Seven (7) directors are appointed by the City Commission of Mercedes who in turn designates management. Directors may be removed from office by the governing board, for cause or at will. 26

75 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Measurement Focus, Basis of Accounting and Basis of 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 financial statements. 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 a re levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. The City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, 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. The City uses funds to report on its financial position and the results of its operations. Fund accounting is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain governmental functions or activities. A fund is a separate accounting entity with a self-balancing set of accounts. The City's funds are classlfied into two categories: governmental and proprietary. Each category, in turn, is divided into separate "fund types." Governmental funds are used to account for all or most of a government's general activities, including the collection and disbursement of earmarked monies (special revenue funds), the acquisition or construction of capital assets (capital project funds), and the servicing of long-term debt (debt service funds). The General Fund is used to account for all activities of the general government not accounted for in some other fund. Proprietary funds are used to account for activities similar to those found in the private sector, where the determination of net income is necessary or useful to sound financial administration. Goods or services from such activities can be provided either to outside parties (enterprise funds) or to other departments or agencies primarily within the government (internal service funds). At September 30, 2016 and 2015, the City was not utilizing any internal service funds. The City reports the following 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 the proceeds of specific revenue sources, other than for major capital projects, that are legally restricted to expenditure for specified purposes. The City does not have any major special revenue funds. 27

76 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Measurement Focus, Basis of Accounting and Basis of Presentation - Continued The capital projects funds a re used to account for the acquisition or construction of ca pita! assets. The Series 2015 Certificates of Obligation Bonds Fund is reported as a major fund. Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general longterm debt principal, interest and related costs. The Debt Service fund is reported as a major fund. The City reports the following proprietary fund types and related major funds: Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses including depreciation) of providing goods or services to the genera I pub Ii c on a con ti nu i ng bas is be fi na need or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and net income Is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. The City reports the Utility Fund as a major fund. The Utility Fund accounts for the provision of water and sewer services to the resident of the City and some residents outside of the city. Fiduciary funds are used to account for assets held on behalf of outside parties, including other governments, or on behalf of other funds within the government. When these assets are held under the terms of a formal trust agreement, e it her a pens ion trust fund, or a private purpose trust is used. At September 30, 2016, the City was not utilizing any fiduciary fund types. In fiscal year 2016, the City adopted new statements of financial accounting standards issued by the Governmental Accounting Standards Board: Statement No. 72, Fair Value Measurement and Application Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Statement No. 79, Certain External Investment Pools and Pool Participants GASB Statement No. 72 requires disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. Governments should organize these disclosures by type of asset or liability reported at fair value. It also requires additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). GASB Statement No. 73 extends the approach to accounting and financial reporting established in Statement 68 to a 11 pensions, with modifications as necessary to reflect that for accounting and fi na ncia I reporting purposes, any assets accumulated for pensions that are provided through pension plans that are not administered through trusts that meet the criteria specified in Statement GS should not be considered pension plan assets. It also requires that information similar to that required by Statement 68 be included in notes to financial statements and required supple me nta ry information by a II si mi I a rly situated employers and none m ployer contri bu ting entities. Currently the City does not have any pension plans that are not administered through a trust. 28

77 City of Mercedes, Texas Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued September 30, 2017 Measurement Focus/Basis of Accounting and Financial Statement Presentation GASB Statement No. 76 reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and nonauthoritative literature in the eventthat the accounting treatment for a transaction or other event is not specified within a source of authoritativegaap. GASB Statement No. 79 establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized costforfinancial reporting purposes and for governments that participate in those pools. Those disclosures for both the qualifying external investment pools and their participants include information about any limitations or restrictions on participant withdrawals. There was no material impact on the City's financial statements as a result of the implementation of Statements mentioned above. Disclosures of the City's investments have been updated to reflect the implementation of GASB Statement No. 72 and GASB Statement No. 79. Assets and Deferred Outflows of Resources, liabilities, and Deferred Inflows of Resources and Equity a. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents include all demand deposits and short term investments (inclusive of restricted assets) with maturity dates within ninety days of the date initially acquired. b. Restricted Assets Certain proceeds of enterprise fund revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the statement of net position, because their use is limited by applicable bond covenants or City ordinance. Funds restricted indude amounts set aside to subsidize potential deficiencies from the enterprise funds' operations that could adversely affect debt service payments, amounts set aside from the proceeds of revenue bond issuances that a re required for payment of construction, am aunts set aside for debt service payments over the succeeding twelve months, amounts set aside for unexpected contingencies or to fund asset replacements and amounts set aside from customers' deposits. c. 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 business-type activities columns in the government-wide financial statements. Capital assets are defined by the City as assets with an initial, individual cost of $5,000 or more and an estimated usefu I life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. 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 the asset or materially extend asset lives are not capitalized. Improvements are capitalized and depreciated over the remaining useful lives of the related capital assets, as applicable. 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. 29

78 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Assets and Deferred Outflows of Resources, Uabilities, and Deferred Inflows of Resources and Equity - Continued Within the proprietary fund, 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 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 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 government-wide Statement of Activities. Capital assets, net of accumulated depreciation, 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 position. Depreciation has been provided over the estimated useful lives using the straight-line method. The estimated useful lives are asfollows: Buildings and improvements Equipment Infrastructure 10 25years 3-10years 15 40years d. Compensated Absences Accumulated unpaid compensated absences are accrued when incurred in proprietary funds. The liability for governmental funds is recorded only in the governmental activities column of the government-wide financial statements. Vested or accumulated vacation leave that is expected to be liquidated with expendable available financial resources is reported as an expenditure and a fund liability of the governmental fund that will pay it. Amounts of vested or accumulated vacation leave that are not expected to be liquidated with expendable available financial resources are reported in long-term debt. No expenditure is reported for these amounts. Vested or accumulated vacation leave of proprietary funds is recorded as an expense and liability of those funds as the benefits accrue to employees. In accordance with the provisions of Governmental Accounting Standards Board Statement No. 16, Accounting for Compensated Absences, no a ccrua I is recorded for compensated absences th at a re dependent on the pe rforma nee of tutu re services by employees or when payments are dependent on future events outside the control of the employer and employees. However, a liability is recognized for that portion of accumulating sick leave benefits that is estimated will be taken as "terminal leave" prior to retirement. e. tong 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 i nsu ranee costs, a re deferred and amortized over the life of the bonds. Bonds payable a re reported net of the applicable bond premium or discount. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. 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. 30

79 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Assets and Deferred Outflows of Resources, Liabilities, and Deferred Inflows of Resources and Equity- Continued f. Fund Balance Reporting In acco rda nee with GAS B Statement No. 54, the City's policy provides for two major types of fund balances, which a re nonspe ndabl ea nd spendable. Nonspenda ble fund balances a re balances that cannot be spent because they a re not expected to be converted to cash or they are legally or contractually required to remain intact. Examples of this classification are prepaid items and inventories. In addition to the nonspendable fund balance, the City's policy has provided a hierarchy of spendable fund balances, based on a hierarchy of spending constraints. Restricted: fund balances that are constrained by external parties, constitutional provisions, or enabling legislation. Committed: fund balances that contain self-imposed constraints of the government from its highest I eve I of decision making authority. The responsibility to commit funds rests with the City Commission. Committed amounts cannot be used for any other purpose unless the City Commission changes or lifts the constraint ta king the same formal action that imposed the constraint originally. Assigned: fund balances that contain self-imposed constraints of the government to be used for a particular purpose. The responsibility to assign funds rests with the City Manager and the Finance Director. Unassigned: fund balance of the general fund that is not constrained for any particular purpose. When an expenditure is incurred for a purpose for which both restricted and unrestricted fund balance is available, The City considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the City considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds. I Bond Issuance Costs/Bond Premiums In governmental fund types and proprietary funds, bond issuance costs are recognized in the current period. Bond premiums, discounts, and bond i nsura nee costs for government-wide financial statements and proprietary fund types are deferred and amortized over the initial life of the bonds. Bond premiums are presented as an increase in long-term liabilities, bond issuance costs are an expense of the current period and bond insurance costs are recorded as prepaid insurance and amortized over the life of the related bond. h. lnterfund Receivables, Payables and Transfers 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. Transfers used to 1) provide unrestricted revenues collected in the general fund to finance various programs accounted for in other funds, 2) reimburse the Debt Service Fund for debt service payments on debt related to the reimbursing fund, and 3) move revenues from the fund that the budget requires to collect them to the fund that the budget requires to expend them. 31

80 City of Mercedes, Texas Notes to Financial Statements NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Continued September 30, 2017 Assets and Deferred Outflows of Resources, Liabilities, and Deferred Inflows of Resources and Equity- Continued i. Comparative Data Comparative total data for the prior year have been presented in the fund financial statements {other supplementary information). j. Fair Value Measurements Investments are carried at fair value as defined in GASB Statement NO. 72 "Fair Value Measurement and Application". Consistent with GASB Statement 72, the City categorizes its fair value measurements within the fair value hierarchy. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. The City did not report any investments that required fair value disclosure during the fiscal year. k. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make es ti mates and assumptions that affect the reported a mounts of assets and lia bil it ies and disc/os ure of contingent assets and liabilities at the date of the financial statements and the reported a mounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. I. Prior Year Reclassification The financial statements for the year ended September 30, 2016, have been reclassified to conform with presentation of the statements for the year ended September 30, m. Net Position The City's net position is classified as follows: Net investment in capital assets: consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of any debt attributable to the acquisition, construction, or improvement of those assets. Restricted net position: consists of net position that is subject to a legally enforceable restriction on their use. Unrestricted: consists of all other net position that does not meet the definition of "restricted" or "net investment in capital assets." n. Deferred Outflows and Inflows of Resources In addition to assets, the combined ba la nee sheet wi II sometimes re port a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources {expense/expenditure) until then. The City reports a deferred charge on refunding, as a deferred outflow of resources in the government-wide statement of financial position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. The City also reports deferred outflow of resources related to pension as further described in Note

81 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Continued Assets and Deferred Outflows of Resources, Liabilities, and Deferred Inflows of Resources and Equity- Continued In the addition to liabilities, the combined balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The City reports unavailable revenue, as a deferred inflow of resources in the governmental funds balance sheet. The governmental funds report unavailable revenues from two sources: property taxes and noncurrent receivables. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. The City also reports deferred inflows of resources related to pension as further described in Note 12. NOTE 2 - STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY Budgetary Information Annual budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America for the General Fund and the Water, Sewer (Utility} Fund. The capital projects funds adopt project - length budgets. Formal budgetary integration is employed as a management control device during the year for the General and Debt Service, as well as for the Water, Sewer (Utility) Fund. Unused appropriations of the above an nu ally budgeted funds lapse at the end of each year. The budget a mounts shown in the financial statements are the final authorized amounts as revised during the year. Budgetary data for Capital Project Funds are budgeted over the life of the respective project and not on an annual basis. Therefore, this data is not presented in the accompanying combined financial statements. Revisions that alter total expenditures within a department must be approved by the City Commission. Therefore, the legal level of budgetary responsibility is by the departmental basis. City Management establishes the amount of estimated revenues and other resources availablefor appropriation for the succeeding budget year. City Management submits to the City Commission a proposed operating budget for the fiscal year commencing the following October 1. The operating fund includes proposed expenditures and the means of financing them. Public hearings are conducted to City Hall to obtain taxpayer comments. Prior to October 1, the budget is adopted by the CityCommission. Expenditures may not legally exceed budgeted appropriations at the department level. During the year, several supplementary appropriations were necessary. 33

82 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 2 STEWARDSHIP, COMPLIANCE ANO ACCOUNTABILITY - Continued Net Position/Fund Balance Deficit A deficit balance in fund balance occurred in the following funds for the year ended September 30, 2017 by the indicated amounts: Special Revenue Fund Mercedes Industrial Fund Mix Use Commercial Park $ (8,383) $ (3,600) $(160,300) Management will further evaluate the balance in the Special Revenue, Mercedes Industrial Fund, and Mix Use Commercial Park, andtransferfunds fromthegeneralfundor other funding sources as they become available. NOTE 3 - 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 102% secured by collateral valued at fair value, less the amount of the Federal Deposit Insurance Corporation insurance. At September 30, 2017, the City's deposits were covered by federal deposit insurance or were secured by collateral held by the City's agent in the City's name pursuantto the City's investment policy and its depository agreement. A reconcilement of cash and investments follows: Primary Government Governmental Business-type Component Cash Restricted cash Activities Activities 636, ,254 2,624,984 Total $636,218 $2,732,238 Units (10,042} 308,619 TX Class TX Class - restricted 3,525,584 95, ,750 $3,525,584 $347, ,788 4,364,636 2,876,734 $7,241,370 m,365 34

83 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE J - DEPOSITS AND INVESTMENTS - Continued The City and component unit report certain redevelopment assets. At the time of acquisition, these properties were purchased to further economic objectives. These investments must be reported at net realizable value. As of September 30, 2017, the City and component units reported redevelopment assets at $144,612 and $4,306,855, respectively. Interest Rate Risk The investment policy states that no investment shall exceed two years in maturity. By limiting the exposure of its investments by less than two years as reflected in the above schedule, the City reduces its risk to the rising interest rates. CrrditRisk As of September 30, 2017, the investments in the Texas CLASS external investment pool was rated AAAm by Moody's Investor Service and Standards and Poor' s. The City's investment policy Ii m its authorized investments to certificates of deposits, U. S. Treasuries and federal government agencies, direct obi igations of the State oft exas or its agencies, certain fu I ly col late ra I ized direct repurchase agreements, commercial pa per-2 70 day Ii m it, or any investment allowed under the Pllblic Funds Investment Act with prior approval of the City Commission. Public Funds Investment Pools Texas Cooperative Liquid Assets Securities System Trust ("Texas CLASS"), is an investment pool (local government investment pool) for its participants pursuant to Section of the Public Funds Investment Act, Texas Government Code. Texas CLASS re ports its financial statements in accordance with Financial Accounting Standard Boards (FASB) and follows ASC 820 "Fair Value Measurement and Disclosure Requirements" In reporting its investments. For pricing and redeeming shares, Texas CLASS maintains a stable net asset value (NAV) of $1 per share using the fair value method. For financial reporting purposes the City and component units reported amounts for investment pools of $3,872,914 and $478, 788, in cash and cash equivalents on the Statement of Net Position as of September 30, There were no unfunded commitments as of September 30, 2017, and amounts reported in the investment pool had a daily redemption frequency and do not require prior notice for redemption. 35

84 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 4 - RECEIVABLES Receivables at September 30, 2017, consist of the following: Prima Government Governmental Business- t:iee Debt Water and Service Non-Major Watewater General Fund Funds Total (Utility) Fund Receivables Property taxes 685, , ,531 Sales taxes Trade 659, , ,022 Grants 75,692 75,692 Other ,400 Gross Receivables 1,344, ,507 75,692 1,675, ,422 Less al I owance for u nco I lecti bl es (236,564) (91,14 3 ) (327,707} (130,611) Net total receivables 1,1os,2so 163,364 75,692 1, 347, ,810 Property tax revenues are recognized when they become available in the fund statements. Avai I able includes those property tax receivables expected to be collected within sixty days after year end. Property taxes attach as an enforceable lien on property as of January 1. Property taxes are levied as of October 1. The county appraisal district certifies the tax roll by July 25th. This tax roll is used by the City to adopt a tax rate by September 1st or soon thereafter. The tax bi I ls are mailed on October 1 or soon thereafter and a re due and payable upon receipt. The billings become delinquent as of February 1 of the following calendar year and penalties and Interest may be assessed by the City. As an inducement to expand economic business operations in the City and the Component Units, accepted notes from various businesses. These notes are for cash loans that carry various interest rates and terms. The interest rates vary by the individual entity and a re based on individual credit worthiness. Promissory notes exist for the City for various extensions of cash funds to the Component Units. These extensions of cash funds were made so the Component Units could carry out certain capital acquisition activities primarily made for furthering economic objectives. 36

85 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 4 - RECEIVABLES Continued Loan receivables at September 30, 2017 consist of the fol I owing: Promissory note from the MIF Promissory note from the EDC Promissory note from the EDC Promissory note from VIDA Promissory note from City Loan to MD International (Galvan) Loan to First National (Gomez) Loan to R. Guerra Loan to Michael Salinas Loan to De La Garza Bakery Loan to Mayo Hermanos Loan to Mayo Hermanos #2 Loan to L & G Concrete Loan to Rubiano Loan to Jose Garcia Loan to M& P Enterprises loan to Mid Valley Dental Loan to 956Sports Loan to Chari ie Bertholf loan to Longoria loan to Petra Reyna loan to the Grind Loan to Jaime Gonzalez loan to Martha Carrillo Loan to Castaneda, Mario & M Loan to Irma Cadena Loan to Maria Pineda Loan to Elias Gonzalez Loan to Nora Martinez Loan to West Harlingen Part Loan to Beatrice Edwards Total Less Allowance for Uncollectibles Net loans Receivable Governmental 127, , , , , ,176 Component Units 1,000, ,688 65,209 81,666 71, ,660 67, , ,235 73,708 84,551 32,222 5,609 9,387 54,903 74,746 57, ,911 6,078 2,598 4,621 6, , ,915,831 {744,455) 2,171,376 37

86 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 4- RECEIVABLES- Continued The City and component unit maintains an allowance for uncollectible for estimated losses resulting from the failure of individuals to make required payments. The City and component unit reviews the loans receivable on a periodic basis and makes allowances where there is doubt as to the collectability of Individual balances. In evaluating the collectabilityof individua I receivable balances, the City and component unit considers many factors, including the age of the balance, the individual's payment history, their current credit-worthiness and current economic trends. A.s of September 30, 2017, the component unit estimated an allowance for uncollectlble loans receivable of $744,455. NOTE S - CAPITAL ASSETS Capital asset activity for the year ended September 30, 2017 is as follows: Go mmental Activities Capital assets, not being depreciated: land Construction in pro1ress Beginning Balance October 1, ,2n,932 2,291,085 3,569,017 Additions Retirements Transfers Ending Balanc.e Septemer 30, 2017 i,2n,932 2,291,085 3,569,017 Capttal assets, being depdated: Buildings Furniture and equipment Improvements Infrastructure Less accumulated depredation Total capital assets, belni de dated, net 13,933,685 5,031, ,915 16,137,198 36,029,776 ( ,203) 23,294, , ,021 (l.240,409) (1,007,388) 13,933,685 5,264, ,915 16,137,198 36,262,797 (13,975,612} 22,287, 185 Governmental activities, capital assets, net 26,863,590 (l.007,388) 25,856,202 Depreciation is provided in the funds in amounts sufficient to relate the cost of the depreciable assets to operations over their estimated service lives on the straight-line basis. The service lives by type of asset are as follows: Improvements Buildings Furniture and equipment Infrastructure years 25 years 3-10 years years Depreciation was charged to government functions as follows: General Government Public Safety Public Works Highways and Streets Culture and Recreation Health and Welfare Total depreciation - governmental activities 505, ,577 42,657 42, , ,820 1,240,409 36

87 NOTE 5 CAPITAL ASSETS- Continued City of Mercedes, Texas Notes to Financial Statements September 30, 2017 Business Type Activities Beginning Balance October Additions Retirements Transfers Ending Balance Septemer 30, 2017 captlal assets, not being depreciated: Land Construction In progress 199, , , , , ,200 capital assets, being depreciated: Furniture and equipment Water system Sewer system Less accumulated depreciation Total capital assets, being depreciated, net 3,333,743 29,475,565 27,461,447 60,270,755 (18,346,7,7) 41,924,008 (l,511,899) (1,511,899) 3,333,743 29,475,565 27,461,447 60,270,755 (19,858,646) 40,412,109 Business type activities, capital assets, net 42,229,208 (l,511,899) 40, 717,309 Depreciation was charged to business type activity functions as follows: Water Sewer Total depreciation - business type activities 782, ,208 1,511,899 Activity for the component units (Mercedes Economic Devetopment Corporation and Mercedes Industrial Foundation) are as follows: Beginning Balance Ending Balance Capital assets, not be inc de predated October 2016 Additions Retirements Transfers Se terner 30l 2017 Land 433, ,597 Capital assets, belne depredated Furniture and equipment 47,103 47,103 47,103 47,103 Less accumulated depreciation (37,769) (2,001i (39,nO) Total capital assets, being depreciated, net 9,334 (2,001) 7,333 Component unit, capital assets, net 442,931 (2,001) 440,930 Depreciation of $2,001 was charged to Economic Development Services Function. 39

88 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 6 - DEFERRED OUTFLOWS AND INFLOWS OF RESOURCES Governmental funds re port deferred inflows in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of unavailable revenue reported in the fund financial statements were as follows: Other Debt Service Govemmenal Component General Fund Fund Funds Total Units Delinquent property taxes receivable 486, , ,671 Loans receivable 254, ,366 Grants 75,692 75,692 Total unavailable revenue 740, ,364 75, ,729 At the government-wide financial statements, the City reports deferred outflows and inflows of resources of the following: Deferred outflows of resources Deferred charge on refunding Deferred outflow related to pension Governmental Activities $ 86,618 1,079,454 Business-type Component Activities Unit $15,375 $ ,028 Deferred inflows of resources Deferred inflow related to pensions $ 1.166,072 $ $ $ s $ NOTE 7 - LONG-TERM DEBT Primary Government - Governmental Activities The City issues general obligation bonds and certificates of obligation to provide funds for the acquisition and construction of major capital facilities. Certificates of obligation have been issued for general government activities as well as business-type {proprietary) activities. Certificates of obligation are direct obligations and pledge the full faith and credit of the City. These bonds and certificates generally are issued as 25-year serial bonds, with varying amounts of principal maturing each year. 40

89 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT - Continued Primary Government - Governmental Activities long-term obligations currently outstanding are as follows: Long-term obllptlons aurently outstandln1 are as follows: 8alance at Original Interest Octoberl,. Serles Balance Rate"' 2016 Serles 2007COmbtnallon Tax and Umlted Pledge Revenue Ce rtlfl cates of Obll 1at10 n $ 6,480, $ 4,860,000 s Increase Balanoe at September30, OueinOne Deuease 2017 Year $ (4,525,000) s 335,000 $ 335,000 Serles 2010 Um!ted Tax Refunding Bonds 1,.623, (183,fiOO) 189, ,000 Series 2010A Umlted Tax Refunding Bonds 2,887,850 l.00 l.so 1,499,328 (283,937) 1,215, ,685 USOA Note Payable 1,54.9, ,500,000 ( 1, S00.000) Series 2013 Public Property Finance Contractual Ob llsatlons 2,860, ,000 (275,000) 2,050, ,000 Serf es 2015Comblnatlon fa)( and Limited Pledge Revenue Certl fl cation of Obi l1atl on 2, ,555,000 (80,000) 2,475,000 80,000 S.rfes 2015 Obllptlon Refunding Bond 2,.l65, ,205,000 (205,000) 2.000, ,000 Serles 2016 Limited Tax Refunding Bonds 5,505, S150S12.SO!109,800) ,400 $ 1S,316,9l8 $ S, s ( 7, 162,337) s 13, 659,841 s 1,443, 41

90 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 LONG-TERM DEBT-Continued Primary Government - Business-Type Activities long-term obligations currently outstanding for business-type activities are as follows: lona term obllgatlons curre ntlv outstandlna a as follows: Balance at Balance at Original Interest Oct:ober1, September 30, Cue In One series Balance Rate 2016 lnaease Decrease 2017 Vear Series 2006Comblnatlon and Subordinate Uen Revenue Certificates of Obll1atton $ 1,265,000 $ 715,000 s $ (65,000) $ 650,000 $ 65,000 Se rte s 200! Cert I fl c.tes of Ob llptlons 7,560,000 US-.t.00 5,390,000 (3,945,000) 1,445, ,000 Serf es 2010 Umlted Tax Refunding Bonds 2,886, (326,400) 336, ,000 Serles loloa Umlted Tak Refunding Bonds 1.282, ,672 (126,063) 539,609 U7,600 Serles 2013 Utllfty System Revenue Bonds 3,255, ,935,000 (160,000) zns,ooo 160,000 Serles 2013 General Otlll&atlon Refunding Bonds 680, ,000 (65,000) 480, ,000 Serie$ 2016UmitedTax Refundtna Bonds 3,519, ,519, ,449 ts,600 $ w. 913,072 s 3,519,750 $ (4.757,663) $ 9,67S.1S9 $ Com2onent Unit: long-term obligations currently outstanding for component units are as follows: Balance at Balance at Octoberl, September 30, Due in One Serles 2016 Increase Decrease 2017 Year Notes Payable 4,273,442 (420,095) 3,853, ,359 Series 2007 Sales Tax Revenue Bonds 2.37St000 l170,000) 2,2os,ooo 6,648,442 (590,095) 6,058, ,359 42

91 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT - Continued Governmental Activities Notes Payable Governmental activities notes payable as of September 30, 2017 are as follows: A note dated March 1, 2016 and payable to the Development Corporation of Mercedes for $1,000,000. The terms of the note include principal payments of $10,417 beginning April 2018, continuing monthly thereafter until March 2026, when the entire balance will be due and payable. The note is interest free and not secured. $ 1,000,000 A note dated April 13, 2016 and payable to Thomas P. Champion, Jr. for $1,520,743 The terms of the note include principal and interest payments of $19,957 beginning May 13, 2016, continuing monthly thereafter until April 13, 2023, when the entire balance, including principal and interest will be due and payable. The interest rate is a fixed 2.8%. The note secured by a lien on deed of property purchased. 1,236,524 A note dated October 1, 2010 and payable to the National Council of La Raza for $47,500. The note is for a 24 month period beginning October 1, 2010 and ending September 30, ,500 Total Governmental Activities Notes Payable $ Busjness-Type Activities Notes Payable Business-type activities notes payable as of September 30, 2017 are as follows: A note dated March 15, 2016 and payable to CH2MHILL for $620,155. The terms of the note include principal and interest payments of $27,207 beginning April 15, 2016, continuing monthly thereafter until March 15, 2018, when the entire balance, including principal and interest will be due and payable. The interest rate is a fixed 5.00%. The note is not secured. $ 160,888 Total Business-Type Activities Notes Payable $ Component Unit Notes Payable Component Unit notes payable as of September 30, 2017 are as follows: A note dated January 5, 2015 and payable to the Office of the Governor Economic Development and Tourism Division for $1,075,000. The terms of the note include principal and interest payments of $10,530 beginning March 1, 2015 and continuing regularly thereafter until February 1, 2025 when the entire balance, including principal and interest will be due and payable. The interest rate is fixed at 3.25%. The note is secured by a lien on and security interest in sales and use tax. $ 826,118 43

92 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 LONG-TERM DEBT - Continued A note dated September 24, 2009 and payable to USDA for $750,000. The terms of the note include principal and interest payments of $30,848 beginning October 2015 and continuing regularly thereafter until October 2041 when the entire balance, including principal and interest will be due and payable. The interest rate is fixed at 1.0%. The note is secured by funds placed in the IRP revolving fund and various collateral obtained as a result of lending activity. $ 652,863 A note dated July 10, 2014 and payable to City of Mercedes for $292,000. The terms of the note include principal and interest payments of $15, 125 beginning October 25, 2014 and continuing regularly thereafter until October 25, 2019, when the entire balance, including principal and interest will be due and payable. The interest rate is fixed at 3.0%. The note is not secured. 254,366 A note dated July 1, 2015 and payable to City of Mercedes for $150,000. The terms of the note include principal and interest payments of $7,500 beginning October 1, 2015 and continuing regularly thereafter until July 1, 2020, when the entire balance, including principal and interest will be due and payable. The loan is interest free and is not secured. 120,000 A note dated February 17, 2016 and payable to Valley Telephone Cooperative, Inc. for $2,000,000. The terms of the note include principal payments of $20,833 and continuing regularly thereafter until March 2026, when the entire balance, will be due and payable. The note is secured by 119 acres owned by the DCM. The note was used to further economic objectives Total Component Unit notes payable $

93 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT-Continued The annual debt service requirements to maturity for Governmental Activities long-term debt obligations are as follows: Total Bonds Payable Total Notes Payable Total Requirements Year Ended September 30, Principal Interest Principal Interest Principal Interest ,405, , ,487 31,973 1,755, , ,567, , ,487 26,087 1,931, , ,450, , ,487 20,035 1,814, , ,496, , ,487 13,811 1,861, , ,466, , ,487 7,410 1,830, , ,848,700 1,174, ,589 1,295 8,325,289 1,175, ,456, ,153 2,456, , ,850 15, ,850 15, ,864,841 3,755,403 2,284, ,611 20,148,865 3,856,014 The annual debt service requirements for Business-type Activities long-term debt obligations are as follows: Total Bonds Pay:able Total Notes Pay:able Total Reguirements Year Ended September 30, PrinciE!al Interest PrinciE!al Interest PrinciE!al Interest ,044, , ,888 2,354 1,205, , , , , , , , , , , , , , , , , , ,021, ,346 5,021, , ,643, ,129 2,643, , ,150 11, ,150 11, ,635,159 2,793, ,888 2,354 12,796,047 2,795,944 45

94 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT - Continued The annual debt service requirements to maturity for the Component Units are as follows: Total Bonds Total Notes Payable Total Reguirements Year Ended Principal Interest Principal Interest Principal Interest September 30, , , ,359 40, , , ,000 92, ,930 35, , , ,000 83, ,104 29, , , ,000 74, ,787 20, ,787 95, ,000 66, ,705 17, ,705 83, ,225, ,436 2,320,525 35,450 3,545, , ,683 16, ,683 16, ,961 9, ,961 9, , ,205, ,318 3,853,347 1,879 95,293 1, ,210 6,058, ,528 46

95 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT - Continued Changes in Long-term Debt for Governmental Activities During the year ended September 30, 2017, the following changes occurred in liabilities reported in the long-term debt in governmental activities: Amounts Due October 1, September 30. Within One 2016 Additions Reductions 2017 Year General Government General obligation debt $15,316,928 5,505,250 (7,162,337) 13,659,841 1,441,085 Premium on bonds 24, ,785 (7,103) 338,U3 Note payable 2,485,815 (201,791) 2,284, ,514 Compensated absences 228,448 33, ,464 Total long-term liabilities 18,055,632 5,859,051 (7,371,231) 16,543,452 1,648,599 Net pension liability 4,788, ,150 4,956,736 Total long-term liabilities $22,844,218 $6, (7,371,231) $21,500, 188 $1,648,599 Business-type activities General obligation debt $10,913,072 3,497,611 (4,757,663) 9,653,020 1,109,200 Premium on bonds 20,698 20,698 Notes payable 470,869 (309,981) 160, ,888 Compensated absences 17,925 24,510 (22,791} 19, Long-term liabilities 11,422,564 3,522,121 (5,090,435) 9,854,250 1,270,088 Net pension liability 595,375 (22, 04 1! 573,334 Total long-term liabilities $12,017,939 $3,522,121 (5,112,476) $10,427,584 $1,270,088 Total primary government $34,862,157 $9,549,322 (12,483, 707} $31,927, 772 $2,918,687 Component Unit Revenue bonds $2,375,000 (170,000) 2,205, ,359 Note payable 4,273,442! 420, 095! 3,853, ,000 Total long-term liabilities 6.648,442 (590,095) 6,058,347 Net pension liability 271,586 (8,854) 262,732 Total long-term liabilities $6,920,028 (598,949) 6,321, , ,359 47

96 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 7 - LONG-TERM DEBT - Continued Non-exchange Financial Guarantee During the fiscal year the City guaranteed certain debt of the Development Corporation of Mercedes (DCM). The Development Corporation of Mercedes is part of the City's financial reporting entity and is presented as part of the aggregate discretely presented component units. This is the only nonexchange financial guarantee extended by the City. On April 13, 2016, the City guaranteed the DCM' s $1,520, 7 43 note payable executed by the DCM. The note payable consist of monthly payments over a 7 year repayment period. At September 30, 2017 the outstanding principal amount of the guaranteed debt is $1, 236,524. During the year the City assumed the full amount of the note payable. As a result, the liability for the note payable has been recognized as long term debt of the City's govern mental activities at the principal amount outstanding. As of September 30, 2017, the liability recognized for the nonexchange financial guarantee is as follows: October 1, 2016 Additions Payments September 30, 2017 Financial guarantee of note payable $1,438,315 (201,791} $1,236,524 The City does not f!!xpect to recover any payments it makes on the DCM's guaranteed debt. NOTE 8 - INTERFUND RECEIVABLES AND PAYABLES lnterfund Balances General Fund Special Revenue Funds Debt Service Fund Enterprise Fund Component Units Total Receivables 199, , ,030 Payables , ,030 lnterfund balances are due to past advances in other funds that were approved by past administrations. Those are expected to be funded once funds are made available. NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES Grants The City participates in a number of grant programs funded by State and Federal Agencies. These programs are subject to compliance audits by the grantor agencies or their representatives. Audits of all of these programs including the year ended September 30, 2017 have not been conducted. Accordingly, the City's compliance with applicable grant requirements will be established at some future date. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time although the City expects such amounts, if any, to be immaterial. 48

97 NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES-Continued City of Mercedes, Texas Notes to Financial Statements September 30, 2017 Litigation In addition, at September 30, 2017, the City was a defendant in various litigation as to which the ultimate resolution and possibility of any unfavorable outcome is not yet determinable. At the present time, the City does not anticipate any material losses as a result of these lawsuits. Estimated Expended Through Amount Project Project Costs 30-Sep-17 Committed Gove mme ntal Activities Streets IV $2,102,021 $1,966,093 $135,928 Park Pavilion 280, ,245 $157,755 Walking Trail ,178 $2,697,121 $2,572,516 $124,605 Business-type Activities Mile 2 West improvements $979,030 $106,100 $872,930 In addition to the construction in progress projects at September 30, 2017, the City has also committed $2,624,984 in an escrow account for the purchase of the North Alamo Water Supply internal water utility lines, individual meters and the right to serve customers within a designated area. The sale agreement is pending approval by the Public Utility Commission. The Development Corporat;on of Mercedes extended economic incentives to the following entities as follows: Paid in Paid in Entity Commitment Prior Year Current Year Balance Due Knapp Medical Center 750, , ,000 OA Mercedes Health Realty 590, , ,000 Rio Grande Livestock Show 300,000 50, ,000 Llano Grande fllobile Park 250, , ,000 Raybecc Ohio Street, LLC 200,000 50,000 50, ,000 Rios of fv1ercedes 254,000 50,800 50, ,400 Storage Depot (demo paid directly to contractor) 145, ,943 JWTC Homes 75,000 75,000 JPO Enterprises 60,000 30,000 30,000 Texas Rio Grande Legal Aid 330,000 50, , ,000 Protech 75,000 37,500 37,500 Total commitments 3,029, , ,754,400 Subsequent year balances of $1,754,400 are contingent on the business entities maintaining agreed upon conditions relating to the incentives. This amount is not recognized as a liability in the financial statements. 49

98 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 10 - TRANSFERS Transfer Out Funds General Fund Debt Service Fund Governmental Funds Total General Fund 71,388 71,388 Other Governmental Funds Utility Fund 23,118 23,118 23,118 71,388 94,506 Current year transfer was made into the general fund from residual fund balances in the Mercedes Fire Station capital projects fund. In addition, a current year transfer was made from the General Fund to the Dome Shelter Fund to cover cost overruns and offset negative reported fund balance. NOTE 11 RISK MANAGEMENT The City of Mercedes is exposed to various uncertainties for losses related to intentional and unintentional torts; theft of, damage to and destruction of real and personal property; errors-and-omissions; catastrophes, and medical claims by employees; job-related Illnesses and injuries and pollution claims for which the City carries commercial insurance coverage. There has been no significant reductions in insurance coverage from the previous year. No negotiated settlements or jury awards have exceeded policy limits in any of the past three years. The City is a member of an intergovernmental risk pool. The risk pool is an interlocal non-assessable agency with present unreserved resources in excess of $374,000,000 (as of September 30, 2017, the most recently audited financial statements completed for the risk pool). Reinsurance is provided by several A and A++ rated companies in amounts ranging from $10,000,000 to $100,000,000 depending on type of insurance coverage. City management is not aware of any pending or alleged claims that could exceed the policy limits of the present insurance coverage. 50

99 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 12 - DEFINED BENEFIT PENSION PLAN Plan Description The City of Mercedes participates as one of 860 plans in the nontraditional, joint contributory, hybrid defined benefit plan administered by the Texas Municipal Retirement System (TMRS). TMRS is an agency created by the State oftexas and administered in accordance with the TMRS Ac:t, Subtitle G, Title 8, Texas Government Code (the TM RS Act) as an agent multiple-employer retirement system for mun ici pa I employees in the State of Texas. The TMRS Act places the general administration and management of the System with a six-member Board oftrustees. Although the Governor, with the advice and consent of the Senate, appoints the Board, TMRS is not fiscally dependent on the State oftexas. TMRS's defined benefit pension plan is a tax-qualified plan under Section 401(a) of the Internal Revenue Code. TMRS issues a publicly available comprehensive annual financial report (CAFR) that can be obtained at All eligible employees of the City are required to participate in TMRS. Benefits Provided TM RS provides retirement, disability, and death benefits. Benefit provisions are adopted by the governing body of the City, within the options available in the state statutes governing TM RS. At retirement, the benefit is calculated as if the sum of the employee's contributions, with interest, and the cityfinanced monetary credits with interest were used to purchase an annuity. Members may choose to receive their retirement benefit in one of seven payments options. Members may also choose to receive a portion of their benefit as a Partial Lump Sum Distribution in an amount equal to 12, 24, or 36 monthly payments, which cannot exceed 75% of the member's deposits and interest. 51

100 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 12 - DEFINED BENEFIT PENSION PLAN - Continued Employees co11ered by benefit terms At the December 31, 2016 va I uation and m easu reme nt date, the following employees were covered by the benefit terms: Inactive employees or beneficiaries currently receiving benefits Inactive employees entitled to but not yet receiving benefits Active employees Contributions The contribution rates for employees in TMRS are either 5%, 6%, or 7% of employee gross earnings, and the city matching percentages are either 100%, 150% or 200%, both as adopted by the governing body of the city. Under the state law governing TM RS, the contribution rate for each city is determined annually by the actuary, using the Entry Age Norma I (EAN) actuaria I cost method. The actuarially determined rate is the estimated amount necessary to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Employees for both the City of Mercedes, Texas and component units were required to contribute 7.00% of their annual gross earnings during the fiscal year. The contribution rates for the City were 19.28% and 19.31% in calendar 2016 and 2017, respectively. The City's and the component units contributions to TMRS for the year ended September 30, 2017 were $768,533 and $27,152, respectively and were equal to the required contributions. Net Pension Liability The City's Net Pension Lia bi I ity ( N Pl) was measured as of Oecem ber 31, 2016, and the Tota I Pension liability (TP L) used to calculate the Net Pension liability was determined by an actuarial valuation as of that date. Actuarial assumptions: The Total Pension Liability in the December 31, 2016 actuarial valuation was determined using the following actuarial assumptions: Inflation Overall payroll growth Investment Rate of Return 2.5% peryear 3.0% peryear 6. 75%, net of pension plan investment expense, including inflation 52

101 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 12 - DEFINED BENEFIT PENSION PLAN - Continued Salary increases were based on a service-related table. Mortality rates for active members, retirees, and beneficiaries were based on the gender-distinct RP2000 Combined Healthy Mortality Table, with male rates multiplied by 109%and female rates multiplied by 103%. The rates are projected on a fully generational basis by scale BB to account for future mortality improvements. For disabled annuitants, the gender-distinct RP2000 Disabled Retiree Mortality Table is used, with slight adjustments. Actua ria I a ssum pt ions used in the December 31, 2016, valuation we re based on the resu Its of actua ria I experience studies. The experience study in TMRS was for the period December 30, 2010 through December 30, Healthy post-retirement mortality rates and annuity purchase rates were updated based on a Mortality Experience Investigation Study covering 2009 through 2011, and dated December 31, These assumptions were first used in the December 31, 2013 valuation, along with a change to the Entry Age Normal (EAN) actuarial cost method. Assumptions are reviewed annually. No additional changes were made forthe 2016 valuation. After the Asset Allocation Study analysis and experience investigation study the Board amended the long-term expended rate of return on pension plan investments from 7% to 6. 75%. The pension plan's policy in regard to the allocation of invested assets is established and may be amended by the TMRS Board oftrustees. Plan assets are managed on a total return basis with an emphasis on both capital appreciation as well as the production of income, in order to satisfy the short-term and long-term funding needs of TMRS. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Asset Class Domestic Equity International Equity Core Fixed Income Non-Core Fixed Income Real Return Real Estate Absolute Return Private Equity Total Target Allocation 17.5% 17.5% 10.0% 20.0% 10.0% 10.0% 10.0% 5.0% 100,0% Long-term Expected Real Rate of Return (Arithmetic) 4.550% 6.10% 1.00% 3.65% 4.03% 5.00% 4.00% 8.00% Discount Rate The discount rate used to measure the Total Pension Liability was 6. 75%. The projection of cash flows used to determine the discount rate assumed that employee and employer contributions will be made at the rates specified in statute. Based on that assumption, the pension plan's Fiduciary Net Position was projected to be available to make a 11 projected future benefit payments of current active and in active employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the Total Pension Liability. 53

102 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 12 - DEFINED BENEFIT PENSION PLAN - Continued Changes in the City's net pension liability for TMRS pension for the fiscal year ended: City Com e onent Unit {Increase (Decrease) Increase (Decrease) (a) (b} (a}-(b} (a) (b) (a)-(b) Total Totill Pension Plan Fiduciary Net Pension Plan Fiduciary Net Pension Pension Liability Net Pension Uabll!ty Net Pension Uablllty Liability Balance at December 31, ,745,933 13,361,9n S,383, , , ,586 Changes for the year Se rvlce cost 704, ,243 36,286 36,286 Interest 1,267,513 1,267,513 65,308 65,308 Change In benl!flt terms Difference between expected/ actual experience (224,969) (224,969) (U,591) (11,591) Changes of assumptions Contrl butlons - employer 750,643 (750,643) 38,677 (38,677) Contributions - employee 275,249 (275,249) 14,182 (14,182) Net Investment Income 903,4n (903,472) 46,551 (46,551) Benefit payments, lndudlng refunds of employee contributions (623,828) (623,828) (32,143) (32,143) Administrative expenses (10,197) 10,197 Other charges (550} Net changes 1.122,959 1,294,789 (171,830) 57,860 66,714 (8,854) Balance at December 31, ,868,892 14,656,761 s , , , (525) (28) Net pension liability amounts are allocated between the governmental activities and business-type activities on the statement of net position. Governmental activities and busjness-type activities reported net pension I ia bil ity in the amount of $4,635, 721 and $576,410, respectively. Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the City, calculated using the discount rate of 6. 75%, as well as what the City's net pension liability would have been if it were calculated using a discount rate that is 1 percentage point lower (5.75%) or l percentage point higher (7.75%) than the current rate. City's net pension liability Component unit's net pension liability 1% Decrease in Discount Rate (5.75%) $8,153, Discount Rate (6.75%) $5,206, ,268 1% rncrease in Discount Rate {7.75%) $2,792, ,903 Total net pension liability $ $ $

103 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 12 - DEFINED BENEFIT PENSION PLAN - Continued Pension Expense and Deferred Outflows of Resources and De/erred Inflows of Resources Related to Pensions Fort he year ended September 30, 2017 the City and component unit recognized a combined pension expense in the amount of $832, 764and $41,988, respectively. At September 30, 2017 the City reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Cit Component Unit Outflows of Inflows of Outflows of Inflows of Resources Resources Resources Resources Differences between expected and actual economic experience (net of current year amortization) 178,584 9,201 Changes in acturial assumptions Differences between projected and actual Investment earnings (net of current year amortization) 1, Contributions subsequent to measurement date Total , ,957 19,384 19,384 9,2n Def erred outflows and deferred inflows of resources related to pensions are allocated between the governmental activities and business-type activities on the statement of net position. The governmental activities portion of deferred outflows of resources related to pensions is $491,812 and the business-type activities is $53,670. Furthermore, the governmental activities portion of deferred inflows ofresources related to pensions is $160,162 and the business-type activities is$19,795. $545,482 and $19,384 in the City and component unit, respectively, which are reported as deferred outflows of resources related to pensions resulting from contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability for the year ended September 30, Other amounts reported as deferred outflows and inflows of resources related to pensions wi I I be recognized in pension expense as follows: Year Ended September 30, Thereafter City 22,031 22,031 61,516 53,552 Component Unit 1,005 1,005 2,805 2,442 55

104 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 13 - OTHER POST EMPLOYMENT BENEFITS Plan Description The City also participates in the cost sharing multiple-employer benefit group-term life insurance plan operated by the Texas Municipal Retirement System (TMRS) known as the Supplemental Death Benefits Fund (SDBF). The City elected, by ordinance, to provide group-term life insurance coverage to both current and retired employees. The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. Benefits The death benefit for active employees provides a lump-sum payment approximately equal to the employee's annual salary (calculated based on the employee's actual earnings, for the 12-month period preceding the month of death); retired employees a re lnsu red for$ 7,500; th is coverage is an "other postemployment benefit," or OPE B. Contributions The City contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one-year term life insurance. The funding policy fort he SDBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to pre-fund retiree term life insurance during employees' entire careers. The City's contributions to the TMRS SDBF for the years ended 2017, 2016 and 2015 were$, $1,667 and $8,002 respectively, which equaled the required contributions each year. Schedule of Contribution Rates (RETIREE - only portion of the rate) Annual Actual Plan/ Required Contribution Percentage Calendar Contribution Made of ARC Year {Rate) (Rate) Contributed % 0.05% 100.0% % 0.04% 0.04% 0.04% 100.0% 100.0% 56

105 City of Mercedes, Texas Notes to Financial Statements September 30, 2017 NOTE 14 - COMPLIANCE AND ACCOUNTABILITY Finance-Related Legal and Contractual Provision In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of finance related legal and contractual provisions, if any, are reported below, along with actions taken to address such violations: None noted. NOTE 15 - FUND BALANCES Nonspendable -These funds were used to purchase inventory items. Restricted - External parties have restricted these funds to be used for their intended purpose. Assigned -The City Commission has authorized the City to use these funds for specifically identified purposes. Unassigned-The unassigned fund balance has no constraints. Series 2015 Certificates of Debt Obligation Other Total General Service Bonds Governmental Government Fund balance (deficit) Fund Fund Fund Funds Funds Non-s pe nda ble Restricted Debt Service - 584, ,536 Capital Projects 92, , ,046 Hotel/Motel tax 989, ,085 Special Revenue 94,993 94,993 Assigned Municipal court fees 52,831 52,831 Industrial Foundation Unassigned 4, 770,240 4,770,240 4, 770, ,536 92,299 1,295,656 6,742,731 NOTE 16 - SUBSEQUENT EVENTS Management has evaluated subsequent events through June 7, 2018 the date the financial statements were available to be issued. 57

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107 APPENDIX D FORM OF BOND COUNSEL'S OPINION

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109 Norton Rose Fulbright US LLP 300 Convent Street, Suite 2100 San Antonio, Texas United States Tel Fax nortonrosefulbright.com Norton Rose Fulbright US LLP is a limited liability partnership registered under the laws of Texas. DRAFT 10/29/18 IN REGARD to the authorization and issuance of the City of Mercedes, Texas Combination Tax and Limited Pledge Revenue Certificates of Obligation, Series 2018 (the Certificates), dated December 1, 2018 in the aggregate principal amount of $, we have reviewed the legality and validity of the issuance thereof by the City Commission of the City of Mercedes, Texas (the Issuer). The Certificates are issuable in fully registered form only, in denominations of $5,000 or any integral multiple thereof (within a Stated Maturity). The Certificates have Stated Maturities of February 15 in each of the years 2019 through 2038, unless redeemed prior to Stated Maturity in accordance with the terms stated on the face of the Certificates. Interest on the Certificates accrues from the dates, at the rates, in the manner, and is payable on the dates, as provided in the ordinance (the Ordinance) authorizing the issuance of the Certificates. Capitalized terms used herein without definition shall have the meanings ascribed thereto in the Ordinance. WE HAVE SERVED AS BOND COUNSEL for the Issuer solely to pass upon the legality and validity of the issuance of the Certificates under the laws of the State of Texas and with respect to the exclusion of the interest on the Certificates from the gross income of the owners thereof for federal income tax purposes and for no other purpose. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer or the Issuer s combined utility system and have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Certificates. We express no opinion and make no comment with respect to the sufficiency of the security for or the marketability of the Certificates. Our role in connection with the Issuer s Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. WE HAVE EXAMINED, the applicable and pertinent laws of the State of Texas and the United States of America. In rendering the opinions herein we rely upon (1) original or certified copies of the proceedings of the City Commission of the Issuer in connection with the issuance of the Certificates, including the Ordinance; (2) customary certifications and opinions of officials of the Issuer; (3) certificates executed by officers of the Issuer relating to the expected use and investment of proceeds of the Certificates and certain other funds of the Issuer, and to certain other facts solely within the knowledge and control of the Issuer; and (4) such other documentation, including an examination of the Certificate executed and delivered initially by the Issuer, and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements and information contained in such certificates. We express no opinion concerning any effect on the following opinions which may result from changes in law effected after the date hereof. Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients. Details of each entity, with certain regulatory information, are available at nortonrosefulbright.com.

110 Legal Opinion of Norton Rose Fulbright US LLP, San Antonio, Texas, in connection with the authorization and issuance of CITY OF MERCEDES, TEXAS COMBINATION TAX AND LIMITED PLEDGE REVENUE CERTIFICATES OF OBLIGATION, SERIES 2018 BASED ON OUR EXAMINATION, IT IS OUR OPINION that the Certificates have been duly authorized and issued in conformity with the laws of the State of Texas now in force and that the Certificates are valid and legally binding obligations of the Issuer enforceable in accordance with the terms and conditions described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity. The Certificates are payable from the proceeds of an ad valorem tax levied, within the limitations prescribed by law, upon all taxable property in the Issuer and are further payable from and secured by a lien on and pledge of the Pledged Revenues, being a limited amount of the Net Revenues derived from the operation of the Issuer s combined utility system (the System), such lien on and pledge of the limited amount of Net Revenues being subordinate and inferior to the lien on and pledge thereof providing for the payment and security of the currently outstanding Prior Lien Obligations and any Additional Prior Lien Obligations, Junior Lien Obligations, or Subordinate Lien Obligations hereafter issued by the Issuer. The Issuer has previously authorized the issuance of the Limited Pledge Obligations that are payable in part from and secured by a lien on and pledge of a limited amount of the Net Revenues of the System in accordance with the ordinances authorizing the issuance of the currently outstanding Limited Pledge Obligations. In the Ordinance, the Issuer reserves and retains the right to issue Additional Prior Lien Obligations, Junior Lien Obligations, Subordinate Lien Obligations, and Additional Limited Pledge Obligations, without limitation as to principal amount but subject to any terms, conditions, or restrictions as may be applicable thereto under law or otherwise. BASED ON OUR EXAMINATION, IT IS FURTHER OUR OPINION that, assuming continuing compliance after the date hereof by the Issuer with the provisions of the Ordinance and in reliance upon the representations and certifications of the Issuer made in a certificate of even date herewith pertaining to the use, expenditure, and investment of the proceeds of the Certificates, under existing statutes, regulations, published rulings, and court decisions (1) interest on the Certificates will be excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof (the Code), of the owners thereof for federal income tax purposes, pursuant to section 103 of the Code, and (2) interest on the Certificates will not be included in computing the alternative minimum taxable income of the owners thereof. WE EXPRESS NO OTHER OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Ownership of tax-exempt obligations such as the Certificates may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of an interest in a financial asset securitization investment trust, individual recipients of Social Security or Railroad Retirement Benefits, individuals otherwise qualifying for the earned income credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations.

111 Legal Opinion of Norton Rose Fulbright US LLP, San Antonio, Texas, in connection with the authorization and issuance of CITY OF MERCEDES, TEXAS COMBINATION TAX AND LIMITED PLEDGE REVENUE CERTIFICATES OF OBLIGATION, SERIES 2018 OUR OPINIONS ARE BASED on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. Norton Rose Fulbright US LLP

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