OFFICIAL STATEMENT DATED MARCH 18, 2014 Ratings: Moody’s: “Aa2” S&P: “AA” (See “OTHER INFORMATION - NEW ISSUE – BOOK-ENTRY-ONLY RATINGS” herein)

In the opinion of Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and the Obligations are not “private activity bonds.” See “TAX MATTERS” for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations.

THE OBLIGATIONS WILL NOT BE DESIGNATED AS “QUALIFIED TAX-EXEMPT OBLIGATIONS” FOR FINANCIAL INSTITUTIONS

CITY OF BAYTOWN, TEXAS (Harris and Chambers Counties)

$28,520,000 $11,715,000 GENERAL OBLIGATION AND COMBINATION TAX AND REVENUE REFUNDING BONDS CERTIFICATES OF OBLIGATION SERIES 2014 SERIES 2014

Dated Date: April 1, 2014 Due: February 1, as shown on the inside cover Interest Accrual Date: Date of Delivery

The $28,520,000 City of Baytown, Texas, General Obligation and Refunding Bonds, Series 2014 (the “Bonds”), and the $11,715,000 City of Baytown, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2014 (the “Certificates”) are being issued by the City of Baytown, Texas (the “City”) pursuant to the terms of two separate ordinances adopted by the governing body of the City and two separate pricing certificates executed pursuant thereto. The Bonds and the Certificates are referred to herein collectively as the “Obligations.” The Bonds and the Certificates are separate securities offerings being issued and sold independently except for the use of a common official statement.

Interest on the Obligations will accrue from the date of delivery and will be payable February 1 and August 1 of each year commencing August 1, 2014, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see “THE OBLIGATIONS – BOOK- ENTRY-ONLY SYSTEM”). The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (see “THE OBLIGATIONS – PAYING AGENT/REGISTRAR”).

See Maturity Schedules on Inside Cover

The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. (See “THE OBLIGATIONS – OPTIONAL REDEMPTION”).

The Obligations are offered for delivery when, as and if issued and received by the underwriters listed below (the “Underwriters”) and subject to the approving opinion of the Attorney General of Texas and the opinion of Bracewell & Giuliani LLP, Houston, Texas, Bond Counsel (see “APPENDIX C – FORMS OF BOND COUNSEL’S OPINIONS”). Certain legal issues will be passed upon for the Underwriters by Haynes and Boone, LLP, Houston, Texas, counsel for the Underwriters. It is expected that the Obligations will be available for delivery through DTC on April 15, 2014.

BAIRD RAYMOND JAMES SOUTHWEST SECURITIES

MATURITY SCHEDULE

$28,520,000 GENERAL OBLIGATION AND REFUNDING BONDS SERIES 2014

Initial Initial Due PrincipalInterest Reoffering Due Principal Interest Reoffering Feb. 1 AmountRate Yield(1) CUSIP (2) Feb. 1 Amount Rate Yield(1) CUSIP (2) 2015$ 1,550,000 2.000 % 0.240 % 073186HA9 2025 (3) $ 2,100,000 4.000 % 3.000 % 073186HL5 2016 2,365,000 3.000 0.340 073186HB7 2026 (3) 1,790,000 4.000 3.130 073186HM3 2017 2,075,000 3.000 0.570 073186HC5 2027 (3) 590,000 3.250 3.340 073186HN1 2018 1,835,000 3.000 0.910 073186HD3 2028 (3) 610,000 3.375 3.500 073186HP6 2019 1,905,000 3.000 1.260 073186HE1 2029 (3) 630,000 3.500 3.610 073186HQ4 2020 1,980,000 4.000 1.690 073186HF8 2030 (3) 655,000 3.500 3.760 073186HR2 2021 1,770,000 4.000 2.110 073186HG6 2031 (3) 680,000 3.750 3.870 073186HS0 2022 1,845,000 4.000 2.440 073186HH4 2032 (3) 705,000 3.750 3.950 073186HT8 2023 1,930,000 4.000 2.680 073186HJ0 2033 (3) 730,000 4.000 4.020 073186HU5 (3) 2024 2,015,000 4.000 2.820 073186HK7 2034 760,000 4.000 4.070 073186HV3

$11,715,000 COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2014 Initial Initial DuePrincipal Interest Reoffering Due Principal Interest Reoffering Feb. 1Amount Rate Yield(1) CUSIP (2) Feb. 1 Amount Rate Yield(1) CUSIP (2) 2015$ 410,000 2.000 % 0.240 % 073186HW1 2025 (3) $ 585,000 4.000 % 3.000 % 073186JG4 2016 425,000 3.000 0.340 073186HX9 2026 (3) 610,000 4.000 3.130 073186JH2 2017 435,000 3.000 0.570 073186HY7 2027 (3) 630,000 3.250 3.340 073186JJ8 2018 450,000 3.000 0.910 073186HZ4 2028 (3) 655,000 3.375 3.500 073186JK5 2019 460,000 3.000 1.260 073186JA7 2029 (3) 675,000 3.500 3.610 073186JL3 2020 480,000 4.000 1.690 073186JB5 2030 (3) 700,000 3.500 3.760 073186JM1 2021 500,000 4.000 2.110 073186JC3 2031 (3) 725,000 3.750 3.870 073186JN9 2022 520,000 4.000 2.440 073186JD1 2032 (3) 755,000 3.750 3.950 073186JP4 2023 540,000 4.000 2.680 073186JE9 2033 (3) 785,000 4.000 4.020 073186JQ2 (3) 2024 560,000 4.000 2.820 073186JF6 2034 815,000 4.000 4.070 073186JR0

(1) The initial reoffering prices or yields on the Obligations are furnished by the Underwriters and represent the initial offering prices or yields to the public, which may be changed by the Underwriters at any time. (2) CUSIP numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the purchasers of the Obligations. Neither the City, the Financial Advisor nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. (3) The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. (See “THE OBLIGATIONS – OPTIONAL REDEMPTION.)

ii This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale.

No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City, the Underwriters or any other person.

The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the City or Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized.

The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described.

NEITHER THE CITY, THE UNDERWRITERS NOR THE FINANCIAL ADVISOR MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY-ONLY SYSTEM.

THE OBLIGATIONS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THE OBLIGATIONS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF.

THIS OFFICIAL STATEMENT CONTAINS “FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.

The agreements of the City and others related to the Obligations are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Obligations is to be construed as constituting an agreement with the purchasers of the Obligations. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

The prices and other terms respecting the offering and sale of the Obligations may be changed from time to time by the Underwriters after the Obligations are released for sale, and the Obligations may be offered and sold at prices other than the initial offering prices, including sales to Underwriters who may sell the Obligations into investment accounts.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OBLIGATIONS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

iii TABLE OF CONTENTS

OFFICIAL STATEMENT SUMMARY ...... V TABLE 11 – AUTHORIZED BUT UNISSUED GENERAL SELECTED FINANCIAL INFORMATION ...... VII OBLIGATION DEBT ...... 17 GENERAL FUND CONSOLIDATED STATEMENT SUMMARY ... VII ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT .. 17 CITY OFFICIALS, STAFF AND CONSULTANTS ..... VIII PENSION FUND ...... 17 ELECTED OFFICIALS ...... VIII OTHER POST-EMPLOYMENT BENEFITS ...... 17 SELECTED ADMINISTRATIVE STAFF ...... VIII FINANCIAL INFORMATION ...... 18 CONSULTANTS AND ADVISORS ...... VIII TABLE 12 – GENERAL FUND REVENUES AND INTRODUCTION ...... 1 EXPENDITURE HISTORY ...... 18 SEPARATE ISSUES ...... 1 TABLE 13 – MUNICIPAL SALES TAX HISTORY ...... 19 DESCRIPTION OF THE CITY ...... 1 CAPITAL IMPROVEMENT PROGRAM ...... 19 PLAN OF FINANCING ...... 1 FINANCIAL POLICIES ...... 20 PURPOSE OF THE BONDS ...... 1 INVESTMENTS ...... 20 PURPOSE OF THE CERTIFICATES ...... 1 TABLE 14 – CURRENT INVESTMENTS ...... 22 REFUNDED OBLIGATIONS ...... 2 THE SYSTEM ...... 22 SOURCES AND USES OF BOND PROCEEDS ...... 2 WATERWORKS AND SANITARY SEWER SYSTEM USED TO SOURCES AND USES OF CERTIFICATE PROCEEDS ...... 2 PAY GENERAL OBLIGATION DEBT SERVICE ...... 22 THE OBLIGATIONS ...... 3 TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT .... 23 DESCRIPTION OF THE OBLIGATIONS ...... 3 WATER SYSTEM ...... 23 AUTHORITY FOR ISSUANCE OF THE BONDS ...... 3 TABLE 16 – HISTORICAL WATER AND WASTEWATER AUTHORITY FOR ISSUANCE OF THE CERTIFICATES ...... 3 USAGE AND DEBT SERVICE COVERAGE ...... 24 SECURITY AND SOURCE OF PAYMENT ...... 3 TABLE 17 – TEN LARGEST WATER CUSTOMERS ...... 24 TAX RATE LIMITATION ...... 3 TABLE 18 – MONTHLY WATER RATES ...... 25 OPTIONAL REDEMPTION ...... 3 WASTEWATER SYSTEM ...... 26 MANDATORY SINKING FUND REDEMPTION ...... 4 TABLE 19 – MONTHLY SEWER RATES ...... 26 NOTICE OF REDEMPTION ...... 4 TABLE 20 – CONDENSED STATEMENT OF OPERATIONS ...... 27 BOOK-ENTRY-ONLY SYSTEM ...... 4 TAX MATTERS...... 27 PAYING AGENT/REGISTRAR ...... 5 TAX EXEMPTION ...... 27 TRANSFER, EXCHANGE AND REGISTRATION ...... 6 ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS ...... 28 RECORD DATE FOR INTEREST PAYMENT ...... 6 CONTINUING DISCLOSURE OF INFORMATION ...... 29 DEFEASANCE ...... 6 ANNUAL REPORTS ...... 29 REMEDIES OF HOLDERS OF THE OBLIGATIONS ...... 6 NOTICES OF CERTAIN EVENTS ...... 29 TAX INFORMATION ...... 7 LIMITATIONS AND AMENDMENTS ...... 30 AD VALOREM TAX LAW ...... 7 COMPLIANCE WITH PRIOR UNDERTAKINGS ...... 30 EFFECTIVE TAX RATE AND ROLLBACK TAX RATE ...... 8 DISASTER PREPAREDNESS ...... 30 PROPERTY ASSESSMENT AND TAX PAYMENT ...... 8 OTHER INFORMATION ...... 31 PENALTIES AND INTEREST ...... 8 RATINGS ...... 31 CITY CHARTER AMENDMENTS ...... 9 LITIGATION ...... 31 CITY APPLICATION OF TAX CODE ...... 9 REGISTRATION AND QUALIFICATION OF OBLIGATIONS TAX ABATEMENT POLICY ...... 9 FOR SALE ...... 31 TAX INCREMENT ZONES ...... 9 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL PUBLIC FUNDS IN TEXAS ...... 31 OBLIGATION DEBT ...... 10 LEGAL MATTERS ...... 31 TABLE 2 – TAXABLE ASSESSED VALUATIONS BY AUTHENTICITY OF FINANCIAL DATA AND OTHER CATEGORY ...... 11 INFORMATION ...... 32 TABLE 3 – VALUATION AND GENERAL OBLIGATION FINANCIAL ADVISOR ...... 32 DEBT HISTORY ...... 12 VERIFICATION OF ARITHMETICAL AND MATHEMATICAL TABLE 4 – TAX RATE, LEVY AND COLLECTION HISTORY .. 12 COMPUTATIONS ...... 32 TABLE 5 – INDUSTRIAL DISTRICT CONTRACTS ...... 12 UNDERWRITING ...... 32 TABLE 6 – TEN LARGEST TAXPAYERS ...... 14 AUDITED FINANCIAL STATEMENTS ...... 33 TABLE 7 – TAX ADEQUACY ...... 15 MISCELLANEOUS ...... 33 TABLE 8 – ESTIMATED OVERLAPPING DEBT ...... 15 DEBT INFORMATION ...... 16 SCHEDULE OF REFUNDED OBLIGATIONS ...... I TABLE 9 – GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS ...... 16 APPENDICES TABLE 10 – INTEREST AND SINKING FUND BUDGET GENERAL INFORMATION REGARDING THE CITY ...... A PROJECTION ...... 17 EXCERPTS FROM THE ANNUAL FINANCIAL REPORT ...... B FORMS OF BOND COUNSEL’S OPINIONS ...... C

iv OFFICIAL STATEMENT SUMMARY

This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Obligations to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement.

THE CITY ...... The City of Baytown, Texas (the “City”) is a municipal corporation and Home Rule City of the State of Texas (the “State”), located in Harris and Chambers Counties, Texas. The City covers approximately 34 square miles (see “INTRODUCTION – DESCRIPTION OF CITY”).

THE BONDS ...... The $28,520,000 City of Baytown, Texas, General Obligation and Refunding Bonds, Series 2014 (the “Bonds”) are issued as serial bonds maturing February 1, 2015 through February 1, 2034, inclusive (see “THE OBLIGATIONS – DESCRIPTION OF THE OBLIGATIONS”).

THE CERTIFICATES ...... The $11,715,000 City of Baytown, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2014 (the “Certificates”; the Bonds and the Certificates are collectively referred to herein as the “Obligations”) are issued as serial certificates maturing February 1, 2015 through February 1, 2034, inclusive (see “THE OBLIGATIONS – DESCRIPTION OF THE OBLIGATIONS”).

SEPARATE ISSUES ...... The Bonds and the Certificates are being offered concurrently by the City under a common Official Statement. The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Bonds and the Certificates share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of holders, and other features.

PAYMENT OF INTEREST ...... Interest on the Obligations accrues from delivery, and is payable August 1, 2014, and each February 1 and August 1 thereafter until maturity or prior redemption (see “THE OBLIGATIONS – DESCRIPTION OF THE OBLIGATIONS”). AUTHORITY FOR ISSUANCE OF THE BONDS ...... The Bonds are issued pursuant to the general laws of the State, including particularly Chapters 1207, 1331 and 1371 Texas Government Code, as amended, an election within the City on November 6, 2007 (the “Election”), an ordinance passed by the City Council of the City on February 27, 2014 and a pricing certificate executed pursuant thereto (see “THE OBLIGATIONS – AUTHORITY FOR ISSUANCE OF THE BONDS” and “DEBT INFORMATION – TABLE 11 – AUTHORIZED BUT UNISSUED GENERAL OBLIGATION DEBT”). AUTHORITY FOR ISSUANCE OF THE CERTIFICATES ...... The Certificates are being issued pursuant to the constitution and general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code (the “Certificate of Obligation Act of 1971”), as amended, Chapter 1371, Texas Government Code, as amended, an ordinance passed by the City Council of the City on February 27, 2014 and a pricing certificate executed pursuant thereto (see “THE OBLIGATIONS – AUTHORITY FOR ISSUANCE OF THE CERTIFICATES”). SECURITY FOR THE BONDS ...... The Bonds constitute direct obligations of the City, payable from a continuing, direct, annual ad valorem tax levied, within the limits prescribed by law and by the City Charter, on all taxable property within the City (see “THE OBLIGATIONS – SECURITY AND SOURCE OF PAYMENT”, “– TAX RATE LIMITATION” and “TAX INFORMATION – CITY CHARTER AMENDMENTS”). SECURITY FOR THE CERTIFICATES ...... The Certificates constitute direct obligations of the City, payable from a combination of (i) a continuing, direct, annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge of a subordinate lien on the net revenues of the City’s waterworks and sewer system in an amount not to exceed $1,000 (see “THE OBLIGATIONS – SECURITY AND SOURCE OF PAYMENT” and “– TAX RATE LIMITATION”).

REDEMPTION ...... The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. (See “THE OBLIGATIONS – OPTIONAL REDEMPTION”).

TAX EXEMPTION ...... In the opinion of Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and the Obligations are not “private activity bonds.” See “TAX MATTERS” for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations.

v USE OF PROCEEDS OF THE BONDS ...... Proceeds from the sale of the Bonds will be used (i) for the construction and acquisition of streets, sidewalks, drainage and utilities improvements, (ii) for a 911 Center, public safety facilities and equipment and communications infrastructure and equipment, (iii) for the acquisition and construction of parks and recreational facilities; (iv) for the construction and repair of drainage facilities, (v) to refund certain obligations of the City described in Schedule I (the “Refunded Obligations”) and (vi) to pay the costs of issuing the Bonds and refunding the Refunded Obligations. (see “PLAN OF FINANCING – USE OF BOND PROCEEDS”). USE OF PROCEEDS OF THE CERTIFICATES ...... Proceeds from the sale of the Certificates will be used (i) for repair and renovation of, the construction of improvements to, and the equipment of the City’s waterworks and sanitary sewer system, (ii) for repair and renovation of, the construction of improvements to, and the equipment of the City’s parks and recreational facilities, including associated parking facilities and drainage improvements and (iii) to pay the costs of professional services incurred in connection therewith (see “PLAN OF FINANCING – USE OF CERTIFICATE PROCEEDS”).

RATINGS ...... The presently outstanding tax-supported debt of the City and the Obligations are rated “Aa2” by Moody’s Investors Service, Inc. (“Moody’s”) and “AA” by Standard & Poor’s Ratings Group, a Standard & Poor’s Financial Services LLC business (“S&P”) without regard to credit enhancement (see “OTHER INFORMATION – RATINGS”). BOOK-ENTRY-ONLY SYSTEM ...... The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see “THE OBLIGATIONS – BOOK-ENTRY-ONLY SYSTEM”).

PAYMENT RECORD ...... The City has never defaulted in payment of its general obligation tax debt.

[Remainder of Page Intentionally Left Blank]

vi

SELECTED FINANCIAL INFORMATION

Ratio Tax Fiscal Per Capita General Per Debt to Receipt from YearEstimated Taxable Taxable Obligation Capita Taxable Percent Of Industrial EndedCity Assessed Assessed (G.O.) G.O. Assessed Total Tax District 9/30 Population Valuation Valuation Tax Debt(1) Tax Debt Valuation Collections Contracts 2009 74,845 $2,692,720,456 $35,977 $55,765,000 $745 2.07% 97.63% $21,129,127 2010 71,802 (2) 2,648,560,961 (3) 36,887 53,779,130 749 2.03% 97.37% 23,027,189 2011 72,339 2,441,722,934 (3) 33,754 47,467,601 656 1.94% 98.04% 25,497,188 2012 73,413 2,408,945,951 32,814 68,965,153 939 2.86% 99.67% 27,403,488 2013 72,418 2,490,463,236 34,390 81,508,570 1,126 3.27% 99.22% 28,334,286 (4) (4) (4) (5) (6) 2014 73,950 2,598,351,442 35,137 86,917,439 1,175 3.35% 93.30% 29,371,842 ______(1) Net of self-supporting debt. See TABLE 1 – VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes; “THE SYSTEM – WATERWORKS AND SANITARY SEWER SYSTEM USED TO PAY GENERAL OBLIGATION DEBT SERVICE” and TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT. (2) 2010 Census data. (3) Decline in value due to changes in industrial and industrial inventory values within the City limits. (4) Includes the Obligations and excludes the Refunded Obligations. (5) Collections as of February 28, 2014. (6) As of February 28, 2014. See “TABLE 5 – INDUSTRIAL DISTRICT CONTRACTS” and the accompanying text for a discussion of the City’s industrial district contracts and payments made to the City under such contracts in lieu of ad valorem taxes.

GENERAL FUND CONSOLIDATED STATEMENT SUMMARY

For Fiscal Year Ended September 30 2013 2012 2011 2010 2009 Total Revenue$ 62,396,436 $ 59,833,161 $ 57,043,771 $ 54,345,583 $ 53,723,924 Total Expenditures 61,411,724 59,201,855 56,058,442 57,111,276 53,050,521 Other Financing Sources (Uses) 1,698,713 (1) 2,141,789 (1) 380,726 (1) 4,109,492 (1) 159,168 Net Revenues$ 2,683,425 $ 2,773,095 $ 1,366,055 $ 1,343,799 $ 832,571

______(1) This amount is net of transfers to the General Fund primarily from the Water and Sewer Fund plus the reimbursement from FEMA and insurance proceeds for Hurricane Ike related repairs and replacements and from the General Fund to the Capital Improvement Fund for various projects.

For additional information regarding the City, please contact:

Ms. Louise Richman, CPA Mr. Drew Masterson Director of Finance or Managing Director City of Baytown First Southwest Company 2401 Market Street 700 Milam Street, Suite 500 Baytown, Texas 77520 Houston, Texas 77002 (281) 420-6530 Phone (713) 651-9850 Phone (281) 420-7135 Fax (713) 654-8658 Fax

vii

CITY OFFICIALS, STAFF AND CONSULTANTS

ELECTED OFFICIALS

Length of City Council Service Term Expires Occupation Stephen H. DonCarlos 8 Years November 2015 Attorney Mayor

Mercedes Renteria III 4 Years November 2016 Process Technician/Operator Council Member, District 1

Chris Presley < 1 Year November 2016 Self-Employed Council Member, District 2

Brandon Capetillo 7 Years November 2016 Quality Manager Council Member, District 3

Terry Sain 6 Years November 2014 Health, Safety and Environment Manager Council Member, District 4

Robert C. Hoskins 3 Years November 2014 Operations Specialist Council Member, District 5

David McCartney 6 Years November 2014 Self-Employed

SELECTED ADMINISTRATIVE STAFF

Length of Service to Name Position City Robert D. Leiper City Manager 37 Years Ron Bottoms Deputy City Manager 2 Years Kevin Troller Assistant City Manager 6 Years Ignacio Ramirez, Sr. City Attorney 27 Years Louise Richman, CPA Director of Finance 3 Years Jose Pastrana, P.E. City Engineer 4 Years Darryl Fourte Director of Public Works/Utilities 5 Years Brent Yowell, CTP Treasurer 3 Years

CONSULTANTS AND ADVISORS

Auditor ...... Belt Harris Pechacek, L.L.L.P. Certified Public Accountants Houston, Texas

Bond Counsel ...... Bracewell & Giuliani LLP Houston, Texas

Financial Advisor ...... Drew Masterson First Southwest Company Houston, Texas

viii OFFICIAL STATEMENT

RELATING TO

CITY OF BAYTOWN, TEXAS (Harris and Chambers Counties)

$28,520,000 $11,715,000 GENERAL OBLIGATION AND REFUNDING BONDS COMBINATION TAX AND REVENUE SERIES 2014 CERTIFICATES OF OBLIGATION SERIES 2014

INTRODUCTION

This Official Statement, which includes the cover pages and Appendices hereto, provides certain information regarding the issuance of $28,520,000 City of Baytown, Texas, General Obligation and Refunding Bonds, Series 2014 (the “Bonds”), and $11,715,000 City of Baytown, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2014 (the “Certificates”) (collectively the “Obligations”). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the ordinance of the City Council of the City of Baytown, Texas (the “City”) dated February 27, 2014 authorizing the issuance of the Bonds and the pricing certificate executed pursuant thereto (collectively, the “Bond Ordinance”) and the ordinance of the City Council dated February 27, 2014 authorizing the issuance of the Certificates and the pricing certificate executed pursuant thereto (collectively, the “Certificate Ordinance”) (the Bond Ordinance and the Certificate Ordinance are collectively referred to herein as the “Ordinances”) except as otherwise indicated herein.

There follows in this Official Statement descriptions of the Obligations and certain information regarding the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City’s Financial Advisor, First Southwest Company, Houston, Texas.

SEPARATE ISSUES

The Bonds and the Certificates are being offered concurrently by the City under a common Official Statement. The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Bonds and the Certificates share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of holders, and other features.

DESCRIPTION OF THE CITY

The City is a political subdivision and municipal corporation of the State of Texas (the “State”), duly organized and existing under the laws of the State, including the City’s home rule charter (the “City Charter”). The City was incorporated in 1948 and first adopted the City Charter in 1948. The City operates under a Council/Manager form of government with a City Council comprised of the Mayor and six Councilmembers who serve staggered three-year terms. The Mayor’s term does not expire concurrently with any City Council terms. Terms for Council Districts One, Two and Three expire concurrently and Council Districts Four, Five and Six expire concurrently in successive years. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are public safety (police and fire protection), streets, water and sanitary sewer utilities, health and social services, culture- recreation, public improvements, planning and zoning, and general administrative services. The 2010 census population for the City was 71,802. The 2014 estimated population for the City is 73,950. The City covers approximately 34 square miles.

PLAN OF FINANCING

PURPOSE OF THE BONDS

Proceeds from the sale of the Bonds will be used (i) for the construction and acquisition of streets, sidewalks, drainage and utilities improvements, (ii) for a 911 Center, public safety facilities and equipment and communications infrastructure and equipment; (iii) for the acquisition and construction of parks and recreational facilities, (iv) for the construction and repair of drainage facilities, (v) to refund certain obligations of the City described in Schedule I (the “Refunded Obligations”) and (vi) to pay the costs of issuing the Bonds and refunding the Refunded Obligations. (see “USE OF BOND PROCEEDS”).

PURPOSE OF THE CERTIFICATES

Proceeds from the sale of the Certificates will be used (i) for repair and renovation of, the construction of improvements to and the equipment of the City’s waterworks and sanitary sewer system, (ii) for repair and renovation of, the construction of improvements to, and the equipment of the City’s parks and recreational facilities, including associated parking facilities and drainage improvements and (iii) to pay the costs of professional services incurred in connection therewith (see “USE OF CERTIFICATE PROCEEDS”).

1 REFUNDED OBLIGATIONS

The principal and interest due on the Refunded Obligations will be paid on the respective scheduled interest payment dates, maturity dates and redemption dates of such Refunded Obligations from funds to be deposited pursuant to a certain Escrow Agreement (the “Escrow Agreement”) between the City and The Bank of New York Mellon Trust, N.A. Dallas, Texas (the “Escrow Agent”). The Bond Ordinance provides that the City will deposit with the Escrow Agent a portion of the proceeds from the sale of the Bonds together with other available funds of the City, if any, in an amount which, when added to the investment earnings thereon, will be sufficient to accomplish the discharge and final payment of the Refunded Obligations on their respective redemption dates. Such funds will be held by the Escrow Agent in a special escrow account (the “Escrow Fund”) and used to purchase a portfolio of securities authorized by Section 1207.062, Texas Government Code, which authorized securities include direct noncallable obligations of the United States and noncallable obligations of an agency or instrumentality of the United States rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent and guaranteed by the full faith and credit of the United States of America (the “Escrow Securities”). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Obligations.

Grant Thornton LLP, a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriters the mathematical accuracy of the schedules that demonstrate the Escrow Securities will mature and pay interest in such amounts which, together with uninvested funds, if any, in the Escrow Fund, will be sufficient to pay, when due, the principal of and interest on the Refunded Obligations. Such maturing principal of and interest on the Escrow Securities will not be available to pay the Bonds (see “OTHER INFORMATION - VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS”).

By the deposit of the Escrow Securities and cash, if any, with the Escrow Agent pursuant to the Escrow Agreement, the City will have effected the defeasance of the Refunded Obligations pursuant to the terms of Chapter 1207, Texas Government Code, and the ordinances authorizing the issuance of the Refunded Obligations. It is the opinion of Bond Counsel that, as a result of such deposit and in reliance upon the report of Grant Thornton LLP, firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations have been made and therefore such Refunded Obligations will be deemed fully paid and no longer outstanding except for the purpose of receiving payments from the amounts held in the Escrow Fund for such purpose by the Escrow Agent.

SOURCES AND USES OF BOND PROCEEDS

The proceeds from the sale of the Bonds will be applied approximately as follows:

Par Amount $ 28,520,000.00 Premium 1,864,050.35 City Contribution 209,689.24 Total Sources of Funds $ 30,593,739.59

Deposit to Construction Fund$ 11,225,000.00 Deposit to Escrow Fund 19,081,467.74 Costs of Issuance(1) 157,218.34 Underwriters' Discount 130,053.51 Total Uses of Funds$ 30,593,739.59

______(1) Includes rounding amount

SOURCES AND USES OF CERTIFICATE PROCEEDS

The proceeds from the sale of the Certificates will be applied approximately as follows:

Par Amount $ 11,715,000.00 Premium 425,804.50 Total Sources of Funds $ 12,140,804.50

Deposit to Construction Fund$ 12,000,000.00 Costs of Issuance(1) 81,920.72 Underwriters' Discount 58,883.78 Total Uses of Funds$ 12,140,804.50

______(1) Includes rounding amount

2 THE OBLIGATIONS

DESCRIPTION OF THE OBLIGATIONS

The Obligations are dated April 1, 2014 (the “Dated Date”), and mature on February 1 in each of the years and in the amounts shown on the inside cover page hereof; however, interest on the Obligations will accrue from the date of delivery to the underwriters (the “Underwriters”). Interest will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on February 1 and August 1, commencing August 1, 2014. The definitive Obligations will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company, New York, New York (“DTC”), pursuant to the Book-Entry-Only System described herein. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, 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 Obligations (see “BOOK-ENTRY-ONLY SYSTEM”).

AUTHORITY FOR ISSUANCE OF THE BONDS

The Bonds are issued pursuant to the general laws of the State, including particularly Chapters 1207, 1331 and 1371 Texas Government Code, as amended, an election held within the City on November 6, 2007 (the “Election”) and the Bond Ordinance. See “DEBT INFORMATION – TABLE 11 – AUTHORIZED BUT UNISSUED GENERAL OBLIGATION DEBT.”

AUTHORITY FOR ISSUANCE OF THE CERTIFICATES

The Certificates are being issued pursuant to the Constitution and general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code (the “Certificate of Obligation Act of 1971”), as amended, Chapter 1371, Texas Government Code, as amended, and the Certificate Ordinance.

SECURITY AND SOURCE OF PAYMENT

The Bonds are direct obligations of the City, payable from a continuing, direct, annual ad valorem tax levied, within the limits prescribed by law, on all taxable property in the City. See “TAX INFORMATION – CITY CHARTER AMENDMENTS”.

The Certificates are direct obligations of the City, payable from and secured by (i) a continuing, direct, annual ad valorem tax levied, within the limits prescribed by law, on all taxable property in the City, and (ii) a limited pledge of a subordinate lien on the net revenues of the City’s waterworks and sanitary sewer system in an amount not to exceed $1,000, as provided in the Certificate Ordinance. See “TAX INFORMATION – CITY CHARTER AMENDMENTS”.

TAX RATE LIMITATION

All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt, within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. Administratively, the Attorney General of the State of Texas will permit allocation of $1.50 of the $2.50 maximum tax rate for all general obligation debt service, as calculated at the time of issuance. Furthermore, Article VIII of the City Charter limits the City’s ad valorem tax rate for maintenance and operations of the City to six- tenths (0.6) of one percent. Any levy of taxes to pay principal or interest on any tax bonds or other tax-supported debt of the City is not subject to this limitation in the Charter. Neither the Bonds nor the Certificates are subject to the $0.60 City home rule charter limitation. The City Charter also prohibits the City from increasing taxes on any property until all property subject to ad valorem taxation has a revised or updated value, and prohibits the City from increasing ad valorem taxes on property by more than 10% over the amount levied thereon by the City in the preceding year, except for increases in value due to subsequent improvements.

OPTIONAL REDEMPTION

The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Obligations are to be redeemed, the City shall determine the Obligations, or portions thereof, within such maturity to be redeemed. If an Obligation (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Obligation (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date.

3 NOTICE OF REDEMPTION

Not less than 30 days prior to a redemption date for the Obligations, the Paying Agent/Registrar, at the direction of the City, shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE OBLIGATIONS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATION OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATION OR PORTION THEREOF SHALL CEASE TO ACCRUE.

The City reserves the right, in the case of an optional redemption, to give notice of its election or direction to redeem Obligations conditioned upon the occurrence of subsequent events. Such notice may state (i) that the redemption is conditioned upon the deposit of moneys and/or authorized securities, in an amount equal to the amount necessary to effect the redemption, with the Paying Agent/Registrar, or such other entity as may be authorized by law, no later than the redemption date, or (ii) that the City retains the right to rescind such notice at any time on or prior to the scheduled redemption date if the City delivers a certificate of the City to the Paying Agent/Registrar instructing the Paying Agent/Registrar to rescind the redemption notice and such notice and redemption shall be of no effect if such moneys and/or authorized securities are not so deposited or if the notice is rescinded. The Paying Agent/Registrar shall give prompt notice of any such rescission of a conditional notice of redemption to the affected Owners. Any Obligation subject to conditional redemption where such redemption has been rescinded shall remain outstanding.

BOOK-ENTRY-ONLY SYSTEM

This section describes how ownership of the Obligations is to be transferred and how the principal of and interest on the Obligations are to be paid to and credited by DTC while the Obligations are registered in its nominee’s 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 Financial Advisor and the City believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof.

The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Obligations, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Obligations), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission (the “SEC”), and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC.

DTC will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities 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 for each maturity will be issued for the Obligations, in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of “AA+.” The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com.

Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for such purchases on DTC’s records. The ownership interest of each actual purchaser of each Obligation (“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 Obligations 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 the Obligations, except in the event that use of the book-entry system described herein is discontinued.

4 To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Obligations 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 Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, tenders, defaults, and proposed amendments to the Obligation documents. For example, Beneficial Owners of Obligations may wish to ascertain that the nominee holding the Obligations for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices for the Obligations shall be sent to DTC. If less than all of the Obligations of a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Obligations unless authorized by a Direct Participant in accordance with DTC’s MMI 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 Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments on the Obligations 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 and the Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City and the Paying Agent/Registrar. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and reimbursement 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 Obligations at any time by giving reasonable notice to the City and the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Obligations are required to be printed and delivered.

The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Obligations will be printed and delivered to the DTC.

Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Obligations are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinances will be given only to DTC.

Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City or the Underwriters.

Effect of Termination of Book-Entry-Only System. In the event that the Book-Entry-Only System of the Obligations is discontinued, printed Obligations will be issued to the DTC Participants or the holder, as the case may be, and such Obligations will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under “THE OBLIGATIONS - TRANSFER, EXCHANGE AND REGISTRATION” below.

PAYING AGENT/REGISTRAR

The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas. In the Ordinances, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Obligations are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State, or any other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Obligations by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar.

5

TRANSFER, EXCHANGE AND REGISTRATION

Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations being transferred or exchanged, at the principal payment office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. New Obligations registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Obligations surrendered for exchange or transfer. See “BOOK-ENTRY-ONLY SYSTEM” herein for a description of the system to be utilized initially in regard to ownership and transferability of the Obligations. In the event the Book-Entry-Only System should be discontinued, the Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer.

RECORD DATE FOR INTEREST PAYMENT

The record date (“Record Date”) for the interest payable on the Obligations on any interest payment date means the close of business on the 15th day of the preceding month.

In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a “Special Record Date”) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest (“Special Payment Date,” which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each registered owner of Obligations appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice.

DEFEASANCE

The City reserves the right to defease the Obligations in any manner now or hereafter allowed by law.

REMEDIES OF HOLDERS OF THE OBLIGATIONS

The Ordinances do not provide for the appointment of a trustee to represent the interests of the holders of the Obligations upon any failure of the City to perform in accordance with the terms of the Ordinances or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Ordinance. Furthermore, the Ordinances do not establish specific events of default with respect to the Obligations and, under State law, there is no right to the acceleration of maturity of the Obligations upon the failure of the City to observe any covenant under the Ordinance. A registered owner of the Obligations could seek a judgment against the City if a default occurred in the payment of principal of or interest on any such Obligation; however, such judgment could not be satisfied by execution against any property of the City and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Obligations as it becomes due or perform other material terms and covenants contained in the Ordinances. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis.

The City is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Obligation holders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court), and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinances and the Obligations are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code.

6 TAX INFORMATION

AD VALOREM TAX LAW

The appraisal of property within the City is the responsibility of the Harris County Appraisal District and Chambers County Appraisal District (collectively, the “Appraisal Districts”). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal Districts are required under Title I of the Texas Tax Code (the “Property Tax Code”) to appraise all property within the Appraisal Districts on the basis of 100% of its market value and is prohibited from applying any assessment ratios. 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 an amount not to exceed the lesser of (1) the market value of the property for the most recent tax year that the market value was determined by the appraisal office or (2) the sum of (a) 10% of the property’s appraised value for the preceding year plus (b) the property’s appraised value in the preceding year plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal Districts is subject to review by an Appraisal Review Board of each of the Appraisal Districts, consisting of three members appointed by the Board of Directors of the respective Appraisal Districts. The Appraisal Districts are required to review the value of property within the Appraisal Districts at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the respective Appraisal Review Boards.

Reference is made to the Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes.

Article VIII of the State Constitution (“Article VIII”) and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation.

Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant 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. Additionally, the governing body of a political subdivision may grant an exemption of up to 20% of the market value of all residence homesteads, with a minimum exemption of $5,000.

The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual’s spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the 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 a rating of 100% disabled is entitled to an exemption from taxation of the total appraised value of the resident’s homestead. A surviving spouse of deceased veteran who had received a rating of 100% disabled is entitled to receive an exemption equal to the total appraised value of the homestead until the surviving spouse remarries.

Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open- space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1.

Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation.

Article VIII, Section 1-j, provides for “freeport property” to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal.

Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in-transit” is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory,

7 including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in-transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property.

The City may create tax increment financing zones, under which the tax values on property in the zone are “frozen” at the value of the property at the time of creation of the zone. Tax revenues collected on values above the “frozen” value must be deposited in a tax increment fund for the zone. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn exempts from taxation all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years.

EFFECTIVE TAX RATE AND ROLLBACK TAX RATE

Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the City, the City Council adopts a tax rate per $100 taxable value for the current year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service.

Under the Property Tax Code, the City must annually calculate and publicize its “effective tax rate” and “rollback tax rate.” The City Council may not adopt a tax rate that exceeds the lower of the rollback tax rate or the effective tax rate until it has held two public hearings on the proposed increase following notice to the taxpayers and otherwise complied with the Property Tax Code. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate.

“Effective tax rate” means the rate that will produce last year’s total tax levy (adjusted) from this year’s total taxable values (adjusted). “Adjusted” means lost values are not included in the calculation of last year’s taxes and new values are not included in this year’s taxable values.

“Rollback tax rate” means the rate that will produce last year’s maintenance and operation tax levy from this year’s values (adjusted) multiplied by 1.08 plus a rate that will produce this year’s debt service from this year’s values (unadjusted) divided by the anticipated tax collection rate.

Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates.

PROPERTY ASSESSMENT AND TAX PAYMENT

Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1.

PENALTIES AND INTEREST

Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows:

Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18

After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, an attorney’s collection fee of up to 20% 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

8 into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court.

CITY CHARTER AMENDMENTS

Article VIII of the City Charter limits the City’s ad valorem tax rate for maintenance and operations of the City to six-tenths (0.6) of one percent. Any levy of taxes to pay principal or interest on any tax bonds or other tax-supported debt of the City is not subject to this limitation in the Charter.

CITY APPLICATION OF TAX CODE

The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $50,000; the disabled are also granted an exemption of $50,000. On November 11, 2004, the City enacted a tax cap for residential homesteads of citizens over the age of 65 and disabled citizens pursuant to Section 1-b, Article VIII of the Texas Constitution.

The City has granted an additional exemption of 20% of the market value of residence homesteads; minimum exemption of $5,000.

The City has created three Industrial Districts (hereinafter defined) and has entered into contracts with the industries located in the Industrial Districts. The City receives payments from each industry located in the Industrial Districts in lieu of ad valorem taxes. See Table 5 for a listing of the Industrial Districts and revenues from the Industrial District contracts described above. (See “TABLE 5 – INDUSTRIAL DISTRICT CONTRACTS.”)

TAX ABATEMENT POLICY

The City has established a tax abatement program to encourage economic development. In order to be considered for tax abatement, a project must meet several criteria pertaining to job creation and property value enhancement. Abatement shall be granted effective with the January 1 valuation date immediately following the date of execution of the agreement. 100% of the value of new eligible properties shall be abated for the first 3 years, followed by 80% abatement for the fourth year, and 60% abatement for the fifth year. In no case shall the period of abatement exceed 5 years.

See Table 1 for a listing of the amounts of the exemptions described above.

TAX INCREMENT ZONES

The City has created Tax Increment Reinvestment Zone Number One (the “Zone”) in the general area of San Jacinto Mall and Interstate 10. The base value for the Zone is the assessed value of property in the Zone as of January 1, 2001. The City participation in the Zone is 100% of the City’s tax rate. Tax increment attributable to the Zone will be dedicated to public improvements relating to the development of the Zone area for 30 years. The base value in the Zone was $50,413,623, and the 2013 value in the Zone was $151,673,647.

[Remainder of Page Intentionally Left Blank]

9 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT

2013/2014 Market Valuation Established by Harris County Appraisal District$ 3,117,791,716 and Chambers County Appraisal District Less Exemptions/Reductions at 100% Market Value: Over 65 Exemptions$ 169,654,524 Disability 27,923,430 Veterans 3,838,687 Pollution Control 594,587 Productivity Loss 28,012,689 Proration 606,751 Homestead Cap Loss 3,414,348 Local Option Percentage Exemption Loss 239,339,819 Interstate or Foreign Commerce 45,706,979 Miscellaneous 348,460 519,440,274 2013/2014 Taxable Assessed Valuation$ 2,598,351,442

General Obligation Debt Payable from Ad Valorem Taxes (as of 2/1/2014)(1)(2) Combination Tax and Revenue Certificates of Obligation, Series 2005 9,100,000 Combination Tax and Revenue Certificates of Obligation, Series 2006A(2) 560,000 General Obligation Bonds, Series 2006(2) 240,000 Combination Tax and Revenue Certificates of Obligation, Series 2006B 13,385,000 Combination Tax and Revenue Certificates of Obligation, Series 2007 9,835,000 Combination Tax and Revenue Certificates of Obligation, Series 2007A 345,000 General Obligation Bonds, Series 2008 10,495,000 Combination Tax and Revenue Certificates of Obligation, Series 2008 23,495,000 Combination Tax and Revenue Certificates of Obligation, Series 2010 8,450,000 General Obligation Refunding Bonds, Series 2010 5,285,000 General Obligation and Refunding Bonds, Series 2011 18,360,000 General Obligation and Refunding Bonds, Series 2012 28,490,000 General Obligation Bonds, Series 2013 16,140,000 Combination Tax and Revenue Certificates of Obligation, Series 2013 15,850,000 The Bonds 28,520,000 The Certificates 11,715,000 $ 200,265,000

Less: Self-Supporting Debt (2)(3) $ 113,347,561 Less: General Obligation Interest and Sinking Fund (as of 9/30/2013) 3,715,519 $ 117,063,080

Net General Obligation Debt Payable from Ad Valorem Taxes$ 83,201,920

Ratio Net General Obligation Debt to Taxable Assessed Valuation 3.20% Estimated 2014 Population - 73,950 Per Capita Taxable Assessed Valuation - $35,137 Per Capita Funded Net Debt - $1,125

(1) Includes the Obligations. (2) Excludes the Refunded Obligations. (3) Includes the self-supporting portion of the Obligations and other general obligation debt for which repayment is provided from revenues of the water and sewer system and sales tax. It is the City’s current policy to provide these payments from such sources. There is no assurance that the use of these sources to make these payments will continue in the future. If payments are not made from such sources in the future, the difference will be paid for with ad valorem taxes.

10 TABLE 2 – TAXABLE ASSESSED VALUATIONS BY CATEGORY

Taxable Appraised Value, Fiscal Year Ending September 30, 2014 2013 2012 % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $ 1,560,764,260 50.06% $ 1,554,866,017 51.53% $ 1,607,577,621 55.05% Real, Residential, Multi-Family 239,301,558 7.68% 218,781,298 7.25% 218,794,329 7.49% Real, Vacant Lots/Tracts 66,671,272 2.14% 66,936,491 2.22% 65,710,061 2.25% Real, Acreage (Land Only) 52,812,250 1.69% 51,477,433 1.71% 51,694,127 1.77% Real, Farm & Ranch Improvements 2,619,960 0.08% 681,510 0.02% 1,307,210 0.04% Real, Commercial 667,620,815 21.41% 596,880,194 19.78% 562,969,056 19.28% Real, Industrial 37,008,275 1.19% 54,252,624 1.80% 54,938,588 1.88% Real, Oil, Gas & Other Mineral Reserves 24,217,300 0.78% 29,668,740 0.98% 17,674,119 0.61% Real and Tangible Personal, Utilities 105,345,753 3.38% 90,382,430 3.00% 77,624,962 2.66% Tangible Personal, Commercial 229,023,372 7.35% 218,493,481 7.24% 187,088,926 6.41% Tangible Personal, Industrial 88,414,126 2.84% 93,200,003 3.09% 36,735,807 1.26% Tangible Personal, Mobile Home 12,966,783 0.42% 12,412,486 0.41% 13,322,008 0.46% Real Property Inventory 4,818,401 0.15% 3,060,327 0.10% 4,499,930 0.15% Special Inventory 26,207,591 0.84% 26,188,264 0.87% 20,068,883 0.69% Total Appraised Value Before Exemptions $ 3,117,791,716 100.00% $ 3,017,281,298 100.00% $ 2,920,005,627 100.00% Adjustments - 15,951,857 46,937,169 Less: Total Exemptions/Reductions 519,440,274 510,866,205 464,122,507 Taxable Assessed Value $ 2,598,351,442 $ 2,490,463,236 $ 2,408,945,951

Taxable Appraised Value, Fiscal Year Ending September 30, 2011 2010 % of % of Category Amount Total Amount Total Real, Residential, Single-Family $ 1,657,999,593 56.17% $ 1,658,024,583 50.37% Real, Residential, Multi-Family 206,574,882 7.00% 216,339,558 6.57% Real, Vacant Lots/Tracts 57,422,708 1.95% 62,897,459 1.91% Real, Acreage (Land Only) 52,546,780 1.78% 38,809,720 1.18% Real, Farm & Ranch Improvements 789,871 0.03% 786,600 0.02% Real, Commercial 539,056,853 18.26% 553,218,391 16.81% Real, Industrial 53,788,473 1.82% 183,998,187 5.59% Real, Oil, Gas & Other Mineral Reserves 31,603,730 1.07% 15,642,103 0.48% Real and Tangible Personal, Utilities 94,216,089 3.19% 72,849,109 2.21% Tangible Personal, Commercial 189,398,007 6.42% 229,513,584 6.97% Tangible Personal, Industrial 33,852,164 1.15% 213,469,063 6.49% Tangible Personal, Mobile Home 13,689,115 0.46% 13,637,453 0.41% Real Property Inventory 5,560,182 0.19% 4,669,964 0.14% Special Inventory 15,066,522 0.51% 27,565,220 0.84% Total Appraised Value Before Exemptions $ 2,951,564,969 100.00% $ 3,291,420,994 100.00% Adjustments 60,297 15,728,770 Less: Total Exemptions/Reductions 509,781,738 658,588,803 Taxable Assessed Value $ 2,441,722,934 (1) $ 2,648,560,961 (1)

______NOTE: Valuations shown are certified taxable assessed values reported by the Harris County Appraisal District and Chambers County Appraisal District to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. (1) Decline in value primarily due to changes in industrial and industrial inventory values within the City limits. Source: The City.

11

TABLE 3 – VALUATION AND GENERAL OBLIGATION DEBT HISTORY

G.O. Ratio of Fiscal Taxable Tax Debt G.O. Tax Debt Year Taxable Assessed Outstanding to Taxable G.O. Ended Estimated Assessed Valuation at End Assessed Tax Debt 9/30Population Valuation Per Capita of Year(1) Valuation Per Capita 2009 74,845 $2,692,720,456 $35,977 $55,765,000 2.07% $745 2010 71,802 (2) 2,648,560,961 (3) 36,887 53,779,130 2.03% 749 2011 72,339 2,441,722,934 (3) 33,754 47,467,601 1.94% 656 2012 73,413 2,408,945,951 32,814 68,965,153 2.86% 939 2013 72,418 2,490,463,236 34,390 81,508,570 3.27% 1,126 (4) (4) (4) 2014 73,950 2,598,351,442 35,137 86,917,439 3.35% 1,175 ______(1) Net of self-supporting debt. See TABLE 1 – VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes; THE SYSTEM – WATERWORKS AND SANITARY SEWER SYSTEM USED TO PAY GENERAL OBLIGATION DEBT SERVICE and TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT. (2) 2010 Census data. (3) Decline in value due to changes in industrial and industrial inventory values within the City limits. (4) Includes the Obligations and excludes the Refunded Obligations.

TABLE 4 – TAX RATE, LEVY AND COLLECTION HISTORY

Fiscal Year Ended General Interest and % Current % Total 9/30 Tax Rate Fund Sinking FundTax Levy Collections Collections 2009 $ 0.78703 $ 0.45700 $ 0.33003 $20,687,000 94.05% 97.63% 2010 0.78703 0.45700 0.33003 20,578,993 94.44% 97.37% 2011 0.78703 0.45700 0.33003 18,723,249 95.99% 98.04% 2012 0.82203 0.42578 0.39625 19,590,385 95.99% 99.67% 2013 0.82203 0.43658 0.38545 20,380,206 95.73% 99.22% (1) (1) 2014 0.82203 0.43713 0.38490 21,244,699 90.65% 93.30% ______(1) Collections as of February 28, 2014.

TABLE 5 – INDUSTRIAL DISTRICT CONTRACTS

The City has created within its extraterritorial jurisdiction, but outside of the City limits, three industrial districts (“Industrial Districts”) and has entered into industrial district agreements (“IDAs”) with the companies listed below within such Industrial Districts. The IDAs specify payments to be made to the City in lieu of ad valorem taxes and provide a limited immunity from annexation during the seven-year terms of the IDAs. The City has annexed a portion of each company located within the Industrial Districts, and has entered into contracts with each such company. The payments are computed as follows:

The payments for those companies that have had previous IDAs with the City are computed as follows:

FMV of Property within City's Property Applicable Yearly (1) XX(2) (3) the Industrial District Tax Rate Payment Rate ______(1) Fair Market Value on January 1, 2002, January 1, 2009 as specified in the previous IDA, or as most recently certified by the appraisal district, whichever is greater. (2) The City’s tax rate per $100.00 of assessed valuation is currently $0.82203. (3) The Yearly Payment Rate increases from 61% to 64% over the seven-year term plus a 1% public community improvement rate, which can be reimbursed to the industries if certain improvements are made.

The intent of this calculation is that it provides a steady, known revenue stream for the seven years of each IDA, as after the base value is calculated, any increase or decrease in value over the seven-year period is not taken into account for purposes of determining the requisite payment under the agreement.

12

The payments for new companies that have not had an IDA with the City are based upon the above-referenced formula plus an added value industrial district payment, which is computed as follows:

FMV of Property within City's Property Applicable Added Value (1) XX(2) (3) the Industrial District Tax Rate Yearly Payment Rate ______(1) The Fair Market Value of all of the Property within the Industrial District on January 1 of each year of the IDA minus the Fair Market Value used in the above referenced formula. (2) The City’s tax rate per $100.00 of assessed valuation is currently $0.82203. (3) The Yearly Payment Rate increases from 0% to 64% over the seven-year term plus a 1% public community improvement rate, which can be reimbursed to the industries if certain improvements are made.

In 2009, the City signed an IDA with Exxon Mobil Corporation which increased the percentage of the fair market value used in connection with the payment calculation from 50% - 60% to 61% - 64%. All IDAs approved after that time will have similar terms.

Industrial District I Contract Expiration Advanced Aeromatics, L.P. 12/2016 Air Products, LLC 12/2018 Exxon Mobil Corporation 12/2015 Rhodia, Inc. 12/2016

Industrial District II Chemicals Incorporated 12/2019 (2) Chevron Phillips Chemical Company LP 12/2016 Enterprise Products Operating, LLC 12/2020 (2) Lone Star NGL Pipeline, LP 12/2019 (2) Praxair, Inc. 12/2019 Processing Equipment & Technologies, LLC (fka Ellering LLC) 05/2016

Industrial District III Ameriport Building 1, LLC 12/2017 (2) Ameriport Building 2, LLC 12/2017 (2) Bayer Business and Technology Services LLC (fka Bayer Corporation) 12/2019 Bayer Material Science LLC (fka Bayer Corporation) 12/2019 Baytown Energy Center, L.P. 12/2020 Borusan Mannesmann Pipe U.S. 12/2019 (2) Cedar Crossing Distribution Center 12/2014 (2) Cedar Crossing Mountain West (fka Vantage) 12/2019 CenterPoint Energy Houston Electric, LLC 12/2018 Century Terminals 12/2016 (2) Cryogenic Vessel Alternatives, Inc. 12/2017 (2) Dietrich Industries (fka Unimast, Inc.) 12/2014 Duna USA, Inc. 12/2018 (2) El Dorado Nitrogen Company 01/2017 EXEL (fka SEAPAC, Inc.) 12/2016 FCC Environmental (fka Siemens Water Technology Corp.) 12/2013 (1) First Chemical Texas, L.P. 03/2017 Flomin, Inc. 12/2018 (2) GE Water & Process Technologies (fka Ecolochem, Inc.) 12/2014 Home Depot U.S.A., Inc. 12/2014 IPSCO Koppel Tubulars Corporation 12/2013 (1)

______(1) In process of renewal. (2) Payment calculation includes the “Applicable Added Value Yearly Payment Rate” as described above.

13 Industrial District III Contract Expiration J. Jennings Investments, L.P. 01/2017 (2) JSW Steel (USA), Inc. (fka US Denro & Saw Pipes USA, Inc. - combined contracts) 12/2014 LANXESS Corporation (fka Bayer Corporation) 12/2019 LS Energy Properties/LS Energy Fabrication 12/2017 (2) Momentive Specialty Chemicals Inc. (fka Hexion Specialties) 04/2017 NRG Cedar Bayou 4, LLC 12/2014 (2) NRG Texas Power, LP (fka Texas Genco II, LP) 12/2018 NSN Properties LLC 12/2018 (2) Rail Logix Ameriport, LLC 12/2017 (2) Rubialas Consulting, Inc. 11/2017 Samson Controls, Inc. 12/2013 (1) Security Truck Services 12/2019 Sumner Baytown Buildings LLC 12/2018 (2) Tapco International 12/2016 (2) Texas Brine Company Baytown, LLC 12/2018 Wal-Mart Stores, Inc. 12/2017 West Texas Drum Company LTD (2) 12/2018 ______(1) In process of renewal. (2) Payment calculation includes the “Applicable Added Value Yearly Payment Rate” as described on previous page.

Revenue from the IDAs is summarized and compared to ad valorem taxation in the following table:

Receipt from Ad Valorem Tax Comparisons Fiscal year Industrial District Equivalent Tax Rate % of Actual Ended 9/30 Contracts Tax Year Equivalent Tax Levy Tax Levy 2009$ 21,129,127 2008$ 0.785 102.14% $ 20,687,000 2010 23,027,189 2009 0.869 111.90% 20,578,993 2011 25,497,188 2010 1.044 136.18% 18,723,249 2012 27,403,488 2011 1.138 139.88% 19,590,385 2013 28,334,286 2012 1.138 139.03% 20,380,206 2014 29,371,842 (1) 2013 1.130 138.25% 21,244,699

______Source: The City (1) As of February 28, 2014.

TABLE 6 – TEN LARGEST TAXPAYERS % of Total 2013/2014 Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation CenterPoint Energy Inc. Energy $ 42,940,538 1.65% ExxonMobil Corp. Chemical and Refining 32,593,537 1.25% TPC Group Inc. Chemical 29,936,346 1.15% LCY Elastomers LP Chemical 29,049,947 1.12% Wal-Mart Retail 21,106,166 0.81% AHC Goose Creek LLC Apartments 20,800,000 0.80% MREF Villas LLC Apartments 18,515,296 0.71% Angel Bros. Enterprises Construction 18,265,178 0.70% 2800 Baker Road Ltd. Apartments 15,700,000 0.60% Continental Airlines Inc. Airline - Fuel Storage 13,933,536 0.54% $ 242,840,544 9.35%

______(1) Goose Creek Independent School District Tax Services

14

TABLE 7 – TAX ADEQUACY

2014 Net Debt Service Requirements ……………………………………………………… $ 7,809,696 (1) $0.3100 Tax Rate at 97% Collection Produces …………………………………………… 7,812,216

Net Average Annual Debt Service Requirement (2014-2034)…………………..………… $ 5,797,838 (1) $0.2301 Tax Rate at 97% Collection Produces …………………………………………… 5,800,358

Net Maximum Annual Debt Service Requirement (2015)…………..…………………..… $ 8,539,791 (1) $0.3389 Tax Rate at 97% Collection Produces …………………………………………… 8,542,311 ______(1) Includes the Obligations and excludes any self-supporting debt and the Refunded Obligations. See “TABLE 1 – VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT” and the accompanying footnotes; “THE SYSTEM – WATERWORKS AND SANITARY SEWER SYSTEM USED TO PAY GENERAL OBLIGATION DEBT SERVICE” and “TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT.”

TABLE 8 – ESTIMATED OVERLAPPING DEBT

Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds (“Tax Debt”) was developed from information contained in “Texas Municipal Reports” published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional bonds since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City.

City's Estimated Estimated Overlapping 2012/2013 Taxable Total % G.O. Debt as Assessed Value Tax Rate G.O. Debt Applicable of 2/1/2014

City of Baytown$ 2,598,351,442 (1) $ 0.82203 $ 200,265,000 (2) 100.00%$ 200,265,000 Chambers County 6,855,581,275 0.38030 22,205,000 7.07% 1,569,894 Goose Creek CISD 6,400,578,010 1.33210 412,810,000 28.97% 119,591,057 Harris County 290,501,987,000 0.40020 1,773,252,190 (3) 0.83% 14,717,993 Harris County Flood Control 280,292,702,000 0.02810 96,470,000 0.83% 800,701 Harris County Department of Ed. 289,007,135,262 0.00660 7,605,000 0.83% 63,122 Lee College District 8,316,668,805 0.24100 50,235,000 29.44% 14,789,184 Port of Houston Authority 279,467,968,000 0.01950 731,969,397 0.83% 6,075,346

Total Direct and Overlapping Funded Debt$ 357,872,296 Less Self-Supporting Debt of the City 113,347,561 Tax-Supported Direct and Overlapping Funded Debt$ 244,524,735 Ratio of Tax-Supported Direct and Overlapping Funded Debt to Taxable Assessed Valuation 9.41% Per Capita Tax-Supported and Overlapping Funded Debt$ 3,307 ______(1) Reflects 2012/2013 assessed valuation and tax rate. Does not include assessed valuation for property under an IDA. See TABLE 5 – INDUSTRIAL DISTRICT CONTRACTS for revenues from the IDAs. (2) Includes self-supporting debt and the Obligations. Excludes the Refunded Obligations. (3) Excludes self-supporting toll road debt.

15

DEBT INFORMATION

TABLE 9 – GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS

Less: Year Total Refunded Total Less: Self- Net Total End Outstanding Obligations Plus: The Bonds Plus: The Certificates Debt Service Supporting Debt Service 9/30 Debt Service Debt Service Principal Interest Total Principal Interest Total Requirements Debt Service(1) Requirements 2014$ 18,556,290 $ 390,611 $ 297,352 $ 297,352 $ 124,640 $ 124,640 $ 18,587,672 $ 10,777,976 $ 7,809,696 2015 18,633,932 1,908,821 $ 1,550,000 994,375 2,544,375 $ 410,000 419,206 829,206 20,098,692 11,558,901 8,539,791 2016 18,464,827 2,738,656 2,365,000 943,400 3,308,400 425,000 408,731 833,731 19,868,302 11,527,521 8,340,781 2017 18,112,735 2,355,298 2,075,000 876,800 2,951,800 435,000 395,831 830,831 19,540,068 11,561,988 7,978,080 2018 17,305,228 2,029,501 1,835,000 818,150 2,653,150 450,000 382,556 832,556 18,761,433 11,090,089 7,671,344 2019 16,298,678 2,037,124 1,905,000 762,050 2,667,050 460,000 368,906 828,906 17,757,511 10,412,167 7,345,344 2020 16,330,573 2,050,494 1,980,000 693,875 2,673,875 480,000 352,406 832,406 17,786,361 10,415,354 7,371,006 2021 16,044,490 1,742,026 1,770,000 618,875 2,388,875 500,000 332,806 832,806 17,524,145 10,297,176 7,226,969 2022 16,088,557 1,747,271 1,845,000 546,575 2,391,575 520,000 312,406 832,406 17,565,267 10,316,827 7,248,440 2023 15,252,323 1,753,888 1,930,000 471,075 2,401,075 540,000 291,206 831,206 16,730,716 10,006,966 6,723,750 2024 14,379,029 1,761,598 2,015,000 392,175 2,407,175 560,000 269,206 829,206 15,853,813 9,651,644 6,202,169 2025 13,394,848 1,765,331 2,100,000 309,875 2,409,875 585,000 246,306 831,306 14,870,698 8,976,980 5,893,718 2026 11,908,960 1,344,358 1,790,000 232,075 2,022,075 610,000 222,406 832,406 13,419,084 7,892,534 5,526,550 2027 9,212,444 590,000 186,688 776,688 630,000 199,969 829,969 10,819,100 5,670,438 5,148,662 2028 8,230,100 610,000 166,806 776,806 655,000 178,678 833,678 9,840,584 4,678,694 5,161,891 2029 4,872,263 630,000 145,488 775,488 675,000 155,813 830,813 6,478,563 2,363,534 4,115,028 2030 4,864,619 655,000 123,000 778,000 700,000 131,750 831,750 6,474,369 2,355,707 4,118,662 2031 4,154,156 680,000 98,788 778,788 725,000 105,906 830,906 5,763,850 1,928,419 3,835,431 2032 3,149,397 705,000 72,819 777,819 755,000 78,156 833,156 4,760,372 1,936,931 2,823,441 2033 2,221,872 730,000 45,000 775,000 785,000 48,300 833,300 3,830,172 1,931,525 1,898,647 2034 - 760,000 15,200 775,200 815,000 16,300 831,300 1,606,500 831,300 775,200 $ 247,475,319 $ 23,624,976 $ 28,520,000 $ 8,810,440 $ 37,330,440 $ 11,715,000 $ 5,041,487 $ 16,756,487 $ 277,937,269 $ 156,182,669 $ 121,754,600

______(1) A portion of the Obligations are self-supporting and those portions planned to be paid from sources other than the City’s debt service taxes are included in the self-supporting debt service column above. Excludes the Refunded Obligations. See “THE SYSTEM - TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT.” See “TAX INFORMATION – TABLE 1 – VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT, Footnote 2.”

16 TABLE 10 – INTEREST AND SINKING FUND BUDGET PROJECTION

General Obligation Net Debt Service Requirements, Fiscal Year Ending September 30, 2014 (1) $ 7,809,696 Interest and Sinking Fund, September 30, 2013$ 3,715,519 Calculated Interest and Sinking Fund Collections @ 97% Collection 9,701,023 Budgeted Deliquent Prior Year Taxes, Penalty and Interest on Prior Year Taxes 360,000 Budgeted Investment Income 3,674 13,780,216

Estimated Balance, September 30, 2014$ 5,970,520 ______(1) Excludes lease/purchase obligations, self-supporting debt and the Refunded Obligations. See “TABLE 1 – VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT” and the accompanying footnotes; “THE SYSTEM - WATERWORKS AND SANITARY SEWER SYSTEM USED TO PAY GENERAL OBLIGATION DEBT SERVICE” and “TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT.”

TABLE 11 – AUTHORIZED BUT UNISSUED GENERAL OBLIGATION DEBT

Date of Amount Issued Amount Authorization Purpose Authorized To Date This Issue(1) Unissued 11/6/2007 Streets, Sidewalks, Drainage and Utilities$ 36,850,000 $ 26,615,000 $ 5,000,000 $ 5,235,000 11/6/2007 Public Safety, EMS and Firefighting Facilities and Equipment 22,995,000 13,312,000 4,000,000 5,683,000 11/6/2007 Parks Improvements and Citywide Beautification 10,940,000 9,046,000 1,825,000 69,000 11/6/2007 East Baker Road Extension 7,170,000 7,170,000 - 11/6/2007 Drainage Improvements 2,020,000 1,472,000 400,000 148,000 $ 79,975,000 $ 57,615,000 (2) $ 11,225,000 $ 11,135,000

______(1) Includes premium counted against voted authorization.

ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT

The City does not expect to issue additional tax-supported debt in the next 12 months.

PENSION FUND

The City provides pension benefits for all of its full-time employees through the Texas Municipal Retirement System (“TMRS”), a State-wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. As part of its strategic plan, in 2013 the TMRS Board asked its consulting actuary to review the mortality tables used to calculate a member’s retirement benefits. The tables used had been adopted in early 1980s and had not been updated to reflect improvements in mortality, i.e., people living longer. The actuarial studies documented that mortality has steadily improved nationwide and for some time is expected to continue to improve. The studies also pointed out that using older tables to calculate retirement benefits has caused City contribution rates to increase to take into account the additional time that benefits are being paid to retirees and concluded that City rates would have to increase further as mortality continues to improve. TMRS has chosen to reduce the impact of the change on future retirees by phasing in the change to the tables. A 13-year phase-in period was recommended by the actuary and adopted by the Board. This 13-year phase-in will produce a gradual change that will ensure that any active member's benefit will continue to increase in future years, although the amount of the increase will be smaller due to the change in the APR than it would have been without the change. The City is currently paying a subsidy for improvements in life expectancy in the form of higher contribution rates. Since changes to the mortality tables have been made over a 13-year phase-in period, this (a) minimizes the impact on the average member's future retirement annuity and (b) does not result in an increase in most cities' contribution rate. Over the long term, changing tables helps further stabilize the City’s contribution rates. (For more detailed information concerning the retirement plan, see “APPENDIX B – EXCERPTS FROM THE CITY’S ANNUAL FINANCIAL REPORT” – Note # 5, D.)

OTHER POST-EMPLOYMENT BENEFITS

In addition to pension benefits, the City provides certain other post-employment benefits for retired employees (“OPEB”). The costs of these benefits are recognized as expenditures on a modified accrual basis when the underlying claims are paid. Commencing in fiscal year 2009, the City implemented GASB Statement No. 45 “Accounting And Financial Reporting By Employers For Post- Employment Benefits Other Than Pensions.” An actuarial study from an outside consultant regarding the City’s OPEB obligations determined an Annual Required Contribution (“ARC”) of approximately $5,397,422 for the 2013 fiscal year. The City no longer offers subsidized retiree insurance coverage for any employee who starts employment with the City of Baytown after January 1, 2010. (For more detailed information concerning the retirement plan, see “APPENDIX B – EXCERPTS FROM THE CITY’S ANNUAL FINANCIAL REPORT” – Note #5, E.)

17 FINANCIAL INFORMATION

TABLE 12 – GENERAL FUND REVENUES AND EXPENDITURE HISTORY

For Fiscal Year Ended September 30, Revenues: 2013 2012 2011 2010 2009 Property Taxes$ 10,613,996 $ 10,034,258 $ 10,755,023 $ 11,549,038 $ 11,564,876 Sales & Use Taxes 11,690,600 11,027,299 9,984,586 9,587,234 10,419,355 Franchise Taxes 3,825,432 3,800,997 3,994,547 3,485,310 4,265,055 Industrial District Payments 28,334,286 27,403,487 25,497,188 23,027,189 21,129,142 Licenses & Permits 1,487,239 1,261,683 923,871 1,196,580 1,066,981 Charges for Services 1,804,074 1,821,071 1,744,986 517,837 1,738,507 Fines & Forfeitures 2,190,326 2,490,774 2,252,321 1,908,340 1,944,202 Intergovernmental Receipts 1,525,994 1,129,168 1,010,658 2,425,452 451,198 Interest Income 533,717 135,936 236,284 208,260 401,666 Miscellaneous 390,772 728,488 644,307 440,343 742,642 Total $ 62,396,436 $ 59,833,161 $ 57,043,771 $ 54,345,583 $ 53,723,624

Expenditures: General Government$ 14,595,578 $ 13,723,771 $ 13,084,837 $ 13,572,314 $ 13,097,301 Public Safety 32,596,508 31,529,591 29,445,862 28,419,199 26,633,998 Public Works 3,821,616 3,642,222 4,147,895 4,391,159 3,841,490 Public Health 2,082,161 2,028,274 1,870,441 1,948,350 1,673,060 Culture & Recreation 5,849,883 6,080,860 5,791,618 5,866,063 5,404,205 Capital Outlay 2,465,978 2,197,137 1,682,630 2,879,032 2,365,308 Debt Service - - 35,159 35,159 35,159 Total$ 61,411,724 $ 59,201,855 $ 56,058,442 $ 57,111,276 $ 53,050,521

Other Financing Sources (Uses): Transfers-in$ 4,830,713 $ 5,677,099 $ 3,185,634 $ 5,614,644 $ 2,183,746 Transfers-out (3,132,000) (3,535,310) (2,804,908) (1,505,152) (2,024,578) $ 1,698,713 $ 2,141,789 $ 380,726 $ 4,109,492 $ 159,168

Change in Fund Balance: $ 2,683,425 $ 2,773,095 $ 1,366,055 $ 1,343,799 $ 832,271

Beginning Fund Balance$ 20,963,139 (1) $ 19,389,943 $ 18,023,888 $ 16,680,089 $ 15,848,218 Ending Fund Balance $ 23,646,564 $ 22,163,038 $ 19,389,943 $ 18,023,888 $ 16,680,489

______Source: The City’s audited financial statements. (1) Restated.

18 TABLE 13 – MUNICIPAL SALES TAX HISTORY

The City has adopted the Municipal Sales and Use Tax Act, Texas Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Obligations. The citizens of the City approved a one-half of one percent (1/2%) Municipal Development District tax on May 5, 2001 and also approved an additional one-fourth of one percent (1/4%) Street Maintenance sales tax on May 14, 2004, which was reauthorized in 2011. On May 13, 2006 the citizens voted to create the Baytown Crime Control and Prevention District and the Baytown Fire Control, Prevention, and Emergency Medical Services District and the adoption of a local sales and use tax at a rate of one-eighth of one percent (1/8%) for each, both taxes were reauthorized in 2011. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. Listed below are historical revenues for each of the sales taxes listed herein.

Fire Control, Prevention, Municipal Crime Control and Emergency % of Fiscal Year Street Development Prevention M edical Services Ad Valorem Ended 9/30 General Fund Maintenance District District District Total Tax Levy 2009 $ 10,281,159 $ 2,570,290 $ 4,499,459 $ 1,210,403 $ 1,192,601 $ 19,753,912 95.49% 2010 9,457,758 2,364,439 4,365,821 1,115,104 1,117,244 18,420,366 89.51% 2011 9,846,675 2,461,669 4,494,771 1,165,765 1,177,386 19,146,266 102.26% 2012 10,908,927 2,727,232 4,956,223 1,317,525 1,340,991 21,250,898 108.48% 2013 11,546,924 2,886,731 5,294,203 1,447,401 1,454,209 22,629,468 111.04% (1) 2014 5,901,886 1,475,471 2,754,268 739,374 770,247 11,641,246 54.80% ______Source: the City. (1) Collections for the first three months of the fiscal year as of February 28, 2014.

The sales tax breakdown for the City is as follows:

City Sales & Use Tax 1¢ Street Maintenance Sales Tax 1/4¢ Municipal Development District 1/2¢ Crime Control and Prevention District 1/8¢ Fire Control, Prevention and Emergency Medical Services District 1/8¢ State Sales & Use Tax 6 1/4¢ Total 8 1/4¢

CAPITAL IMPROVEMENT PROGRAM

General Improvement Bond Program - The City Council, Citizens and Administration agree that maintaining and improving the facilities and infrastructure within the City is vital to its growth and development. In November 2007, the voters overwhelmingly approved five initiatives that will provide improvements in the following areas: streets; sidewalks; drainage; public safety; and parks, recreation and beautification. A total of $69 million dollars in general obligation bonds have or will be sold before the end of the 2013-14 budget year for the multi-year bond program. The City issued $16.8 million in general obligation bonds in 2012-13. The City will continue to monitor and assess the cash flow of the projects and adjust the program as necessary. There will be no ad valorem tax increase associated with the budgeted 2013-14 general obligation debt issuance; future issuances may require an increase.

Utility Capital Improvements- Another capital improvement initiative seen as critical to the growth and development of the City is the utility infrastructure. Current and active projects detailed in this document represent over $120 million in improvements from 2002 through 2017. Projects in this category include development and redevelopment of wastewater treatment plants and lift stations, water and sewer line rehabilitation, line extensions, new construction and rehabilitation of existing water towers and water well replacement. A reassessment of cash flows for these projects resulted in the deferral of debt issuance which deferred the related debt service. Additional ongoing projects that will improve the City’s utility infrastructure include the hardening of the lift stations and other water and sewer facilities throughout the City. These projects are funded by grants and are budgeted in excess of $ 12 million.

Street Maintenance Improvements- Funded by a dedicated sales tax, which was reauthorized in 2011, the Street Maintenance Fund provides for a critical program to address the maintenance of the city streets in substandard condition. Represented in the current program is additional funding for Asphalt Base Restore/Mill and Overlay ($1,250,000); Crack Seal and Joint Repair ($600,000); Concrete Street Repair ($900,000); and new Capital Project Initiatives ($950,000).

19 General Capital Improvements Program Fund (CIPF) – This fund is used to provide for various small to medium projects and is primarily funded with a transfer from General Fund. Major recurring programs reflected here include funding for the CIP Project Management ($277,527) and Building Demolition ($496,982). Funding has been captured here from the Fire/EMS Special District to provide for the long term capital project for a Fire Training Grounds Facility ($2.5 million) and Fire Radio Replacement ($603,237). Other Projects include a Traffic Signal ($150,000), GIS Improvements ($20,000) and New Initiatives ($530,000). Additionally, the General Fund transferred $5 million to the CIPF at the end of FY 2007-08 to provide the resources to fund the recovery efforts required from Hurricane Ike. Of that, $4.5 million has been reimbursed to the General Fund through 2012-13.The remaining $500,000 is budgeted for Marina Dredging costs which will fulfill the reimbursement obligation to the General Fund.

FINANCIAL POLICIES

GASB 34 . . .The City is a Phase II City which required GASB 34 implementation for the fiscal year ending September 30, 2003. The City has implemented GASB 34.

Basis of Accounting . . .The accounts of the City are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate.

General Fund . . .The General Fund is the principal fund of the City. All general tax revenues and other receipts that are not allocated by law or contractual agreement to some other fund are accounted for in this fund. From the fund are paid general operating costs, fixed charges and capital improvement costs that are not paid through other funds.

Special Revenue Funds . . .The Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to expenditures for specified purposes. These funds include grants from the Department of Housing and Urban Development (Community Development Block Grant), the Texas Criminal Justice Division, the Department of Transportation, Texas State Library, and miscellaneous other sources.

Debt Service Fund. . .The Debt Service Fund is used to account for the payment of principal and interest on general long-term liabilities paid primarily by taxes levied by the City.

Capital Projects Funds . . .The Capital Projects Funds are used to account for the acquisition of capital facilities being financed from bond proceeds, contributed capital or transfers from other funds, other than those recorded in the Enterprise Funds, Internal Service Funds or Trust Funds.

Budgetary Procedures . . .At least 60 days prior to the beginning of each fiscal year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning the following October 1. The operating budget includes proposed expenditures and the means of financing them. Public hearings are conducted prior to the adoption of the budget in order to obtain taxpayer comments. The budget is legally enacted by the City Council through passage of an ordinance prior to the beginning of the fiscal year. The City Manager is authorized to transfer budgeted amounts within departments at any time and City Council may, within the last three months of the fiscal year, transfer between departments. However, any revisions that modify the total expenditures of any budgeted fund must be approved by the City Council. Budgeted amounts are as revised by the City Manager, or as amended by the City Council. At the request of the City Manager, the Council may by resolution transfer any unencumbered appropriation balance or portion thereof from one office, department or agency to another.

INVESTMENTS

The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City. Both state law and the City’s investment policies are subject to change.

Legal Investments . . . Available City funds are invested as authorized by Texas law and in accordance with investment policies approved by the City. Both Texas law and the City’s investment policies are subject to change. Under Texas law, the City is authorized to invest in (1) obligations, including letters of credit, of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal and interest of which are unconditionally guaranteed, insured, or backed by the full faith and credit of the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit and share certificates (i) issued by a depository institution that has its main office or a branch office in the State of Texas, that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits, or (ii) where (a) the funds are invested by the City through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted, at least annually, by the City

20 as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the City; (b) the broker or the depository institution selected by the City arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the City; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the City appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the City with respect to the certificates of deposit, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the City, held in the City’s name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State of Texas; (9) bankers’ acceptances with a stated maturity of 270 days or less from the date of its issuance, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (11) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the preceding clauses, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent, and (13) public funds investment pools that have an advisory board which includes participants in the pool and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. Texas law also permits the City to invest bond proceeds in a guaranteed investment contract, subject to limitations as set forth in the Public Funds Investment Act, Texas Government Code, Chapter 2256 (the “PFIA”).

A political subdivision such as the City may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City’s name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less.

The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 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. The City is specifically prohibited from investing in (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage- backed security collateral and pays no principal (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years, and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

Additional Provisions . . . Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment, and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All City funds must be invested consistent with a formally adopted “Investment Strategy Statement” that specifically addresses each fund’s investment.

Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made “with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person’s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived.” At least quarterly the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value and the ending market value of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the City Council.

21 TABLE 14 – CURRENT INVESTMENTS

As of February 28, 2014, the City’s investable funds were invested in the following categories:

Type of Investments Book Value Market Value Coupon Agencies 10,842,455 10,851,624 Certificates of Deposit 993,575 993,575 Commercial Paper 23,982,130 24,000,000 Municipal Bonds 15,486,224 15,479,546 TexPool 61,949,874 61,949,874 TexSTAR 19,368,716 19,368,716 Total$ 132,622,974 $ 132,643,335

______Source: The City.

THE SYSTEM

WATERWORKS AND SANITARY SEWER SYSTEM USED TO PAY GENERAL OBLIGATION DEBT SERVICE

The City’s waterworks and sanitary sewer system has contractual debt outstanding which is paid from gross revenues of the waterworks and sanitary sewer system. The Baytown Area Water Authority Water Supply Contract Revenue Refunding Bonds, Series 2007; Water Supply Contract Revenue Bonds, Series 2006; and Water Supply Contract Revenue and Refunding Bonds, Series 2012 represent the outstanding debt paid from gross operating revenues and such bonds are treated as operating expenses of the system.

The City also has certain outstanding Certificates of Obligation and General Obligation Refunding Bonds, including a portion of the Refunded Obligations, a portion of the proceeds of which were used or will be used for waterworks and sanitary sewer system improvements or for the purpose of refinancing obligations incurred for such purpose. This debt is currently being paid from surplus net revenues of the system and is listed below:

Percent System Debt Attributed to Due in 2014 Issue(1) System Debt Fiscal Year Combination Tax and Revenue Certificates of Obligation, Series 2004A 100% 576,724 Combination Tax and Revenue Certificates of Obligation, Series 2005 100% 883,311 General Obligation Refunding Bonds, Series 2005A(2) (3) 140,831 Combination Tax and Revenue Certificates of Obligation, Series 2006A(2) 100% 741,108 Combination Tax and Revenue Certificates of Obligation, Series 2006B 100% 1,369,148 Combination Tax and Revenue Certificates of Obligation, Series 2007 100% 982,950 Combination Tax and Revenue Certificates of Obligation, Series 2007A 100% 120,185 Combination Tax and Revenue Certificates of Obligation, Series 2008 100% 2,134,615 General Obligation Refunding Bonds, Series 2010 (3) 1,091,266 General Obligation and Refunding Bonds, Series 2011 (3) 349,900 General Obligation and Refunding Bonds, Series 2012 (3) 614,450 Combination Tax and Revenue Certificates of Obligation, Series 2013 100% 1,129,688 The Certificates 100% 124,640 The Bonds (3) 91,425 Total System Debt Due in 2014 Fiscal Year $ 10,350,239

______(1) Does not include the Combination Tax and Revenue Certificates of Obligation, Series 2010 supported by revenues from the Municipal Development District. (2) Excludes the Refunded Obligations (3) Partially self-supporting.

The debt service described in this table is general obligation debt for which repayment is provided from revenues of the water and sewer system (see “TABLE 20 – CONDENSED STATEMENT OF OPERATIONS.”). It is the City’s current policy to provide these payments from such sources. There is no assurance that the use of these sources to make these payments will continue in the future. If payments are not made from such sources in the future, the difference will be paid for with ad valorem taxes.

22

TABLE 15 – COMPUTATION OF SELF-SUPPORTING DEBT

Estimated Revenue Available for Debt Service from Waterworks and Sewer System, Fiscal Year Ended 9/30/2013$ 11,716,828 Less: Waterworks and Sewer System Revenue Debt Service Requirements, Fiscal Year Ending 9/30/2014 - Estimated Balance Available $ 11,716,828

Certificates of Obligation and General Obligation Bond Requirements being paid from Waterworks and Sewer System Revenues, Fiscal Year Ending 9/30/2014(1) $ 10,350,239 Percentage of Certificates of Obligation and General Obligation Bond Requirements being paid from Waterworks and Sewer System Revenues, Fiscal Year Ending 9/30/2014 100.00%

Gross Sales Tax Receipts from Municipal Development District, Fiscal Year Ended 9/30/2013$ 5,294,203 Less: Sales Tax Revenue Bonds Requirements, Fiscal Year Ending 9/30/2014 - Estimated Balance Available $ 5,294,203

Certificates of Obligation and General Obligation Bond Requirements being paid from Municipal Development District Revenues, Fiscal Year Ending 9/30/2014(2) $ 427,738 Percentage of Certificates of Obligation and General Obligation Bond Requirements being paid from Municipal Development District Revenues, Fiscal Year Ending 9/30/2014 100.00% ______(1) Excludes the Refunded Obligations. (2) Includes the Combination Tax and Revenue Certificates of Obligation, Series 2010 supported by revenues from the Municipal Development District.

WATER SYSTEM

The Baytown Area Water Authority (BAWA) was created in 1973 to serve the Baytown area with a stable and reliable source of treated surface water and to reduce the area’s reliance on groundwater.

BAWA provides the City with its entire domestic and commercial supply of water. The water treated by BAWA originates from the Trinity River and is conveyed to BAWA via the Coastal Water Authority (CWA) canal system.

CWA’s Trinity River water conveyance system is operated under a contract with the City of Houston. On January 3, 2005, BAWA and the City of Houston extended the contract for raw water through the year 2040. This contract obligates the City of Houston to provide water up to an average of 20 million gallons per day (MGD). This contract allows BAWA to purchase above an average of 20 MGD with a surcharge if the overage exceeds a ten percent average for the month.

The City is the largest customer of BAWA, purchasing approximately 12.58 MGD in fiscal year 2013. Eighty-nine percent of BAWA’s water is utilized by the City with the remaining eleven percent utilized by BAWA’s seven other customers.

The BAWA treatment plant has a design capacity of 22.5 MGD and a peak capacity of 26 MGD. The plant utilizes conventional treatment including coagulation, flocculation, sedimentation, and disinfection for treatment of the raw water. The finished water storage capacity is 13.5 million gallons.

To assure future water needs are met, the City is currently undertaking architectural and engineering studies related to the future construction of a second surface water treatment plant. This plant, estimated to cost about $30 million for 6 MGD capacity, will be constructed in an undetermined location generally south of IH 10 and west of SH 99 along the CWA Barbers Hill Canal. Preliminary plans call for construction to begin no earlier than FYE 2015/2016.

BAWA and the City have entered into a contract where the City provides the personnel necessary to manage, operate, and maintain the water treatment plant. BAWA reimburses the City the actual cost of the employees’ salaries and benefits, and the materials and supplies used by BAWA in operating and maintaining the treatment plant.

A revenue sufficiency analysis by Burton & Associates last completed in 2010 is scheduled to be performed in 2014. This study will give the City assurance that utility rates are structured to provide sufficient cash flow for operations, maintenance and projected capital needs

23 TABLE 16 – HISTORICAL WATER AND WASTEWATER USAGE AND DEBT SERVICE COVERAGE

Fiscal Net Year Water Wastewater Available Annual Debt Ended Average Daily Average Daily For Debt Service Coverage 9/30 Production (MGD) Treatment (MGD) Service Requirements(1) Of Debt 2009 11.89 10.57 $ 15,897,637 $ 2,446,393 6.50x 2010 12.29 11.40 12,330,984 2,451,532 5.03x 2011 12.92 10.30 15,517,315 1,042,189 14.89x 2012 12.01 9.53 15,495,278 1,040,725 14.89x 2013 12.58 12.23 11,716,828 614,825 19.06x ______Source: The City (1) On October 24, 2013, the City redeemed with cash all remaining outstanding debt of the Waterworks and Sewer System.

TABLE 17 – TEN LARGEST WATER CUSTOMERS (BASED ON GALLONS CONSUMED)

Water Usage In Gallons(1) Customer (000's) Exxon 203,453 Spring Meadows MUD 95,433 CCID # 1 90,622 Chambers Co. MUD 68,191 Goose Creek ISD 66,781 San Jacinto Methodist Hospital 42,050 Bay Pointe Aptartments 23,607 Quail Hollow Apartments 20,375 Piedmont Apartments 19,218 Woodcreek Village Apartments 19,197 648,927

______Source: The City (1) For the fiscal year ended September 30, 2013.

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24 TABLE 18 – MONTHLY WATER RATES (EFFECTIVE OCTOBER 1, 2013)

Water S ervice—Rate S chedule Individually Metered Single-Family Residential Inside Outside Base Facility Charge: City Limits City Limits Per Dwelling Unit $7.11 $14.23

Customer Charge: Per Bill Issued $3.42 $6.84

Gallonage Charge (Per Thousand Gallons): Up to 2,000 gallons per unit $2.43 $3.65 Over 2,000—6,000 gallons per unit $5.29 $7.93 Over 6,000—12,000 gallons per unit $6.34 $9.53 Over 12,000—18,000 gallons per unit $8.26 $12.38 Use over 18,000 gallons per unit $10.73 $16.10

Water S ervice—Rate S chedule Multifamily Residential Master Meter Service Inside Outside City Limits City Limits Base Facility Charge: Per Dwelling Unit $7.11 $14.23

Customer Charge: Per Bill Issued $3.42 $6.84

Gallonage Charge (Per Thousand Gallons): Up to 2,000 gallons per unit $2.43 $3.65 Over 2,000 gallons per unit $5.29 $7.93

Unit = Constructed, regardless of whether occupied.

25 WASTEWATER SYSTEM

The City has four wastewater treatment plants. The East District Plant is rated at 6.0 MGD, the Central District Plant is rated at 6.2 MGD, the West District Plant is rated at 8.0 MGD, and the Northeast Plant is rated at 4.0 MGD. Currently, all plants are operating at less than 75% design capacity and all meet the minimum standards as set forth by the EPA and the Texas Commission on Environmental Quality.

TABLE 19 – MONTHLY SEWER RATES (EFFECTIVE OCTOBER 1, 2013)

Wastewater Service—Rate Schedule Individually Metered S ingle-Family Residential

Inside Outside City Limits City Limits Base Facility Charge: Per Dwelling Unit $7.11 $14.23

Customer Charge: Per Bill Issued $3.42 $6.84

Gallonage Charge (Per Thousand Gallons): Up to 2,000 gallons per unit $2.46 $3.68 Over 2,000 - 12,000 gallons per unit $5.32 $7.99 Over 12,000 gallons per unit No charge No charge

Wastewater Service—Rate Schedule Multifamily Residential Master Meter Service Inside Outside City Limits City Limits Base Facility Charge: Per Dwelling Unit $7.11 $14.23

Customer Charge: Per Bill Issued $3.42 $6.84

Gallonage Charge (Per Thousand Gallons): Up to 2,000 gallons per unit $2.43 $3.65 Over 2,000 gallons per unit $5.29 $7.93

Unit = Constructed, regardless of whether occupied.

26

TABLE 20 – CONDENSED STATEMENT OF OPERATIONS

For Fiscal Year Ended September 30 2013 2012 2011 2010 2009 Revenue: Charges for Service$ 30,718,509 $ 32,431,550 $ 30,744,283 $ 27,241,025 $ 27,270,247 Service Charges and Other 3,304,007 2,937,818 2,712,287 3,552,006 4,430,444 Intergovernmental - 2,531,225 2,549,797 52,849 125,683 Interest Income 264,682 148,105 410,838 324,086 831,841 Total Revenue $ 34,287,198 $ 38,048,698 $ 36,417,205 $ 31,169,966 $ 32,658,215

Expe nse s (Other Than Depreciation): Personnel Costs$ 8,027,025 $ 7,770,461 $ 7,719,902 $ 7,203,554 $ 5,362,517 Supplies 10,444,340 10,137,855 9,483,558 7,160,370 6,614,721 Maintenance 1,801,860 1,455,109 1,325,058 1,099,360 1,541,185 Services 2,189,821 3,112,135 2,268,908 3,281,305 3,242,155 Miscellaneous 107,324 77,860 102,464 94,393 - Total Expenses $ 22,570,370 $ 22,553,420 $ 20,899,890 $ 18,838,982 $ 16,760,578

Net Revenue Available for Debt Service $ 11,716,828 $ 15,495,278 $ 15,517,315 $ 12,330,984 $ 15,897,637

Water Customers 22,212 22,104 21,903 21,804 21,678 Sewer Customers 21,316 21,241 21,086 21,011 20,918 ______Source: The City’s audited financial statements for fiscal years 2009-2013.

TAX MATTERS

TAX EXEMPTION

In the opinion of Bracewell & Giuliani LLP, Bond Counsel, (i) interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and (ii) the Obligations are not “private activity bonds” under the Internal Revenue Code of 1986, as amended (the “Code”) and, as such, interest on the Obligations is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations.

The Code imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Obligations, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of obligation proceeds and the source of repayment of obligations, limitations on the investment of obligation proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of obligation proceeds be paid periodically to the United States and a requirement that the issuer file an information report with the Internal Revenue Service (the “Service”). The City has covenanted in the Ordinances that it will comply with these requirements.

Bond Counsel’s opinion will assume continuing compliance with the covenants of the Ordinances pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Obligations for federal income tax purposes and, in addition, will rely on representations by the City, the City’s Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the City, the City’s Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the City fails to comply with the covenants in the Ordinances or if the foregoing representations on the Report should be determined to be inaccurate or incomplete, interest on the Obligations could become includable in gross income from the date of delivery of the Obligations, regardless of the date on which the event causing such inclusion occurs.

The Code also imposes a 20% alternative minimum tax on the “alternative minimum taxable income” of a corporation if the amount of such alternative minimum tax is greater than the amount of the corporation’s regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT or REMIC), includes 75% of the amount by which its “adjusted current earnings” exceeds its other “alternative minimum taxable income.” Because interest on tax-exempt obligations, such as the Obligations, is included in a corporation’s “adjusted current earnings,” ownership of the Obligations could subject a corporation to alternative minimum tax consequences.

Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Obligations.

27

Bond Counsel’s opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel’s knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel’s attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel’s opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsel’s legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Obligations. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Obligations could adversely affect the value and liquidity of the Obligations during the pendency of the audit regardless of the ultimate outcome of the audit.

ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS

Collateral Tax Consequences. . . Prospective purchasers of the Obligations should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax- exempt obligations, and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits tax” on their effectively connected earnings and profits, including tax exempt interest such as interest on the Obligations. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Obligations should also be aware that, under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Obligations, received or accrued during the year.

Tax Accounting Treatment of Original Issue Premium Obligations . . . The issue price of all or a portion of the Obligations may exceed the stated redemption price payable at maturity of such Obligations. Such Obligations (the “Premium Obligations”) are considered for federal income tax purposes to have “bond premium” equal to the amount of such excess. The basis of a Premium Obligation in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Obligation in determining gain or loss for federal income tax purposes. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Obligation by the initial owner. No corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Obligation that is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Obligation) is determined using the yield to maturity on the Premium Obligation based on the initial offering price of such Obligation.

The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Obligations that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Obligations should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Obligation and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Obligations.

Tax Accounting Treatment of Original Issue Discount Obligations. . . The issue price of all or a portion of the Obligations may be less than the stated redemption price payable at maturity of such Obligations (the “Original Issue Discount Obligations”). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Obligation, and (ii) the initial offering price to the public of such Original Issue Discount Obligation constitutes original issue discount with respect to such Original Issue Discount Obligation in the hands of any owner who has purchased such Original Issue Discount Obligation in the initial public offering of the Obligations. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Obligations equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Obligation continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Obligations under the captions “TAX MATTERS – TAX EXEMPTION” and “ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS - Collateral Tax Consequences” and “- Tax Legislative Changes” generally applies, and should be considered in connection with the discussion in this portion of the Official Statement.

In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Obligation prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Obligation in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Obligation was held by such initial owner) is includable in gross income.

28 The foregoing discussion assumes that (a) the Initial purchaser have purchased the Obligations for contemporaneous sale to the public and (b) all of the Original Issue Discount Obligations have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm’s-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the inside cover page of this Official Statement. Neither the City nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Obligations will be offered and sold in accordance with such assumptions.

Under existing law, the original issue discount on each Original Issue Discount Obligation is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Obligations and ratably within each such six-month period) and the accrued amount is added to an initial owner’s basis for such Original Issue Discount Obligation for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Obligation.

The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Obligations which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Obligations should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Obligations and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Obligations.

Tax Legislative Changes…Current law may change so as to directly or indirectly reduce or eliminate the benefit of the exclusion of interest on the Obligations from gross income for federal income tax purposes. Any proposed legislation, whether or not enacted, could also affect the value and liquidity of the Obligations. Prospective purchasers of the Obligations should consult with their own tax advisors with respect to any proposed, pending or future legislation.

CONTINUING DISCLOSURE OF INFORMATION

In the Ordinances, the City has made the following agreement for the benefit of the holders and beneficial owners of the Obligations. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (“MSRB”). Information will be available free of charge via the Electronic Municipal Market Access (“EMMA”) system at www.emma.msrb.org.

ANNUAL REPORTS

The City will provide certain updated financial information and operating data to the MSRB annually via EMMA. The information to be updated includes all quantitative financial information and operating data of the general type included in this Official Statement in Tables 1 through 7 and Tables 9 through 20, and in APPENDIX B. The City will update and provide this information within six months after the end of each fiscal year.

The City may provide updated information in full text or may incorporate by reference other publicly available documents, as permitted by SEC Rule 15c2-12 (the “Rule”). The updated information will include audited financial statements if the City commissions an audit and the audit is completed by the required time. If audited financial statements are not available by the required time, the City will provide such financial statements on an unaudited basis within the required time and audited financial statements when they become available. Any such financial statements will be prepared in accordance with the accounting principles described in APPENDIX B or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation.

The City’s current fiscal year end is September 30. Accordingly, the City must provide updated information by the last day of March in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change.

NOTICES OF CERTAIN EVENTS

The City will also provide the following to the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of ten (10) business days after the occurrence of the event, notice of any of the following events with respect to the Obligations: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Obligations, or other material events affecting the tax status of the

29 Obligations; (7) modifications to rights of holders of the Obligations, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Obligations, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of successor or additional paying agent/registrar or the change of name of a paying agent/registrar, if material. In addition, the City will provide to the MSRB, in a timely manner, notice of any failure by the City to provide the required annual financial information described above under “ANNUAL REPORTS” and any notices of material events in accordance with this section.

For these purposes, any event described in (12) in the immediately preceding paragraph 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.

LIMITATIONS AND AMENDMENTS

The City has agreed to update information and to provide notices of events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Obligations at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Obligations may seek a writ of mandamus to compel the City to comply with its agreement.

The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Obligations in the initial primary offering in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Obligations consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Obligations. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the 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 Obligations in the primary offering of the Obligations.

If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under “ANNUAL REPORTS” an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided.

COMPLIANCE WITH PRIOR UNDERTAKINGS

During the last five years, the City has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule.

DISASTER PREPAREDNESS

Baytown has invested a great deal of staff time and effort into training for disaster prevention, response and recovery. All full-time City employees are required to meet the National Incident Management System (NIMS) training requirements. In addition, in 2013 the City sent 70 of its senior managers to FEMA’s National Emergency Training Center (NETC) for a week long training and series of disaster exercises.

In September 2008, Hurricane Ike struck Baytown inflicting millions of dollars in public property damages. The City recovered quickly with no lasting impacts to assessed values or reductions in tax, utility, or franchise fees. Subsequent to that experience, the City has invested nearly $50 million in grants and budget funds to harden its infrastructure to ensure that future disaster events have less impact on operations and facilities. The City also has a detailed comprehensive Hazard Mitigation Plan that assesses its emergency and disaster risk exposures and sets priorities for mitigation projects that will reduce those vulnerabilities.

30 OTHER INFORMATION

RATINGS

The presently outstanding tax supported debt of the City and the Obligations are rated “Aa2” by Moody’s and “AA” by S&P without regard to credit enhancement. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Obligations.

LITIGATION

It is the opinion of the City Attorney that there is no pending litigation against the City that would have a material adverse financial impact upon the City’s ability to pay debt service on the Obligations.

REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE

The sale of the Obligations has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Obligations have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Obligations under the securities laws of any jurisdiction in which the Obligations may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions.

LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS

Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Obligations are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Obligations by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Obligations be assigned a rating of “A” or its equivalent as to investment quality by a national rating agency. See “OTHER INFORMATION – RATINGS” herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Obligations are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Obligations are legal investments for various institutions in those states.

LEGAL MATTERS

The City will furnish to the Underwriters a complete transcript of proceedings incident to the authorization and issuance of the Obligations, including the unqualified approving legal opinion of the Attorney General of the State of Texas to the effect that the Obligations are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bracewell & Giuliani LLP, Houston, Texas, Bond Counsel, in substantially the form attached hereto as Appendix B.

Though such firm represents the Financial Advisor and the Underwriters from time to time in matters unrelated to the issuance of the Obligations, Bond Counsel has been engaged by and only represent the City in connection with the issuance of the Obligations. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement and has not assumed any responsibility with respect hereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions or subcaptions, “PLAN OF FINANCING” (except the subcaptions “SOURCES AND USES OF BOND PROCEEDS” and “SOURCES AND USES OF CERTIFICATE PROCEEDS”), “THE OBLIGATIONS” (except the subcaptions “BOOK-ENTRY-ONLY SYSTEM” and “REMEDIES OF HOLDERS OF THE OBLIGATIONS”) and “CONTINUING DISCLOSURE OF INFORMATION” (except the subcaption “COMPLIANCE WITH PRIOR UNDERTAKINGS”), and is of the opinion that the statements and information contained therein fairly and accurately reflect the provisions of the Ordinances; further, Bond Counsel has reviewed the statements and information contained in the Official Statement under the captions “TAX MATTERS,” “OTHER INFORMATION – REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE,” “OTHER INFORMATION – LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS,” and “OTHER INFORMATION – LEGAL MATTERS” (except for the last two sentences of the third paragraph), and is of the opinion that the statements and information contained therein fairly and accurately describe the laws and legal issues addressed therein.

31 The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Obligations is contingent upon the sale and delivery of the Obligations. Certain legal matters will be passed upon for the Underwriters by their counsel, Haynes and Boone, LLP, Houston, Texas. The legal fee of such firm is contingent upon the sale and delivery of the Obligations.

The various legal opinions to be delivered concurrently with the delivery of the Obligations express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of 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.

AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION

The financial data and other information contained herein have been obtained from City records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects.

FINANCIAL ADVISOR

First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Obligations. The Financial Advisor’s fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. First Southwest Company, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Obligations, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information.

Effective November 30, 2012, the ultimate parent of First Southwest Company is Hilltop Holdings Inc. (“Hilltop”). Mr. Gerald J. Ford serves as the Chairman of the Board of Directors of Hilltop. On July 29, 2011, Hilltop has extended a $50 million term loan to SWS Group, Inc. (“SWSG”), which is the parent company of Southwest Securities, Inc. In connection with the term loan, SWSG issued a warrant to Hilltop to purchase 8,695,652 shares of SWSG common stock (the “Warrant”), subject to anti-dilution adjustments, which if fully exercised, would represent approximately a 17% equity interest in SWSG, in addition to any shares of SWSG common stock purchased by Hilltop in open market and block transactions. Mr. Gerald J. Ford is a member of the Board of Directors of SWSG.

On January 9, 2014, Hilltop submitted an unsolicited written proposal to SWSG to acquire all of the outstanding shares of SWSG that it does not already own for a combination of cash and Hilltop common stock.

VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS

Grant Thornton LLP, a firm of independent public accountants, will deliver to the City, on or before the settlement date of the Bonds, its verification report indicating that it has verified, in accordance with attestation standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the securities, to pay, when due, the maturing principal of, interest on and related call premium requirements of the Refunded Obligations and (b) the mathematical computations of yield used by Bracewell & Giuliani LLP to support its opinion that interest on the Bonds will be excluded from gross income for federal income tax purposes.

The verification performed by Grant Thornton LLP will be solely based upon data, information and documents provided to Grant Thornton LLP by the City and its representatives. Grant Thornton LLP has restricted its procedures to recalculating the computations provided by the City and its representatives and has not evaluated or examined the assumptions or information used in the computations.

UNDERWRITING

Robert W. Baird & Co., as representative and on behalf of the Underwriters, has agreed to purchase the Bonds for a price of $30,253,996.84 (representing the par amount of the Bonds, plus a net reoffering premium of $1,864,050.35, and less an Underwriters’ discount of $130,053.51) and the Certificates for a price of $12,081,920.72 (representing the par amount of the Certificates, plus a net reoffering premium of $425,804.50, and less an Underwriters’ discount of $58,883.78) pursuant to a bond purchase agreement with

32 the City. The Underwriters’ obligations to purchase all of the Bonds if any are purchased and to purchase all of the Certificates if any are purchased are subject to regulatory approvals and other customary conditions.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of their responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

AUDITED FINANCIAL STATEMENTS

Belt Harris Pechacek, L.L.L.P., the City’s independent auditor, (the “Auditor”) has not reviewed, commented on, or approved, and is not associated with, this Official Statement. The report of the Auditor relating to City’s financial statements for the fiscal year ended September 30, 2013 is included in this Official Statement in Appendix B; however, the Auditor has not performed any procedures on such financial statements since the date of such report, and has not performed any procedures on any other financial information of the City, including without limitation any of the information contained in this Official Statement, and has not been asked to consent to the inclusion of its report, or otherwise be associated with this Official Statement.

MISCELLANEOUS

The financial data and other information contained herein have been obtained from the City’s records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects.

/s/ Stephen H. DonCarlos Mayor City of Baytown, Texas ATTEST:

/s/ Leticia Brysch City Clerk

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SCHEDULE I

SCHEDULE OF REFUNDED OBLIGATIONS

General Obligation Bonds, Series 2005 General Obligation Refunding Bonds, Series 2005A

Maturity Interest Par Amount Call Call Maturity Interest Par Amount Call Call February 1 Rate to be Refunded Date Price February 1 Rate to be Refunded Date Price 2/1/2015 3.500%$ 240,000 4/21/2014 100% 2/1/2015 4.000%$ 910,000 4/21/2014 100% 2/1/2016 3.600% 255,000 4/21/2014 100% 2/1/2016 4.500% 950,000 4/21/2014 100% 2/1/2017 3.750% 265,000 4/21/2014 100% 2/1/2017 4.375% 600,000 4/21/2014 100% 2/1/2018 3.800% 280,000 4/21/2014 100% 2/1/2018 4.400% 280,000 4/21/2014 100% 2/1/2019 3.900% 300,000 4/21/2014 100% 2/1/2019 4.500% 290,000 4/21/2014 100% 2/1/2020 4.000% 315,000 4/21/2014 100% 2/1/2020 4.500% 310,000 4/21/2014 100% 2/1/2021 4.000% 335,000 4/21/2014 100%$ 3,340,000 2/1/2022 4.100% 350,000 4/21/2014 100% 2/1/2023 4.100% 370,000 4/21/2014 100% 2/1/2024 4.200% 395,000 4/21/2014 100% 2/1/2025 4.250% 415,000 4/21/2014 100% $ 3,520,000

Combination Tax and Revenue Certificates of Obligation, Series 2006A General Obligation Bonds, Series 2006

Maturity Interest Par Amount Call Call Maturity Interest Par Amount Call Call February 1 Rate to be Refunded Date Price February 1 Rate to be Refunded Date Price 2/1/2016 4.000%$ 590,000 2/1/2015 100% 2/1/2016 4.000%$ 250,000 2/1/2015 100% 2/1/2017 4.000% 615,000 2/1/2015 100% 2/1/2017 4.000% 260,000 2/1/2015 100% 2/1/2018 4.100% 645,000 2/1/2015 100% 2/1/2018 4.000% 275,000 2/1/2015 100% 2/1/2019 4.125% 675,000 2/1/2015 100% 2/1/2019 4.125% 285,000 2/1/2015 100% 2/1/2020 4.200% 705,000 2/1/2015 100% 2/1/2020 4.250% 300,000 2/1/2015 100% 2/1/2021 4.250% 735,000 2/1/2015 100% 2/1/2021 4.250% 315,000 2/1/2015 100% 2/1/2022 4.300% 770,000 2/1/2015 100% 2/1/2022 4.250% 330,000 2/1/2015 100% 2/1/2023 4.350% 805,000 2/1/2015 100% 2/1/2023 4.375% 345,000 2/1/2015 100% 2/1/2024 4.400% 840,000 2/1/2015 100% 2/1/2024 4.375% 360,000 2/1/2015 100% 2/1/2025 4.400% 880,000 2/1/2015 100% 2/1/2025 4.500% 375,000 2/1/2015 100% 2/1/2026 4.450% 920,000 2/1/2015 100% 2/1/2026 4.500% 395,000 2/1/2015 100% $ 8,180,000 $ 3,490,000

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APPENDIX A

GENERAL INFORMATION REGARDING THE CITY

GENERAL INFORMATION

The City of Baytown, Texas is the third largest city in the Houston Metropolitan Area. Located east of Houston, Baytown is 20 miles from downtown Houston, within 35 minutes of Houston Hobby Airport and within 55 minutes of Houston George Bush Intercontinental Airport.

Houston is readily accessible via Interstate 10, a major thoroughfare running through the north side of Baytown. The City encompasses an area of 34 square miles with an estimated population of 73,950. It is surrounded by six bays and the Houston Ship Channel, which has led not only to the development of a booming petrochemical industry, but also a variety of recreational activities centered on the area’s waterways.

The City was incorporated January 24, 1948 as a home-rule municipality operating under the Council-Manager form of government. The City Council is composed of the Mayor and six City Council members. City Council positions and the Mayor are elected for three-year staggered terms, and Council members are required to reside within defined districts from which they are elected. The Mayor is elected at- large.

Article III, Section 32 of the City Charter requires that the Council appoint a City Manager to act as chief administrative and executive officer of the City. It is the responsibility of the City Manager to appoint, with City Council confirmation, and remove department heads and conduct the general affairs of the City in accordance with the policies of the Council.

SUMMARY OF CITY AND COMMUNITY INITIATIVES

In 2001, the citizens of the City of Baytown authorized the creation of the Baytown Municipal Development District (MDD) and the collection of a ½ cent sales and use tax for the purpose of financing economic development projects. In fiscal year 2013, the Baytown MDD generated sales and use tax revenue of $5,294,203 and is projected to generate $5,441,000 in fiscal year 2014. These sales and use tax receipts fund a multitude of economic development projects and public improvements including economic development initiatives and infrastructure to support greater economic development such as improved streets, drainage, sidewalks and signalization improvements; utilities improvements; and parks facilities.

In 2011, voters reauthorized a street maintenance sales tax in the amount of ¼ of 1%. Funds generated by the sales tax are specifically designated for maintenance of existing residential streets at the time of authorization.

In 2011, Baytown citizens also voted to reauthorize the Baytown Crime Control and Prevention District and the Baytown Fire Control, Prevention, and Emergency Medical Services District each funded by a local sales and use tax at a rate of one-eighth of one percent (1/8%). These funds are dedicated to crime reduction programs and to fire safety and enhancement of emergency medical services respectively.

With significant support of the community, numerous amenities have added to the enjoyable quality of life experienced in Baytown, including the Goose Creek Greenbelt Project - a linear park passing through the heart of the community; the Eddie V. Gray Wetlands Education and Recreation Center, a cooperative effort of the City, Goose Creek Consolidated School District, Lee College and area industry to provide an opportunity for young and old to learn more about fisheries, wildlife, ecology, etc.; and the Baytown Nature Center, a 450 acre preserve within the city limits developed from a former subdivision that was destroyed by subsidence and Hurricane Alicia. The Nature Center is on the Great Texas Coastal Birding Trail and is host to over 300 different species of birds along with numerous varieties of flora and fauna. Other community amenities include two City owned and operated water parks - “Pirates Bay” and “Calypso Cove.”

The City has initiated numerous ordinances (Smoking, Sign/Billboards, Sexually Oriented Business, Landscaping, Gated Communities, etc.) to improve the livability and visual appearance of the community. The Neighborhood Protection Division of the Health Department and the Planning & Development Services Department provide enforcement and support of these and other Council adopted initiatives that target an improved community.

To further enhance the visual quality of Baytown, the City operates a “CLEAN” Team. This Citywide Litter Eradication And Neutralization Team was added by City Council to patrol and quickly respond to complaints of dumping. This service also allows for increased hours of operation at the City's recycling Green Center, and provides capacity for special clean-up projects.

Improvements and expansions to the City's water and wastewater facilities over the last few years have increased capacity and enhanced reliability to the City's residents and water customers. A significant improvement included the installation of independent generators to allow water production and wastewater treatment to continue without interruption in the event of a hurricane or other significant disaster. Funding for the expansions was primarily provided by the contribution from the Municipal Development District and a loan from the Texas Water Development Board.

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The City's Tax Increment Reinvestment Zone (TIRZ) is located in the Garth Road/San Jacinto Mall area with other non-contiguous areas consisting of Sjolander Road from I-10 to Wallisville Road and portions of the Chevron Phillips facility. The creation of the TIRZ continues to promote commercial and residential development within the zone. Having the TIRZ provides the ability to utilize the incremental revenue generated by improvements to reimburse developers for their investment in the community.

The Grand Parkway, developed through a partnership with the Texas Department of Transportation, private landowners, local governments and public interest groups, is a 170-mile outer loop currently under construction to serve the regional mobility needs of Houston and seven surrounding counties. The Grand Parkway (SH 99) has been divided into nine segments (A-I 2), each of which is a complete and independently justifiable project. Segment I-2, from SH 146 to IH 10 which includes Baytown and its ETJ, opened in 2009, and is the second leg of SH 99 to be constructed.

In 2011, the City Council reviewed and adopted an ordinance establishing impact fees which ensure the provision of adequate facilities to serve new development in the area by requiring each such development to pay its pro rata share of the cost of water and wastewater capital improvements necessitated by and attributable to such new development.

Baytown has been recognized by several organizations and agencies by being the recipient of the following awards:

 Government Finance Officers Association (GFOA) Distinguished Budget Presentation Award  GFOA Award for Outstanding Achievement in Popular Annual Financial Reporting  GFOA Certificate of Achievement for Excellence in Financial Reporting  Texas Comptroller Gold Leadership Circle 2013 – Fourth Year Award  Texas Recreation and Park Society Region IV 2012 Lone Star Programming Award  Texas Recreation and Park Society Region IV 2013 Lone Star Programming Award Class III  Harris/Galveston Area Council 2012 Parks and Natural Areas Award – On the Ground Project under $500K – Baytown Nature Center Tidal Channels and Wetlands Expansion Project  Harris/Galveston Area Council 2012 Parks and Natural Areas Award – On the Ground Project under $500K – Emmett Hutto Parkway  Harris/Galveston Area Council Special Recognition – Planning Process – Strategic Master Plan for Pirates Bay Waterpark  Texas Recreation and Park Society East Region Awards – 2014 Advocate of the Year – Friends of the Baytown Nature Center  Texas Recreation and Park Society East Region Awards – 2014 Lone Star Programming Award – Wetlands Wagon Outreach Program  Texas Recreation and Park Society East Region Awards – 2014 Part Time Employee of the Year – Leon Smith  Texas Recreation and Park Society East Region Awards – 2014 Innovations in Park and Facility Design – Emmett Hutto Parkway

MAJOR INDUSTRIES’ EFFECT ON THE CITY’S ECONOMY

The City has created, within its extraterritorial jurisdiction (ETJ), three Industrial Districts. The City has entered into contracts with each industry within these Districts which specify payments to be made to the City in lieu of ad valorem taxes in exchange for the City not annexing the industry during the seven-year term of the contract. Industrial District payments are based upon a percentage (currently 61%- 64%) of the fair market value of the industry times the current tax rate, based on the latest certified value of the facility at the time of the creation of the IDA. Any future value increases over that base year value are excluded from the payment calculation until the contract is renewed. In addition, value decreases are not considered in the payment calculation. This base value allows for predicable revenue for the City for the term of the contract and also encourages economic development since added value is not taxed until the next contract period. An important feature if the IDAs is a 1% Public Community Improvement Rate that is available for rebate to the company for approved community improvement projects. If not utilized by the company, the funds will be available for use by the City on a project consistent with the City’s public community improvement goals. The cornerstones of Baytown’s industrial development are three world-recognized entities consisting of ExxonMobil, Bayer and Chevron Phillips.

The ExxonMobil Baytown Complex is one of the largest integrated and most technologically advanced petroleum and petrochemical complexes in the world. Founded in 1919, ExxonMobil's Baytown, Texas complex is located on approximately 3,400 acres along the Houston Ship Channel. The Baytown complex is comprised of three manufacturing sites (a refinery, a chemical plant and an olefins plant), the Chemical Company's Technology and Engineering Complex and a regional downstream engineering office. The Baytown complex is staffed by approximately 3,785 ExxonMobil employees and 2,129 contract personnel, who manage the businesses and operate and maintain the manufacturing facilities on a 24-hour, year-round basis.

Additionally, ExxonMobil has announced its intent to construct a multibillion-dollar world-scale ethane cracker at its Baytown complex. The project, still in permitting phase, is expected begin construction in 2014.

Another industrial corporate citizens' presence in Baytown, the Bayer Baytown Industrial Park, is distinguished by steady expansion. Strategically positioned along Cedar Bayou for barge access, the Baytown plant is located on 1,688 acres, of which 35% is developed and employs approximately 2,000 people, including permanent contractors. Since 1971, when the first polyurethane unit began operation, the site has grown more than ten-fold. Over the last ten years, Bayer Corporation has invested over $1.3 billion, by far the single largest capital investment within Bayer worldwide.

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Today, Baytown is the largest of Bayer's U.S. chemicals operations, home to three active business groups – Bayer Polymers, Bayer Chemicals and Bayer Corporate and Business Services. Bayer Technology Services headquarters in Baytown to serve the Bayer businesses in the Americas. Their Gulf Coast Distribution Center consolidates Bayer’s growing shipments and is adjacent to the manufacturing operations.

The final major petrochemical partner in the community is the Chevron Phillips Chemical Company LLC (Chevron Phillips Chemical), with its affiliates, which is one of the world's top producers of olefins and polyolefins and a leading supplier of aromatics, alpha olefins, styrenics, specialty chemicals, piping and proprietary plastics. The company has total assets of almost $7 billion and is owned equally by Chevron Corporation and ConocoPhillips. Chevron Phillips Chemical’s Cedar Bayou Chemical Plant is the largest of the company’s domestic manufacturing facilities with approximately 592 employees and approximately 350 contract employees.

Chevron Phillips Chemical Company, LP announced plans to build a new ethylene unit at its Baytown facility with a reported value of over $5 billion. The construction phase is expected to provide 10,000 engineering and construction jobs with a reported 400 permanent employees when the facility is completed in 2017.

Chevron Phillips is located in Industrial District No. 2. The Baytown City Council recently approved expanding the district to allow the offering of IDA’s for projects within the northern portion of the city’s extraterritorial jurisdiction. One such project is an expansion proposed by Enterprise Products, LLC. Enterprise plans to build a propane dehydronation facility valued at $1.2 billion. The project will be completed by 2015.

Cedar Crossing Business Park is located in Baytown’s Chambers County ETJ, with infrastructure designed to address the requirements for a wide range of commercial and industrial uses. It also provides two advantages critical to manufacturing and distribution. It is close to hundreds of existing manufacturers, distributors and potential customers and is relatively isolated from potential conflicting land uses. The Texas Department of Economic Development has identified Cedar Crossing as the prime industrial site in the Texas Gulf Coast region. As a planned industrial park, its primary uses are industrial, manufacturing warehousing and distribution. Amenities include water, rail and highway transportation, on-site feedstock pipeline and abundant surface water for process operations. Top-tier companies including Home Depot (a 750,000 square foot regional distribution warehouse) and Wal-Mart (a 4 million square-foot distribution center on a 296-acre site employing between 300 and 400 people) are two of the nationally known corporations that have located in the business park. Other significant tenants include Exel Logistics, TapcoEnpro, Jindal Steel Works USA, TMK-Ipsco and Samson Controls. The most recent addition is Borusan Mannesmann, a Turkish OCTG manufacturer. Borusan is investing $148 million in a 350,000 sq. ft. manufacturing facility which will employ 250 – 300 people.

The AmeriPort Industrial Park is also located in Baytown’s ETJ. Tenants include Flexsteel Pipe, Delta Chemicals, Hunting Energy Services and INOXCVA, one of the largest cryogenic vessel fabricators in the country.

Baytown is also home to a growing healthcare cluster, anchored by the Houston San Jacinto Methodist Hospital and enhanced by recent investments by Altus Healthcare.

Retail development is robust in the city, with multiple entries over the last 5 years.

CITY OUTLOOK

In February 2013, the City Council adopted new zoning regulations and rezoned the entire city replacing the limited land use regulations first adopted in 1995. The new zoning regulations are the first part of the Unified Land Development Code (ULDC), which combines and simplifies land development rules and processes in an easier to understand format. The City is experiencing significant commercial growth with several new national-chain restaurants and large retail stores within the last few years. In 2013, the construction valuation of new commercial developments increased over $30 million totaling $137,553,065. A Super Wal-Mart with several anchor stores is under development as well as a Buc-ees, which will add sales tax value to the City. There is also a new residential neighborhood slated in 2014 for approximately 490 single-family homes and a commercial reserve. The City is also preparing an annexation plan accompanied with a capital improvements plan to guide and adequately plan for anticipated growth to the north and east of the City.

TRANSPORTATION

A wide range of transportation sources, including rail, air, water and highways, are available to companies located in the Baytown/West Chambers County area. Rail service is provided by the Union Pacific railroad. There are two major airports located within 30 miles of the area. Most of the air cargo service and 67% of the air passenger service is out of Houston’s George Bush Intercontinental Airport to the north. Hobby Airport, to the south of downtown Houston, provides passenger service and some cargo capabilities. The Bush facility is the 3rd largest in the United States providing service to over 170 destinations.

George Bush Intercontinental Airport ranks as the 10th busiest airport for total passengers; serving over 40 million passengers in 2011. It is the largest hub of United Airlines with an average of 800 daily departures. Hobby Airport is the region's oldest commercial airport. In 2012, the Houston City Council approved a deal to have Southwest Airlines build a $100 million international facility, making it the region's second international airport, with service to Mexico, Central America and South America scheduled to begin in 2015. Every major overnight delivery service in the United States serves the Houston region on a daily basis.

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The Houston Ship Channel, adjacent to Baytown, is one of the United States' busiest seaports. The channel stretches 50 miles from the Gulf of Mexico just east of Galveston Island to the Turning Basin six miles from downtown Houston. The waterway is generally 40 feet deep and 400 feet wide. Vessels of 80,000-100,000 deadweight tons routinely navigate the channel.

The City of Baytown recently adopted a Mobility Plan which prioritized infrastructure spending through 2035 to keep Baytown growing at the pace of development in the region. The plan addresses mobility for both people and freight and includes recommendations for mass transit, shallow and deepwater port facilities, and expansions of rail and heavy haul roads. The Mobility Plan is an important update to the Comprehensive Plan which will keep Baytown connected to commerce in the Houston region.

(1) EDUCATION

Goose Creek Consolidated Independent School District (the “District”), accredited since 1921, has 16 elementary schools, 5 junior schools, 3 high schools, one special education school, one alternative school, two instructional support centers, one media center, and one vocational center. In addition, an Early College High School is provided through a partnership between the District and the local Junior College District, Lee College. The District encompasses a 134-square mile area and has 22,235 students. The City also has several thriving private schools.

Located in the City since 1934, Lee College is a public co-educational, two-year community college offering liberal arts, technical and continuing education. The 40-acre campus, comprised of ten major buildings and several small facilities, serves in excess of 9,000 students per year. ______(1) Source: Baytown Chamber of Commerce.

POPULATION

1970 1980 1990 2000 2010 Official Official Official Official Official Census Census Census Census Census City of Baytown 43,980 56,917 63,850 66,430 71,802 City of Houston 1,233,535 1,595,138 1,630,553 1,953,631 2,099,451 Harris County 1,741,912 2,409,544 2,818,199 3,400,578 4,092,459

EMPLOYMENT

2012/2013 Number of Principal Employers Employees Exxon Mobil-Baytown Complex 3,785 Goose Creek Consolidated ISD 3,012 San Jacinto Methodist Hospital 1,687 Bayer Corporation 1,100 City of Baytown 789 Chevron Phillips Chemical Company 685 Wal-Mart Distribution Center 600 Lee College 390 Home Depot Distribution Center 325 TMK-IPSCO 245 12,618

______Source: The City.

COUNTY CHARACTERISTICS

Harris County is a southeast Texas county and a major component of the Houston Primary Metropolitan Statistical Area. The economy is based on petrochemicals, tourism, shipping, refining, chemicals, space exploration, manufacturing and education. The County is ranked as the 6th largest manufacturing county in the country. The Texas Almanac designates cattle, rice and forest products as principal sources of agricultural income. The County is one of the leading producers of rice.

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LABOR STATISTICS

City of Baytown

Calendar Labor Total Unemployment Year Force Employment Unemployment Rate 2008 31,651 29,437 2,214 7.0% 2009 32,243 28,794 3,449 10.7% 2010 33,026 29,068 3,958 12.0% 2011 34,012 30,055 3,957 11.6% 2012 34,678 31,130 3,548 10.2% 2013 34,965 31,834 3,131 9.0%

Houston MSA

Calendar Labor Total Unemployment Year Force Employment Unemployment Rate 2008 2,774,859 2,640,520 134,339 4.8% 2009 2,840,477 2,625,636 214,841 7.6% 2010 2,895,737 2,650,608 245,129 8.5% 2011 2,982,934 2,740,969 241,965 8.1% 2012 3,045,342 2,839,026 206,317 6.8% 2013 3,101,350 2,910,615 190,735 6.2%

Harris County

Calendar Labor Total Unemployment Year Force Employment Unemployment Rate 2008 1,930,016 1,836,986 93,030 4.8% 2009 1,970,554 1,821,773 148,781 7.6% 2010 2,009,311 1,839,100 170,211 8.5% 2011 2,054,025 1,886,265 167,760 8.2% 2012 2,097,127 1,953,745 143,382 6.8% 2013 2,131,136 1,999,107 132,029 6.2%

______Source: Texas Workforce Commission.

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APPENDIX B

EXCERPTS FROM THE

CITY OF BAYTOWN, TEXAS

ANNUAL FINANCIAL REPORT

For the Year Ended September 30, 2013

The information contained in this Appendix consists of excerpts from the City of Baytown, Texas Annual Financial Report for the Year Ended September 30, 2013, 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.

INDEPENDENTAUDITORS' REPORT

To the Honorable Mayor, City Council Members, and Finance Committee of the City of Baytown, 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 information of the City of Baytown, Texas (the "City"), as of and for the year ended September 30, 2013, 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 Financial Statements

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.

Auditors' Responsibility

Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the City'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 City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

15

Partners Houston Bellville Austin All Offices Robert Belt, CPA 3210 Bingle Rd., Ste. 300 1304 South Front St. 100 Congress Ave., Ste. 2000 www.tcxasauditors.com Governmental Stephanie E. I-Iarris, CPA Houston, TX 77055 Bellvillc,TX77418 Austin, TX 78701 [email protected] Audit Quality Center Nathan Krupke, CPA 713.263.1123 979.865.3169 512.381.0222 713.263.1550 fax AIC PA 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 referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City as of September 30, 2013, and the respective changes in financial position and, 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 in the United States of America require that the Management's Discussion and Analysis, budgetary comparison information, and schedules of funding progress, identified as Required Supplementary Information on the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the Required Supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic fmancial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic fmancial statements. The introductory section, combining statements and schedules, and statistical section are presented for purposes of additional analysis and are not required parts of the basic financial statements.

The combining statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, 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 procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining statements and schedules are fairly stated in all material respects in relation to the basic financial statements as a whole.

The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them.

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Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated January 31, 2014 on our consideration of the City's internal control over financial 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 describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on 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 considering the City's internal control over financial reporting and compliance.

ELT ARRAS .' ECHACE.K, LLLP

Belt Harris Pechacek, LLLP Certified Public Accountants Houston, Texas January 31, 2014

17 (This page intentionally left blank.) 18 MANAGEMENT'S DISCUSSION AND ANALYSIS

19 (This page intentionally left blank.) 20 CITY OF BAYTOWN, TEXAS MANA GEMENT'S DISCUSSION AND ANALYSIS For the Year Ended September 30, 2013

The purpose of the Management's Discussion and Analysis (MD&A) is to give the readers an objective and easily readable analysis of the financial activities of the City of Baytown, Texas (the "City") for the year ending September 30, 2013. The analysis is based on currently known facts, decisions, or economic conditions. It presents short and long-term analysis of the City's activities, compares current year results with those of the prior year, and discusses the positive and negative aspects of that comparison. Please read the MD&A in conjunction with the transmittal letter at the front of this report and the City's financial statements, which follow this section.

THE STRUCTURE OF OUR ANNUAL REPORT

Components of the Financial Section

Management's Basic Financial Required Discussion and Statements Supplementary Analysis Information

Independent Government- Fund Financial Notes to the Auditors' Report Wide Financial Statements Financial Statements Statements Summary C Detail The City's basic financial statements include (1) government-wide financial statements, (2) individual fund financial statements, and (3) notes to the financial statements. This report also includes supplementary information intended to furnish additional detail to support the basic financial statements themselves.

Government-Wide Statements

The government-wide statements report information for the City as a whole. These statements include transactions and balances relating to all assets, including infrastructure capital assets. These statements are designed to provide information about cost of services, operating results, and financial position of the City as an economic entity. The Statement of Net Position and the Statement of Activities, which appear first in the City's financial statements, report information on the City's activities that enable the reader to understand the financial condition of the City. These statements are prepared using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account even if cash has not yet changed hands.

The Statement of Net Position presents information on all of the City's assets, liabilities, and deferred inflows/outflows of resources, with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. Other nonfinancial factors, such as the City's property tax base and the condition of the City's infrastructure, need to be considered in order to assess the overall health of the City.

The Statement of Activities presents information showing how the City's net position changed during the most recent year. All changes in net position are reported as soon as the underlying event giving rise to the change

21 CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013 occurs, regardless of the timing of related cash flows - the accrual method rather than modified accrual that is used in the fund level statements.

The Statement of Net Position and the Statement of Activities divide the City into two classes of activities:

1. Governmental Activities - Most of the City's basic services are reported within this class including police and fire protection, municipal court, streets, drainage, leisure services, community development and general administrative services. This class also includes interest payments on the City's debt. Sales tax, property tax, franchise taxes, municipal court fines, and permit fees finance most of these activities.

2. Business-Type Activities - Services involving a fee for those services are reported within this class. These services include the City's water and sewer services, as well as solid waste collection, storm water utility operations, and water park operations.

The government-wide financial statements include not only the City itself (known as the primary government), but also a legally separate municipal development district and the legally separate Baytown Area Water Authority for which the City is financially accountable. Financial information for these component units is reported separately from the fmancial information presented for the primary government itself. The tax increment reinvestment zone, crime control and prevention district, and fire control, prevention, and emergency medical services district, although also legally separate, function for all practical purposes as departments of the City and, therefore, have been included as an integral part of the primary government.

The government-wide financial statements can be found after the MD&A.

FUND FINANCIAL STATEMENTS

Funds may be considered as operating companies of the parent corporation, which is the City. They are usually segregated for specific activities or objectives. The City uses fund accounting to ensure and demonstrate compliance with finance-related legal reporting requirements. The two categories of City funds are governmental and proprietary.

Governmental Funds

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide fmancial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the year. Such information may be useful in evaluating the City's near-term financing requirements.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term fmancing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities.

The City maintains 12 individual governmental funds. Tnformation is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the general fund and capital projects fund, both of which are considered to be major funds for

22 CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013 reporting purposes. The City has also elected include the debt service fund as a major fund for reporting purposes. The City adopts an annual appropriated budget for its general fund and each of the special revenue funds, except for the TIRZ fund. Budgetary comparison schedules have been provided for these funds to demonstrate compliance with these budgets.

Proprietary Funds

The City maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The enterprise funds are used to account for operations that provide water and wastewater collection, wastewater treatment operations, solid waste collection and disposal, water park operations, and storm water utility operations. The proprietary fund financial statements provide separate information for the water distribution, wastewater collection/treatment, and sanitation funds. The proprietary fund financial statements can be found in the basic financial statements of this report.

The City also uses internal service funds to account for its equipment replacement services and for expenses associated with risk management of health benefits and workers' compensation claims. These internal service funds have been included within governmental activities in the government-wide financial statements.

Notes to Financial Statements

The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes are the last section of the basic financial statements.

Other Information

In addition to basic financial statements, MD&A, and accompanying notes, this report also presents certain Required Supplementary Information (RSI). The RSI includes a budgetary comparison schedule for the general fund and schedules of funding progress for the Texas Municipal Retirement System and Post Employment Healthcare Benefits. RSI can be found after the notes to the basic financial statements.

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net position may serve over time as a useful indicator of the City's financial position. For the City, assets and deferred outflows of resources exceed liabilities by $280,814,441 as of September 30, 2013 in the primary government. The largest portion of the City's net position (87 percent) reflects its investments in capital assets (e.g., land, building, equipment, improvements, construction in progress, and infrastructure), less any debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the assets themselves cannot be used to liquidate these liabilities.

23

CITY OF BAYT'OWINI, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

Statement of Net Position:

The following table reflects the condensed Statement of Net Position:

SUMMARY STATEMENT OF NET POSITION

Total Governmental Business-Type Primary Activities Activities Government 2013 2012 2013 2012 2013 2012 Current and other assets $ 74,175,762 $ 69,801,128 $ 43,722,482 $ 43,013,945 $ 117,898,244 $ 112,815,073 Capital assets, net 201,154,122 186,622,369 217,734,400 205,571,358 418,888,522 392,193,727 Total Assets 275,329,884 256,423,497 261,456,882 248,585,303 536,786,766 505,008,800 Deferred charge on refunding 1,267,862 1,348,529 20,567 24,363 1,288,429 1,372,892 Total Deferred Outflows of Resources 1,267,862 1,348,529 20,567 24,363 1,288,429 1,372,892 Long-term liabilities 144,672,792 129,563,364 94,597,109 83,038,938 239,269,901 212,602,302 Other liabilities 11,646,198 13,769,162 6,344,655 7,576,895 17,990,853 21,346,057 Total Liabilities 156,318,990 143,332,526 100,941,764 90,615,833 257,260,754 233,948,359

Net Position: Net investment in capital assets 108,585,824 101,431,576 136,434,868 132,575,369 245,020,692 234,006,945 Restricted 32,167,392 15,805,828 5,364,616 5,023,851 37,532,008 20,829,679 Unrestricted (20,474,460) (2,797,904) 18,736,201 20,394,613 (1,738,259) 17,596,709 Total Net Position $ 120,278,756 $ 114,439,500 $ 160,535,685 $ 157,993,833 $ 280,814,441 $ 272,433,333

A portion of the primary government's net position, $37,532,008 or 13 percent, represents resources that are subject to external restriction on how they may be used.

The City's total net position increased by $8,381,108 during the current fiscal year, an increase of three percent in comparison to the prior year. This increase is largely the result of more revenue being received for taxes.

24

CITY OF BAY'TOWYN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

Statement of Activities:

The following table provides a summary of the City's changes in net position:

Total Governmental Business-Type Primary Activities Activities Government 2013 2012 2013 2012 2013 2012 Revenues Program revenues: Charges for services $ 6,003,083 $ 6,105,481 $ 41,902,188 $ 43,056,647 $ 47,905,271 ' $ 49,162,128 Operating grants 7,903,949 17,002,961 7,903,949 17,002,961 Capital grants and contributions 73,000 1,537,175 2,241,040 2,531,225 2,314,040 4,068,400 General revenues: Property taxes 21,128,244 20,121,463 21,128,244 20,121,463 Industrial district 28,339,356 27,403,488 - 28,339,356 27,403,488 Other taxes 22,3 84,041 21,144,948 22,3 84,041 21,144,948 Other revenues 2,406,269 1,734,331 265,092 154,808 2,671,361 1,889,139 Total Revenues 88,237,942 95,049,847 44,408,320 45,742,680 132,646,262 140,792,527

Expenses General government 22,049,401 23,539,249 22,049,401 23,539,249 Public safety 39,297,052 38,976,626 - 39,297,052 38,976,626 Public works 8,881,876 8,522,846 8,881,876 8,522,846 Public health 2,431,619 2,465,254 2,431,619 2,465,254 Parks, recreation, and culture 8,739,612 8,949,422 8,739,612 8,949,422 Interest and fiscal agent fees on long-term debt 3,749,173 3,229,968 3,749,173 3,229,968 Water and sewer 31,539,964 30,344,693 31,539,964 30,344,693 Sanitation 4,685,496 4,396,725 4,685,496 4,396,725 Aquatics - 2,245,949 2,051,620 2,245,949 2,051,620 Bayland development - 208,078 146,375 208,078 146,375 Storm water utility 436,934 467,170 436,934 467,170 Total Expenses 85,148,733 85,683,365 39,116,421 37,406,583 124,265,154 123,089,948

Increase in Net Position before Transfers 3,089,209 9,366,482 5,291,899 8,336,097 8,381,108 17,702,579

Transfers 2,750,047 (16,735,496) (2,750,047) 16,735,496 2,750,047 (16,735,496) (2,750,047) 16,735,496

Change in Net Position 5,839,256 (7,369,014) 2,541,852 25,071,593 8,381,108 17,702,579

Beginning net position 114,439,500 121,808,514 157,993,833 132,922,240 272,433,333 254,730,754

Ending Net Position $ 120,278,756 $ 114,439,500 $ 160,535,685 $ 157,993,833 $ 280,814,441 $ 272,433,333

25 CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

Graphic presentations of selected data from the summary tables follow to assist in the analysis of the City's activities.

GOVERNMENTAL REVENUES

Other taxes 25%

Industrial district 32%

For the year ended September 30, 2013, revenues from governmental activities totaled $88,237,942. Industrial district payments are the City's largest revenue source at $28,339,356 or 32.12 percent. Other taxes increased by 5.86 percent mainly due to gains in sales tax revenue as a result of more economic activity in the City. Property tax revenue had an increase of 5.00 percent due to an increase in property tax appraisal values. Operating grants and capital grants and contributions decreased by $9,099,012 and $1,464,175, respectively, which was largely due to less federal funding for capital projects in the general fund from prior year.

26

CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

GOVERNMENTAL FUNCTIONAL EXPENSES

Interest and fiscal Parks, recreation, and agentfees on long-term culture 10% debt 4%

General government 26%

For the year ended September 30, 2013, expenses for governmental activities totaled $85,148,733. This represents a decrease of $534,632 from last year or 0.62 percent. Expenses remained comparable to the previous year.

There was a contribution of capital to business type activities for a total of $1,857,184 related to the Pirates Bay water park expansion.

27

CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

Business-type activities are shown comparing operating costs to revenues generated by related services.

BUSINESS-TYPE ACTIVITIES Revenue vs. Costs

$50,000,000 -` $45,000,000 $40,000,000 $35,000,000 -1', $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 - $5,000,000 4f' $0 2013 2012 Bl Operating Revenues s Operating Costs Operating revenues decreased $1,334,360 or 2.92 percent which was primarily due to a decrease in charges for services. Charges for services decreased due to a decrease in water consumption of industrial users. Expenses increased $1,709,838 or 4.57 percent which is primarily due to the rising costs of maintenance to repair machinery and equipment. After transfers from governmental activities, total net position increased by $2,541,852 or 1.61 percent over the prior year. The increase was mainly due to contributions of capital from governmental activities as a result of construction activities for the Pirates Bay water park expansion.

FINANCIAL ANALYSIS OF THE CITY'S FUNDS

As noted earlier, fund accounting is used to demonstrate and ensure compliance with finance-related legal requirements.

Governmental Funds - The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unassigned fund balance may serve as a useful measure of the City's net resources available for spending at the end of the year.

The City's governmental funds reflect a combined fund balance of $56,069,476. Of the total governmental fund balance, $257,952 is nonspendable, and $32,167,392 is restricted for various purposes. The remaining balance of $23,644,132 is unassigned.

There was a net increase. in the combined fund balance of $5,123,059 from the prior year. This is largely attributable to the increase in the general and debt service fund balance due to the increase in property tax revenue. Capital projects fund balance increased primarily due to bonds being issued.

The general fund is the chief operating fund of the City. At the end of the current year, unassigned fund balance of the general fund was $23,644,132, while total fund balance reached $23,646,564. As a measure of the general fund's liquidity, it may be useful to compare both unassigned fund balance and total fund balance to total fund

28 CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013 expenditures. Unassigned and total fund balance represents 38.50 percent and 38.50 percent of total general fund expenditures, respectively.

The debt service fund has a total fund balance of $3,715,519, all of which is restricted for the payment of debt service. The net increase in fund balance during the current year in the debt service fund was $2,486,403. This increase can be attributed to transfers from other funds.

The capital projects fund had a total fund balance of $22,846,956. The total fund balance included $22,592,436 reported as restricted, and $254,520 reported as nonspendable. The capital projects fund also issued debt for $16,800,000.

The City's water and sewer fund has a total net position of $138,359,074 as of a result of an increase in net position of $1,377,405. This increase can be attributed to capital contributions.

The City's sanitation fund had a total net position of $1,005,789, which is a decrease of $317,024 from the prior year. This decrease can be attributed to a transfer to the general fund and internal service fund totaling $220,554.

GENERAL FUND BUDGETARY HIGHLIGHTS

There had been a planned decrease in budgeted fund balance in the amount of $4,689,958 in the general fund. However, there was a net increase in fund balance of $3,479,698 resulting in a positive variance of $8,169,656 from budgeted as amended.

Actual general fund revenues exceeded original and amended budgeted revenues by $4,151,428 during 2013. This increase includes the positive variance of $2,638,480 for taxes which is primarily due to more sales, property tax revenue, and industrial development agency payments being collected than expected. The revenue budget increase also includes a positive variance of $479,622 for miscellaneous revenue which is primarily due to unbudgeted auction proceeds.

Total expenditures were lower than budgeted amounts by $2,692,464 for the fiscal year. This decrease is mainly due to less expenditures for payroll then what was expected.

CAPITAL ASSETS

At the end of fiscal year 2013, the City's governmental activities funds had invested $201,154,122 in a variety of capital assets and infrastructure (net of accumulated depreciation).

Major capital asset events during the current year include the following:

• The City continues to maintain a comprehensive street reconstruction program with capital expenditures for various street projects in excess of $4.1 million in fiscal year 2012-2013.

• The City has a total of $22 million in construction in progress for the fiscal year 2012-2013 for governmental funds.

• $4.2 million in new construction, expansion and improvements to fire and training facilities, City hall, and other City amenities.

• Work began on the Baker Road extension project with a budgeted cost of $9 million and completion scheduled for fiscal year 2013-2014.

29 CITY OF BAYTOWN, TEXAS %44ANAGE41ENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

More detailed information about the City's capital assets is presented in note III.C to the financial statements.

LONG-TERM DEBT

At the end of the current year, the City's governmental funds had total bonds and certificates of obligation outstanding of $103,364,850. Of this amount, $92,419,850 was general obligation debt and $10,945,000 was certificates of obligation. Business-type activities had total revenue bonds and certificates of obligation outstanding of $89,460,150 at year end. During the year, the City had a net increase in the long-term debt of $21,975,000. This increase in debt was primarily due to debt issuance of general obligation bonds, series 2013 for $16,800,000 and certificate of obligation, series 2013 for $16,500,000. More detailed information about the City's long-term liabilities is presented in note III.D to the fmancial statements.

The City maintains an underlying rating of "AA" from Standard & Poor's and an "Aa2" rating from Moody's Investors Services for general obligation debt. Revenue bonds of the City have an underlying rating of "AA-" from Standard & Poor's and an "Aa3" rating by Moody's.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGET

The City Council approved a $166.3 million budget for the City's major operating funds (general, debt service, hotel/motel tax, aquatics, water and sewer, water and sewer debt service, sanitation, stone water utility, garage, warehouse operations and street maintenance) for fiscal year 2014. This budget did not require a property tax rate increase due to strategic and contingency planning which began during the first quarter of fiscal year 2009. This planning proactively addressed the potential slowdown of the economy and the recovery efforts predicated by Hurricane Ike.

The 2013-2014 budget focuses on the City's priorities within the constraints of available resources. The top priorities considered were: continue to enhance public safety in the City; maintain and where possible expand essential services; implement capital project and bond programs to improve traffic flow and ensure our infrastructure keeps pace with our growth; attract and retain the highest quality workforce and provide competitive employee benefit programs; continue quality of life and infrastructure maintenance and improvement programs; continue economic development in all areas of our community; and ensure long term financial integrity - matching recurring revenues to recurring expenditures and maintaining adequate working capital reserves.

The City Council, Administration and Citizens agree that maintaining and improving the facilities and infrastructure within the City are vital to our growth and development. In November 2007, the voters overwhelmingly approved five initiatives that will provide improvements in the streets, sidewalks, drainage, public safety, parks, recreation and overall City beautification. A total of $57,615,000 General Obligation Bonds have been sold over the first six years of the 2007 program. In light of the stronger state of the economy and continuing favorable interest rates the City plans to issue $11.4 million of GOs in 2013-14. At this point in our bond program we were scheduled to have implemented a 10 cent tax increase. Due to economic gains and efficient program implementation, the bonds have only required an 8.5 cent increase thus far. The improving state of the economy and the commercial and industrial growth will allow $11.4 million in additional bond projects without an accompanying tax increase.

Our community is in the midst of change and our organization is responding. In past years our focus was on stimulating and managing growth. Now, we continue to stimulate growth, development and redevelopment while balancing the need to preserve the excellent quality of life in our community in light of reduced revenue resources. We will continue to engage our citizens and stakeholders to strategically invest in efforts to strengthen our community.

30 CITY OF BAYTOWN, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2013

The Baytown-West Chambers County Economic Development Foundation (EDF), on behalf of the City of Baytown, serves as an advocate for and provides technical assistance to existing and/or new business and industry seeking to locate, relocate or expand operations in the Baytown-West Chambers County service area. This advocacy is conducted via the following performance categories, the results of which are the creation and preservation of jobs and the attraction of new investments:

n Stimulating & Encouraging Business and Commercial Activity n Workforce Development & Analysis n Facilitating Local, State & Federal Incentive Programs n Conducting Educational and Informational Seminars n Supporting the Creation and Expansion of Foreign Trade Zones n Compilation and Dissemination of Economic & Business Data n Interaction and Support of Officials, Economic Developers n Promoting Regional Tourism and Business

In 2013, as in recent years, EDF efforts in the above-referenced categories to further economic development were aligned with economic growth trends in the following areas:

n Petrochemical Expansions n Healthcare n Retail Recruitment n Heavy Fabrication & Manufacturing n Logistics & Distribution; and n Transportation

Additionally, recent dynamics in the local and regional petrochemical cluster have forged a strong public-private partnership of the EDF, industry/manufacturers/contractors, educational institutions, the City of Baytown and other units of government, working together as a system to implement a workforce preparedness strategy to address current and future manufacturing demands.

The City budget is the ultimate partnership between City Council, staff, citizens, business owners, customers and other partners in the Baytown community. In the face of tough economic times, the adopted budget reflects a balanced approach of minimizing impacts to our citizens and customers while providing funding to enhance and maintain quality of life initiatives while fostering economic development.

CONTACTING THE CITY'S FINANCIAL MANAGEMENT

This financial report is designed to provide a general overview of the City's finances. Questions concerning this report or requests for additional financial information should be directed to Finance Director, City of Baytown, Texas, P.O. Box 424, Baytown, TX 77522-0424; telephone 281-420-6530; or for general City information, visit the City's website at http://www.baytown.org .

31 (This page intentionally left blank.) 32 BASIC FINANCIAL STATEMENTS

33

CITY OF BAYTOWN, TEXAS STATEMENT OF NET POSITION September 30, 2013

Primary Government

Governmental Business-Type Activities Activities Total Assets Cash and equity in pooled cash and investments $ 63,501,899 $ 39,455,134 $ 102,957,033 Receivables, net 9,689,657 4,263,810 13,953,467 Inventories 541,254 3,538 544,792 Prepaids and other assets 442,952 - 442,952 Restricted assets: Cash and cash equivalents - debt service Cash and cash equivalents - bonds Capital assets: Nondepreciable 31,300,056 14,039,264 45,339,320 Depreciable, net 169,854,066 203,695,136 373,549,202 Total Assets 275,329,884 261,456,882 536,786,766 Deferred Outflows of Resources Deferred charge on refunding 1,267,862 20,567 1,288,429 Liabilities Account payable 7,922,532 3,058,045 10,980,577 Accrued expenses 1,472,211 15,208 1,487,419 Accrued interest payable 609,738 547,409 1,157,147 Refundable deposits and escrow funds 107,100 2,565,798 2,672,898 Claims and judgments 1,534,617 - 1,534,617 Retainage payable 158,195 158,195 Noncurrent liabilities: Portion due within one year: Compensated absences 8,265,844 663,511 8,929,355 Bonds payable 6,380,200 6,269,800 12,650,000 Capital leases payable 226,861 226,861 Portion due in more than one year: Compensated absences 918,427 73,722 992,149 Net pension obligation 4,977,502 789,166 5,766,668 Net OPEB obligation 21,401,607 3,137,023 24,538,630 Bonds payable 100,061,887 83,663,887 183,725,774 Capital leases payable 2,440,464 2,440,464 Total Liabilities 156,318,990 100,941,764 257,260,754 Net Position Net investment in capital assets 108,585,824 136,434,868 245,020,692 Restricted for: Capital projects 23,893,285 23,893,285 Debt service 3,715,519 5,364,616 9,080,135 Special revenue projects 4,558,588 4,558,588 Unrestricted (20,474,460) 18,736,201 (1,738,259) Total Net Position $ 120,278,756 $ 160,535,685 $ 280,814,441 See Notes to Financial Statements.

34

Component Units Municipal Baytown Development Area Water District Authority

$ 5,506,394 $ 5,658,923 925,806 113,669

4,102,567 5,224,124

1,136,230 - 34,184,723 6,432,200 50,420,236

115,995

24,723 308,874 236,305

132,156 1,860,000

280,666 16,963,847

437,545 19,369,026

16,613,101

5,210,729 3,866,262

5,994,655 5,477,113 $ 5,994,655 $ 31,167,205

35

CITY OF BAYTOWN, TEXAS STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013

Program Revenues Operating Capital Charges for Grants and Grants and Functions/Programs Expenses Services Contributions Contributions Primary Government Governmental Activities General government $ 22,049,401 $ 170,704 $ 1,505,982 $ Public safety 39,297,052 4,074,745 1,631,537 Public works 8,881,876 1,217,110 3,821,200 Public health 2,431,619 148,900 945,230 Parks, recreation, and culture 8,739,612 391,624 73,000 Interest and fiscal agent fees 3,749,173 - Total Governmental Activities 85,148,733 6,003,083 7,903,949 73,000

Business-Type Activities Water and sewer 31,539,964 34,022,544 2,241,040 Sanitation 4,685,496 4,589,026 Bayland Island development 208,078 16,327 Aquatics 2,245,949 2,056,711 Storm water utility 436,934 1,217,580 Total Business-Type Activities 39,116,421 41,902,188 2,241,040

Total Primary Government $ 124,265,154 $ 47,905,271 7,903,949 $ 2,314,040

Component Units Municipal Development District $ 5,453,079 $ $ $ Baytown Area Water Authority 8,109,400 11,165,765 Total Component Units $ 13,562,479 $ 11,165,765 $

General Revenues: Taxes: Property taxes Sales and hotel/motel taxes Franchise taxes Industrial district payments Investment income Miscellaneous Capital contributions Transfers, net Total General Revenues and Transfers

Change in Net Position

Beginning net position Ending Net Position See Notes to Financial Statements.

36

Net Revenue (Expense) and Changes in Net Position Primary Government Component Units Municipal Baytown Governmental Business-Type Development Area Water Activities Activities Total District Authority

$ (20,372,715) $ - $ (20,372,715) $ $ (33,590,770) (33,590,770) (3,843,566) (3,843,566) (1,337,489) (1,337,489) (8,274,988) (8,274,988) (3,749,173) (3,749,173) (71,168,701) (71,168,701)

4,723,620 4,723,620 (96,470) (96,470) (191,751) (191,751) (189,238) (189,238) 780,646 780,646 5,026,807 5,026,807

(71,168,701) 5,026,807 (66,141,894)

(5,453,079) 3,056,365 (5,453,079) 3,056,365

21,128,244 - 21,128,244 - - 18,558,609 - 18,558,609 5,294,203 - 3,825,432 - 3,825,432 28,339,356 - 28,339,356 - 628,564 265,092 893,656 12,615 10,956 1,777,705 - 1,777,705 60,045 63,196 133,193 - 2,750,047 (2,750,047) 77,007,957 (2,484,955) 74,523,002 5,500,056 74,152

5,839,256 2,541,852 8,381,108 46,977 3,130,517

114,439,500 157,993,833 272,433,333 5,947,678 28,036,688 $ 120,278,756 $ 160,535,685 $ 280;814,441 $ 5,994,655 $ 31,167,205

37

CITY OF BAYTOWINI, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS September 30, 2013

Nonmaj or Debt Capital Governmental General Service Projects Funds Assets Current assets: Cash and equity in pooled cash and investments $ 22,076,330 $ 3,715,519 $ 24,659,666 $ 7,828,430 Receivables, net 4,738,091 1,248,538 3,703,028 Due from other funds 740,006 - - - Prepaid items 2,432 - 254,520 1,000 Total Assets $ 27,556,859 $ 4,964,057 $ 24,914,186 $ 11,532,458

Liabilities. Deferred Inflows of Resources, and Fund Balances Liabilities: Account payable $ 466,019 $ $ 2,067,230 $ 5,222,041 Accrued expenditures 1,472,211 Due to other funds 449,980 Refundable deposits 107,100 Total Liabilities 2,045,330 2,067,230 5,672,021

Deferred inflows of resources: Unavailable revenue - property taxes 1,864,965 1,248,538

Fund balances: Nonspendable: Prepaids 2,432 254,520 1,000 Restricted: Debt service 3,715,519 Capital projects 22,592,436 1,300,849 Special projects 4,558,588 Unassigned 23,644,132 Total Fund Balances 23,646,564 3,715,519 22,846,956 5,860,437 Total Liabilities, Deferred Inflows of Resources, and Fund Balances $ 27,556,859 $ 4,964,057 $ 24,914,186 $ 11,532,458

38

Total Funds

$ 58,279,945 9,689,657 740,006 257,952 $ 68,967,560

$ 7,755,290 1,472,211 449,980 107,100 9,784,581

3,113,503

257,952

3,715,519 23,893,285 4,558,588 23,644,132 56,069,476

$ 68,967,560

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CITY OF BAYTOWN, TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION September 30, 2013

Total fund balances for governmental funds $ 56,069,476

Amounts reported for governmental activities in the Statement of Net Position are different, because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. Capital assets, nondepreciable 31,300,056 Capital assets, net depreciable 169,854,066 201,154,122

Some of the City's revenues will be collected after year end, but are not available to pay for current period expenditures and, therefore, are reported as deferred inflows in the funds. 3,113,503

Internal service funds are used by management to charge the costs of certain services and benefits to individual funds. The assets and liabilities of the internal service funds are included in the governmental activities in the Statement of Net Position. Internal service funds' net position 4,103,366 Capital assets accounted for in capital assets used in governmental activities (382,124) Compensated absences accounted for in long-term liabilities 108,753 Pension obligation accounted for in long-term liabilities 80,050 OPEB obligation accounted for in long-term liabilities 46,278 3,956,323

Long-term liabilities are not due and payable in the current period and, therefore, are not reported in the funds. Bonds payable, net of unamortized premium (106,442,087) Deferred charge on refunding 1,267,862 Capital leases (2,667,325) Compensated absences (9,184,271) Net pension obligation (4,977,502) Net OPEB obligation (21,401,607) Accrued interest payable (609,738) (144,014,668)

Net Position of Governmental Activities $ 120,278,756

41

CITY OF BAYTOWN, TEXAS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended September 30, 2013

Nonmajor Debt Capital Governmental General Service Projects Funds

Revenues Taxes $ 54,464,314 $ 9,282,017 $ $ 7,666,266 Licenses and permits 1,487,239 Charges for services 1,804,074 58,728 Fines and forfeitures 2,190,326 462,716 Intergovernmental 1,068,494 437,488 73,000 6,397,967 Investment earnings 533,717 34,913 39,983 19,951 Miscellaneous 848,272 - 264,025 665,408 Total Revenues 62,396,436 9,754,418 377,008 15,271,036 Expenditures Current: General government 14,595,578 7,517,048 Public safety 32,596,508 151,446 3,183,578 Public works 3,821,616 7,340,534 978,361 Public health 2,082,161 75,767 Parks, recreation, and culture 5,849,883 1,382,703 Capital outlay 2,465,978 10,873,516 1,360,093 Debt service: Principal 5,600,963 - 120,000 Interest and fiscal agent fees 3,457,277 104,275 Issuance costs 278,160 Total Expenditures 61,411,724 9,058,240 18,643,656 14,721,825 Excess (Deficiency) of Revenues Over (Under) Expenditures 984,712 696,178 (18,266,648) 549,211

Other Financing Sources (Uses) Transfers in 4,830,713 1,790,225 2,290,504 296,454 Transfers (out) (3,132,000) (521,240) (1,478,200) Bond premium 283,150 Debt issued 16,800,000 Total Other Financing Sources (Uses) 1,698,713 1,790,225 18,852,414 (1,181,746)

Net Change in Fund Balances 2,683,425 2,486,403 585,766 (632,535)

Beginning fund balances 20,963,139 1,229,116 22,261,190 6,492,972 Ending Fund Balances $ 23,646,564 $ 3,715,519 $ 22,846,956 $ 5,860,437

See Notes to Financial Statements.

42 Total Funds

$ 71,412,597 1,487,239 1,862,802 2,653,042 7,976,949 628,564 1,777,705 87,798,898

22,112,626 35,931,532 12,140,511 2,157,928 7,232,586 14,699,587

5,720,963 3,561,552 278,160 103,835,445

(16,036,547)

9,207,896 (5,131,440) 283,150 16,800,000 21,159,606

5,123,059

50,946,417 $ 56,069,476

43 (This page intentionally left blank.) 44

CITY OF BAYTOWN, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended September 30, 2013

Amounts reported for governmental activities in the Statement of Activities are different because:

Net changes in fund balances - total governmental funds $ 5,123,059

Governmental funds report capital outlay as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. Capital outlay, net of contributions to business-type funds and disposals 21,970,457 Depreciation (7,438,704)

The issuance of long-term debt (e.g., bonds, certificates of obligation) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the Statement of Activities. Debt principal repayments 5,514,250 Debt issued - revenue and refunding bonds (16,800,000) Additional premium on bonds (283,150) Amortization of deferred charge on refunding (80,667) Amortization of premium on bonds 220,383 Capital lease activity 206,713

Revenue in the Statement of Activities that does not provide current financial resources is not reported as revenue in the funds. 439,044

Some expenses reported in the Statement of Activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. Compensated absences (659,900) Change in pension obligation (265,164) Change in OPEB obligation (3,042,560) Interest expense on bonds (49,177)

Internal service funds are used by management to charge the costs of providing various services and benefits to individual funds. The net revenue of certain activities of internal service funds is reported with governmental activities. 984,672

Change in Net Position of Governmental Activities 5,839,256

See Notes to Financial Statements.

45

CITY OF BAYTOWN, TEXAS STATEMENT OF NET POSITION (Page I of 2) PROPRIETARY FUNDS September 30, 2013

Business-Type Activities-Enterprise Funds Water and Nonmajor Total Sewer Sanitation Funds Funds Assets Current assets: Cash and equity and equity in pooled cash and investments $ 37,175,976 $ 937,955 $ 1,341,203 $ 39,455,134 Accounts receivable, net 3,669,248 534,336 60,226 4,263,810 Inventories 3,538 3,538 Prepaid items Total Current Assets 40,845,224 1,472,291 1,404,967 43,722,482

Noncurrent assets: Capital assets: Nondepreciable 12,260,368 - 1,778,896 14,039,264 Depreciable, net 185,077,882 386,026 18,231,228 203,695,136 Total Capital Assets (Net of Accumulated Depreciation) 197,338,250 386,026 20,010,124 217,734,400 Total Noncurrent Assets 197,338,250 386,026 20,010,124 217,734,400 Total Assets $ 238,183,474 $ 1,858,317 $ 21,415,091 $ 261,456,882

Deferred Outflows of Resources Deferred charge on refunding 20,567 20,567

46

Internal Service Funds

$ 5,221,954

541,254 185,000 5,948,208

382,124

382,124 382,124 $ 6,330,332

47

CITY OF BAYTOVVNI, TEXAS STATEMENT OF NET POSITION (Page 2 of 2) PROPRIETARY FUNDS September 30, 2013

Business-Type Activities - Enterprise Funds Water and Nonmajor Total Sewer Sanitation Funds Funds

Liabilities Current liabilities: Accounts payable $ 2,288,697 $ 468,171 $ 31,977 $ 2,788,845 Accrued expenses 15,208 15,208 Compensated absences 575,815 53,724 33,972 663,511 Refundable deposits 2,565,798 - - 2,565,798 Due to other funds - Retainage payable 158,195 - 158,195 Accrued interest payable 547,409 547,409 Accounts payable - restricted 269,200 269,200 Bonds payable - current 6,269,800 6,269,800 Total Current Liabilities 12,674,914 537,103 65,949 13,277,966

Noncurrent liabilities: Bonds payable, net of premiums 83,663,887 - 83,663,887 Compensated absences 63,979 5,969 3,774 73,722 Net pension obligation 683,667 61,085 44,414 789,166 NetOPEB obligation 2,758,520 248,371 130,132 3,137,023 Total Noncurrent Liabilities 87,170,053 315,425 178,320 87,663,798 Total Liabilities 99,844,967 852,528 244,269 100,941,764

Net Position Net investment in capital assets 116,038,718 386,026 20,010,124 136,434,868 Restricted for: Debt service 5,364,616 - 5,364,616 Unrestricted 16,955,740 619,763 1,160,698 18,736,201 Total Net Position $ 138,359,074 $ 1,005,789 $ 21,170,822 160,535,685

See Notes to Financial Statements.

48

Internal Service Funds

$ 167,242 1,534,617 106,374

290,026

2,098,259

2,379 80,050 46,278 128,707 2,226,966

382,124

3,721,242 $ 4,103,366

49

CITY OF BAYTOWN, TEXAS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS For the Year Ended September 30, 2013

Business-Type Activities - Enterprise Funds Water and Nonmajor Total Sewer Sanitation Funds Funds Operating Revenues Water and sewer sales $ 30,718,509 $ - $ $ 30,718,509 Service charges and other services 3,304,035 - 3,290,618 6,594,653 Solid waste collection 4,589,026 4,589,026 Total Operating Revenues 34,022,544 4,589,026 3,290,618 41,902,188

Operating Expenses Personnel costs 8,027,025 716,012 1,826,642 10,569,679 Supplies 10,444,340 67,921 57,089 10,569,350 Maintenance 1,801,860 120,960 7,256 1,930,076 Services 2,189,821 3,564,388 276,187 6,030,396 Claim payments and fees Miscellaneous 107,324 80,758 41,414 229,496 Depreciation 5,463,349 135,457 678,118 6,276,924 Total Operating Expenses 28,033,719 4,685,496 2,886,706 35,605,921 Operating Income (Loss) 5,988,825 (96,470) 403,912 6,296,267

Nonoperating Revenues (Expenses) Investment earnings 264,682 410 265,092 Interest expense and other (3,123,765) - (4,255) (3,128,020) Costs of issuance of debt (382,480) - - (382,480) Total Nonoperating (Expenses) (3,241,563) (3,845) (3,245,408)

Income (Loss) Before Contribution and Transfers 2,747,262 (96,470) 400,067 3,050,859

Capital contribution 2,366,832 1,731,392 4,098,224 Transfers in 245,309 280,395 525,704 Transfers (out) (3,981,998) (220,554) (930,383) (5,132,935)

Change in Net Position 1,377,405 (317,024) 1,481,471 2,541,852

Beginning net position 136,981,669 1,322,813 19,689,351 157,993,833 Ending Net Position $ 138,359,074 $ 1,005,789 $ 21,170,822 160,535,685

See Notes to Financial Statements.

50

Inernal Service Funds

$ 14,873,518

14,873,518

865,680 1,762,319 21,533 46,265 11,799,470

47,359 14,542,626 330,892

330,892

226,079 530,775

1,087,746

3,015,620 $ 4,103,366

51

CITY OF BAYTOWN, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS (Page 1 of 2) For the Year Ended September 30, 2013

Business-Type Activities-Enterprise Funds Water and Nonmajor Total Sewer Sanitation Funds Funds Cash Flows from Operating Activities Cash received from customers $ 34,549,260 $ 4,600,263 $ 3,291,418 $ 42,440,941 Cash payments for goods and services (16,087,052) (3,830,218) (551,330) (20,468,600) Cash payments to employees (7,604,455) (672,295) (1,826,642) (10,103,392) Net Cash Provided by Operating Activities 10,857,753 97,750 913,446 11,868,949

Cash Flows from Noncapital and Related Financing Activities Transfers in 245,309 280,395 525,704 Transfers (out) (3,981,998) (220,554) (930,383) (5,132,935) Net Cash Provided (Used) for Noncapital and Related Financing Activities (3,736,689) (220,554) (649,988) (4,607,231)

Cash Flows from Capital and Related Financing Activities Acquisition, and construction of capital assets (14,334,215) (11,781) (14,345,996) Principal paid on capital debt (5,810,750) (5,810,750) Interest and fiscal agent fees paid (3,107,575) - (3,107,575) Proceeds from bond issuance 16,500,000 - 16,500,000 Net Cash (Used) by Capital and Related Financing Activities (6,752,540) - (11,781) (6,764,321)

Cash Flows from Investing Activities Interest received 264,682 410 265,092

Net Cash Provided by Investing Activities 264,682 410 265,092

Net Increase (Decrease) in Cash and Cash Equivalents 633,206 (122,804) 252,087 762,489

Beginning cash and cash equivalents 36,542,770 1,060,759 1,089,116 38,692,645 Ending Cash and Cash Equivalents $ 37,175,976 $ 937,955 $ 1,341,203 $ 39,455,134

See Notes to Financial Statements.

52

Internal Service Funds

$ 14,826,774 (13,313,809) (865,680)

647,285

530,775

530,775

(62,613)

(62,613)

1,115,447

4,106,507 $ 5,221,954

53

CITY OF BAYTOWN, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS (Page 2 of 2) For the Year Ended September 30, 2013

Business-Type Activities-Enterprise Funds Water and Nonmajor Total Sewer Sanitation Funds Funds Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities Operating income (loss) $ 5,988,825 $ (96,470) $ 403,912 $ 6,296,267 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation 5,463,349 135,457 678,118 6,276,924 Changes in Operating Assets and Liabilities: (Increase) Decrease in Current Assets: Accounts receivable 434,450 11,237 800 446,487 Inventory - Prepaids 1,432 1,432 Increase (Decrease) in Current Liabilities: Accounts payable (1,280,618) 43,003 (12,414) (1,250,029) Accrued expenses 11,833 2,294 14,127 Retainage payable (88,604) - (88,604) Compensated absences (58,780) (8,078) 7,953 (58,905) Net pension obligation 16,692 1,321 (1,260) 16,753 Net OPEB obligation 452,825 48,180 15,192 516,197 Refundable deposits 92,266 - 92,266 Due to other funds - (117,932) (117,932) Advances from other funds (174,485) (39,194) (62,355) (276,034) Net Cash Provided by Operating Activities $ 10,857,753 $ 97,750 $ 913,446 $ 11,868,949

Noncash investing, capital, and fmancing activities: Contributions of capital assets from governmental funds $ 2,366,832 $ $ 1,731,392 $ 4,098,224 See Notes to Financial Statements.

.54

Internal Service Funds

$ 330,892

47,359

(33,744)

(19,176) 71,853

11,931 80,050 46,278

124,842

$ 647,285

$ 226,079

55 (This page intentionally left blank.) 56 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS For the Year Ended September 30, 2013

I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Reporting Entity

The City of Baytown, Texas (the "City") was incorporated and has operated under a "Home Rule Charter," which provides for a Council-Manager form of government, since 1948.

The City Council is the principal legislative body of the City. The City Manager is appointed by a majority vote of the City Council and is responsible to the Council for the administration of all the affairs of the City. The City Manager is responsible for the appointment and removal of department directors and employees, supervision and control of all City departments, and preparation of the annual budget.

The City provides the following services: public safety (police, fire services, and emergency medical services), municipal court, culture and recreation, streets, drainage, water and sewer services, solid waste collection and disposal, storm water utilities, community development, and general administration.

The City is an independent political subdivision of the State of Texas governed by an elected council and a mayor and is considered a primary government. As required by generally accepted accounting principles, these basic financial statements have been prepared based on considerations regarding the potential for inclusion of other entities, organizations, or functions as part of the City's financial reporting entity. They present the government and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the government's operations. Each discretely presented component unit is reported in a separate column in the government-wide financial statements to emphasize that it is legally separate from the government. Additionally, as the City is considered a primary government for financial reporting purposes, its activities are not considered a part of any other governmental or other type of reporting entity.

Considerations regarding the potential for inclusion of other entities, organizations, or functions in the City's financial reporting entity are based on criteria prescribed by generally accepted accounting principles. These same criteria are evaluated in considering whether the City is a part of any other governmental or other type of reporting entity. The overriding elements associated with prescribed criteria considered in determining that the City's financial reporting entity status is that of a primary government are that it has a separately elected governing body, it is legally separate, and it is fiscally independent of other state and local governments. Additionally, prescribed criteria under generally accepted accounting principles include considerations pertaining to organizations for which the primary government is financially accountable and considerations pertaining to organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's fmancial statements to be misleading or incomplete.

1. Blended Component Units

Crime Control and Prevention District

The Crime Control and Prevention District (CCPD) has been included in the reporting entity as a blended component unit. The CCPD is reported as a blended component unit due to CCPD providing services almost entirely for the City. The CCPD is funded by a local sales and use tax at a rate of one- eighth of one percent. The expenditure of this tax is restricted for public safety activities. The CCPD is dissolved on the fifth anniversary of the date the CCPD began to levy taxes, if the CCPD has not

57 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

held a continuation or dissolution referendum (Texas Local Government Code, Chapter 363). The operations of the CCPD are presented as a governmental fund type.

Fire Control Prevention, and Emergency Medical Services District

The Fire Control, Prevention, and Emergency Medical Services District (FCPEMSD) has been included in the reporting entity as a blended component unit The FCPEMSD is reported as a blended component unit due to FCPEMSD providing services almost entirely for the City. The FCPEMSD is dedicated to fire safety and emergency medical services and is funded by a local sales and use tax at a rate of one-eighth of one percent. The FCPEMSD is dissolved on the fifth anniversary of the date the FCPEMSD began to levy taxes, if the FCPEMSD has not held a continuation or dissolution referendum (Texas Local Government Code, Chapter 344). The operations of the FCPEMSD are presented as a governmental fund type.

Tax Increment Reinvestment Zone No. One

The Tax Increment Reinvestment Zone (TIRZ) Number One was created in 2001 as a development/redevelopment financing tool and is included in the reporting entity as a blended component unit. The TIRZ is reported as a blended component unit due to TIRZ providing services almost entirely for the City. The TIRZ provides a method to finance public improvements in a designated zone utilizing the property tax increment, or growth in value, subsequent to the creation of the zone. The operations of the TIRZ are presented as a governmental fund type.

2. Discretely Presented Component Units

Baytown Area Water Authority

The Baytown Area Water Authority (BAWA) was created to purchase and distribute surface and/or underground water supplies almost entirely to the City of Baytown. The boundaries of BAWA include the entire City and most of the City's extraterritorial jurisdiction in east Harris County, Texas. The City Council appoints all members of the governing board of BAWA and approves any debt issued by BAWA. Separate financial statements of BAWA may be obtained from the finance department of the City.

Municipal Development District

The Municipal Development District (MDD) was created to levy and account for the collection of a sales and use tax at the rate of one-half of one percent for the purpose of financing economic development projects that provide economic benefit and diversify the economic base of the community. The boundaries of the MDD include the portion of the City that is in Harris County and exclude the portion that is in Chambers County. City Council appoints all members of the governing board of the MDD and approves any debt issued by the MDD.

B. Government-Wide Financial Statements

The government-wide financial statements (i.e., the Statement of Net Position and the Statement of Activities) report information on all activities of the primary government and its component units. Governmental activities, which normally are supported by taxes, intergovernmental revenues, and other nonexchange transactions, are reported separately from business-type activities, which rely to a significant extent on fees and charges to external customers for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is fmancially accountable.

58 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

C. Basis of Presentation - Government-Wide Financial Statements

While separate government-wide and fund financial statements are presented, they are interrelated. The goverrunental activities column incorporates data from governmental funds and internal service funds, while business-type activities incorporate data from the City's enterprise funds. Separate fmancial statements are provided for governmental funds and proprietary funds.

As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are payments in lieu of taxes where the amounts are reasonably equivalent in value to the interfund services provided and other charges between the City's water functions and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned.

D. Basis of Presentation - Fund Financial Statements

The fund financial statements provide information about the City's funds, including its blended component units. Separate statements for each fund category - governmental and proprietary - are presented. The emphasis of fund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental and enterprise funds are aggregated and reported as nonmajor funds.

The City reports the following governmental funds:

General Fund The general fund is used to account for all fmancial transactions not properly includable in other funds. The principal sources of revenues include local property taxes, sales and franchise taxes, licenses and permits, fines and forfeitures, and charges for services. Expenditures include general government, public safety, public works, public health, and parks and recreation. The general fund is considered a major fund for reporting purposes.

Special Revenue Funds The special revenue funds are used to account for proceeds of specific revenue sources that are restricted or committed to expenditures for specified purposes other than debt service or capital projects. The special revenue funds are considered nonmajor funds for reporting purposes.

Debt Service Fund The debt service fund is used to account for the payment of interest and principal on all general obligation bonds and other long-term debt of governmental funds. The primary source of revenue for debt service is local property taxes. The debt service fund is considered a major fund for reporting purposes.

Capital Projects Funds The capital projects fund is used to account for the resources that are restricted, committed, or assigned to expenditures for capital outlay. The capital projects fund is considered a major fund for reporting purposes.

The City reports the following enterprise funds:

Enterprise Funds

The enterprise funds are used to account for the operations that provide water and wastewater collection, wastewater treatment operations, solid waste collection and disposal, water park 59 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

operations, and storm utility operations. The services 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 general public on a continuing basis will be financed or recovered primarily through user charges. The water and sewer fund is considered a major fund for reporting purposes. The City has elected to present the sanitation fund as a major fund. The nomnajor funds include the Bayland Island fund, aquatics fund, and storm water utility fund.

Additionally, the City reports the following fund types:

Internal Service Funds

Internal service funds account for services provided to other departments or agencies of the City, or to other governments, on a cost reimbursement basis. These funds include the central services operation for the garage and warehouse and the risk management fund.

During the course of operations, the City has activity between funds for various purposes. Any residual balances outstanding at year end are reported as due from/to other funds and advances to/from other funds. While these balances are reported in fund financial statements, certain eliminations are made in the preparation of the government-wide financial statements. Balances between the funds included in governmental activities (i.e., the governmental and internal service funds) are eliminated so that only the net amount is included as internal balances in the governmental activities column. Similarly, balances between the funds included in business-type activities (i.e., the enterprise funds) are eliminated so that only the net amount is included as internal balances in the business-type activities column.

Further, certain activity occurs during the year involving transfers of resources between funds. In fund financial statements, these amounts are reported at gross amounts as transfers in/out. While reported in fund financial statements, certain eliminations are made in the preparation of the government-wide financial statements. Transfers between the funds included in governmental activities are eliminated so that only the net amount is included as transfers in the governmental activities column. Similarly, balances between the funds included in business-type activities are eliminated so that only the net amount is included as internal balances in the business-type activities column.

E. Measurement Focus and Basis of Accounting

The accounting and financial reporting treatment is determined by the applicable measurement focus and basis of accounting. Measurement focus indicates the type of resources being measured such as current financial resources or economic resources. The basis of accounting indicates the timing of transactions or events for recognition in the financial statements.

The government-wide and proprietary fund financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

The 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. 60 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

For this purpose, 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, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. General capital asset acquisitions are reported as expenditures in governmental funds. Issuance of long-term debt and acquisitions under capital leases are reported as other financing sources.

Property taxes, sales taxes, franchise taxes, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Entitlements are recorded as revenues when all eligibility requirements are met, including any time requirements, and the amount is received during the period or within the availability period for this revenue source (within 60 days of year end). Expenditure-driven grants are recognized as revenue when the qualifying expenditures have been incurred and all other eligibility requirements have been met, and the amount is received during the period or within the availability period for this revenue source (within 60 days of year end). All other revenue items are considered to be measurable and available only when cash is received by the City.

F. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance

1. Cash and Cash Equivalents

The City maintains a pooled cash and investments account. Each fund whose monies are deposited in the pooled cash and investment account has equity therein, and interest earned on the investment of these monies is allocated based upon relative equity at the previous month end. Amounts on deposit in interest-bearing accounts and other investments are displayed on the combined balance sheet as "cash and equity in pooled cash and investments."

2. Investments

In accordance with GASB Statement No. 31, Accounting and Reporting for Certain Investments and External Investment Pools, the City reports all investments at fair value, except for "money market investments" and "2a7-like pools." Money market investments, which are short-term highly liquid debt instruments that may include U.S. Treasury and agency obligations, are reported at amortized costs. Investment positions in external investment pools that are operated in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940, such as TexPool, are reported using the pools' share price.

The City has adopted a written investment policy regarding the investment of its funds as defined in the Public Funds Investment Act, Chapter 2256, Texas Government Code. In summary, the City is authorized to invest in the following:

Direct obligations of the U.S. government Money market mutual funds that meet certain criteria Collateralized certificates of deposits and share certificates Statewide investment pools

3. Inventories and Prepaid Items

The costs of governmental fund type inventories are recorded as expenditures when the related liability is incurred (i.e., the purchase method). Inventories in the central services fund consist of

61

CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

expendable supplies held for consumption and are carried at weighted-average cost. The weighted- average cost is recorded as an expenditure at the time of consumption. Certain payments to vendors reflect costs applicable to future accounting periods (prepaid expenditures) and are recognized as expenditures when utilized.

4. Restricted Assets

Certain resources of the BAWA fund are set aside for the repayment of revenue bonds, which are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. The revenue bond construction account is used to report those proceeds of bond issuance that are restricted for use in construction. The bond reserve requirement account is used to segregate resources accumulated for debt service payments over the next 12 months.

5. Capital Assets

Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. In accordance with GASB Statement No. 34, infrastructure has been capitalized retroactively. Capital assets are defined by the City as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of three years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. Major outlays for capital assets and improvements are capitalized as projects are constructed.

Interest costs incurred in connection with construction of enterprise fund capital assets are capitalized when the effects of capitalization materially impact the financial statements.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized.

Property, plant, and equipment of the primary government, as well as the component units, are depreciated using the straight-line method over the following estimated useful lives:

Estimated Asset Description Useful Life Buildings and improvements 15 to 50 years Machinery and equipment 3 to 10 years Infrastructure 30 to 50 years

6. Deferred Outflows/Inflows of Resources

In addition to assets, the statement of financial position will sometimes report 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 only has one item that qualifies for reporting in this category. It is the deferred charge on refunding reported in the government-wide Statement of Net 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.

In addition to liabilities, the statement of fmancial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of

62 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

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 has only one type of item, which arises only under a modified accrual basis of accounting, that qualifies for reporting in this category. Accordingly, the item, unavailable revenue, is reported only in the governmental funds balance sheet. The governmental funds report unavailable revenues from property taxes. This amount is deferred and recognized as an inflow of resources in the period that the amount becomes available.

7. Compensated Employee Absences

It is the City's policy to permit employees to accumulate certain earned but unused benefits. Amounts accumulated, up to certain amounts, may be paid to employees upon termination of employment. The estimated amount of compensation for services provided 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 when it matures or becomes due. Amounts of vested or accumulated vacation leave that are not expected to be liquidated with expendable, available financial resources are maintained separately and represent a reconciling item between the fund and government-wide presentations.

8. Long-Term Obligations

In the government-wide fmancial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type Statement of Net Position. The long-term debt consists primarily of bonds payable.

Long-term debt for governmental funds is not reported as a liability in the fund financial statements until due. The debt proceeds are reported as other financing sources, including any premium or discount, and payments of principal and interest are reported as expenditures. In the governmental fund types, issuance costs, even if withheld from the actual net proceeds received, are reported as debt service expenditures. However, claims and judgments paid from governmental funds are reported as a liability in the fund financial statements only for the portion expected to be financed from expendable, available financial resources.

For proprietary fund types, bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method, if material. Bonds payable are reported net of the applicable bond premium or discount.

The property tax rate is allocated each year between the general and debt service funds. The full amount estimated to be required for debt service on general obligation debt is provided by the tax along with interest earned in the debt service fund.

Assets acquired under the terms of capital leases are recorded as liabilities and capitalized in the government-wide fmancial statements at the present value of net minimum lease payments at inception of the lease. In the year of acquisition, capital lease transactions are recorded as other financing sources and as capital outlay expenditures in the applicable fund. Lease payments representing both principal and interest are recorded as expenditures in the general fund upon payment with an appropriate reduction of principal recorded in the government-wide financial statements.

9. Net Position Flow Assumption

Sometimes the City will fund outlays for a particular purpose from both restricted (e.g., restricted bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to report as restricted- 63 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

net position and unrestricted-net position in the government-wide and proprietary fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the City's policy to consider restricted-net position to have been depleted before unrestricted-net position is applied.

10. Fund Balance Flow Assumptions

Sometimes the City will fund outlays for a particular purpose from both restricted and unrestricted resources (the total of committed, assigned, and unassigned fund balance). In order to calculate the amounts to report as restricted, committed, assigned, and unassigned fund balance in the governmental fund fmancial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the City's policy to consider restricted fund balance to have been depleted before using any of the components of unrestricted fund balance. Further, when the components of unrestricted fund balance can be used for the same purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned fund balance is applied last.

11. Fund Balance Policies

Fund balances of governmental funds are reported in various categories based on the nature of any limitations requiring the use of resources for specific purposes. The City itself can establish limitations on the use of resources through either a commitment (committed fund balance) or an assignment (assigned fund balance). Amounts that cannot be spent because they are either not in spendable form or legally or contractually required to be maintained intact are classified as nonspendable fund balance. Amounts that are externally imposed by creditors, grantors, contributors or laws or regulations of other governments; or imposed by law through constitutional provisions are classified as restricted fund balance.

The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the City's highest level of decision-making authority. The City Council is the highest level of decision-making authority for the City that can, by adoption of an ordinance prior to the end of the fiscal year, commit fund balance. Once adopted, the limitation imposed by the ordinance remains in place until a similar action is taken (the adoption of another ordinance) to remove or revise the limitation.

Amounts in the assigned fund balance classification are intended to be used by the City for specific purposes but do not meet the criteria to be classified as committed. The City Council may also assign fund balance as it does when appropriating fund balance to cover a gap between estimated revenue and appropriations in the subsequent year's appropriated budget. Unlike commitments, assignments generally only exist temporarily. In other words, an additional action does not normally have to be taken for the removal of an assignment. Conversely, as discussed above, an additional action is essential to either remove or revise a commitment.

12. Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.

64 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

G. Revenues and Expenditures/Expenses

1. Program Revenues

Amounts reported as program revenues include 1) charges to customers or applicants who purchase, use, or directly benefits from goods, services, or privileges provided by a given function or segment and 2) grants and contributions (including special assessments) that are restricted to meeting the operational or capital requirements of a particular function or segment. All taxes, including those dedicated for specific purposes, and other internally dedicated resources are reported as general revenues rather than as program revenues.

2. Property Taxes

Property taxes are levied during October of each year and are due upon receipt of the City's tax bill. Taxes become delinquent, with an enforceable lien on property, on February 1 of the following year.

3. Proprietary Funds Operating and Nonoperating Revenues and Expenses

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the enterprise funds and internal service funds are charges to customers for sales and services. The water and sewer fund also recognizes as operating revenue the portion of tap fees intended to recover the cost of connecting new customers to the system. Operating expenses for the enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

H. STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY

Budgetary Information

The City prepares its general and special revenue funds' annual budgets on a basis that differs from GAAP. The budget and all transactions are presented in accordance with the City's method (budgetary basis) in the schedule of revenues, expenditures, and changes in fund balances - budget and actual (budgetary basis) for the general and special revenue funds to provide a meaningful comparison of actual results with the budget. The major differences between budgetary and GAAP basis of accounting are that encumbrances are recorded as the equivalent of expenditures (budgetary) as opposed to restricted fund balance (GAAP) and some revenue and expenditures within the nonmajor governmental fund do not have an adopted budget. The debt service fund's budget is adopted and presented in accordance with GAAP.

On or before May 31 of each year, all departments of the City submit requests for appropriations to the City Manager so that a budget may be prepared. At least 60 days prior to the beginning of each fiscal year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning the following October 1. The operating budget includes proposed expenditures and the means of fmancing them. The Council holds public hearings and a final budget must be prepared and adopted no later than September 27. The annual budget adopted by the City Council covers the general; debt service; library grant; crime control and prevention district; hotel/motel; fire control, prevention, and emergency medical services district; water and sewer; sanitation; storm water; garage, warehouse, and central services funds. The budget is legally enacted at the department level by the City Council through passage of an ordinance prior to the beginning of the fiscal year. Other special 65

CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

revenue funds such as community development block grant; emergency management; police grant; and other special revenue do not have appropriated budgets since other means control the use of these resources (e.g., grant awards) and sometimes span of more than one fiscal year.

The City Council must approve any supplemental budget appropriations at the department level. The City Manager is authorized to transfer budgeted amounts within departments within any fund. During the fiscal year ended September 30, 2013, the City Manager approved various budget revisions within departments.

HI. DETAILED NOTES ON ALL FUNDS

A. Deposits and Investments

As of September 30, 2013, the City had the following investments:

Weighted Average Maturity Credit Investment Type Fair Value (Years) Risk Commercial paper $ 17,500,000 0.25 A-1-1/F-1 Bankers acceptance 793,970 0.21 A-1-1/F-1+ Municipal bonds 26,254,564 0.43 AA/Aa Coupon agencies 4,016,370 1.76 AAA/AA+ Certificate of deposits 993,575 0.55 AAA External investment pools TexPool 39,741,668 0.00 AAAm TexStar 37,258,920 0.00 AAAm Total fair value $ 126,559,067 Portfolio weighted average maturity 0.19

Interest rate risk In accordance with its investment policy, the City manages its exposure to declines in fair values by limiting the weighted average maturity not to exceed five years, structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, monitoring credit ratings of portfolio position to assure compliance with rating requirements imposed by the Public Funds Investment Act, and investing operating funds primarily in short-term securities or similar government investment pools.

Credit risk The City's investment policy limits investments in no-load money market mutual funds rated as to investment quality not less than "AAA" by a nationally recognized investment rating firm. As of September 30, 2013, the City's investments in TexPool and TexSTAR were rated "AAAm" by Standard & Poor's. All other investments are guaranteed (either express or implied) by the full faith and credit of the United States government or the issuing U.S. agency. More specifically, the investments in U.S. agencies held by the City as of September 30, 2013 consist of a variety of bonds and discount notes issued by the Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association.

Custodial credit risk - deposits. In the case of deposits, this is the risk that in the event of a bank failure, the City's deposits may not be returned to it. State statutes require that all deposits in financial institutions be insured or fully collateralized by U.S. government obligations or its agencies and instrumentalities or direct obligations of Texas or its agencies and instrumentalities that have a market value of not less than the principal amount of the deposits. As of September 30, 2013, the market values of pledged securities and FDIC coverage exceeded bank balances.

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Custodial credit risk - investments. For an investment, this is the risk that, in the event of the failure of the counterparty, the City will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The City's investment policy requires that it will seek to safe keep securities at fmancial institutions, avoiding physical possession. Further, all trades, where applicable, are executed by delivery versus payment to ensure that securities are deposited in the City's safekeeping account prior to the release of funds.

TexPool

TexPool was established as a trust company with the Treasurer of the State of Texas as trustee, segregated from all other trustees, investments, and activities of the trust company. The State Comptroller of Public Accounts exercises oversight responsibility over TexPool. Oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. The advisory board members review the investment policy and management fee structure. Finally, Standard & Poor's rates TexPool "AAAm". As a requirement to maintain the rating, weekly portfolio information must be submitted to Standard & Poor's, as well as to the office of the Comptroller of Public Accounts for review.

TexSTAR

The Texas Short Term Asset Reserve Fund (TexSTAR) is a local government investment pool organized under the authority of the Interlocal Cooperation Act, Chapter 791, Texas Government Code, and the Public Funds Investment Act, Chapter 2256, Texas Government Code. TexSTAR was created in April 2002 by contract among its participating governmental units and is governed by a board of directors. JPMorgan Fleming Asset Management (USA), Inc. and First Southwest Asset Management, Inc. act as co-administrators, providing investment management services, participant services, and marketing. JPMorgan Chase Bank and/or its subsidiary, J.P. Morgan Investor Services, Inc., provide custodial, transfer agency, fund accounting, and depository services.

TexPool and TexSTAR operate in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. TexPool and TexSTAR use amortized cost rather than market value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool and TexSTAR are the same as the value of TexPool and TexSTAR shares.

B. Receivables

The following comprise receivable balances at year end:

Governmental Funds Nonmajor Debt Special Total General Service Revenue Funds Taxes $ 2,188,575 $ 1,625,625 $ 1,248,995 $ 5,063,195 Accounts 4,166,912 129,591 4,296,503 Interest 826,651 826,651 Grants 91,259 2,324,442 2,415,701 Less allowance (2,535,306) (377,087) - (2,912,393) $ 4,738,091 $ 1,248,538 $ 3,703,028 $ 9,689,657

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Proprietary Funds

Water and Nonmajor Total Sewer Sanitation Funds Funds Accounts $ 4,164,952 $ 534,336 $ 60,226 4,759,514 Less allowance (495,704) (495 704) $ 3,669,248 $ 534,336 $ 60,226 $ 4,263,810

C. Capital Assets

A summary of changes in capital assets for the year ended is as follows:

1. Primary Government

*Beginning Reclassifications/ Ending Balance Increases (Decreases) Balance Governmental Activities: Capital assets not being depreciated: Land $ 9,159,375 $ 53,327 $ $ 9,212,702 Construction in progress 7,900,700 18,418,157 (4,231,503) 22,087,354

Total Capital Assets Not Being Depreciated 17,060,075 18,471,484 (4,231,503) 31,300,056

Capital assets being depreciated: Buildings 56,844,859 2,505,622 59,350,481 Improvements other than buildings 11,949,791 2,056,219 14,006,010 Machinery and equipment 46,703,705 2,643,030 (1,181,524) 48,165,211 Infrastructure 153,965,668 528,985 154,494,653

Total Capital Assets Being Depreciated 269,464,023 7,733,856 (1,181,524) 276,016,355

Less accumulated depreciation for: Buildings (17,497,685) (1,282,323) (18,780,008) Improvements other than buildings (1,663,711) (503,350) (2,167,061) Machinery and equipment (37,711,373) (2,501,323) 1,178,144 (39,034,552) Infrastructure (43,028,960) (3,151,708) (46,180,668) Total Accumulated Depreciation (99,901,729) (7,438,704) 1,178,144 (106,162,289) Total Capital Assets, Net 169,562,294 295,152 (3,380) 169,854,066 Governmental Activities Capital Assets, Net $ 186,622,369 $ 18,766,636 $ (4,234,883) 201,154,122

Less associated debt (109,109,412) Plus deferred charge on refunding 1,267,862 Unspent bond proceeds 15,273,252

Net Investment in Capital Assets $ 108,585,824

* Beginning balances have been restated

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Depreciation was charged to governmental functions as follows:

General government $ 573,770 Public safety 1,926,677 Public works 3,472,725 Public health 222,981 Recreation and culture 1,195,192 Capital assets held by the City's internal service funds are charged to various functions based on their usage of the assets 47,359 Total Governmental Activities Depreciation Expense $ 7,438,704

2. Construction Commitments - Governmental

The City has active governmental activities construction projects as of September 30, 2013. The projects include the following:

Authorized Contract Remaining Project Description Contract Expenditures Commitment Street Rehabilitation and Construction $ 4,895,566 $ 4,511,159 $ 384,407 Baker Road Extension 9,700,949 6,541,684 3,159,265 North Central Fire Building 2,925,250 1,704,068 1,221,182 Fire Training Facility 1,701,640 1,612,670 88,970 Total $ 19,223,405 $ 14,369,581 $ 4,853,824

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CITY OF BAYTOWN, TExAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

The following is a summary of changes in capital assets for business-type activities for the year ended:

*Beginning Reclassifications/ Ending Balance Increases (Decreases) Balance Business-Type Activities Capital assets not being depreciated: Land $ 533,426 $ $ $ 533,426 Construction in progress 46,137,585 18,896,461 (51,528,208) 13,505,838 Total Capital Assets Not Being Depreciated 46,671,011 18,896,461 (51,528,208) 14,039,264

Capital assets being depreciated: Buildings and systems 63,112,219 63,112,219 Improvements other than buildings 162,712,750 50,523,538 213,236,288 Office furniture and equipment 1,395,559 1,395,559 Machinery and equipment 7,343,410 548,175 7,891,585 Total Capital Assets Being Depreciated 234,563,938 51,071,713 285,635,651

Less accumulated depreciation for: Buildings and systems (46,237,763) (1,264,431) (47,502,194) Improvements other than buildings (22,138,431) (4,472,854) (26,611,285) Office furniture and equipment (1,297,412) (931) (1,298,343) Machinery and equipment (5,989,985) (538,708) (6,528,693) Total Accumulated Depreciation (75,663,591) (6,276,924) (81,940,515) Total Capital Assets, Net 158,900,347 44,794,789 203,695,136 Business-Type Activities Capital Assets, Net $ 205,571,358 $ 63,691,250 $ (51,528,208) 217,734,400

Less associated debt (89,933,687) Plus deferred charge on refunding 20,567 Unspent bond proceeds 8,613,588

Net Investment in Capital Assets $ 136,434,868

* Beginning balances have been restated

Depreciation was charged to business-type functions as follows:

Water and sewer $ 5,463,350 Sanitation 135,456 Bayland Island 181,912 Storm water 5,375 Aquatics 490,832 Total Business-Type Activities Depreciation Expense $ 6,276,925

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

3. Construction Commitments - Business-Type

The City has active business-type activities construction projects as of September 30, 2013. The projects include the following:

Authorized Contract Remaining Project Description Contract Expenditures Commitment Central District Wastewater Treatment Plant $ 826,240 $ 61,372 $ 764,868 Central District Wastewater Lift Station 8,075,954 2,069,607 6,006,347 West Main Lift Station 1,202,370 680,542 521,828 Raccoon Lift Station 3,764,297 3,377,909 386,388 Ferry Road Sewer 709,003 420,739 288,264 Pirates Bay Expansion 7,107,400 1,630,698 5,476,702 Total $ 21,685,264 $ 8,240,867 $ 13,444,397

4. Discretely Presented Component Units

The following is a summary of changes in capital assets for BAWA for the year ended September 30, 2013:

Beginning Ending Balance Increases (Decreases) Balance Capital assets, not being depreciated: Land $ 264,321 $ - $ $ 264,321 Construction in progress 6,418,293 381,523 (5,927,907) 871,909 Total Capital Assets Not Being Depreciated 6,682,614 381,523 (5,927,907) 1,136,230

Capital assets, being depreciated: Buildings 1,021,268 1,021,268 Improvements other than buildings 40,435,437 5,927,907 46,363,344 Machinery and equipment 3,962,139 10,684 3,972,823 Total Capital Assets Being Depreciated 45,418,844 5,938,591 51,357,435 Total Capital Assets 52,101,458 6,320,114 (5,927,907) 52,493,665

Less accumulated depreciation for: Buildings (573,902) (23,640) (597,542) Improvements other than buildings (11,454,632) (1,237,808) (12,692,440) Machinery and equipment (3,316,773) (565,957) (3,882,730) Total Accumulated Depreciation (15,345,307) (1,827,405) (17,172,712) Total Capital Assets Being Depreciated, Net 30,073,537 4,111,186 34,184,723 Discretely Presented Component Units Capital Assets, Net $ 36,756,151 $ 4,492,709 $ (5,927,907) $ 35,320,953

Less associated debt (18,823,847) Plus deferred charge on refunding 115,995

Net Investment in Capital Assets $ 16,613,101

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

5. Construction Commitments - Component Units

The City has active construction projects for BAWA as of September 30, 2013. The proj ects are listed below:

Authorized Contract Remaining Project Description Contract Expenditures Commitment BAWA Plant Improvements $ 751,351 $ 656,585 $ 94,766

D. Long-Term Debt

The following is a summary of changes in the City's primary government and component units total long-term liabilities for the year ended. In general, the City uses the general and debt service funds to liquidate governmental long-term liabilities.

Amounts Beginning Ending Due Within Balance Additions Reductions Balance One Year Governmental Activities Bonds, notes and other payables: General obligation bonds $ 80,519,100 $ 16,800,000 $ 4,899,250 $ 92,419,850 $ 5,250,200 Combinations and tax revenue bonds 11,560,000 - 615,000 10,945,000 1,130,000 Plus deferred amounts: For premiums 3,014,470 283,150 220,383 3,077,237 - Capital leases 2,874,038 206,713 2,667,325 226,861 Total 97,967,608 17,083,150 5,941,346 109,109,412 * 6,607,061 Other liabilities: Net pension obligation 4,712,338 265,164 4,977,502 - Net OPEB obligation 18,359,047 3,042,560 - 21,401,607 - Compensated absences 8,524,371 8,331,834 7,671,934 9,184,271 8,265,844 Total 31,595,756 11,639,558 7,671,934 35,563,380 8,265,844 Total Governmental Activities $ 129,563,364 $ 28,722,708 $ 13,613,280 $ 144,672,792 $ 14,872,905

Long-term debt due in more than one year $ 129,799,887

*Debt associated with capital assets $ 109,109,412

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Amounts Beginning Ending Due Within Balance Additions Reductions Balance One Year Business-Type Activities Revenue bonds $ 5,650,900 $ $ 1,505,750 $ 4,145,150 $ 1,359,800 Certificates of obligation 73,120,000 16,500,000 4,305,000 85,315,000 4,910,000 Less deferred amounts: For premiums 78,663 407,288 12,414 473,537 Total 78,849,563 16,907,288 5,823,164 89,933,687 * 6,269,800 Other liabilities: Net pension obligation 772,413 16,753 789,166 Net OPEB obligation 2,620,826 516,197 - 3,137,023 Compensated absences 796,138 657,619 716,524 737,233 663,511 Total 4,189,377 1,190,569 716,524 4,663,422 663,511 Total Business-Type Activities $ 83,038,940 $ 18,097,857 $ 6,539,688 $ 94,597,109 $ 6,933,311

Long-term debt due in more than one year $ 87,663,798

*Debt associated with capital assets $ 89,933,687

Amounts Beginning Ending Due Within Balance Additions Reductions Balance One Year Discretely Presented Component Units Revenue bonds $ 20,570,000 $ $ 1,790,000 $ 18,780,000 * $ 1,860,000 Bank Loan 539,809 126,987 412,822 132,156 Less deferred amounts: For premiums 45,932 2,085 43,847 * Total 21,155,741 1,919,072 19,236,669 1,992,156

Long term debt payable in more than one year $ 17,244,513

Long term debt related to capital assets $ 18,823,847 *

Long-term liabilities applicable to the City's governmental activities are not due and payable in the current period and, accordingly, are not reported as fund liabilities in the governmental funds. Internal service funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. At year end, $235,081 make up the internal service funds' compensated absences, pension obligation, and OPEB obligation which is included in the above amounts for governmental activities. The governmental activities compensated absences, net pension obligations, and other post employment benefit obligations are generally liquidated by the general and water and sewer funds. Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due.

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CITY OF BAYTOWRN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Long-term governmental debt at year end was comprised of the following debt issues:

Interest Maturity Original Net Description Rate (%) Date Issue Retirement Outstanding General Obligation Bonds: Series 2003 3.35 - 5.00 2023 $ 7,355,000 $ 7,355,000 $ Series 2004 4.00 - 6.00 2024 4,705,000 4,485,000 220,000 Series 2005 3.50 - 4.25 2025 5,060,000 1,315,000 3,745,000 Refunding, Series 2005 4.00 - 6.00 2020 7,740,000 3,540,000 4,200,000 Series 2006 3.00 - 4.51 2026 5,215,000 1,255,000 3,960,000 Series 2008 3.00-4.50 2028 12,890,000 1,890,000 11,000,000 Refunding, Series 2010 1.00 - 3.00 2018 7,933,100 4,618,250 3,314,850 Refunding, Series 2011 2.50 - 5.00 2031 22,390,000 2,860,000 19,530,000 Partial Refunding, Series 2012 1.69-3.23 2032 30,225,000 575,000 29,650,000 Series 2013 2.00-3.375 2033 16,800,000 - 16,800,000 Total General Obligation Bonds 120,313,100 27,893,250 92,419,850

Combination and Tax Revenue Bonds: Series 2007A 3.82 2017 1,000,000 550,000 450,000 Tax Increment, Series 2008 5.75 2024 2,200,000 550,000 1,650,000 Series 2010 1.00 - 4.38 2030 10,000,000 1,155,000 8,845,000 Total Combination Tax and Revenue Bonds 13,200,000 2,255,000 10,945,000

Total General Bonded Debt $ 136,533,100 $ 33,168,250 $ 103,364,850

Capital Leases: Energy performance improvements 4.00 - 5.00 2022 $ 3,430,293 $ 762,968 $ 2,667,325

Total Capital Leases $ 3,430,293 $ 762,968 $ 2,667,325

Long-term business-type activity debt at year end was comprised of the following debt issues:

Interest Maturity Original Net Description Rate (%) Date Issue Retirement Outstanding Water and Sewer Bonds: Refunding Series, 2003 1.25 - 4.90 2013 $ 8,100,000 $ 7,405,000 $ 695,000 Refunding Series, 2010 1.00 - 3.00 2018 8,256,900 4,806,750 3,450,150 Total Water and Sewer Bonds 16,356,900 12,211,750 4,145,150

Texas Water Development Board Bonds: TWDB, Series 2005 1.35 - 3.50 2025 13,370,000 3,685,000 9,685,000 TWDB, Series 2006 2.70 - 3.70 2026 19,700,000 5,425,000 14,275,000 Total Texas Water Development Board Bonds 33,070,000 9,110,000 23,960,000

Certificates of Obligation: Certificates of Obligation, Series 2003 3.35 - 5.00 2022 4,630,000 4,630,000 Certificates of Obligation, Series 2004 4.00 - 6.00 2024 11,980,000 11,415,000 565,000 Certificates of Obligation, Series 2006 4.00 - 5.88 2026 12,230,000 2,955,000 9,275,000 Certificates of Obligation, Series 2007 4.00 - 6.01 2027 13,000,000 2,610,000 10,390,000 Certificates of Obligation, Series 2008 4.00 - 4.50 2028 29,500,000 4,875,000 24,625,000 Certificates of Obligation, Series 2013 2.00-3.38 2033 16,500,000 16,500,000 Total Certificates of Obligation 87,840,000 26,485,000 61,355,000

Total Revenue-Bonded Debt $ 137,266,900 $ 47,806,750 $ 89,460,150

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Long-term discretely presented component unit's activity debt at year end was comprised of the following debt issues:

Interest Maturity Original Net Description Rate (%) Date Issue Retirement Outstanding Certificates of Obligation: Certificates of Obligation, Series 2006 2.25-2.90 2022 $ 13,290,000 $ 590,000 $ 6,025,000 Certificates of Obligation, Series 2007 4.00 - 4.25 2019 6,505,000 715,000 4,925,000 Certificates of Obligation, Series 2012 2.00 - 4.00 2032 8,315,000 485,000 7,830,000 Total Certificates of Obligation 28,110,000 1,790,000 18,780,000

Texas State Infrastructure Bank Loan Bank Loan Series 2008 2016 1,000,000 126,987 412,822

Total Descretely Presented Component Unit Debt $ 29,110,000 $ 1,916,987 $ 19,192,822

The annual requirements to amortize bond and certificate debt issues outstanding at year end were as follows:

Year Total Ending Governmental Activities Business-Type Activities Primary Sept. 30 Principal Interest Principal Interest Government 2014 $ 6,380,200 $ 3,568,504 $ 6,269,800 $ 3,178,886 $ 19,397,390 2015 7,199,700 3,363,171 5,315,300 2,987,363 18,865,534 2016 7,324,050 3,136,499 5,420,950 2,812,030 18,693,529 2017 7,158,650 2,915,846 5,636,350 2,627,393 18,338,239 2018 6,712,250 2,714,142 5,667,750 2,433,095 17,527,237 2019-2023 32,825,000 10,040,403 29,200,000 8,996,441 81,061,844 2024-2028 22,915,000 4,355,585 26,890,000 3,149,858 57,310,443 2029-2033 12,850,000 922,649 5,060,000 429,659 19,262,308 Total $ 103,364,850 $ 31,016,799 $ 89,460,150 $ 26,614,725 $ 250,456,524

Year Descretely Presented Ending Component Units Sept. 30 Principal Interest Total 2014 $ 1,992,156 $ 583,934 $ 2,576,090 2015 2,052,534 522,825 2,575,359 2016 2,123,132 459,398 2,582,530 2017 2,030,000 393,392 2,423,392 2018 2,090,000 331,180 2,421,180 2019-2023 5,765,000 866,597 6,631,597 2024-2028 1,630,000 412,051 2,042,051 2029-2032 1,510,000 132,400 1,642,400 Total $ 19,192,822 $ 3,701,777 $ 22,894,599

General obligation bonds are direct obligations of the City for which its full faith and credit are pledged. Repayment of general obligation bonds is from taxes levied on all taxable property located within the City. The City is not obligated in any manner for special assessment debt.

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

The annual requirement to amortize capital leases outstanding at year end were as follows:

Year Ending Governmental Activities Sept. 30 Principal Interest Total 2014 $ 226,861 $ 123,906 $ 350,767 2015 248,268 113,021 361,289 2016 271,005 101,121 372,126 2017 295,147 88,143 383,290 2018 320,768 74,021 394,789 2019-2023 1,305,276 132,953 1,438,229 Total $ 2,667,325 $ 633,165 $ 3,300,490

The assets acquired through capital leases are as follows:

Governmental Activities Assets: Machinery and equipment $ 3,430,293 Less: Accumulated depreciation (406,219) Total $ 3,024,074

E. Interfund Transactions

Transfers between the primary government funds during the year were as follows:

Transfers In Transfers Out Governmental Funds: Individual major governmental funds: General $ 4,830,713 $ 3,132,000 Capital projects 2,290,504 521,240 Debt service 1,790,225 Other non-major governmental funds 296,454 1,478,200 Total Governmental Funds 9,207,896 5,131,440 Enterprise Funds: Individual major enterprise funds: Water and sewer 245,309 3,981,998 Sanitation - 220,554 Other nonmajor enterprise funds 280,395 930,383 Total Enterprise Funds 525,704 5,132,935 Internal Service Funds: Central services 530,775 Total Internal Service Funds 530,775

Total Transfers $ 10,264,375 $ 10,264,375

Transfers are used to move revenues from the fund with collection authorization to the debt service fund as debt service principal and interest payments become due. They are also utilized to move unrestricted general fund revenues to finance various programs that must be accounted for in other

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

funds in accordance with budgetary authorizations, including amounts provided as matching funds for various grant programs and governmental expenditures.

The composition of interfund balances as of year end was as follows:

Receivable Fund Payable Fund Amounts General Nonmajor governmental $ 449,980 Central services 290,026 Total $ 740,006

Amounts recorded as due to/from are considered to be temporary loans and will be repaid during the following year.

F. Fund Equity

As of September 30, 2013, $2,765,688 of the City's total fund balance is restricted by enabling legislation.

G. Restatement of Net Position and Fund Balance

In the fiscal year ending September 30, 2013, the City implemented GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. In accordance with this statement, beginning net position of the governmental activities has been reduced by $989,972 and beginning net position of the business-type activities and water and sewer fund balance has been reduced by $754,222 to remove previously capitalized bond issuance costs. Beginning net position of governmental and business-type activities has also been restated by $395,405 to reclass an internal fund balance related to the elimination of internal service fund provisions. In addition, beginning accumulated depreciation for capital assets was restated for the water and sewer fund, governmental activities, and business-type activities in the amounts of $103,146, $718,690, and $103,146 for capital assets under depreciated in prior years. The general fund balance has been restated by $1,199,899 as a result of sales tax revenue that was received in previous years but was determined to be sales tax revenue that belonged to another jurisdiction.

See below for a reconciliation of changes in beginning net position/fund balances:

General Water and Governmental Business-Type Fund Sewer Fund Activities Activities Prior year ending net position/fund balance as reported $ 22,163,038 $ 137,839,037 $ 116,952,656 $ 159,246,606 Reclass internal fund balance - 395,405 (395,405) Accumulated depreciation (103,146) (718,690) (103,146) Sales tax revenue (1,199,899) (1,199,899) Bond issuance costs - (754,222) (989,972) (754,222) New beginning net position/fund balance as reported $ 20,963,139 $ 136,981,669 $ 114,439,500 $ 157,993,833

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

V. OTHER INFORMATION

A. Risk Management

The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the City participates along with 2,617 other entities in the Texas Municipal League's Intergovernmental Risk Pools (the "Pool"). The Pool purchases commercial insurance at group rates for participants in the Pool. The City has no additional risk or responsibility to the Pool, outside of the payment of insurance premiums. The City has not significantly reduced insurance coverage or had settlements which exceeded coverage amounts for the past three years.

The City maintains a self-insurance program for medical benefits and workers' compensation. The risk management internal service fund pays claims and judgments, maintains loss reserves, and purchases insurance coverage as required. A third-party administrator pays group medical benefits and workers' compensation claims. Revenues are recognized from payroll deductions for employee dependent coverage, from City contributions for employee coverage and from interest earnings.

Group medical benefits have an annually negotiated specific and aggregate stop-loss policy. The fund provides the first dollar coverage of claims up to the casualty insurance policy's deductible amounts. This policy also contains aggregate excess loss coverage for claims in excess of approximately $3 million, less any amounts reimbursed on the individual stop-loss insurance. Medical claim liabilities have been recorded at $1,274,492 as of September 30, 2013.

The City maintains third-party coverage for workers' compensation claims that exceed $300,000 per individual claim. Workers' compensation claims and judgments at year end have been recorded at $260,125. Liabilities include an amount for claims that have been incurred but not reported (IBNR).

Changes in the balances of claim liabilities during the past year are as follows:

Reconciliation of Changes in the Aggregate Liabilities 2013 2012 for Claims and Judgments: Unpaid claims, beginning of year $ 1,435,511 $ 1,474,076 Plus: incurred claims (including IBNR) 8,924,334 7,517,985 Less: claim payments (8,825,228) (7,556,550) Unpaid Claims, End of Year $ 1,534,617 $ 1,435,511

B. Related Party Transactions

The City and BAWA entered into an agreement on November 26, 1996 to provide treated water to the City. BAWA is contractually obligated to provide treated water to the City with a maximum obligation of 10.71 million gallons per day per month through calendar year 2020. Should the consumption exceed the contract quantity by ten percent, a five percent surcharge shall be charged against that portion of the consumption that exceeds the contract quantity.

C. Contingent Liabilities

Amounts received or receivable from granting agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amounts of expenditures which may be disallowed by the grantor cannot be determined at this time, although the City expects such amounts, if any, to be immaterial. 78 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

The City is a defendant in several lawsuits. Although the outcome of these lawsuits is not presently determinable, it is the opinion of the City's management that resolution of these matters will not have a material adverse effect of the financial condition of the City.

Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. No claim liabilities are reported at year end.

The Tax Reform Act of 1986 instituted certain arbitrage legislation consisting of complex regulations with respect to issuance of tax-exempt bonds after August 31, 1986. Arbitrage regulations deal with the investment of tax-exempt bond proceeds at an interest yield greater than the interest yield paid to bondholders. Generally, all interest paid to bondholders can be retroactively rendered taxable if applicable rebates ate not reported and paid to the Internal Revenue Service at least every five years for applicable bond issues. Accordingly, there is the risk that if such calculations are not performed or are not performed correctly, a substantial liability to the City could result. The City periodically engages an arbitrage consultant to perform the calculations in accordance with the Internal Revenue Service's rules and regulations.

D. Pension Plans

Texas Municipal Retirement System

Plan Description

The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan (the "plan") in the state-wide Texas Municipal Retirement System (TMRS), one of 837 administered by TMRS, an agent multiple-employer public employee retirement system. The Plan provisions that have been adopted by the City are within the options available in the governing state statutes of TMRS.

TMRS issues a publicly available comprehensive annual financial report that includes financial statements and Required Supplementary Information for the Plan. The report also provides detailed explanations of the contributions, benefits, and actuarial methods and assumptions used by the TMRS. This report may be obtained by writing to TMRS, P.O. Box 149153, Austin, TX 78714-9153 or by calling 800-924-8677. In addition, the report is available on TMRS 's website at www.TMRS. corn. The Plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City were as follows:

2013 2012 Employee deposit rate 7.00% 7.00% Matching ratio (City to employee) 2 to 1 2 to 1 Years required for vesting 5 5 Service requirement eligibility (expressed as age/yrs of service) 60/5, 0/20 60/5, 0/20 Updated service credit 100% Repeating, 100% Repeating, Transfers Transfers Annuity increase (to retirees) 70% of CPI 70% of CPI Repeating Repeating

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Benefits

Upon retirement, benefits depend upon the sum of the employee's contributions to the Plan, with interest, and the City-financed monetary credits, with interest. City-financed monetary credits are composed of three sources: prior service credits, current service credits, and updated service credits. At the date the Plan began, the City granted monetary credits for service rendered before the Plan began of a theoretical amount at least equal to two times what would have been contributed by the employee, with interest, prior to establishment of the Plan. Monetary credits for service since the Plan began are a percentage (100 percent, 150 percent, or 200 percent) of the employee ' s accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit. This is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the Plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and City matching percent had always been in existence, and if the employee's salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions, with interest, and the employer-fmanced monetary credits, with interest, were used to purchase an annuity.

Contributions

Under the state law governing TMRS, the contribution rate for each City is determined annually by the actuary, using the projected unit credit actuarial cost method. This rate consists of the normal cost contribution and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the portion of an active member's projected benefit allocated annually and the prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the remainder of the plan's 30-year amortization period. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits such as updated service credits and annuity increases.

The City contributes to the Plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect (i.e., December 31, 2011 valuation is effective for rates beginning January 2013).

The annual pension cost and the net pension obligation (asset) are as follows:

Annual required contribution (ARC) $ 7,405,503 Interest on net pension obligation (NPO) 383,933 Adjustment to the ARC (337,316) Annual pension cost (APC) 7,452,120 Contributions made (7,170,203) Increase in NPO 281,917 NPO - beginning of year 5,484,751 NPO - end of year $ 5,766,668

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Three-year trend information for the annual pension cost (APC) is as follows:

Annual Actual Percentage Pension Contribution of ARC Fiscal Year Cost (APC) Made Contributed NPO 2011 $ 8,322,054 $ 6,682,443 80.30% $ 4,925,541 2012 $ 7,634,974 $ 7,075,764 92.68% $ 5,484,751 2013 $ 7,452,120 $ 7,170,203 96.22% $ 5,766,668

The required contribution rates for fiscal year 2013 were determined as part of the December 31, 2010 and 2011 actuarial valuations. Additional information as of the latest actuarial valuation, December 31, 2012, also follows:

2013 2012 2011 Actuarial valuation date 12/31/2012 12/31/2011 12/31/2010 Actuarial cost method Projected Unit Credit Projected Unit Credit Projected Unit Credit Amortization method Level % of Payroll Level % of Payroll Level % of Payroll GASB 25 equivalent single 25.1 Years - Closed 26.1 Years - Closed 27.1 Years - Closed amortization period period period period Amortization period for new gains/losses 30 years 30 years 30 years Asset valuation method 10-year smoothed 10-year smoothed 10-year smoothed market market market Investment rate of return 7.0% 7.0% 7.0% Projected salary increases Varies by age and Varies by age and Varies by age and service service service Includes inflation at 3.00% 3.00% 3.00% Cost of living adjustments 2.10% 2.10% 2.10%

Funded Status and Funding Progress

The funded status as of December 31, 2012, the most recent valuation date, is as follows:

2013 Actuarial valuation date 12/31/2012 Actuarial value of assets $ 184,197,313 Actuarial accrued liability $ 229,104,179 Percentage funded 80.4% Unfunded actuarial accrued liability (UAAL) $ 44,906,866 Annual covered payroll $ 39,742,936 UAAL as a percentage of covered payroll 113.0%

Actuarial valuations involve estimates of the values of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future.

81 CITY OF BAYTOYWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-teen perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The schedule of funding progress, presented as following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of Plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits.

E. Other Post Employee Benefits

TMRS - Supplemental Death Benefits Fund

Plan Description

The City also participates in the cost-sharing multiple-employer defimed benefit group-term life insurance plan operated by the 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.

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), and retired employees are insured for $7,500. This coverage is an "other post employment benefit," or OPEB. The obligations of this plan are payable only from the SDBF and are not an obligation of, or a claim against, the pension trust fund. For the year ended September 30, 2013, the City offered the supplemental death benefit to both active and retired employees.

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 for the 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 fiscal years ended 2013, 2012, and 2011 were $15,897, $15,751, and $15,034, respectively. The City's contribution rates for the past three years are shown below:

2013 2012 2011 Annual req. contrib. (rate) 0.04% 0.04% 0.04% Actual contribution made 0.04% 0.04% 0.04% Percentage of ARC contrib. 100.00% 100.00% 100.00%

Post Employment Healthcare Plan

Plan Description

The City administers a single-employer defined benefit other post employment benefits OPEB plan, known as the City of Baytown Retiree Healthcare Plan (the "Plan"). The Plan offers medical benefits

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CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

for eligible retirees and their dependents. The premiums are based on a combination of years of service and hire date, and the coverage levels for retirees are the same as coverage provided to active employees. Upon the death of the retiree, spouses are eligible to receive the same coverage at the same rate. Like the retiree, the coverage is supplemental once the spouse is eligible for Medicare. The City requires all covered retirees/spouses to apply for Medicare when eligible in order to continue coverage under the City's plan.

Employees hired after January 1, 2010 are not eligible for benefits under this plan.

Funding Policy

The City has elected to subsidize premiums for the Plan and funding is provided on a pay-as-you-go basis.

Annual OPEB Cost

The City's annual OPEB cost (expense) is calculated based on the annual required contribution of the employer ARC, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years.

The annual OPEB cost and the net OPEB obligation (asset) are as follows:

Annual required contribution (ARC) $ 5,397,422 Interest on net OPEB obligation (NPO) 944,094 Adjustment to the ARC (1,259,848) Annual OPEB cost (AOC) 5,081,668 Contributions made (1,522,911) Increase in net OPEB obligation 3,558,757 Net OPEB obligation - beginning of year 20,979,873 Net OPEB obligation - end of year $ 24,538,630

The City's annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for 2013 and the two preceding years are as follows:

Annual Actual Percentage OPEB Contribution of AOC Net OPEB Fiscal Year Cost (AOC) Made Contributed Obligation 2011 $ 6,387,536 $ 1,671,792 26.17% $ 16,647,072 2012 $ 6,362,501 $ 2,029,700 31.90% $ 20,979,873 2013 $ 5,081,668 $ 1,522,911 29.97% $ 24,538,630

Funded Status and Funding Progress

As of December 31, 2012, the most recent actuarial valuation date, the plan was 0.00 percent funded. The actuarial accrued liability for benefits was $58,072,450, and the actuarial value of assets was $0, resulting in an unfunded actuarial accrued liability (UAAL) of $58,072,450. The annual covered payroll is $39,742,936 and the UAAL as a percentage of covered payroll is 146.1 percent.

83 CITY OF BAYTOWN, TEXAS NOTES TO FINANCIAL STATEMENTS (Continued) For the Year Ended September 30, 2013

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of Plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive Plan (the Plan as understood by the employer and the Plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and Plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

The following is a summary of the actuarial assumptions:

Actuarial cost method Projected unit credit Amortization method Level dollar contributions Remaining amortization period 30 years - Open period Asset valuation method Market value Investment rate of return 4.5% Healthcare cost trend rate (initial/ultimate) 9.0%/4.5% Inflation rate 3.0%

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APPENDIX C

FORMS OF BOND COUNSEL’S OPINIONS

Texas Bracewell & Giuliani LLP New York 711 Louisiana Street Washington, DC Suite 2300 Connecticut Houston, Texas Seattle 77002-2770 Dubai London 713.223.2300 Office 713.221.1212 Fax

bgllp.com

[CLOSING DATE]

WE HAVE ACTED as bond counsel for the City of Baytown, Texas (the “City”), in connection with an issue of bonds described as follows:

CITY OF BAYTOWN, TEXAS, GENERAL OBLIGATION AND REFUNDING BONDS, SERIES 2014, dated April 1, 2014, in the principal amount of $28,520,000 (the “Bonds”).

The Bonds mature, bear interest, and may be transferred and exchanged as set out in the Bonds and in the ordinance adopted by the City Council of the City authorizing their issuance (the “Bond Ordinance”) and a pricing certificate executed pursuant to the Bond Ordinance (together, the “Ordinance”).

WE HAVE ACTED as bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, under which the City is acting as a home-rule city of the State of Texas, and with respect to the exclusion of interest on the Bonds from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of certified proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Bonds. Our role in connection with the City’s Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein.

IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Bonds, and the obligations being refunded, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the City; an escrow agreement (the “Escrow Agreement”) between the City and The Bank of New York Mellon Trust Company, N.A., as escrow agent (the “Escrow Agent”); a report (the “Report”) of Grant Thornton LLP, Certified Public Accountants (the “Verification Agent”), verifying the sufficiency of the deposits made with the Escrow Agent for defeasance of the obligations being refunded (the “Refunded Obligations”); customary certificates of officers, agents and representatives of the City, and other public officials; and other certified showings relating to the authorization and issuance of the Bonds. We have also examined such applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the “Service”) as we have deemed relevant. We have also examined executed Bond No. ICI-1 of this issue.

#4510921.1

BASED ON SUCH EXAMINATION, IT IS OUR OPINION that:

(1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently effective and therefore the Bonds constitute valid and legally binding obligations of the City;

(2) Firm banking and financial arrangements have been made for the discharge and final payment of the obligations being refunded pursuant to the Ordinance, and therefore such bonds are deemed to be fully paid and no longer outstanding except for the purpose of being paid from the funds provided therefor in the Ordinance; and

(3) Taxable property in the City is subject to the levy of ad valorem taxes, within the limits prescribed by law, to pay the Bonds and the interest thereon.

THE RIGHTS OF THE OWNERS of the Bonds are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion.

IT IS OUR FURTHER OPINION that:

(4) Interest on the Bonds is excludable from gross income for federal income tax purposes under existing law.

(5) The Bonds are not “private activity bonds” within the meaning of the Code, and as such, interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Bonds will be included in the “adjusted current earnings” of a corporation (other than an S corporation, regulated investment company, REIT, or REMIC) for purposes of computing its alternative minimum tax liability.

In providing such opinions, we have relied on representations of the City, the City’s financial advisor, and the Underwriter (as defined in the Ordinance), with respect to matters solely within the knowledge of the City, the City’s financial advisor, and the Underwriter, respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Bonds for federal income tax purposes. We have further relied on the Report of the Verification Agent, regarding the mathematical accuracy of certain computations. If such representations or the Report are determined to be inaccurate or incomplete or the City fails to comply with the foregoing provisions of the Ordinance, interest on the Bonds could become includable in gross income from the date of original delivery, regardless of the date on which the event causing such inclusion occurs.

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#4510921.1

Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership, or disposition of the Bonds.

Owners of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits tax” on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Bonds).

The opinions set forth above 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 these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes.

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#4510921.1 Texas Bracewell & Giuliani LLP New York 711 Louisiana Street Washington, DC Suite 2300 Connecticut Houston, Texas Seattle 77002-2770 Dubai London 713.223.2300 Office 713.221.1212 Fax

bgllp.com

[CLOSING DATE]

WE HAVE ACTED as bond counsel for the City of Baytown, Texas (the “City”), in connection with an issue of certificates of obligation described as follows:

CITY OF BAYTOWN, TEXAS, COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2014, dated April 1, 2014, in the principal amount of $11,715,000 (the “Certificates”).

The Certificates mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance adopted by the City Council of the City authorizing their issuance (the “Certificate Ordinance”) and a pricing certificate executed pursuant to the Certificate Ordinance (together, the “Ordinance”).

WE HAVE ACTED as bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas, and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of certified proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City’s Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein.

IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates which contains certified copies of certain proceedings of the City, customary certificates of officers, agents and representatives of the City and other public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined such applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the “Service”) as we have deemed relevant. We have also examined executed Certificate No. I-1 of this issue.

BASED ON SUCH EXAMINATION, IT IS OUR OPINION that the transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and that therefore the Certificates constitute valid and legally binding obligations of the City, and that

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taxable property within the City is subject to the levy of ad valorem taxes, within the limits prescribed by law, to pay the Certificates and the interest thereon.

IT IS OUR FURTHER OPINION that the revenues to be derived from the operation of the City’s waterworks and sanitary sewer system, after the payment of all operation and maintenance expenses thereof (the “Net Revenues”), are also pledged to the payment of the principal of and interest on the Certificates; provided, however, that such pledge of the Net Revenues is limited to an amount not to exceed $1,000 and is junior and subordinate in all respects to the pledge of the Net Revenues to the payment of all outstanding obligations of the City and any obligation of the City, whether authorized heretofore or hereafter, which the City designates as having a pledge senior to the pledge of the Net Revenues to the payment of the Certificates.

THE CITY has reserved the right to issue, for any lawful purpose at any time in one or more installments, bonds, certificates of obligation and other obligations of any kind payable in whole or in part from the Net Revenues, secured by a pledge of the Net Revenues that may be prior and superior in right to, on a parity with, or junior and subordinate to the pledge of the Net Revenues securing the Certificates.

THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion.

IT IS OUR FURTHER OPINION that:

(1) Interest on the Certificates is excludable from gross income for federal income tax purposes under existing law.

(2) The Certificates are not “private activity bonds” within the meaning of the Code, and interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the “adjusted current earnings” of a corporation (other than any S corporation, regulated investment company, REIT or REMIC) for purposes of computing its alternative minimum tax liability.

In providing such opinions, we have relied on representations of the City, the City’s financial advisor and the Underwriter (as defined in the Ordinance) of the Certificates, with respect to matters solely within the knowledge of the City, the City’s financial advisor and the Underwriter (as defined in the Ordinance), respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the City fails to comply with the foregoing provisions of the Ordinance, interest on the Certificates could become includable in gross income from the date of original delivery, regardless of the date on which the event causing such inclusion occurs.

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Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership, or disposition of the Certificates.

Owners of the Certificates should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits tax” on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Certificates).

The opinions set forth above 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 these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes.

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