Metropolitan Transit Authority of Harris County, Texas

OFFICIAL STATEMENT DATED APRIL 9, 2014 NEW ISSUES — BOOK-ENTRY-ONLY Ratings: See “OTHER INFORMATION— RATINGS” herein

In the opinion of Co-Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under “TAX MATTERS” herein, and is not includable in the federal alternative minimum taxable income of individuals. See “TAX MATTERS” for a discussion of the opinion of Co-Bond Counsel, including the alternative minimum tax consequences for corporations.

METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS

$130,605,000 SALES AND USE TAX CONTRACTUAL OBLIGATIONS SERIES 2014

Interest accrues from the date of delivery CUSIP Prefix: 41422E Due: November 1, as shown on the inside cover The Sales and Use Tax Contractual Obligations, Series 2014 (the “Obligations”) are being issued by the Metropolitan Transit Authority of Harris County, Texas (the “Authority” or “METRO”), for the purposes described herein. See “PLAN OF FINANCE.” Interest on the Obligations will accrue from the date of delivery at the rates specified on the inside cover page, will be payable on each May 1 and November 1, commencing November 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 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 thereof. See “BOOK-ENTRY-ONLY SYSTEM” herein. The initial Paying Agent/Registrar and Trustee is Wells Fargo Bank, N.A., Dallas, Texas. See “THE OBLIGATIONS – TRUSTEE/PAYING AGENT/REGISTRAR.” The Obligations are secured, equally and ratably with outstanding debt obligations and any future parity obligations (collectively, the “Senior Lien Obligations”), by a grant to Wells Fargo Bank, N.A., Dallas, Texas, as trustee (the “Trustee”), of a senior lien on and pledge of 75% of the sales and use tax revenues collected and received by the Authority, plus any investment income earned on moneys in certain funds to which such revenue is deposited. See “THE OBLIGATIONS – SECURITY AND SOURCE OF PAYMENT.” A sales and use tax is levied by the Authority at the rate of 1% on all taxable transaction within the Authority’s boundaries. See “REVENUES AND INVESTMENTS.” The Obligations are not Reserve Fund Participants (as defined in this Official Statement) and therefore are not secured by a debt service reserve fund, which secures other Senior Lien Obligations. See “THE OBLIGATIONS – DEBT SERVICE RESERVE FUNDS” and “DEBT AND OTHER OBLIGATIONS – TABLE 6 – OUTSTANDING DEBT AS OF JANUARY 31, 2014.” The Obligations are being issued for the purposes of (a) acquiring, and/or reimbursing the acquisition of, personal property, including, but not limited to, clean diesel transit and commuter buses and light rail vehicles and (b) paying the costs of issuance of the Obligations. See “PLAN OF FINANCE.”

SEE INSIDE COVER PAGE FOR MATURITY SCHEDULES AND PRICES

The Obligations are subject to optional redemption prior to maturity as set forth herein. See “THE OBLIGATIONS – OPTIONAL REDEMPTION.” The Obligations are offered for sale when, as and if issued by the Authority and accepted by the Underwriters listed below, subject, prior to sale, to the withdrawal or modification of the offer without notice, and, prior to delivery, to the approving opinions of the Attorney General of Texas and the opinions of Andrews Kurth LLP, Houston, Texas, and Bates & Coleman, P.C., Houston, Texas, Co-Bond Counsel. See APPENDIX C —“FORM OF CO-BOND COUNSEL’S OPINION.” Certain additional matters will be passed upon for the Authority by its Special Disclosure Counsel, Escamilla & Poneck, LLP, Houston, Texas. Certain matters will be passed upon for the Underwriters by Greenberg Traurig, LLP, Houston, Texas, and West & Associates, L.L.P., Houston, Texas, as Co-Counsel to the Underwriters. It is expected that the Obligations will be available for delivery through DTC on or about April 22, 2014.

WELLS FARGO SECURITIES CABRERA CAPITAL MARKETS, LLC MISCHLER FINANCIAL GROUP SIEBERT BRANDFORD SHANK & CO., L.L.C. CITIGROUP

MATURITY SCHEDULES

$130,605,000 Sales and Use Tax Contractual Obligations, Series 2014

Maturity Principal Interest Offering CUSIP (November 1)(1) Amount Rate Yield(2) No.(3) 2015 $5,995,000 5.000% 0.200% 41422EEE9 2016 6,300,000 5.000 0.510 41422EEF6 2017 6,625,000 5.000 0.880 41422EEG4 2018 6,965,000 5.000 1.210 41422EEH2 2019 7,320,000 5.000 1.580 41422EEJ8 2020 7,700,000 5.000 1.900 41422EEK5 2021 8,090,000 5.000 2.150 41422EEL3 2022 8,505,000 5.000 2.420 41422EEM1 2023 8,945,000 5.000 2.620 41422EEN9 2024 9,400,000 5.000 2.730 41422EEP4 2025 9,885,000 5.000 2.860 41422EEQ2 2026 10,390,000 5.000 2.970 41422EER0 2027 10,925,000 5.000 3.050 41422EES8 2028 11,485,000 5.000 3.100 41422EET6 2029 12,075,000 5.000 3.190 41422EEU3

(Interest accrues from date of delivery)

(1) The Authority reserves the right, at its option, to redeem Obligations having stated maturities on and after November 1, 2025, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on November 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. See “THE OBLIGATIONS — OPTIONAL REDEMPTION.” Additionally, the Obligations may be subject to mandatory sinking fund redemption prior to maturity. (2) The initial offering yield is calculated to maturity or the first optional par redemption date, whichever produces a lower yield. (3) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Global Services managed by Standard and Poor’s Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the Authority, the Co- Financial Advisors or the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein.

The Obligations have not been registered under the United States Securities Act of 1933, as amended, in reliance upon exemptions contained in such Act. Any registration or qualification of the Obligations in accordance with applicable provisions of securities laws of the states in which the Obligations may have been registered or qualified and the exemption from registration or qualification in other states cannot be regarded as a recommendation thereof.

In making an investment decision, investors must rely on their own examination of the terms of this offering, including the merits and risks involved. The Obligations have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this Official Statement. Any representation to the contrary may be a criminal offense.

This Official Statement includes descriptions and summaries of certain events, matters, laws and documents. Such descriptions and summaries do not purport to be complete, and all such descriptions, summaries and references thereto are qualified in their entirety by reference to this Official Statement in its entirety and to each such law or document, copies of which may be obtained from the Authority or from the Co-Financial Advisors to the Authority. Any statements made in this Official Statement or the appendices hereto involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of such opinions or estimates will be realized.

References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader’s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this final official statement for purposes of, and as that term is defined in, the Rule.

This Official Statement is delivered in connection with the sale of securities referred to herein and may not be reproduced or used, in whole or in part, for any other purposes.

The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Obligations in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. No dealer, salesman or other person has been authorized by the Authority to give any information or to make any representation other than those contained herein, and, if given or made, such other information or representation must not be relied upon as having been authorized by the Authority or any other person. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create the implication that there has been no change in the matters described herein since the date hereof. The cover page contains certain information for general reference only. Investors must read the entire Official Statement to obtain information essential to make an investment decision. See “INVESTMENT CONSIDERATIONS” for a discussion of factors that should be considered, in addition to other matters set forth herein, in evaluating the investment quality of the Obligations. 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. CERTAIN STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS OFFICIAL STATEMENT (INCLUDING, WITHOUT LIMITATION, ALL APPENDICES HERETO) CONSTITUTE “FORWARD-LOOKING STATEMENTS.” SUCH STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE TERMINOLOGY USED, SUCH AS “PLAN,” “EXPECT,” “ESTIMATE,” “BUDGET,” “FORECAST” OR SIMILAR WORDS. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE AUTHORITY DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD- LOOKING STATEMENT IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED CHANGE. INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON SUCH FORWARD- LOOKING STATEMENTS. PLEASE REVIEW THE FACTORS DESCRIBED BELOW UNDER “INVESTMENT CONSIDERATIONS” AND ELSEWHERE HEREIN WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER FROM EXPECTATIONS.

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TABLE OF CONTENTS The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement.

OFFICIAL STATEMENT SUMMARY ...... vi DEBT AND OTHER OBLIGATIONS ...... 17 SALES TAX-SUPPORTED DEBT ...... 17 INTRODUCTION ...... 1 MASTER LEASE PURCHASE PROGRAM ...... 17 OFFERING ...... 1 OUTSTANDING DEBT ...... 18 DESCRIPTION OF THE AUTHORITY...... 1 TABLE 6 —OUTSTANDING DEBT AS OF APRIL 22, PLAN OF FINANCE ...... 2 2014 ...... 18 ANNUAL DEBT SERVICE REQUIREMENTS ...... 19 ESTIMATED SOURCES AND USES OF FUNDS ...... 2 TABLE 7 –ANNUAL DEBT SERVICE REQUIREMENTS THE OBLIGATIONS ...... 3 SECURED BY PLEDGED REVENUES ...... 19 DESCRIPTION ...... 3 MAXIMUM AND AVERAGE ANNUAL DEBT SERVICE AUTHORITY FOR ISSUANCE ...... 3 REQUIREMENTS ...... 20 OPTIONAL REDEMPTION ...... 3 DEBT SERVICE COVERAGE ...... 20 NOTICE OF REDEMPTION ...... 3 GENERAL MOBILITY CONTRACTS ...... 20 SECURITY AND SOURCE OF PAYMENT ...... 3 GENERAL MOBILITY ESCROW ...... 20 OUTSTANDING AND ADDITIONAL PARITY DEBT POLICY ...... 20 OBLIGATIONS ...... 4 SWAP POLICY ...... 20 DEBT SERVICE RESERVE FUNDS ...... 5 LEASE/LEASEBACK TRANSACTIONS ...... 20 FLOW OF FUNDS ...... 5 RETIREMENT PLANS ...... 20 INVESTMENT OF FUNDS ...... 6 NEW PENSION ACCOUNTING RULES ...... 20 DEFEASANCE ...... 6 RISK FACTORS RELATING TO PENSION SYSTEMS ...... 204 TRUSTEE/PAYING AGENT/REGISTRAR ...... 6 OTHER POST-EMPLOYMENT BENEFITS ...... 24 AMENDMENTS TO RESOLUTION ...... 7 CLAIMS AND LITIGATION AFFECTING THE AUTHORITY ...... 26 BOOK-ENTRY-ONLY SYSTEM ...... 7 CAPITAL PROGRAM ...... 27 EFFECT OF TERMINATION OF BOOK-ENTRY-ONLY SYSTEM ...... 9 DESCRIPTION ...... 27 THE AUTHORITY ...... 9 INVESTMENT CONSIDERATIONS ...... 28 GENERAL ...... 9 FORWARD-LOOKING STATEMENTS ...... 28 JURISDICTION ...... 9 FUNDING OF CAPITAL IMPROVEMENT PROGRAM BOARD OF DIRECTORS ...... 9 AND OPERATIONS ...... 28 MANAGEMENT ...... 9 RISKS ASSOCIATED WITH FEDERAL FUNDING ...... 29 TRANSIT SYSTEM ...... 9 RISKS RELATING TO BUILD AMERICA BONDS ...... 29 RIDERSHIP INFORMATION ...... 10 LOSS OF TAX EXEMPTION ...... 29 TABLE 1 – SELECTED RIDERSHIP STATISTICS FOR GOVERNMENT DEBT CEILING ...... 29 THE LAST FIVE FISCAL YEARS ...... 10 REGULATIONS AND RESTRICTIONS AFFECTING THE FLEET REPLACEMENT POLICIES ...... 10 AUTHORITY ...... 29 THE AUTHORITY HAS LIMITED ABILITY TO REVENUES AND INVESTMENTS ...... 10 INCREASE OR MAINTAIN REVENUE ...... 29 TABLE 2 - COMBINED SOURCES OF REVENUE ...... 11 ADDITIONAL OBLIGATIONS MAY BE INCURRED ...... 30 SALES AND USE TAX AUTHORITY ...... 11 THE AUTHORITY’S UNFUNDED FUTURE EXPENSES OPERATING REVENUE ...... 13 FOR PRIOR EMPLOYMENT MAY GROW TABLE 3 – CURRENT FARES FISCAL YEAR 2014 ...... 13 SUBSTANTIALLY AND ADVERSELY AFFECT ITS GRANTS ...... 13 FINANCIAL CONDITION ...... 30 INVESTMENTS ...... 14 PAYMENT OF SHORT-TERM PARITY OBLIGATIONS TABLE 4 – CASH AND INVESTMENTS (AS OF MAY DEPEND ON MARKET ACCESS AND POSSIBLE DECEMBER 31, 2013) ...... 14 MARKET DISRUPTIONS ...... 30 MAINTENANCE COSTS ...... 31 EXPENDITURES ...... 14 OPERATING REVENUES; NO PROPERTY TAXES ...... 31 BUDGET ...... 14 THE STATE COMPTROLLER MAY OFFSET CURRENT FISCAL YEAR 2014 BUDGET ...... 16 DISTRIBUTIONS FOR OVERPAYMENTS OR REMIT FINANCIAL HEDGES FOR FUEL ...... 16 SALES AND USE TAX REVENUE LESS TABLE 5 — OPERATING AND CAPITAL FREQUENTLY ...... 31 EXPENDITURES AND DEPRECIATION...... 17 ADVERSE LEGISLATION COULD BE ENACTED ...... 31

RIGHTS OF OWNERS ARE LIMITED ...... 32 TAX MATTERS ...... 32 TAX EXEMPTION ...... 32 PROPOSED TAX LEGISLATION ...... 323 TAX ACCOUNTING TREATMENT OF PREMIUM ON THE OBLIGATIONS ...... 33 CONTINUING DISCLOSURE OF INFORMATION ...... 33 ANNUAL REPORTS ...... 33 CERTAIN EVENT NOTICES...... 34 LIMITATIONS AND AMENDMENTS ...... 34 COMPLIANCE WITH PRIOR UNDERTAKINGS ...... 34 OTHER INFORMATION ...... 35 RATINGS ...... 35 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS ...... 35 LEGAL MATTERS ...... 35 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION ...... 35 CO-FINANCIAL ADVISORS...... 36 UNDERWRITING ...... 36 INDEPENDENT AUDITORS ...... 37 GENERAL INFORMATION...... 37

APPENDICES Selected Provisions of the Resolution ...... A-1 Audited Financial Statements and Unaudited Management’s Discussion and Analysis and Supplemental Information ...... B-1 Form of Co-Bond Counsel’s Opinion ...... C-1 Selected Information Regarding Harris County, Texas ...... D-1

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 AUTHORITY ...... The Metropolitan Transit Authority of Harris County, Texas (the “Authority” or “METRO”) is a metropolitan rapid transit authority created pursuant to legislation now codified as Chapter 451, Texas Transportation Code, as amended, and was confirmed at a confirmation and tax election held on August 12, 1978. The Authority provides transit services to, and collects sales and use taxes on taxable transactions in, a 1,286-square mile area with a population of approximately 3.5 million people. The Authority also serves other areas by contract. See “THE AUTHORITY.” See also the inside back cover for a map depicting the Authority’s service area and sales tax jurisdiction.

THE OBLIGATIONS ...... The Sales and Use Tax Contractual Obligations, Series 2014 (the “Obligations”) are being issued by the Authority in the aggregate principal amount shown on the inside cover page hereof.

USE OF PROCEEDS ...... The Obligations are being issued pursuant to a resolution adopted by the Board of Directors of the Authority (the “Board”) for the purposes of (a) acquiring, and/or reimbursing the acquisition of, personal property, including, but not limited to, clean diesel transit and commuter buses, and light rail vehicles, and (b) paying the costs of issuance of the Obligations. See “PLAN OF FINANCE.”

AUTHORITY FOR ISSUANCE ...... The Obligations are authorized by Chapters 1201 and 1371, Texas Government Code, as amended, Chapter 271, Subchapter A, Texas Local Government Code, as amended, a resolution adopted by the Board authorizing the issuance of the Obligations (the “Resolution”) and an Officer’s Pricing Certificate authorized by the Resolution (the “Officer’s Pricing Certificate”). See “THE OBLIGATIONS – AUTHORITY FOR ISSUANCE.”

PAYMENT OF INTEREST ...... Interest on the Obligations accrues from the date of delivery and is payable November 1, 2014, and each May 1 and November 1 thereafter until maturity or prior redemption.

SECURITY FOR THE OBLIGATIONS ...... The Obligations are secured, equally and ratably with outstanding and any future parity obligations (collectively, the “Senior Lien Obligations”), by a senior lien on and pledge of 75% of the sales and use tax revenues collected and received by the Authority, plus any investment income earned on moneys in certain funds to which such revenue is deposited (together, the “Pledged Revenues”). See “THE OBLIGATIONS – SECURITY AND SOURCE OF PAYMENT.” A sales and use tax is levied by the Authority at the rate of 1% on all taxable transactions within the Authority’s boundaries. See “REVENUES AND INVESTMENTS.” The Obligations are not Reserve Fund Participants and therefore are not secured by a debt service reserve fund, which secures other Senior Lien Obligations.

ADDITIONAL PARITY OBLIGATIONS ...... Subject to certain requirements, the Authority may issue additional parity Senior Lien Obligations, as well as obligations secured by a junior lien on and pledge of the Pledged Revenues. See “THE OBLIGATIONS – OUTSTANDING AND ADDITIONAL PARITY OBLIGATIONS.” The Authority has authorized the issuance of up to $275 million of commercial paper notes, which are secured on a parity with the Senior Lien Obligations, including the Obligations, but are not secured by a debt service reserve fund. See “PLAN OF FINANCE” and “DEBT AND OTHER OBLIGATIONS.”

REDEMPTION ...... The Authority reserves the right, at its option, to redeem Obligations having stated maturities on and after November 1, 2025, in whole or in part, in authorized denominations on November 1, 2024, or any date thereafter, at 100% of the principal amount, plus accrued interest to the date of redemption. See “THE OBLIGATIONS – OPTIONAL REDEMPTION.”

Additionally, the Obligations may be subject to mandatory sinking fund redemption prior to maturity.

TAX EXEMPTION ...... In the opinions of Co-Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under the caption “TAX MATTERS” herein, and is not includable in the federal alternative minimum taxable income of individuals. See “TAX MATTERS” for a discussion of the opinions of Co-Bond Counsel, including the alternative minimum tax consequences for corporations.

RATINGS ...... The following ratings have been assigned to the Obligations. See “OTHER INFORMATION – RATINGS.”

Moody’s S&P Aa2 AA+

PAYMENT RECORD ...... The Authority has never defaulted in the payment of its obligations.

RISK FACTORS ...... An investment in the Obligations involves certain risks. See “INVESTMENT CONSIDERATIONS.”

ADDITIONAL INFORMATION ...... For additional information regarding the Authority, please contact:

Debbie Sechler Jim Haddon Chief Financial Officer Managing Director Metropolitan Transit Authority of Harris County, Texas or Public Financial Management, Inc. 1900 Main Street 40 Wall Street, 49th Floor Houston, Texas 77002 New York, New York 10005 (713) 739-4930 (212) 809-4212

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METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS

BOARD MEMBERS

Board Member Position Appointing Authority

Mr. Gilbert Andrew Garcia Chairman City of Houston Mr. Allen Dale Watson Vice Chairman City of Houston Ms. Lisa Gonzales Castañeda Secretary Harris County Mr. Burt Ballanfant Board Member Multi-Cities Honorable Dwight Jefferson Board Member City of Houston Ms. Diann L. Lewter Board Member City of Houston Mr. Jim Robinson Board Member Harris County Ms. Cindy Siegel Board Member Multi-Cities Mr. Christof Spieler Board Member City of Houston

OFFICERS

Officer Position

Mr. Thomas C. Lambert President & Chief Executive Officer Ms. Debbie Sechler Chief Financial Officer Ms. Alva Treviño General Counsel Mr. Roberto Treviño Vice President of Engineering and Capital Projects

CONSULTANTS AND ADVISORS

Co-Bond Counsel

Andrews Kurth LLP Houston, Texas Bates & Coleman, P.C. Houston, Texas

Special Disclosure Counsel

Escamilla & Poneck, LLP Houston, Texas

Co-Financial Advisors

Public Financial Management, Inc. Estrada Hinojosa & Company, Inc. Rice Financial Products Company New York, New York Dallas and Houston, Texas Houston, Texas

Trustee and Paying Agent/Registrar Wells Fargo Bank, N.A. Dallas, Texas

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OFFICIAL STATEMENT

Relating to METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS

$130,605,000 SALES AND USE TAX CONTRACTUAL OBLIGATIONS SERIES 2014

INTRODUCTION

OFFERING

This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance by the Metropolitan Transit Authority of Harris County, Texas (the “Authority” or “METRO”), of its Sales and Use Tax Contractual Obligations, Series 2014 (the “Obligations”) in the aggregate principal amount shown above.

Capitalized terms used in this Official Statement, except as otherwise indicated herein, have the meanings assigned to such terms in the resolution authorizing the issuance of the Obligations adopted by the Board of Directors of the Authority (the “Board”) on March 27, 2014 (the “Resolution”), excerpts from which are attached as APPENDIX A. The Resolution recognizes and confirms the prior appointment of Wells Fargo Bank, N.A., as trustee (together with any successor, the “Trustee”) for the sole purpose of holding certain funds for the payment of the Obligations authorized by the Resolution, as described herein.

There follows in this Official Statement descriptions of the Obligations and certain information regarding the Authority and its finances. All descriptions of laws and documents contained herein are only summaries and are qualified in their entirety by reference to each such law and document. Copies of such documents may be obtained from the Authority’s Co-Financial Advisors, Public Financial Management, Inc., 40 Wall Street, 49th Floor, New York, New York 10005; Estrada Hinojosa & Company, Inc., 1717 Main Street, 47th Floor, Dallas, Texas 75201; and Rice Financial Products Company, 333 Clay Street, Suite 3010, Houston, Texas 77002.

DESCRIPTION OF THE AUTHORITY

The Authority is a metropolitan rapid transit authority created pursuant to legislation now codified as Chapter 451, Texas Transportation Code, as amended (the “Authority Act”). Its creation was confirmed at a confirmation and tax election held on August 12, 1978. The Authority provides transit service for, and collects sales and use taxes on taxable transactions in, a 1,286 square mile area with a population of approximately 3.5 million, including the cities of Houston, Bellaire, Bunker Hill Village, El Lago, Hedwig Village, Hilshire Village, Humble, Hunters Creek Village, Katy, Missouri City, Piney Point Village, Southside Place, Spring Valley Village, Taylor Lake Village, and West University Place (the “Participating Municipalities”), and significant portions of unincorporated Harris County. The Authority also provides transit service for other areas by contract. See “THE AUTHORITY.”

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PLAN OF FINANCE

The Obligations are being issued for the purposes of (a) acquiring, and/or reimbursing the acquisition of, personal property, including, but not limited to, clean diesel transit and commuter buses and light rail vehicles, and (b) paying the costs of issuance of the Obligations.

ESTIMATED SOURCES AND USES OF FUNDS

The following schedule is an estimate of the sources and uses of proceeds of the Obligations:

Sources of Funds: Principal amount $130,605,000.00 Original issue premium 22,626,350.65 TOTAL $153,231,350.65

Uses of Funds: Deposit to Acquisition Fund $152,000,000.00 Costs of issuance(1) 1,231,350.65 TOTAL $153,231,350.65 ______(1) Costs of issuance include underwriters’ discount, co-financial advisors’ fees, rating agency fees, paying agent/registrar fees, legal fees, printing expense and rounding amounts.

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THE OBLIGATIONS

DESCRIPTION

The Obligations will accrue interest from the date of delivery thereof, and mature on November 1 in each of the years and in the amounts shown on the inside cover page hereof. Interest will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on May 1 and November 1 of each year, commencing November 1, 2014, until maturity or earlier redemption. The definitive Obligations will be issued only in fully registered form in any integral multiple of $5,000 for any one series and maturity. All 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. 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 “BOOK-ENTRY-ONLY SYSTEM.”

AUTHORITY FOR ISSUANCE

The Obligations are issued pursuant to the Resolution and an Officer’s Pricing Certificate authorized by the Resolution (the “Officer’s Pricing Certificate”). In addition, the Obligations are authorized by Chapters 1201 and 1371, Texas Government Code, as amended, and Chapter 271, Subchapter A, Texas Local Government Code, as amended.

OPTIONAL REDEMPTION

The Authority reserves the right, at its option, to redeem Obligations having stated maturities on and after November 1, 2025, in whole or (from time to time) in part, on any date on or after November 1, 2024, at a redemption price equal to the principal amount thereof plus accrued interest thereon from the most recent interest payment date to which interest has been paid or duly provided for, to the date of redemption.

If less than all of the Obligations of a maturity are to be redeemed, at the option of the Authority, the Paying Agent/Registrar shall select the Obligations of such maturity to be redeemed by lot or other means acceptable to it. If an Obligation subject to redemption is in a denomination larger than $5,000, a portion of such Obligation may be redeemed, but only in integral multiples of $5,000. In selecting portions of Obligations for redemption, each Obligation shall be treated as representing that number of Obligations of $5,000 denomination which is obtained by dividing the principal amount of such Obligation by $5,000. Upon presentation and surrender of any Obligation for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Resolution, shall authenticate and deliver in exchange therefor an Obligation or Obligations of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Obligation so surrendered.

NOTICE OF REDEMPTION

Notice of any redemption, identifying the Obligations or portions thereof to be redeemed, shall be sent by first class mail, postage prepaid, to the Registered Owners thereof at their addresses as shown on the books of registration kept by the Paying Agent/Registrar, not less than thirty (30) days before the date fixed for such redemption, provided that any notice of optional redemption may be conditioned on the authorization and issuance of a series of refunding bonds by the Authority, or any other condition. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Obligations called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Obligations that are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the purpose of being paid with the funds so provided for such payment. See “BOOK-ENTRY- ONLY SYSTEM.”

SECURITY AND SOURCE OF PAYMENT

The Obligations are payable from all legally available funds of the Authority. The Obligations are secured equally and ratably with certain outstanding debt obligations and any future parity obligations (collectively, the “Senior Lien Obligations”) by a senior lien on and pledge of 75% of the sales and use tax revenues collected and received by the Authority plus any investment income earned on moneys in the Revenue Fund and the Sales Tax Interest and Sinking Fund for any such obligations referred to herein (together, the “Pledged Revenues”). See “– OUTSTANDING AND ADDITIONAL PARITY OBLIGATIONS” below. Under the Resolution, the Authority has agreed to cause the Pledged Revenues to be paid directly to the Trustee.

A sales and use tax is levied by the Authority at the rate of 1% on all taxable transactions within the Authority’s boundaries. See “REVENUES AND INVESTMENTS.”

The Authority has reserved the right to issue or incur additional parity obligations, as described under “– OUTSTANDING AND ADDITIONAL PARITY OBLIGATIONS,” and the right to pledge and grant liens on Pledged Revenues in the future, on a basis

subordinate to the pledge and lien securing the Senior Lien Obligations to secure Junior Lien Obligations and Subordinate Lien Obligations. See “Section 22. Pledges and Sources of Payment; Tax Levy; Other Security” and “Section 33. Additional Obligations” in APPENDIX A – SELECTED PROVISIONS OF THE RESOLUTION.

In the Resolution, the Authority has covenanted and agreed that, while any Obligations are outstanding, it will not reduce the rate at which its sales and use tax is levied below its current rate of 1% or take action to apply such tax to less than all taxable transactions. See “REVENUES AND INVESTMENTS – SALES AND USE TAX AUTHORITY – Imposition of Tax.”

Although the Obligations are payable from fare revenue as well as sales and use tax revenue, under the Authority Act, the expenses of operating and maintaining the Authority’s mass transit system (the “System”) are a first lien on and charge against any revenue from operation or ownership of the System. The Authority has not historically earned (and does not expect to earn) any net revenue from the operation or ownership of its transit system. Consequently, prospective investors should not rely on operating revenue as a source of payment of the Obligations.

The Obligations are not payable from funds raised or to be raised by property taxes. The Authority has no authority to levy property taxes.

The Obligations are not Reserve Fund Participants and therefore are not secured by a debt service reserve fund, which secures other Senior Lien Obligations.

OUTSTANDING AND ADDITIONAL PARITY OBLIGATIONS

Senior Lien Obligations and other debt in the total aggregate principal amount of $1,020,755,000 were outstanding as of February 28, 2014, consisting of (i) $625,630,000 aggregate principal amount of Sales Tax Bonds, $137,945,000 aggregate principal amount of contractual obligations and $183,400,000 aggregate principal amount of commercial paper notes, all of which are secured by a senior lien on and pledge of Pledged Revenues on a parity with the Obligations, and (ii) $73,780,000 aggregate principal amount of certificates of participation, which are subject to appropriation. See “DEBT AND OTHER OBLIGATIONS – OUTSTANDING DEBT.”

In the Resolution, the Authority reserves the right to issue additional parity bonds, notes and other debt obligations (as further defined in APPENDIX A, “Additional Obligations”) and enter into credit agreements (as further defined in APPENDIX A, “Senior Credit Agreements”) payable from any and all legally available funds and secured, equally and ratably with the Obligations, by a lien on and pledge of the Pledged Revenues, but only if (while any Senior Lien Obligations remain Outstanding) the Pledged Revenues for the preceding Fiscal Year or any consecutive 12-month period out of the 18-month period preceding the month in which the resolution authorizing such parity Additional Obligations or Senior Credit Agreement is adopted were at least 200% of the maximum annual debt service (“MADS”) on all Senior Lien Obligations, after giving effect to the issuance of the Additional Obligations or execution of the Senior Credit Agreement.

Under the Resolution, Additional Obligations may also be issued on a parity with the Obligations to refund or defease Senior Lien Obligations (including termination payments under interest rate management agreements), regardless of the amount of historical Pledged Revenues, if the issuance of such Additional Obligations will not increase MADS on Senior Lien Obligations by more than 10%. See “Section 33. Additional Obligations” in APPENDIX A – SELECTED PROVISIONS OF THE RESOLUTION.

For purposes of the debt service coverage tests described in the preceding two paragraphs, Pledged Revenues may be adjusted to give retroactive effect to (A) any increase in the sales and use tax rate that has occurred before the authorization of the Additional Obligations or Senior Credit Agreement and (B) any increase in the percentage of sales and use tax revenues dedicated by the Authority to purposes other than the payment of principal of and interest and other obligations on Senior Lien Obligations, as if either such increase had been in effect for the entire applicable period.

For these purposes, MADS is defined by the Resolution to assume the accrual of variable rate interest at hedged or average historical rates, and to assume the refunding of demand debt and bullet maturities (including the CP Notes), as described in APPENDIX A. Accordingly, the MADS assumed in issuing Additional Obligations and entering into Senior Credit Agreements may be less than the maximum amount of debt service that could actually come due on Senior Lien Obligations in a year, and the difference could be substantial.

When issuing Additional Obligations, the Authority will determine whether such Additional Obligations shall be secured by a debt service reserve fund. If the Additional Obligations are secured by a debt service reserve fund, the Authority must fund any resulting increase in the required balance of such debt service reserve fund with monthly deposits ratably over the next 36 months, to the extent not then funded with proceeds of the Additional Obligations or funds on hand. See “– DEBT SERVICE RESERVE FUNDS” below.

DEBT SERVICE RESERVE FUNDS

The Obligations are not Reserve Fund Participants. Pursuant to the Resolution, the Authority is not required to maintain and fund a debt service reserve fund for the Obligations.

The Authority, however, is required to maintain and fund debt service reserve funds (each a “Reserve Fund” and collectively the “Reserve Funds”) for other Senior Lien Obligations and Additional Obligations that the Authority designates at or before the time of issue (the “Reserve Fund Participants”). The required balance of each Reserve Fund is equal to 50% of pro forma MADS for all Senior Lien Obligations Outstanding designated by the Authority to be payable from such Reserve Fund. See “DEBT AND OTHER OBLIGATIONS – TABLE 6 – OUTSTANDING DEBT AS OF MARCH 28, 2014.”

On each date for payment of principal of or interest or other amounts on Senior Lien Obligations payable from a Reserve Fund, including upon call for redemption, the Trustee is required to transfer from such Reserve Fund to the paying agent for such Senior Lien Obligations an amount sufficient, together with funds then transferred from the applicable Interest and Sinking Fund, to pay such principal, interest, and other amounts when due.

For Additional Obligations payable from a Reserve Fund, or if the balance of a Reserve Fund is less than the applicable Reserve Fund Requirement as of any valuation date, the Trustee is required to make monthly transfers from the Revenue Fund in substantially equal monthly deposits over a three-year period into such Reserve Fund as required to increase its balance to its Reserve Fund Requirement. The Authority may provide for satisfaction of a Reserve Fund Requirement with the purchase or acquisition of a Reserve Fund Surety Policy (defined in APPENDIX A) or with the deposit into such Reserve Fund of cash or investment securities. A Reserve Fund Surety Policy may be drawn upon only after all other amounts in the Reserve Fund have been used or applied, and other amounts in the Reserve Fund may be used to reimburse and repay an issuer of a Reserve Fund Policy for amounts drawn thereon together with interest thereon and related costs.

The combined balance of the Reserve Funds was $25,641,323 as of February 28, 2014, consisting of a balance of (i) $17,934,829 for the Reserve Fund established for Senior Lien Obligations issued as Sales Tax Bonds and (ii) $7,706,494 for the Reserve Fund established for Senior Lien Obligations issued as Contractual Obligations. For those current Reserve Fund Participants, the Authority expects to continue to fund the differences between the current balances and the Reserve Fund requirements with cash deposits over the three year period as required by the resolutions authorizing those Reserve Fund Participants.

FLOW OF FUNDS

The Resolution recognizes and confirms the prior establishment and maintenance of certain funds and accounts for the application of the proceeds of the Obligations and for the Pledged Revenues. The Trustee holds the “Revenue Fund” to receive and administer Pledged Revenues, and an “Interest and Sinking Fund” to provide for the payment of the Senior Lien Obligations, including the Obligations.

Revenue Fund. Pledged Revenues must be deposited directly to the Revenue Fund held by the Trustee under the Resolution as received. Pursuant to the Resolution, moneys in the Revenue Fund will be applied immediately upon receipt as follows:

First, to make all deposits into the Interest and Sinking Fund as described below and, if the applicable Senior Lien Obligations are ratably secured thereby, in any other interest and sinking fund provided in any order or resolution authorizing the issuance of any other parity Senior Lien Obligations;

Second, to make all deposits into the Reserve Funds as required by the resolutions authorizing the Reserve Fund Participants, if any, and in any other reserve fund provided in any order or resolution authorizing the issuance of any Senior Lien Obligations other than Reserve Fund Participants; provided that on any date on which there is a deficiency in a Reserve Fund, the Trustee may not apply any moneys to any other such fund in an amount greater than that required to produce a balance therein equal to 50% of the MADS on the Senior Lien Obligations payable from such other reserve fund ratably over a 36-month period from the original date of any deficiency therein, unless an additional deposit to the Reserve Funds is made to cure any deficiency in the Reserve Funds at the same rate;

Third, to make all other deposits not made pursuant to clause Second above into any reserve fund provided in any order or resolution authorizing the issuance of any Senior Lien Obligations;

Fourth, to make all other deposits required by the Resolution and in any order or resolution authorizing the issuance of any Senior Lien Obligations and any related agreement or credit agreement;

Fifth, to make all deposits required by any order or resolution authorizing the issuance of any Junior Lien Obligations; and

Sixth, to make all deposits required by any order or resolution authorizing the issuance of any Subordinate Lien Obligations.

After making the foregoing transfers and deposits from the Revenue Fund, the Trustee is required to transfer any balance therein to the Authority for use for any lawful purpose.

In case money on deposit in the Revenue Fund is at any time insufficient to make in full all deposits and transfers, then such deposits and transfers then to be made from the Revenue Fund shall be made from such money in the priority set out above, but ratably according to the aggregate amount within each priority to be deposited and without any preference within a priority.

Interest and Sinking Fund. The Resolution provides that, for so long as any Obligations remain Outstanding, the Trustee shall transfer from the Revenue Fund to the Interest and Sinking Fund, on each date on which funds are deposited to the Revenue Fund, such amounts which, when added to other amounts in the Interest and Sinking Fund, will provide for the accumulation, in substantially equal monthly installments, of amounts sufficient to pay (i) the interest scheduled to become due on all Outstanding Senior Lien Obligations on the next succeeding interest payment date (other than interest scheduled to become due but anticipated to be paid with the proceeds of such Senior Lien Obligations), (ii) the principal of all such Outstanding Senior Lien Obligations scheduled to mature on the next succeeding principal payment date (other than maturing principal anticipated to be paid with the proceeds of such Senior Lien Obligations), (iii) payments due and payable to Credit Providers on Senior Credit Agreements (e.g., the current credit agreements for the CP Notes) on ensuing payment dates; and (iv) the redemption price of all such Outstanding Senior Lien Obligations called or scheduled for redemption on the next redemption date, plus all fees, charges and other amounts payable to the Trustee any paying agent/registrar, market agent, broker/dealer, remarketing agent or Credit Provider in respect of such Senior Lien Obligations; provided that in all cases the Trustee is required to deposit an amount sufficient to ensure that the Interest and Sinking Fund has adequate funds on deposit to make all required principal, interest and other payments on Senior Lien Obligations through the immediately succeeding month, assuming accrual of interest at the maximum rate for any period for which the rate has not been fixed and payment thereof on the last day of such succeeding month. For a description of the application of amounts deposited to the Interest and Sinking Fund, see “Section 26. Revenue Fund and Interest and Sinking Fund” in “APPENDIX A — SELECTED PROVISIONS OF THE RESOLUTION.” If the balance of the Interest and Sinking Fund is not sufficient to pay principal of and interest and other amounts payable on all Senior Lien Obligations secured by a pledge of money deposited therein when due, available funds must be transferred ratably to the paying agents for such Senior Lien Obligations, including those entitled to the benefits of a Reserve Fund, in proportion to the amount then due on each, before computing the deficiency to be funded from the applicable Reserve Fund.

Proceeds of any issue of Senior Lien Obligations on deposit in an Interest and Sinking Fund will be available to pay interest only on such issue of Senior Lien Obligations and will be credited against the transfer requirements described in the preceding paragraph only for such issue of Senior Lien Obligations.

INVESTMENT OF FUNDS

The Revenue Fund, the Reserve Funds and the Interest and Sinking Fund may be invested by the Trustee at the direction of the Authority solely in investments authorized for the investment of the Authority’s funds. The Resolution imposes no additional credit or term limitations on the investments, except that investments must mature by the date when invested funds are expected to be applied. See “Section 29. Investment of Trust Funds” in “APPENDIX A — SELECTED PROVISIONS OF THE RESOLUTION.”

DEFEASANCE

The Resolution provides that the Obligations may be defeased in any manner now or hereafter permitted by law, including by irrevocably depositing in trust (i) direct noncallable obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent; (iii) noncallable obligations of a state or an agency or a county, municipality or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent; or (iv) cash. Upon defeasance, Obligations will no longer be considered outstanding for purposes of the applicable Resolution, and the Authority will no longer be obligated to provide funds to pay such Obligations, except from and to the extent of the deposited cash and obligations. See “Section 43. Defeasance” in “APPENDIX A — SELECTED PROVISIONS OF THE RESOLUTION.”

TRUSTEE/PAYING AGENT/REGISTRAR

The initial Trustee and Paying Agent/Registrar is Wells Fargo Bank, N.A., Dallas, Texas. In the Resolution, the Authority retains the right to replace the Trustee and Paying Agent/Registrar, and either may resign under conditions set out in the Resolution. The Authority covenants to maintain and provide a Trustee and Paying Agent/Registrar for Senior Lien Obligations, including the Obligations, at all times until such Senior Lien Obligations are duly paid. Any successor Trustee or Paying Agent/Registrar must be a bank, trust company, financial institution or other agency duly qualified and legally authorized to

serve as and perform the duties and services of Paying Agent/Registrar for the Obligations and have a minimum capital and surplus of at least $1 billion. The Resolution provides that no resignation or removal of the Trustee may be effective until a successor has been appointed, qualified and accepted its appointment.

The Trustee has been appointed for the sole purpose of receiving, holding, investing, and disbursing the Pledged Revenues and Reserve Funds. The Trustee is not empowered to enforce the Resolution or otherwise act on behalf of the Owners of the Obligations. See “Section 36. The Trustee” in “APPENDIX A — SELECTED PROVISIONS OF THE RESOLUTION.”

AMENDMENTS TO RESOLUTION

The Resolution constitutes a contract with the Owners, from time to time, of the Obligations, is binding on the Authority and the Trustee, and shall not be amended or repealed by the Authority so long as any Obligations remain Outstanding, except as follows: The Authority may, without the consent of or notice to any Owners, but with notice to the Trustee, from time to time and at any time, amend the Resolution, in any manner not detrimental to the interests of the Owners of the Obligations authorized thereby, including the curing of any ambiguity, inconsistency or formal defect or omission therein. In addition, the Authority may, with the written consent of the Trustee and the Owners who own in the aggregate 51% of the principal amount of such Obligations, as applicable, then Outstanding, amend, add to or rescind any of the provisions of the Resolution, provided that, without the consent of all affected Owners of Outstanding Obligations authorized thereby, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on such Obligations, reduce the principal amount thereof, the redemption price or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on such Obligations, (ii) give any preference to any such Obligation over any other such Obligation or (iii) reduce the aggregate principal amount of the such Obligations or Senior Lien Obligations required to be held by the Owners for consent to any such amendment, addition or rescission.

BOOK-ENTRY-ONLY SYSTEM

This section describes how ownership of the Obligations is to be transferred and how the principal of, premium, if any, and interest on the Obligations are to be paid to and credited by DTC while the Obligations are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The Authority believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof.

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

DTC will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for each series and maturity of the Obligations, each in the aggregate principal amount of such series and 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 issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC, is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

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

To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC’s records reflect only the identity of the Direct 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 shall be sent to DTC. If less than all Obligations of the same series and maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant of such series and maturity 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 Authority 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).

Redemption proceeds, distributions, and dividend 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 Authority or Agent, 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 Trustee, the Paying Agent/Registrar, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, the Paying Agent/Registrar or the Authority, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Obligations at any time by giving reasonable notice to the Authority or the Trustee or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Obligation certificates are required to be printed and delivered.

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

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof.

EFFECT OF TERMINATION OF BOOK-ENTRY-ONLY SYSTEM

In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the Authority, printed certificates will be issued to the holders and the Obligations will be subject to transfer, exchange and registration provisions as set forth in the Resolution.

THE AUTHORITY

GENERAL

The Authority is a metropolitan rapid transit authority created pursuant to legislation now codified as Chapter 451, Texas Transportation Code, as amended, and confirmed at a confirmation and tax election held on August 12, 1978.

JURISDICTION

The Authority provides transit service for, and collects sales and use taxes on taxable transactions in a 1,286 square mile area with a population of approximately 3.5 million, including the cities of Houston, Bellaire, Bunker Hill Village, El Lago, Hedwig Village, Hilshire Village, Humble, Hunters Creek Village, Katy, Missouri City, Piney Point Village, Southside Place, Spring Valley Village, Taylor Lake Village, and West University Place (the “Participating Municipalities”), and significant portions of unincorporated Harris County. The Authority also serves by contract, but does not collect sales and use taxes in, other areas.

BOARD OF DIRECTORS

The Authority is governed by a nine-member Board of Directors, each of whom serves a two-year term. Five directors are nominated by the Mayor of the City of Houston, Texas (the “City”) and confirmed by the Houston City Council, two directors are appointed by the mayors of the Authority’s 14 other Participating Municipalities (the “Multi-Cities”) and two directors are appointed by the Harris County Commissioners Court. A list of the current members of the Board, the position held by each member and the appointing entity for each member are listed on page viii hereof.

MANAGEMENT

The management of the Authority is under the direction of its President and Chief Executive Officer, who performs any duties delegated to him by the Board. A list of certain of the Authority’s key executives is provided on page viii hereof.

TRANSIT SYSTEM

The Authority is organized to develop, operate and maintain a mass transit system to serve the residents within and visitors to its area. The Authority’s transit system is a multi-modal system consisting of the following components:

Bus System - The Authority provides public bus service within its service area utilizing a fleet of approximately 1,248 buses, including the Greenlink CNG buses, 118 METROLift paratransit service vans, plus passenger facilities, including 9,898 active bus stops, and 34,159 parking spaces. In Fiscal Year 2013, METRO buses ran 68 million revenue miles in a service area of 1,286 square miles with approximately 84 million boardings. See “TABLE 1 — SELECTED RIDERSHIP STATISTICS FOR THE LAST FIVE FISCAL YEARS.”

HOV/HOT Lane System – The High Occupancy Vehicle (“HOV”) lane program and the High Occupancy Toll (“HOT”) lane program are cooperative efforts among the Texas Department of Transportation (“TxDOT”), Harris County and the Authority. The programs are funded through a combination of federal, state and local resources. As of September 2013, METRO has 141 miles of HOV/HOT lanes on Houston freeways. For Fiscal Year 2013, the projected HOV/HOT lane ridership is approximately 26.6 million.

Under the HOT program, METRO has converted several HOV lanes to provide solo drivers the opportunity to use the lanes by paying a toll charge. Such drivers are allowed to use the system by paying a toll with an authorized EZ Tag issued by Harris County or one of the other interoperable toll tags available for use on toll road systems in the State of Texas. The Authority has a contract with Harris County for the processing of toll transactions on the Authority’s HOT lanes. The Authority’s operational responsibilities for the HOV/HOT lanes include HOV/HOT lane enforcement, debris removal, maintenance and repair of electronic gates and signs, opening and closure of HOV/HOT lane gates and dispatch operations, including assignment of wreckers to remove disabled vehicles. TxDOT is responsible for cleaning and maintaining the HOV/HOT lanes. City wreckers perform the removal of stalled or disabled vehicles from HOV/HOT lanes.

Light Rail System - The Authority's first light rail line began operation on January 1, 2004. This 7.5-mile red line originates in the northern part of Houston's central business district and continues south through Midtown, the Museum District, the Texas Medical Center and the Reliant Park Complex to the Fannin South Park and Ride Lot. There are 16 stations along the

route. On December 21, 2013, the Authority opened its North Line. This 5.3 mile northern extension of the Authority’s red line includes eight new stations and connects the University of Houston-Downtown and the North Line Commons Mall, making the entire red line nearly 13 miles. In the Fall 2014, the Authority expects to open its East End/Green Line, which will extend 3.3 miles from downtown Houston to the Magnolia Transit Center. In 2014, the Authority expects to complete construction on its Southeast Line, which will be extended 6.6 miles from downtown Houston to the Palm Center Transit Center Station. With these additional lines, METRO's total light rail miles will be 22.7. See “CAPITAL IMPROVEMENT PROGRAM.”

Paratransit Service - The Authority’s METROLift paratransit service provided service to 17,745 registrants using both METRO-owned lift-equipped vans and contractor-owned and operated accessible minivans in Fiscal Year 2013.

Commuter Vanpool Service – In Fiscal Year 2013, the Authority's METRO STAR commuter vanpool service had 720 vanpools, taking approximately 2.5 million trips annually with approximately 7,189 riders. In Fiscal Year 2014, the Authority is estimating 2.5 million trips annually, with approximately 7,205 riders; making METRO STAR one of the largest vanpool programs in the nation.

RIDERSHIP INFORMATION

Table 1 below presents selected information regarding the Authority’s ridership during the Fiscal Years ending September 30, 2009 through 2013 and comparative data for the three months ended December 31, 2012 and 2013.

TABLE 1 – SELECTED RIDERSHIP STATISTICS FOR THE LAST FIVE FISCAL YEARS

Three Months Ended Fiscal Year Ended September 30 December 31 2009 2010 2011 2012 2013 2012 2013(4) Transit boarding 88,517,657 81,158,905 81,032,075 81,020,887 84,266,386 21,204,623 20,991,875 Revenue vehicle miles(1) 55,142,910 55,670,178 57,119,898 57,332,904 68,324,181 16,917,974 17,266,249 Passenger Miles – Transit 610,865,178 551,914,756 537,017,914 534,648,747 574,724,199 144,622,435 143,171,425 HOV/HOT Ridership(2) 24,112,235 23,761,231 24,706,519 24,936,852 25,371,590 5,749,254 6,113,394 Passenger Miles(3) 254,105,685 244,978,292 254,724,211 257,098,944 261,581,093 59,274,809 63,029,092 Total Actual Passenger Car Revenue Miles 903,668 900,517 901,194 905,795 989,373 224,194 238,394 HOV/HOT Lane Miles 128.6 128.6 134.7 140.8 140.8 140.8 140.8

(1) “Revenue Vehicle Miles” are the miles traveled when a vehicle is available to the general public and there is an expectation of carrying passengers. (2) Includes cars, vans, and non-Authority buses. (3) Includes carpool/vanpool non-Authority buses on transitway. (4) Does not reflect ridership numbers for the North Line, which opened on December 21, 2013.

FLEET REPLACEMENT POLICIES

Bus Replacement. The Authority’s fleet replacement plan is designed to ensure service reliability. In accordance with FTA standards, the Authority assumes a useful life of 12 years for each bus. Therefore, the Authority replaces one-twelfth of its approximately 1,200 vehicle bus fleet, or approximately 100 buses, each year. Under its current bus delivery schedule, the Authority anticipates that it will acquire an additional 140 buses with proceeds of the Obligations. See “PLAN OF FINANCE.” The Authority may alter the rate of bus retirement to address unanticipated service changes and service demands. The Authority’s replacement plan is updated regularly and incorporated into the capital and operating budgets.

Rail Car Replacement. The Authority has not adopted a rail car replacement policy. In accordance with FTA standards, the Authority assumes a life expectancy of 25 years of each rail car. The oldest rail cars in the Authority’s fleet were purchased in 2003. Plans for replacement of rail cars will be considered as needed in future capital and operating budgets.

REVENUES AND INVESTMENTS

The Authority’s principal sources of revenue are (1) a 1% sales and use tax imposed on all taxable personal property and service transactions within the Authority’s boundaries, (2) federal and state grants for operations and capital projects and (3) transit fares and other operating revenue. The amount of revenue received by the Authority from these and other sources in the last five fiscal years (audited) and comparative (unaudited) data for the three month periods ended December 31, 2012 and 2013, are shown in the following table:

TABLE 2 - COMBINED SOURCES OF REVENUE

Three Months Ended Fiscal Year Ended September 30, December 31, (Unaudited) 2009 2010 2011 2012 2013 2012 2013 Sales and use tax(a) $517,972,851 $489,972,748 $536,572,595 $593,732,843 $642,515,462 $166,128,307 $172,368,760 Operating revenue(b) 67,083,414 64,538,736 68,740,526 66,887,319 72,782,991 17,822,082 18,342,366 Grants: Capital(c) 3,421,988 27,111,888 21,767,789 1,341,560 3,372,883 260,958 - Service-related(d) 52,377,450 54,923,543 53,685,295 46,877,743 65,610,667 4,086,007 2,155,195 Investment income(e) 4,307,902 2,103,533 327,467 625,042 768,527 274,643 150,792 Other(f) 1,115,401 848,968 643,766 3,030,912 3,831,776 537,497 407,330 TOTAL $646,279,006 $639,499,416 $681,737,438 712,495,419 788,882,306 189,109,494 193,424,443

(a) Represents 100% of sales and use tax revenue of the Authority. Only 75% of the sales and use tax revenue is included in Pledged Revenues. See “REVENUES AND INVESTMENTS — SALES AND USE TAX.” (b) Represents farebox receipts, special events fares and route guarantees for specific transit service. See “— OPERATING REVENUE.” (c) Represents revenue received under recurring federal capital grant programs. Other FTA capital programs are non-recurring, are specific to individual projects and are awarded through competitive selection process. Non-recurring federal capital grants received by the Authority in Fiscal Years 2009 through 2013 are excluded from the table and ranged from $38,595,576 to $355,645,500 in the last five fiscal years. (d) Represents revenue under federal programs for bus and rail capitalized preventive maintenance, the regional vanpool program, new bus service and alternative fuel/clean air programs. Other FTA programs, the Federal Highway Administration and state programs are non-recurring, are specific to individual projects and are awarded through competitive selection process. FEMA funds are received based on reimbursement of actual eligible expenditures associated with a natural disaster. Non-recurring federal grants for noncapital uses received by the Authority in Fiscal Years 2009 through 2013 are excluded from the table and ranged from $5,903,629 to $9,582,572 in the last five fiscal years. (e) See “TABLE 4 – CASH AND INVESTMENTS” for information relating to the Authority’s investments. (f) Other income consists of miscellaneous revenues such as parking revenue, concession sales, leased property revenue and rebates on procurement cards.

SALES AND USE TAX AUTHORITY

Imposition of Tax. State law authorizes the Authority to impose a sales tax on the sale within the Authority’s boundaries of all items subject to the state sales tax and a use tax on the use, storage or consumption within the Authority’s boundaries of any such taxable items purchased, leased or rented from a retailer, at a rate established by the Board in accordance with the Authority Act. The Board has established the rate at 1%, as authorized by public vote when the Authority was confirmed in 1978. The sales tax and use tax is referred to herein as the “sales tax.”

Section 451.061, Texas Transportation Code, authorizes the Authority to impose fares, tolls, charges, rents, and other compensation in amounts sufficient to produce revenue, together with sales tax revenue received by the Authority, in an amount adequate to: (1) pay all expenses necessary to operate and maintain its transit system; (2) pay when due debt service, sinking fund and reserve fund payments agreed to be made with respect to all Authority obligations payable in whole or in part from such revenue; and (3) fulfill the terms of any other agreement with the holders of any such obligations. The total of compensation and sales taxes imposed may not exceed the amounts necessary to produce revenue sufficient to meet the obligations of the Authority under Chapter 451, Texas Transportation Code. See “EXPENDITURES – BUDGET.”

Section 451.061(e) specifies that the right of the State of Texas (the “State”) to regulate sales taxes is not limited by Section 451.061, but also includes specific provisions that recognize the rights of holders of Authority obligations, including protections against (i) alterations to the power given to the Authority under Section 451.061 to impose sales taxes, fares, tolls, charges, rents, and other compensation in amounts sufficient to satisfy its debt service and other obligations and (ii) any impairment of the rights and remedies of holders of such obligations until such obligations have been fully discharged.

2003 Election. Pursuant to an election held within the Authority in November 2003 (the “2003 Election”), 25% of sales tax revenue collected by the Authority through September 30, 2014 is dedicated for street improvements and mobility projects (referred to herein as “General Mobility”). The remaining 75% of the sales tax revenue is available for the payment of the Authority’s operating expenses and other obligations, including repayment of bonds, notes, commercial paper notes, leases and other obligations and, along with any investment income earned on moneys in certain funds to which such revenues are deposited, constitutes Pledged Revenues.

2012 Election. Pursuant to an election held on November 6, 2012 (the “2012 Election”), the qualified voters of the Authority elected to continue the dedication of the Authority’s sales tax revenue for the period October 1, 2014 through December 31, 2025, for street improvements and related projects, to be calculated as follows: (1) an amount equal to 25% of the sales and use tax revenues collected by the Authority during its Fiscal Year 2014, which is the period October 1, 2013 through

September 30, 2014 (such amount, the “2014 Collection”), shall be paid to Harris County, the City and the other cities within the Authority’s jurisdiction; and (2) in any Authority fiscal year in which the amount of sales and use tax revenues collected by the Authority is greater than the 2014 Collection, the 25% General Mobility portion of such additional amount (the “Incremental Collection”) shall be divided equally, with (a) 50% of the Incremental Collection being paid to Harris County, the City and the other cities within the Authority’s jurisdiction and (b) 50% of the Incremental Collection being retained by the Authority. However, in any Authority fiscal year in which the amount of sales and use tax revenues collected by the Authority is less than the 2014 Collection, the total payment made to Harris County, the City and the other cities within the Authority’s jurisdiction for that fiscal year shall be 25% of the sales and use tax revenues collected by the Authority during such fiscal year. Any future Incremental Collection by the Authority does not constitute Pledged Revenues.

Taxable Transactions. Taxable items include any tangible personal property and certain taxable services, unless exempted from the sales and use tax. “Taxable services” include certain amusement services; personal services; motor vehicle parking and storage services; the repair, maintenance and restoration of most tangible personal property; credit reporting services; debt collection services; insurance services; information services; real property services; data processing services; real property repair and remodeling services; security services; telephone answering services; internet access services; and certain transmission or delivery of taxable electricity usage. Many items are exempted from the sales tax by State law, including items purchased for resale, food products (except food products which are sold for immediate consumption, e.g., by restaurants, lunch counters, etc.), health care supplies (including medicines, corrective lens and various therapeutic appliances and devices), agricultural items (if the item is to be used exclusively on a farm or ranch or in the production of agricultural products), gas and electricity purchased for residential use, newspapers and magazines. In addition, items which are taxed under other State laws are generally exempted from sales taxes. These items include certain natural resources, cement, motor vehicles and insurance premiums, although alcohol and tobacco products are taxed under both State alcohol and tobacco taxes as well as the sales tax. In addition, purchases made by various exempt organizations are not subject to the sales tax. Such organizations include the federal and state governments, political subdivisions, Indian tribes, religious institutions and certain charitable organizations and non-profit corporations. In addition, sales of telecommunication services (including cable and satellite TV services) are exempt from the Authority’s sales tax unless the Board determines to suspend the exemption and the suspension is approved at an election within the Authority. To date, the Board has not taken any actions to suspend the exemption for telecommunication services.

In general, a sale or use of a taxable item happens when such sale or use occurs within the jurisdiction in which the sale or use is consummated. For purposes of the Authority’s tax, the use, storage or consumption of tangible personal property is considered to be consummated at the location where the item is first stored, used or consumed in an area of the State where a mass transit sales tax is imposed. Thus, the use is considered to be consummated in the Authority if the item is shipped from outside the State or outside any other State mass transit agency with sales tax authority, for first use, storage or consumption within the Authority’s jurisdiction.

Collection Procedures. With certain exceptions, sales taxes in the State are collected at the point of sale and are remitted to the State Comptroller of Public Accounts (the “Comptroller”) by, generally speaking, the business that collects the tax resulting from a taxable transaction. The Comptroller collects sales taxes based upon the amount of taxes reported by the seller or purchaser. Taxpayers who collect $500 or more in State sales tax in a month must remit the taxes on or before the 20th day of the month following the month in which the taxes were collected. Taxpayers who collect less than $500 in State sales tax per month (or less than $1,500 per calendar quarter) may file quarterly or annually depending on the amount collected. Under State law, a collecting taxpayer may deduct ½% of the amount of taxes due as reimbursement for the cost of collecting the taxes. In addition, taxpayers who file monthly or quarterly may prepay the taxes due and deduct 1¼% of the amount of the prepayment in addition to the ½% for the cost of collecting the sales tax.

The Comptroller is required by law to distribute funds to the Authority as often as feasible, but not less frequently than quarterly. Historically, and at the present time, the Comptroller distributes the funds monthly. Distributions to the Authority are made by electronic funds transfers.

Seasonality and Recent Collections. The Authority's sales and use tax receipts are seasonal, with the greatest monthly collections typically received in the months of February and August, reflecting taxes on retail sales in the holiday and back-to- school seasons. In the last three fiscal years, receipts in the lowest revenue months were 65.9%, 65.5% and 71%, respectively, of collections in the highest revenue months. During Fiscal Year 2013, unaudited sales and use tax receipts ($638,230,930) were 8% higher than audited amounts in Fiscal Year 2012 ($590,967,220). This increase reflects the Houston area’s significant recovery from the Great Recession. Sales tax receipts in early Fiscal Year 2014 reflect continuing improvement. Sales and use tax receipts for the first three months of Fiscal Year 2014 were $162,836,158, compared to $152,486,378 for the first three months of Fiscal Year 2013, representing a 6.7% increase.

Collection and Allocation of Delinquent Taxes. Although sales and use taxes are imposed on purchasers, retail sellers are responsible for collecting the taxes and are the only source from which the taxes can practically be collected. Accordingly, collections are dependent on the solvency and continued operation of retail sellers. The Comptroller is responsible for enforcing the collection of sales taxes in the State. Under State law, the Comptroller utilizes sales tax permits, payment bonds and audits to

encourage timely payment of sales taxes. Each entity selling, renting, leasing or otherwise providing taxable goods or services is required to have a sales tax permit. As a general rule, every person who applies for a sales tax permit for the first time, or who becomes delinquent in paying the sales or use tax, is required to post a bond in an amount sufficient to protect against the failure to pay taxes. A person who has filed security is entitled to have the Comptroller return the security if, in the Comptroller’s judgment, the person has for two consecutive years continuously complied with the conditions of the security. The Comptroller’s audit procedures include auditing the largest 2% of the sales taxpayers (who report about 65% of all sales tax in the State annually) every three or four years. Other taxpayers are selected at random or upon some other basis for audits. The Comptroller also engages in taxpayer education programs and mails a report to each taxpayer before the last day of the month, quarter or year that it covers.

Once a taxpayer becomes delinquent in the payment of a sales or use tax, the Comptroller may collect the delinquent tax by using one or more of the following methods: (1) collection by an automated collection center or local field office; (2) estimating the taxpayer’s liability based on the highest amount due in the previous 12 months and billing them for it; (3) filing liens and requiring a new or increased payment bond; (4) utilizing forced collection procedures such as seizing assets of the taxpayer (e.g., a checking account) or freezing assets of the taxpayer that are in the custody of third parties; (5) removing a taxpayer’s sales and use tax permit; and (6) certifying the account to the Attorney General’s Office to file suit for collection. The Authority may not sue for delinquent taxes unless it joins the Attorney General as a plaintiff or unless it first receives the permission of the Attorney General and the Comptroller.

In addition to the sales taxes levied by the Authority, the State imposes a 6¼% sales tax for its own purposes and the City imposes a 1% sales tax, in each case applied to essentially the same taxable transactions as those to which the Authority's sales tax is applied. If the Comptroller is unable to collect the full amount of sales tax liability, collections are applied to the State’s share of the sales tax, first, and the applicable municipality’s share, second, before distributing any part of the collections to the Authority.

OPERATING REVENUE

The Authority derives operating revenue from transportation fares, which include bus, rail and METROLift fare box receipts plus ticket sales from special events and the Texas Medical Center Route Guarantee Services. The Authority last increased fares by an average of 25% effective November 2, 2008. The current fares established by the Board for most commonly used services are set forth below.

TABLE 3 – CURRENT FARES FISCAL YEAR 2014

Full Fare Discounted Fare Local/METRORail $1.25 $0.60 Park & Ride Zone 1 $2.00 $1.00 Park & Ride Zone 2 $3.25 $1.60 Park & Ride Zone 3 $3.75 $1.85 Park & Ride Zone 4 $4.50 $2.25 Day Pass $3.00 $1.50 METROLift Paratransit $1.15 n/a

Groups eligible for the discounted fare are: • Senior citizens aged 65 to 69 (seniors 70 and older ride free) • Disabled riders • Students age 6 through full-time college/university (children 5 and under ride free) • Medicare cardholders

The Authority is required by the Authority Act to impose reasonable and nondiscriminatory fares, tolls, charges, rents and other compensation for the use of its mass transit system sufficient to produce revenue in an amount that, together with tax revenue received by the Authority, is adequate to pay all expenses necessary to operate and maintain the system, to pay principal of and interest on obligations of the Authority, to make required sinking fund and reserve fund deposits for such obligations, and to fulfill the terms of agreements with the holders of such obligations.

GRANTS

The Authority is the recipient of a number of federal and state grants from a variety of programs including Urbanized Area (“UZA”) Formula grants, Clean Fuel Program, New Starts, Fixed Guideway Modernization (“FGM”), Bus and Bus Facilities, Congestion Mitigation/Air Quality (“CMAQ”), Surface Transportation Program (“STP”) and American Recovery and Reinvestment Act (“ARRA”). The UZA and FGM grants are annual allocations, with amounts based on the Authority’s operating and financial data relative to other transit authorities in the country. UZA allocations averaged approximately

$63 million between FY 2009 and FY 2013. FGM allocations were $11.9 million and $13.2 million in FY 2011 and FY 2012, respectively. The ARRA UZA funds of $87.2 million and $2.3 million for UZA and FGM funds, respectively, are one-time windfall grants provided as part of the over-all national economic stimulus package. Other grant programs are awarded on a discretionary basis through competitive processes at the federal and local levels. Note that with the passage of the Moving Ahead for Progress in the 21st Century (MAP-21) legislation that took effect on October 1, 2012, several grant program changes took place. Notable grant programs repealed by MAP-21 include Clean Fuels, Fixed Guideway Modernization, discretionary Bus & Bus Facilities (“BBF”), Job Access & Reverse Commute (“JARC”), and New Freedom resulting in a reduction of $7.6 million in discretionary funds for the Authority in Fiscal Year 2013. Notable new grant programs created by MAP-21 include State of Good Repair (“SoGR”), formula Bus & Bus Facilities (“BBF”), and Enhanced Mobility of Seniors and Individuals with Disabilities resulting in apportionments of $9.1 million for SoGR, $7.7 million for formula BBF and $2.9 million for Seniors and Individuals for the Authority in Fiscal Year 2014.

INVESTMENTS

The Authority invests surplus revenue in accordance with its Investment Policy. Certain features of the Authority’s Investment Policy are summarized in Note 2 (beginning on page 39) to the Authority’s financial statements for the Fiscal Year ended September 30, 2013, under the section captioned “Deposits and Investment Activities Including Compliance with the Texas Public Funds Investment Act (TPFIA),” which are attached hereto as APPENDIX B. The Authority’s current Investment Policy was approved and adopted by the Board on November 21, 2013. The allocation of cash and investments in the Authority’s operating fund as of December 31, 2013, is summarized below.

TABLE 4 – CASH AND INVESTMENTS (AS OF DECEMBER 31, 2013)

Percentage of Investments Par Value Portfolio Cash $ 2,261,786 1.21% Local Government Investment Pools 77,290,080 41.27 Certificates of Deposit 10,000,000 5.34 U.S. Agency Bonds 40,000,000 21.36 Municipal Bonds 26,000,000 13.88 Municipal Commercial Paper 31,726,000 16.94 Total $187,277,866 100.00%

The table above reflects General and Operating funds and does not include monies escrowed for General Mobility program commitments, funds held in the Reserve Funds or the Interest and Sinking Fund or proceeds of Authority debt obligations. See “DEBT AND OTHER OBLIGATIONS – GENERAL MOBILITY CONTRACTS” and “– GENERAL MOBILITY ESCROW.”

EXPENDITURES

BUDGET

The Authority Act requires the Board to adopt an annual operating budget of all major expenditures by type and amount for each fiscal year before conducting any business in the fiscal year. The Authority must hold a public hearing on each proposed annual operating budget, or any amendment to the budget, before adopting the budget or amendment.

The Authority constantly manages performance against its budget. Detailed financial reports are produced monthly and quarterly for review by the Board. Each department prepares quarterly reports and meets with the Board to review the departmental budget performance against goals and business initiative accomplishments.

The Authority budgets its Total Operating Expenses for each fiscal year. “Total Operating Expense” is the sum of all employee labor, the cost of supporting that labor (e.g., insurance, space, utilities) and the direct costs for operating and maintaining the bus and rail system, including purchased transportation and support vehicles (e.g., parts, fuel, tires, batteries, etc.) and also includes the labor expenses of the Authority’s employees incurred when those employees perform work on capital improvement projects.

The following table summarizes Fiscal Year 2013 actual and budgeted operating expenses by cost category and the Fiscal Year 2014 operating budget.

OPERATING BUDGET BY COST CATEGORY Change in Budget Variance(1) FY 2014 vs. FY 2013(2) FY 2013 FY 2013 FY 2014 Budget Actual Amount % Budget Amount % Expense Category Salaries and Wages $ 176,983,719 $ 176,462,383 $ (521,336) -0.44% $ 189,819,834 $ 12,836,115 7.3% Fringe Benefits 88,752,289 84,233,971 (4,518,318) -5.09% 95,461,174 6,708,885 7.6% Subtotal Labor and Fringe Benefits $265,736,008 $ 260,696,354 $( 5,039,654) -1.90% $ 285,281,008 $ 19,545,000 7.4%

Services $ 34,712,488 $ 27,722,550 $ (6,989,938) -20.14% $ 39,933,471 $ 5,220,983 15.0% Materials and Supplies 19,689,940 20,474,307 784,367) 3.98% 21,115,065 1,425,125 7.2% Fuel & Utilities 50,104,164 48,821,352 (1,282,812) -2.56% 51,522,033 1,417,869 2.8% Casualty and Liability 3,256,864 2,637,148 (619,716) -19.03% 4,677,577 1,420,713 43.6% Purchased Transportation 80,895,333 81,063,261 167,928 0.21% 88,591,060 7,695,727 9.5% Leases, Rentals and Miscellaneous 7,720,430 7,023,473 (696,957) -9.03% 7,431,621 (288,809) (3.7%) Subtotal Non-Labor $ 196,379,219 $ 187,742,091 $ (8,637,128) -4.40% $ 213,270,828 $ 16,891,609 8.6%

Subtotal Labor and Non-Labor $ 462,115,227 $ 448,438,445 $(13,676,782) -2.96% $ 498,551,836 $ 36,436,609 7.9%

Emergency Fund ------$ 1,000,000 $ 1,000,000 -- Contingency 4,608,993 -- $(4,608,993) -100.00% 9,000,000 4,391,007 95.3% Allocation to Capital Program and (21,724,220) $2,550,672 -11.74% (21,158,651) 565,569 2.6% GMP (19,173,548) Subtotal Contingency/ Allocation (17,115,227) $ (19,173,548) $ (2,058,321) 12.03% $ (11,158,651) $ 5,956,576 34.8% Total Operating Expenses $ 445,000,000 $ 429,264,897 $ (15,735,103) -3.54% $ 487,393,187 $ 42,393,187 9.5%

(1) Fiscal Year 2013 Actual compared to Fiscal Year 2013 Budget. (2) Fiscal Year 2014 Budget compared to Fiscal Year 2013 Budget.

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The Authority also budgets its annual capital expenditures, consisting of capitalized purchases comprising part of Total Operating Expenses as well as the costs of labor and support costs to plan, manage and implement General Mobility, Capital Improvements, METRORail and Debt Service together with labor and support costs for bus and rail service funded by Formula and CMAQ capital funds. The sum of the total amount is referred to as the “Capital Program.” The following table summarizes the Operating and Capital Budgets for Fiscal Years 2013 and 2014.

SUMMARY OF BUDGETS Change in Budget Variance(1) FY 2014 vs. FY 2013(2) Purpose FY 2013 Budget FY 2013 Actual Amount % FY 2014 Budget Amount % Operating Budget $ 445,000,000 $ 429,264,897 $ (15,735,103) -3.54% $ 487,393,187 $ 42,393,187 10% Capital Program: General Mobility 164,834,000 151,241,201 (13,592,799) -8.25% 160,120,730 (4,713,270) -3% Capital Improvement 159,777,000 104,952,792 (54,824,208) -34.31% 198,367,000 38,590,000 24% METRORail Expansion 559,400,000 448,336,497 (111,063,503) -19.85% 314,557,000 (244,843,000) -44% Debt Service 78,302,000 75,121,898 (3,180,102) -4.06% 80,198,494 1,896,494 2% TOTAL $ 1,407,313,000 $1,208,917,285 $(198,395,715) -14.10% $1,240,636,411 $(166,676,589) -11%

(1) Fiscal Year 2013 Actual compared to Fiscal Year 2013 Budget. (2) Fiscal Year 2014 Budget compared to Fiscal Year 2013 Budget.

Substantial risks that could cause a variance between actual and budgeted expenses include possible increases in pension and other employee benefit funding requirements, possible increases in unhedged energy costs or failures of hedges, increased costs from possible storm damage and other risks that cannot be predicted or avoided. Neither the Authority’s budgets nor the data in the above tables employ generally accepted accounting principles since they are prepared to manage, rather than to fairly present, financial condition and performance. Accordingly, the data in the above tables may differ from financial data appearing elsewhere in this Official Statement.

Although the Authority has successfully limited its actual expense to budgeted expense in each of the last seven fiscal years, there can be no assurance that it will be successful in doing so in the future.

FISCAL YEAR 2014 BUDGET

METRO has approved its Fiscal Year 2014 budgets for operations, General Mobility, its Capital Program and Debt Service. The highest priorities for Fiscal Year 2014 include increasing ridership with a back to basics approach to delivering quality transit services, which includes investment in bus service, while opening three new lines to extend current rail service. See “INVESTMENT CONSIDERATIONS— FORWARD LOOKING STATEMENTS.”

FINANCIAL HEDGES FOR FUEL

The Authority employs physical forward and financial commodities contracts to provide fuel and energy commodity price certainty for up to 24 months of expected consumption. Counterparties to the fuel hedging contracts must either have a minimum long-term rating of “A3” or “A-” assigned by at least two of the three nationally recognized rating agencies or comply with collateral posting requirements. Certain features of the Authority’s Fuel Hedge Policy and outstanding diesel fuel swaps are summarized in Note 7 (beginning on page 59) to the Authority’s financial statements for the Fiscal Year ended September 30, 2013, under the sections captioned “Fuel Hedge Policy” and “Outstanding Diesel Fuel Swaps” which are attached hereto as APPENDIX B.

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Table 5 below describes the Authority’s expenditures by category for its Fiscal Years ending September 30, 2009 through 2013 and comparative information for the six-month periods ending December 31, 2012 and 2013.

TABLE 5 — OPERATING AND CAPITAL EXPENDITURES AND DEPRECIATION

Three Months Fiscal Year Ended September 30, Ended December 31, (unaudited) 2009 2010 2011 2012 2013 2012 2013 Operating cost before depreciation $ 417,704,339 $ 418,575,388 $ 432,207,302 $ 436,406,460 $ 436,049,187 $104,900,208 $108,088,743 Infrastructure(1) 116,744,258 150,091,349 188,467,654 222,054,292 170,373,931 45,747,680 19,143,124 Capital additions(2) 290,784,259 386,986,111 401,886,804 490,115,732 574,710,766 69,305,945 61,211,557 Total expenditures $ 825,232,856 $ 955,652,848 $1,022,561,760 $1,148,576,484 $1,181,133,884 $219,953,833 $188,443,424

Depreciation(3) $ 140,847,103 $ 143,977,419 $ 138,295,447 $ 137,094,956 $ 136,642,238 $ 31,905,961 $ 32,686,534

(1) See page 50 of the Financial Statements in the section captioned “Agreements to Fund Local Infrastructure & Mobility.” (2) See page 42 of the Financial Statements for a discussion and description of capital additions. (3) The Authority does not maintain a capital replacement fund to provide for the replacement of depreciated assets.

DEBT AND OTHER OBLIGATIONS

SALES TAX-SUPPORTED DEBT

Voter Authorized. In the 2003 Election, voters authorized the issuance of $640,000,000 of bonds payable from a pledge of 75% of the sales and use tax revenue collected by the Authority (the “Voted Sales Tax Bonds”) to fund projects for its transit system. The Authority has issued all of the bonds authorized at the 2003 Election. The Authority may hold one or more future elections to authorize additional sales tax bonds.

Under current State law, in addition to the Voted Sales Tax Bonds and other sales tax bonds approved by future elections, the Authority may issue certain other Senior Lien Obligations without an election, specifically (i) contractual obligations and (ii) commercial paper notes and sales and use tax bonds or notes with a five-year or shorter term.

Contractual Obligations. Contractual obligations may be issued as Senior Lien Obligations on a parity with the Voted Sales Tax Bonds and may be issued to finance vehicles and other personal property. As of March 28, 2014, $137,945,000 in aggregate principal amount of contractual obligations, all constituting Senior Lien Obligations, were outstanding.

Commercial Paper Notes. The Authority has established a $400 million commercial paper program (“CP Program”) for the issuance of Sales and Use Tax Revenue Commercial Paper Notes (the “CP Notes”) in multiple separate series. As described in further detail below, the current maximum issuance capacity of the CP Program is $275 million, which is the amount of authorized CP Notes secured by credit facilities. The current CP Program expires in June 2014, and, consistent with the terms of the Authority Act, the Authority expects to renew the CP Program for an additional five years prior to its expiration. The CP Notes are Senior Lien Obligations payable on a parity with the Obligations. The CP Notes are not secured by the Reserve Funds.

As of March 28, 2014, CP Notes were outstanding in the aggregate principal amount of $183,400,000.

The Authority has contracted for liquidity support for the CP Notes by means of (1) a $200,000,000 line of credit provided by JPMorgan Chase Bank, N.A., and (2) a $75,000,000 line of credit provided by State Street Bank and Trust Company. The lines of credit obligate the respective banks to provide liquidity for the payment of the principal of (but not interest on) maturing CP Notes, subject to certain conditions. If a bank makes an advance to pay for maturing CP Notes, the Authority must repay such advances over a two-year period. The stated expiration dates for the credit facilities are as follows: JPMorgan Chase Bank, N.A. (line of credit), June 20, 2014; and State Street Bank and Trust Co. (line of credit), June 15, 2014. The Authority expects to either renew or replace one or more of the facilities on or before such expiration dates.

MASTER LEASE PURCHASE PROGRAM

The Authority has established a Master Lease Purchase Program for the lease-purchase financing from time to time of equipment, including buses, bus rapid transit vehicles and rail rapid transit vehicles. The lease-purchase payments due under each lease purchase agreement are payable from sales and use taxes and other revenues, subject to appropriation on an annual basis, and are not secured by the Pledged Revenues. The Authority has entered into two lease-purchase agreements under the Master Lease Purchase Program. It is currently lease-purchasing 98 buses pursuant to the Series 2008A Lease Purchase Agreement, financed by $62,255,000 Series 2008A Certificates of Participation, and 60 buses pursuant to the Series 2008B Lease Purchase Agreement, financed by $45,785,000 Series 2008B Certificates of Participation. The aggregate principal portion of the Authority’s outstanding lease-purchase obligations as of January 31, 2014, was $73,780,000. The Series 2008A Lease Purchase

Agreement has a final maturity of November 1, 2020, and the Series 2008B Lease Purchase Agreement has a final maturity of November 1, 2021. The Authority may no longer enter into new lease-purchase agreements pursuant to the Master Lease Purchase Program, which expired on June 15, 2013.

OUTSTANDING DEBT

The following table summarizes selected terms of debt of the Authority payable from and, except for certificates of participation, secured by a senior lien on and pledge of Pledged Revenues on a parity with the Obligations and expected to be outstanding upon issuance of the Obligations. The table includes the Obligations.

TABLE 6 —OUTSTANDING DEBT AS OF APRIL 22, 2014

Principal Amount Reserve Fund Final Series Outstanding Interest Participant Maturity Senior Lien Obligations: Sales and Use Tax Bonds, Series 2009A $ 82,065,000 Fixed Yes(1) 2029 Series 2009C 82,555,000 Fixed Yes(1) 2038 Series 2011A 461,010,000 Fixed Yes(1) 2041 Subtotal $625,630,000

Contractual Obligations, Series 2009B 38,245,000 Fixed Yes(2) 2033 Series 2009D 25,010,000 Fixed Yes(2) 2021 Series 2010A 31,975,000 Fixed Yes(2) 2022 Series 2011B 42,715,000 Fixed Yes(2) 2023 Series 2014 130,605,000 Fixed No 2029 Subtotal $268,550,000

Commercial Paper Notes Series A-1 160,400,000 Variable No N/A Series A-3 23,000,000 Variable No N/A Subtotal $183,400,000

Lease Purchase Obligations: Series 2008A Certificates of Participation 40,150,000 Fixed No(3) 2020 Series 2008B Certificates of Participation 33,630,000 Fixed No(3) 2021 Subtotal $73,780,000

Total $1,151,360,000

______(1) Secured by the Sales Tax Bond Reserve Fund. (2) Secured by the Contractual Obligation Reserve Fund. (3) Secured by the Certificates of Participation Reserve Fund.

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ANNUAL DEBT SERVICE REQUIREMENTS

The following table sets forth the Authority’s annual debt service requirements on Senior Lien Obligations (other than CP Notes) to be outstanding after issuance of the Obligations, as well as the portion of debt service requirements expected to be paid to the Authority by the federal government, computed based upon the noted assumptions. The table excludes debt service on the CP Notes and the Series 2008A and Series 2008B certificates of participation. See “PLAN OF FINANCE” and “– OUTSTANDING DEBT.”

TABLE 7 – ANNUAL DEBT SERVICE REQUIREMENTS SECURED BY PLEDGED REVENUES

Less: Fiscal Outstanding The Obligations Combined Build Year Senior Lien Senior Lien America Combined Ending Obligations Total Debt Total Debt Bond Total Net Debt Sept. 30 Debt Service(1) Principal Interest Service Service(1) Subsidy(2) Service 2014 $52,513,956 $ $ $ 52,513,956 (1,843,453) 50,670,503 2015 52,515,956 6,693,506 6,693,506 59,209,463 (1,843,453) 57,366,009 2016 60,011,981 5,995,000 6,380,375 12,375,375 72,387,356 (1,843,453) 70,543,903 2017 59,967,406 6,300,000 6,073,000 12,373,000 72,340,406 (1,843,453) 70,496,953 2018 59,956,781 6,625,000 5,749,875 12,374,875 72,331,656 (1,843,453) 70,488,203 2019 59,978,931 6,965,000 5,410,125 12,375,125 72,354,056 (1,843,453) 70,510,603 2020 59,952,269 7,320,000 5,053,000 12,373,000 72,325,269 (1,843,453) 70,481,816 2021 59,947,181 7,700,000 4,677,500 12,377,500 72,324,681 (1,843,453) 70,481,228 2022 59,947,306 8,090,000 4,282,750 12,372,750 72,320,056 (1,843,453) 70,476,603 2023 56,222,956 8,505,000 3,867,875 12,372,875 68,595,831 (1,843,453) 66,752,378 2024 51,875,556 8,945,000 3,431,625 12,376,625 64,252,181 (1,843,453) 62,408,728 2025 46,604,169 9,400,000 2,973,000 12,373,000 58,977,169 (1,986,480) 56,990,689 2026 46,601,619 9,885,000 2,490,875 12,375,875 58,977,494 (1,986,480) 56,991,014 2027 46,606,181 10,390,000 1,984,000 12,374,000 58,980,181 (1,986,480) 56,993,702 2028 46,605,044 10,925,000 1,451,125 12,376,125 58,981,169 (1,986,480) 56,994,689 2029 46,602,531 11,485,000 890,875 12,375,875 58,978,406 (1,986,480) 56,991,927 2030 46,605,156 12,075,000 301,875 12,376,875 58,982,031 (1,986,480) 56,995,552 2031 45,422,094 45,422,094 (1,894,802) 43,527,292 2032 45,541,563 45,541,563 (1,707,234) 43,834,328 2033 46,224,500 46,224,500 (1,511,125) 44,713,375 2034 46,018,703 46,018,703 (1,306,052) 44,712,651 2035 42,847,594 42,847,594 (1,091,595) 41,755,998 2036 42,621,094 42,621,094 (867,333) 41,753,761 2037 42,388,203 42,388,203 (632,784) 41,755,420 2038 42,144,844 42,144,844 (387,527) 41,757,317 2039 41,886,891 41,886,891 (131,080) 41,755,810 2040 41,756,000 41,756,000 41,756,000 2041 41,755,750 41,755,750 41,755,750 2042 41,758,500 41,758,500 41,758,500 TOTAL $1,432,880,716 $130,605,000 $61,711,381 $192,316,381 $1,625,197,097 ($41,726,395) $1,583,470,702 ______(1) Excludes debt service on the CP Notes. (2) Represents federal subsidy for the Series 2009C Sales Tax Bonds issued as direct subsidy “Build America Bonds.” The subsidy has been reduced by 7.2% per annum from Fiscal Year Ending 2014. The schedule also assumes a 7.2% reduction (subject to change) applied from fiscal years 2015 through 2024 (the last year of sequestration under current law). See “– OUTSTANDING DEBT” and “INVESTMENT CONSIDERATIONS – RISKS ASSOCIATED WITH FEDERAL FUNDING” and “– RISKS RELATING TO BUILD AMERICA BONDS.”

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MAXIMUM AND AVERAGE ANNUAL DEBT SERVICE REQUIREMENTS

After the issuance of the Obligations, the MADS and combined average annual debt service requirements on the Senior Lien Obligations (other than the CP Notes) will be $70,543,903 and $54,602,438, respectively. In addition to the Senior Lien Obligations, the Authority is obligated on lease purchase obligations for the Series 2008A and Series 2008B certificates of participation, which are secured by a lien on buses. If debt service on the Senior Lien Obligations (other than the CP Notes) and the lease purchase obligations are combined, MADS would be $82,474,616 and the combined average annual debt service requirements would be $58,072,745. The foregoing calculations take into account projected federal subsidy payments (as shown on Table 7) on the Series 2009C Obligations issued as direct subsidy “Build America Bonds” and exclude debt service payments on the CP Notes.

DEBT SERVICE COVERAGE

Sales and use tax revenues accrued for Fiscal Year 2013 amounted to $642,515,462. Pledged Revenues for Fiscal Year 2013 are equal to 75% of such amount, or $481,886,596. Coverage of the MADS and combined average annual debt service requirements on the Senior Lien Obligations (other than CP Notes) by Fiscal Year 2013 Pledged Revenues, after giving effect to the issuance of the Obligations, is equal to 6.83x and 8.83x, respectively. If debt service on the Senior Lien Obligations (other than the CP Notes) and the Series 2008A and Series 2008B certificates of participation is combined, these ratios equal 5.84x and 8.30x, respectively. The foregoing calculations take into account projected federal subsidy payments on the Series 2009C Obligations issued as direct subsidy “Build America Bonds” and exclude debt service payments on the CP Notes.

GENERAL MOBILITY CONTRACTS

Pursuant to the 2012 Election and interlocal agreements, the Authority is committed through December 31, 2025, to make payments to or on behalf of Harris County, the City and the Participating Municipalities of up to 25% of sales and use tax revenue collected by the Authority for General Mobility projects. The Authority is also committed by the 2012 Election to seek additional voter authority to renew its General Mobility commitments beyond December 31, 2025.

GENERAL MOBILITY ESCROW

Recognizing the potential liquidity risks associated with varying rates at which sales tax revenues pledged to General Mobility will be billed to the Authority by other local governments, in October 2010 the Authority established an escrow account to isolate funds dedicated to intergovernmental obligations. Contributions are deposited to the escrow account each month from sales tax receipts in amounts equal to 25% of the current net receipts. As of February 28, 2014, the Authority had collected and escrowed $68,586,161 in sales tax revenues committed to the General Mobility program in the service area that had not been billed for reimbursement by the partner local governments. See “EXPENDITURES – FISCAL YEAR 2014 BUDGET.”

DEBT POLICY

In April 2009, the Board approved an updated Debt Policy for the Authority (the “Debt Policy”). The Debt Policy sets forth guidance on the type of debt that may be incurred by the Authority (e.g., long-term versus short-term), the source of payment for its debt obligations and other factors to be considered when incurring debt. The Debt Policy allows the Authority to incur debt for only the following purposes: financing capital assets, improving infrastructure, refunding or defeasing existing obligations, funding capitalized interest, paying costs of issuance or making deposits to reserve funds and other funds required in debt instruments. The Debt Policy specifies budgeting interest costs on variable rate debt, such as 1% above the two-year historical average rate for the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Index (formerly the BMA Municipal Swap Index), plus ongoing costs such as credit facilities. Additionally, the Debt Policy specifies financial policies such as the use of external economists for sales tax projections and maintaining a working capital reserve amount of at least 15% of annualized budgeted operating expenditures. Compliance with all continuing disclosure agreements is part of the Debt Policy.

SWAP POLICY

The Authority has a policy of not entering into derivative transactions related to the Authority’s debt. The Authority does, however, enter into financial hedges, which are described under “EXPENDITURES – FINANCIAL HEDGES FOR FUEL.”

LEASE/LEASEBACK TRANSACTIONS

The Authority has five lease/sublease agreements as of March 28, 2014. Two are for facilities, two are for buses and one is for fare boxes/radios. Under each of the agreements, the Authority entered into a head-lease as lessor with an investor and simultaneously entered into a sublease agreement as lessee to lease back the assets. The Authority received upfront head-lease rent prepayments, which it placed into a trust invested in fixed-income deposits in an amount that, including interest, would be sufficient to fund all of its scheduled sublease rent payments through the date on which the Authority can exercise a designated purchase option.

The facility lease agreements require the Authority to maintain third-party payment guarantees by organizations with credit ratings of AA-/Aa3 or higher or purchase replacement coverage acceptable to the equity investors if the credit rating assigned to such guarantor by Standard & Poor’s Corporation or Moody’s Investor Corporation falls below a designated level. American International Group, Inc. (AIG) and Financial Security Assurance (FSA) continue to have credit ratings below the minimal requirements and the authority has been working with all parties to resolve all agreement issues. These agreements also provide for the Authority’s right to continue to use and control these facilities, buses and property during the term of the subleases so long as the Authority is not in default of its obligations under the lease/leaseback agreements. The Authority agreed to indemnify the investors against increased costs and any new or increased taxes or fees imposed on the leased assets, cash flows or income of the lease, other than changes to the income tax rate.

The Authority continues to negotiate with Bank of America, which is the equity investor in the two remaining facility leases as well as with Wells Fargo and Comerica which are the equity investors for the remaining bus and equipment leases. As of September 30, 2013, Bank of America is the only equity investor that officially requested the authority to replace the initial lease Equity Payment Agreement and the Letter of Credit (LOC) due to the downgrade of AIG. Each such lease agreement states that in the case of a default by the Authority, the Authority is to pay to the investor an equity “termination payment” which varies by amount and date according to a schedule provided at the related lease closing. The estimated cost to early terminate the remaining five leases is approximately $18 million. This estimate will fluctuate based on the schedule of termination payments, market conditions, and credit ratings for AIG and FSA.

Certain information about the lease/leaseback transactions is summarized in Note 7 of the Authority’s financial statements for the Fiscal Year ended September 30, 2013, attached hereto as APPENDIX B.

RETIREMENT PLANS

The Authority has three pension plans and two post-employment healthcare plans. Two of the pension plans are noncontributory, single employer, defined benefit plans and one is a defined contribution plan. The post-employment healthcare plans are single-employer, defined benefit plans that are available to eligible retirees.

Pension and post-employment healthcare contributions are authorized by the Board during its annual budgeting process. Monthly pension contributions are placed into separate trust accounts that are used to fund pension payments as they become due. Other post-employment benefits are funded on a pay-as-you-go basis. The Authority has no access to pension plan assets, which are kept in separate trust accounts and managed by two separate administrative committees. The Plans’ asset custodian, State Street Bank, is responsible for executing and recording all investment transactions authorized by the Plans’ money managers or committees.

Calculating the annual required contributions and obligations for the defined benefit pensions and the defined post-employment healthcare benefit plans requires the use of actuarial estimates that include: future employment, mortality, asset returns, salaries, funding, and healthcare cost trend rates, which are listed in tables on the following pages. These actuarial calculations reflect a long-term perspective and use techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and assets. See page 61 of Appendix B for a schedule of funding progress which presents multi-year trend information (2011-2013) about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities.

Defined Benefits Plans. The Transport Workers Union Pension Plan Local 260, AFL-CIO (“TWUPP”), is for employees hired before October 1, 2012 and whose jobs are covered by a collective bargaining agreement. These employees primarily consist of operators, mechanics and related support staff. TWUPP provides monthly normal retirement benefits based on the participants' years of service of not less than $300 per month. The calculation for monthly normal retirement benefits is based on the designated dollar amount times the number of credited years of service. The designated dollar amount used to determine the monthly normal retirement benefit is based on date of retirement and the current union contract. The designated dollar amount will change periodically (benefiting only future retirees) as a result of new contracts and has ranged from $50 effective August 1, 2002 to $60 effective February 1, 2009. Participants can only choose monthly distributions. No lump-sum payments are available unless the participant has a balance of $5,000 or less. TWUPP is managed by a four-member administrative committee comprised of two Transport Workers Union representatives and two non-union employees of the Authority appointed by the Board of Directors.

Plan participants are 100% vested after five years of credited services. Participants become eligible to receive benefits at the earlier of 28 years of credited services or at age 60 with five years of credited services. A participant who reaches the age of 55 and has 25 years of credited service may retire early with reduced benefits. In addition, after five years of credited service, the plan provides disability retirement benefits. Additional requirements include five years of vesting service for vested deferred retirement benefits and for preretirement spousal benefits.

TWUPP annual required contributions (“ARC”) are made based on actuarial valuations prepared annually by an independent actuary from data furnished by the Authority. The unfunded actuarial accrued liability (“UAAL”) as of January 1, 2013 was $85,698,753 and the pension expense recognized in the financial statements for the current and previous two fiscal years was

$14,544,413, $14,344,181 and $14,055,722, respectively. Actual contributions for the current and previous two fiscal years were $14,362,412, $14,206,770 and $13,224,450, respectively.

The Non-Union Pension Plan (“NUPP”) is primarily for full-time administrative staff and police officers hired before October 1, 2007. Participants are 100% vested in employer contributions to the plan after five years of credited service. Participants become eligible to receive benefits at age 65 with special provisions allowing for retirement at an earlier age. The minimum monthly normal retirement benefit of a participant who retires on or after their normal retirement date is $300 a month, provided the participant has at least ten years of credited service at retirement regardless of the date of their retirement. The monthly benefit is based on the average monthly salary of the participant for the last three years of service, number of service years, and the retirement factor of 2.5%. Participants can choose a lump-sum distribution or a monthly distribution. Participants with balances equal to or less than $1,000 automatically receive a lump-sum distribution payment or are rolled into another qualified plan. An employee who reaches age 55 with 15 years of credited services may retire early with reduced benefits. In addition, the plan provides for disability retirement benefits for total and permanent disability at any age, with benefits deferred to normal retirement date. Additional requirements include five years of vesting services for vested deferred retirement benefits and preretirement spousal benefits. NUPP is managed by a seven-member administrative committee comprised of employees and retirees of the Authority and private industry representatives appointed by the Board of Directors.

NUPP ARCs are based on actuarial valuations prepared annually by an independent actuary from data furnished by the Authority. The UAAL as of January 1, 2013 was $37,364,173 and the pension expense recognized in the financial statements for the current and previous two fiscal years was $8,764,797, $8,873,835 and $10,962,239, respectively. Actual contributions for the current and previous two fiscal years were $8,615,666, $8,907,720 and $10,725,234, respectively.

Significant actuarial assumptions used in the Authority’s plan valuations and funded status are listed below:

TWUPP NUPP Valuation date January 1st of each year January 1st of each year Cost method Projected unit credit Projected unit credit Inflation rate 3.0% per year IRS salary limit 3.0% per year IRS salary limit Asset valuation method Five-year smoothed market value Five-year smoothed market value Investment rate of return 8.0% per annum 8.0% per annum Funding policy Meeting the ARC requirements Meeting the ARC requirements Cost of living adjustments None None Projected salary increase None 2.5% per annum Assumed annual Retirement rate Varying percentage ranging Varying percentage ranging from 5% to 100% for age 60 from 20% to 100% for ages 55 through 70 through 70 Mortality and Disabled Mortality RP-2000 Combined Mortality with RP-2000 Combined Mortality with Projection Scale AA to year 2013 Projection Scale AA to year 2013

Amortization of gains/losses Level dollars/reestablished Level dollars/reestablished Method annually Annually Period 30 years closed 30 years closed Open to new members No (as of October 1, 2012) No

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The current and previous fiscal year contributions and changes in the net pension obligations for the last two fiscal years were:

Fiscal Year 2013 Fiscal Year 2012

TWUPP NUPP TWUPP NUPP Annual required contributions (ARC) $ 14,362,413 $ 8,689,450 $ 14,206,770 $ 8,833,935 Interest on net pension obligation (1,649,407) (456,439) (1,245,299) (361,598) Adjustment to ARC 1,831,407 531,786 1,382,710 401,498

Annual pension cost 14,544,413 8,764,797 14,344,181 8,873,835

Contributions 14,362,412 8,615,666 14,206,770 8,907,720

Change in net pension obligation 182,001 149,131 137,411 (33,885) Beginning net pension obligation/(asset) (20,617,580) (6,060,511) (20,754,991) (6,026,626)

Ending net pension obligation/(asset) $ (20,435,579) $ (5,911,380) $ (20,617,580) $ (6,060,511) Percentage of pension cost contributed 98.75% 98.30% 99.04% 100.38% Percentage of ARC contributed 100.00% 99.15% 100.00% 100.84%

The funded status of the TWUPP and NUPP pension plans as of January 1, 2013 (in thousands) was as follows:

Actuarial Actuarial Accrued UAAL as a Value of Liabilities Unfunded Funded Ratio Covered Percentage of Assets (AAL) (UAAL) Percentage Payroll Covered Payroll TWUPP $181,661 $267,359 $85,698 67.9% $91,830 93.3% NUPP 113,145 150,509 37,364 75.2 44,389 84.2

The TWUPP and NUPP Annual Pension Cost (“APC”) and net pension obligations are as follows:

Year-End Annual Percentage of Net Pension Pension Cost APC Funded Obligation/(Asset) TWUPP 2011 $ 14,055,722 94.09% $ (20,754,991) 2012 14,344,181 99.04 (20,617,580) 2013 14,544,413 98.75 (20,435,579)

NUPP 2011 $ 10,962,239 97.84% $ (6,026,626) 2012 8,873,835 100.38 (6,060,511) 2013 8,764,797 98.30 (5,911,380)

Defined Contribution Pension Plan (“DCPP”). The NUPP was closed October 1, 2007 and the TWUPP was closed October 1, 2012 to new employees. Individuals hired after those dates are placed into a DCPP. As part of the DCPP, the Authority will contribute two percent (2%) of the employee’s annual salary and will match up to an additional four percent (4%) of their contributions. All contributions are placed into a third party trust account. Employee’s vesting rates are 40 percent (40%) after the second year and 20 percent (20%) annually thereafter. Contributions by the Authority for the current and previous two fiscal years were $1,121,291, $769,874 and $604,251, respectively, with employees contributing $1,040,871, $757,795 and $501,089, respectively.

NEW PENSION ACCOUNTING RULES

New accounting rules adopted by GASB in June 2012 will result in significant changes in the Authority’s financial statements relating to its Defined Benefit Plans. Statement No. 67 (“GASB 67”) is effective for fiscal years beginning June15,

2013 or later and addresses financial reporting for state and local government pension plans. Statement No. 68 (“GASB 68”) is effective for fiscal years beginning June 15, 2014or later and establishes new accounting and financial reporting requirements for governments that provide their employees with pensions. The statements are available from GASB. The new accounting rules are expected to have a negative impact on the Authority’s overall net pension liability; however, the Authority does not expect the rules to have a significant negative impact on the Authority’s contribution to its Defined Benefit Plans. Changes include, but are not limited to:

• The calculation of the Authority’s funding obligation (UAAL) will be different and separate from the calculation of the Authority’s “net pension liability” (the amount that it is required to report in its financial statement).

• If current and expected future plan assets (including projected contributions on behalf of current plan participants) are insufficient to cover projected benefit payments for current employees and retirees, projected benefit payments will be discounted to their present value using a blended rate, as follows: (i) the long–term expected rate of return on plan investments can be used to discount projected benefits that are covered by projected assets and (ii) a yield or index rate for 20-year tax-exempt, high-quality municipal bonds with an average rating of AA/Aa or higher will be used to discount projected benefits that are not covered by projected assets.

• The Defined Benefit Plans currently assume a long-term expected rate of return on plan investments of 8.0%. If a Pension System does not have plan assets that fully cover its projected benefit payments, the new GASB rules would require the Authority to use a blended rate to discount such payments, which rate would be lower than 8.0%. Although the Authority’s financial statement will reflect a significant increase in the Authority’s net pension liability, the Authority’s UAAL (funding obligation) will not be affected.

• GASB 67/68 mandates a particular Actuarial Cost Method for determining the Normal Cost and Accrued Liability elements of the plan's liabilities for financial reporting purposes. The GASB-mandated Actuarial Cost Method may be different from the Actuarial Cost Method currently being used for determining the Normal Cost and Accrued Liability elements of the plan's liabilities for calculating the Actuarial Required Contribution (ARC) for funding purposes. Also, for financial reporting purposes, GASB mandates that the market value of assets must be used for determining the Net Pension Liability and that shorter amortization periods must be used for determining an Actuarially Determined Employer Contribution (ADEC). In the case of Defined Benefit Plans, the ADEC for pension expense purposes in accordance with GASB 68 is expected to be [higher] than the ARC for funding purposes.

• Numerous changes to the presentation of financial, actuarial, and accounting information.

RISK FACTORS RELATING TO PENSION SYSTEMS

There are numerous actuarial assumptions that an actuary makes in evaluating a pension plan. Any material deviation between actual results and the actuary’s assumptions over an extended period of time can have a significant impact on actuarial funding. These deviations can include, but are not limited to, actual investment performance different than assumed, changes in post-retirement longevity of retirees, and changes in the level of benefits provided. See also “Investment Considerations --The Authority’s Unfunded Future Expenses for Prior Employment May Grow Substantially and Adversely Affect its Financial Condition.”

OTHER POST-EMPLOYMENT BENEFITS

The Authority sponsors two single-employer defined benefit Other Post-employment Healthcare Plans, which include the Transport Workers Union Metropolitan Transit Authority Health & Welfare Trust (“Trust”) and the Non-Union Plan. These plans cover medical, dental and life insurance for retirees, with a retiree’s contribution being based on years of service for the Non-Union Plan. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and historical pattern of cost sharing between the employer and plan members. The Authority is on a pay-as-you-go funding basis for these benefits.

The Trust is a separate legal entity that is managed by four trustees who are responsible for managing resources and establishing benefits. Two of the trustees are from the Transport Workers Union Local 260, AFL-CIO and two are from the Authority. Payments to the Trust are irrevocable and made monthly based on amounts established during contract negotiations with the union. To qualify for this retirement benefit, an employee must be either 60 years of age with 5 years of credited services, any age with 28 years of credited services, or 55 years of age with 25 years of credited services or meet disability qualifications. Actual contributions for the current and previous two fiscal years were $8,116,228, $7,347,943 and $7,168,000, respectively.

The Non-Union Plan is administered by the Authority and covers full-time employees with payments made as services are provided. To qualify for this benefit, an employee must be 55 years of age or older with 5 years of credited services. Employees hired after December 31, 2009 are not eligible for post-retirement medical and dental benefits. Effective October 1 2012, the Authority moved retirees over the age of 65 and their spouses to the Extended Health program. This plan is capped at $2,801 per

24 person annually, including medical, dental, vision and pharmacy. Actual contributions for the current and previous two fiscal years were $3,211,888, $4,709,585, and $2,503,469, respectively. Significant actuarial assumptions used in the Authority’s Other Post-Employment Plans valuations are as follows:

Trust Non-Union

Valuation date Biennially on January 1st Biennially on January 1st Cost method Projected unit credit Projected unit credit

Healthcare cost trend rate Varying from 6.2% declining Varying from 8% declining to 3.9 % after 2100 to 4.6% after 2083 Investment rate of return without prefunding 4.0% per annum 4.0% per annum

Funding policy Pay-as-you-go Pay-as-you-go

Assumed annual Varying percentage ranging Varying percentage ranging retirement rate from 5% to 100% for age 55 from 20% to 100% for ages 55 through 70 through 70

Inflation assumption 2.75% per annum, compounded 2.75% per annum, compounded annually Annually

Mortality basis after normal Healthy lives (sex distinct) Healthy lives (sex distinct) Retirement RP-2000 Combined Mortality RP-2000 Combined Mortality Table projected to 2012 using Table projected to 2013 using Projection Scale AA Projection Scale AA

Disabled lives (sex distinct) Disabled lives (sex distinct) RP-2000 Disabled Mortality RP-2000 Disabled Mortality Table projected to 2012 using Table projected to 2013 using Projection Scale AA Projection Scale AA Amortization of gains and losses Method Level dollars/reestablished Level dollars/reestablished annually annually Period 30 years closed 30 years closed Open to new members Yes No

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The following calculations for Other Post-Employment Cost, Net Post-Employment Benefit Obligation, and Funded Status of the plans are based on independent actuarial reports. The Non-Union report was dated January 1, 2013, while the Trust report was dated January 1, 2012.

Fiscal Year 2013 Fiscal Year 2012 Trust Non-Union Trust Non-Union Annual required contributions $ 28,567,946 $ 10,155,179 $ 28,567,946 $ 12,469,800 Interest on prior year net post employment benefit obligation 3,209,716 1,735,335 3,209,716 1,027,621 Adjustment to annual required Contributions ( 4,461,976) (2,412,370) ( 4,461,976) (1,428,544) Other post-employment cost 27,315,686 9,478,144 27,315,686 12,068,877 Contribution 8,116,228 3,211,888 7,347,943 4,709,585 Change in net post-employment benefit obligation 19,199,458 6,266,256 19,967,743 7,359,292 Beginning net post-employment benefit obligation 100,210,647 43,383,374 80,242,904 36,024,082 Ending net post-employment benefit obligation $119,410,105 $ 49,649,630 $100,210,647 $ 43,383,374

Percentage of post-employment benefit cost contributed 29.71% 33.89% 26.90% 39.02%

The Trust and Non-Union Other Post-Employment Benefit (“OPEB”) cost and Net OPEB Obligation are as follows:

Year-End Annual Percentage of Net OPEB OPEB Cost OPEB Funded Obligation Trust 2011 $ 27,606,406 25.96% $ 80,242,904 2012 27,315,686 26.90 100,210,647 2013 27,315,686 29.71 119,410,105

Non-union 2011 $ 12,068,877 20.74% $ 36,024,082 2012 12,068,877 39.02 43,383,374 2013 9,478,144 33.89 49,649,630

The funded status of the Trust and Non-Union OPEB plans are as follows:

Actuarial Actuarial Accrued Valuation Value of Liabilities Unfunded Funded Ratio Date Assets (AAL) AAL Percentage Trust October 1, 2012 - $ 338,260,120 $ 338,260,120 - Non-Union October 1, 2012 - 108,927,425 108,927,425 -

More detail regarding OPEB can be found on page 46 of the Authority’s financial statements for the Fiscal Year ended September 30, 2013, attached hereto as APPENDIX B.

CLAIMS AND LITIGATION AFFECTING THE AUTHORITY

The Authority is a defendant in various lawsuits and is aware of pending claims arising in the ordinary course of its governmental and enterprise activities, certain of which seek substantial damages. That litigation includes lawsuits claiming damages that allege that the Authority caused personal injuries and wrongful deaths; class actions and other lawsuits and claims alleging discriminatory hiring and promotion practices; various claims from contractors for additional amounts under construction contracts; and various other liability claims. The status of such litigation ranges from an early discovery stage to various levels of appeal of judgments both for and against the Authority. The amount of damages is limited in certain cases under the Texas Tort Claims Act and is subject to appeal. The Authority regularly reviews the potential cost exposure of such cases and does not anticipate these exposures will interfere with the normal course of business. The Authority intends to defend itself vigorously

26 against the suits; however, no prediction can be made, as of the date hereof, with respect to the liability of the Authority for such claims or the final outcome of such suits.

The Authority is also aware that various claims for inverse condemnation may be asserted against the Authority, the aggregate amounts of which are unknown and could affect the capital cost of METRORail Expansion.

CAPITAL PROGRAM

DESCRIPTION

The Authority Act requires the Board to adopt an annual budget which specifies major expenditures by type and amount. Each year the Board approves a rolling five year Capital Program Budget, which is revised annually to include new projects to reflect changes in priorities, established through input from the Board, staff, and citizens. The Capital Program consists of MetroRail Expansion (MRE) and the Capital Improvement Program (CIP).

The Authority’s funding of its Capital Program Budget is subject to available funding sources and access to the financial markets. The Authority does not intend to issue any debt that could be expected to adversely affect the sufficiency of revenues to pay costs of operation and maintenance of the Authority’s transportation services. Consequently, the Authority intends to adjust its capital plans as necessary to finance the plans consistent with available resources and operating needs.

The Authority’s Fiscal Year 2014-2018 Capital Program Budget reflects expenditures of $1.32 billion, with $510 million budgeted for MRE and $810 million budgeted for CIP.

The table below summarizes the $512.9 million Capital Program Budget for Fiscal Year 2014:

Capital Program FY2014 Annual Budget (in millions) Description Proposed FY14 METRORail Expansion Program (MRE)(2) Budget(1) LRT Lines $304.488 Main Street Vehicles & Other 10.069 Total MRE 314.557

Capital Improvement Program (CIP) Main Street Upgrades and Other MRE-related projects 15.308

State of Good Repair Bus and Van Acquisitions 67.324 State of Good Repair Projects 61.895 Total State of Good Repair 129.219

Enhancement of Existing Assets (Less MRE related projects) 21.389 Service Expansion 32.451 Total CIP 198.367 TOTAL Capital Program $512.924

______(1) Reflects a decrease of $206.3 million or 29% over the FY 2013 approved budget. This decline is largely due to a $244.8 million or a 44% decrease in METRORail expansion expenditures, offset by a $38.5 million or 24% increase in planned Capital Improvement Program expenditures. (2) Funding sources include proceeds of borrowing (contractual obligations and bond issuances) totaling $33.9 million and grant revenues of $126.65 million. An additional $153.5 million will be used from fund balance to cover remaining expenditures.

The Fiscal Year 2014 budget allots $314.6 million for MRE program expenditures, specifically, $304.5 million for the LRT lines, $10.1 million for Main Street rail vehicle procurements, on-board equipment expenditures, and other related expenses, $198.4 million for the CIP program: specifically, $15.3 million for Main Street upgrades and other MRE related projects (considered separate from the MRE program), $129.2 million for State of Good Repair projects (including bus acquisitions, METROLift van replacements, bus and facilities improvements and support vehicles), $21.4 million for projects that enhance existing assets and $32.5 million for projects relating to service expansion.

See below for additional detail regarding Fiscal Year 2014 priorities for the MRE and CIP budgets.

METRORail Expansion. MRE is a Light Rail Transit (LRT) infrastructure plan to expand the existing LRT system by adding three additional lines (North, Southeast, and East End). This program includes the design and construction of approximately 15 miles of LRT, 24 LRT stations, a storage facility at the Southeast line, a service and inspection facility at the East End line, and the procurement of 39 Light Rail Vehicles for the opening day fleets. The expansion also includes the capacity to increase the existing Main Street Red Line fleet by procuring 19 additional vehicles and expansion of the existing Rail Operations Center. Other costs included are MRE pre-design/build program development, planning, engineering and land acquisition.

Capital Improvement Program. The CIP provides for the capital needs that are outside the scope of the METRORail Expansion (e.g., bus replacement, facility renovations, procurement of equipment, etc.). The infrastructure supported by the FY 2014 CIP budget includes facilities (maintenance and administrative support), revenue rolling stock (rail cars, buses and paratransit vans), rail system infrastructure including rail stations and a vast array of tools and equipment.

INVESTMENT CONSIDERATIONS

THE PURCHASE OF THE OBLIGATIONS IS SUBJECT TO CERTAIN RISKS. EACH PROSPECTIVE INVESTOR IN THE OBLIGATIONS IS ENCOURAGED TO READ THIS OFFICIAL STATEMENT IN ITS ENTIRETY, INCLUDING ALL APPENDICES HERETO. PARTICULAR ATTENTION SHOULD BE GIVEN TO THE FACTORS DESCRIBED BELOW, WHICH, AMONG OTHERS, COULD AFFECT THE PAYMENT OF PRINCIPAL OF AND INTEREST ON THE OBLIGATIONS AND WHICH COULD ALSO AFFECT THE MARKET PRICE OF OBLIGATIONS TO AN EXTENT THAT CANNOT BE DETERMINED.

FORWARD-LOOKING STATEMENTS

The statements contained in this Official Statement, and in other information provided by the Authority, that are not purely historical, are forward-looking statements, including statements regarding the Authority's expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this Official Statement are based on information available to the Authority on the date hereof, and the Authority assumes no obligation to update any such forward-looking statements.

The forward-looking statements herein are necessarily based on various assumptions and estimates that are inherently subject to numerous risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate.

FUNDING OF CAPITAL IMPROVEMENT PROGRAM AND OPERATIONS

The Authority’s funding of its capital improvement plan is subject to available funding sources and access to the financial markets. The amount of debt service the Authority pays will directly affect the amount of the Pledged Revenues available to the Authority to support its operations, maintenance and capital reinvestment needs. The Authority does not intend to issue any debt that could be expected to adversely affect the sufficiency of revenues to pay costs of operation and maintenance of the Authority’s transportation services. Consequently, the Authority intends to adjust its capital plans as necessary to finance the plans consistent with available resources and operating needs.

RISKS ASSOCIATED WITH FEDERAL FUNDING

The receipt of capital grants from the FTA is not assured and is subject to approval by the FTA, Secretary of Transportation and Office Management and Budget as well as appropriation by the U.S. Congress, to the allocation and delivery procedures of the U.S. Department of Transportation (“USDOT”) and the FTA, and to compliance by the Authority with conditions to the grants. Under the Sequestration Transparency Act of 2012 (“STA”), if Congress fails to enact legislation to reduce the federal deficit by $1.2 trillion, as required by the Budget Control Act of 2011, the STA will automatically trigger large scale cuts in the federal budget. The STA went into effect March 1, 2013.

If federal funding for transit programs is reduced, whether as a result of the STA or for other reasons, METRO’s receipt of FTA grant funding, as well as METRO’s substantial recurring revenue from the FTA, could be delayed, not approved or cancelled.

RISKS RELATING TO BUILD AMERICA BONDS

The Authority's Series 2009C Sales Tax Bonds were issued as direct subsidy “Build America Bonds.” The Authority elected to receive a subsidy payment from United States Treasury equal to 35% of the interest the Authority pays on the Series 2009C Sales Tax Bonds. In order to receive the subsidy, the Authority is required to make certain filings with the Internal Revenue Service. If the Authority fails to make the required filings, it will not be eligible to receive the subsidy payments. Additionally, the proceeds of "Build America Bonds" have a number of limitations on their use. If the Authority were to use the proceeds of the Series 2009C Sales Tax Bonds for expenditures other than capital expenditures, reasonably required reserve funds, and costs of issuance, the Series 2009C Sales Tax Bonds would not be eligible for the subsidy payments or as an offset against amounts owed by the Authority to the federal government. In federal fiscal year 2013, the subsidy was reduced by 8.7%, as a result of sequestration. In federal fiscal year 2014, the subsidy is reduced by 7.2%. To date, in 2014 the Authority realized a reduction of $71,513 in subsidy payments as a result of the 7.2% sequestration reduction. The subsidy reduction equals 0.14% of the Authority’s total fiscal year 2014 combined debt service on Senior Lien Obligations (including the Obligations but excluding the CP Notes). Subsidy payments could be further reduced, or eliminated, as a result of a change in law, as a result of sequestration. The Authority has determined that the reduced amount of the subsidy to be received from the Treasury in relation to the Series 2009C Sales Tax Bonds as a result of Sequestration will not have a material impact on the financial condition of the Authority or its ability to pay regularly scheduled debt service on Series 2009C Sales Tax Bonds when and in the amounts due and owing.

LOSS OF TAX EXEMPTION

In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Obligations, the Authority has covenanted in the Resolution to comply with the applicable requirements of the Internal Revenue Code of 1986, as amended. The interest on the Obligations could become includable in gross income for purposes of federal income taxation retroactive to the date of issuance of such Obligations as a result of acts or omissions of the Authority in violation of this or other covenants in the Resolution applicable to the Obligations. The Obligations are not subject to redemption or any increase in interest rates in the event of an event of taxability and will remain outstanding until maturity or prior redemption in accordance with the provisions contained in the Resolution. See “TAX MATTERS.”

GOVERNMENT DEBT CEILING

The federal government has been periodically subject to the risk of a failure to raise the nation’s debt ceiling. This event could have a material adverse impact on the operations of the Authority. The Authority cannot make any assurances as to the degree to which a failure to raise the debt ceiling might have on the operations of the Authority.

REGULATIONS AND RESTRICTIONS AFFECTING THE AUTHORITY

The operations of the Authority are affected by a variety of contractual, statutory and regulatory restrictions and limitations. The Authority also has been required to implement enhanced security measures mandated by the FTA, DHS and Authority management. It is not possible to predict whether future restrictions or limitations on Authority operations will be imposed, whether future legislation or regulations will affect anticipated federal funding or collections for the Authority, whether additional requirements will be funded by the federal government or require funding by the Authority, or whether such restrictions or legislation or regulations would adversely affect the Pledged Revenues.

THE AUTHORITY HAS LIMITED ABILITY TO INCREASE OR MAINTAIN REVENUE

The Authority has imposed the maximum sales tax authorized by law, and it has no authority to impose property taxes in proportion to value or to impose other taxes without an election. Unless additional taxes are authorized at an election, the Authority’s sales and use tax revenue will be limited by changes in the value of taxable transactions within its boundaries, which are beyond its control. Variations in the amount of receipts can be affected adversely by a number of variables, including possible (1) changes in State law and administrative practices governing the remittance and allocation of sales and use tax receipts, (2) changes in the transactions against which the sales and use tax may be imposed, (3) further migration of commerce to Internet sales that are not taxed or taxes from which cannot be effectively collected, and (4) changes in economic activity within the Authority’s taxing jurisdiction.

The increasing use of the Internet to conduct electronic commerce may affect the collection of the sales and use tax. To the extent that transactions subject to the sales and use tax imposed by the Authority avoid normal collection and remittance procedures because they occur over the Internet, the Authority’s receipt of sales and use tax may be adversely affected. At this time, the Authority is unable to predict how Internet sales may affect the amount of sales and use tax collected in the future. If, due to increases in Internet or other tax-exempt sales, the Authority’s sales and use tax revenue decreases or increases more slowly than operating expenses and debt service requirements, the Authority’s ability to pay the Obligations and maintain operations could be adversely affected to an extent that cannot be predicted.

The federal Internet Tax Freedom Act, as amended, imposes a moratorium on taxes on online commerce. The Act was first approved in 1998 and has been extended twice, most recently in 2007. The amendments to this act extend the moratorium until November 2014. There can be no assurance that the Act will not be extended past that time.

For additional investment considerations regarding the Authority’s sales and use tax, including seasonality, collection and delinquency issues, see the section captioned “REVENUES AND INVESTMENTS — SALES AND USE TAX AUTHORITY.”

ADDITIONAL OBLIGATIONS MAY BE INCURRED

Subject to certain financial tests and limitations contained in the Resolution, the Authority may issue Additional Obligations secured by a pledge of and lien on Pledged Revenues on a parity with the Obligations. Such Additional Obligations may or may not be entitled to the benefits of the Reserve Fund. The Authority may issue (i) additional bonds approved by voters at a future election or (ii) bonds or other obligations that do not require voter approval in order to provide financing for components of the Authority’s capital improvement plan. Under the Resolution, the Authority may also issue non-voted Additional Obligations for other purposes, including for the purchase of buses, rail cars and other equipment. The debt service requirements for the payment of any such Additional Obligations may be substantial. The financial tests that must be satisfied to permit the issuance of Additional Obligations are based on certain assumptions concerning future revenue and debt service requirements. Actual debt service requirements may exceed assumed requirements, and the excess could be substantial. In addition, the Authority may issue obligations secured by a junior lien without meeting any of the financial tests and limitations of the Resolution. See “– RIGHTS OF OWNERS ARE LIMITED” below.

THE AUTHORITY’S UNFUNDED FUTURE EXPENSES FOR PRIOR EMPLOYMENT MAY GROW SUBSTANTIALLY AND ADVERSELY AFFECT ITS FINANCIAL CONDITION

Pension. For its two defined benefit pension plans, the Authority has cumulatively contributed more than the annual required contributions. This has resulted in smaller unfunded liabilities than if the Authority had funded exactly the ARC each year. Under current accounting rules, this has resulted in a “net pension asset” of $20.4 million for TWUPP and $5.9 million for NUPP. If employee compensation in the years prior to retirement, or employee life expectancies are higher, or future Authority contributions to or investment returns on plan assets are lower, than those assumed, the combined UAAL for the Authority’s pension plans would be higher, and the increase could be substantial. In calculating the UAAL for its pension plans, the Authority assumed a rate of return on plan assets and used a discount rate equal to 8% per annum. For additional information, see “DEBT AND OTHER OBLIGATIONS – RETIREMENT PLANS.”

OPEB. The Authority has historically funded OPEB on a pay-as-you-go basis. If the Authority begins to prefund for OPEB, the expected effects include:

• Substantial reductions in the unfunded liabilities for OPEB. This would be due both to the direct effect of prefunding, and to the likely use of a higher discount rate for OPEB liabilities. • Substantial reductions in the annual required contributions. This would be primarily due to the likely use of a higher discount rate for OPEB liabilities. • In the short run, a larger cash expenditure for OPEB. Any prefunding would be in addition to pay-as-you-go costs. In the long run, prefunding is expected to reduce budget outlays for OPEB. The Authority’s UAAL for OPEB is expected to continue to grow significantly, unless the Authority begins to fund for current accruals of estimated OPEB expenses. If medical costs rise faster than expected or employees retire sooner than expected or live longer than expected, OPEB costs may grow at a higher rate than projected. Unless the Authority restricts the growth of or reduces its UAAL for OPEB, it may be required to pay substantial OPEB costs from current revenues in future years, and its financial condition may be adversely affected, before the Obligations are retired. OPEB costs are also sensitive to changes in Federal and State regulation of medical care and insurance, and future changes may substantially increase or decrease costs to the Authority. For additional information, see “DEBT AND OTHER OBLIGATIONS – OTHER POST-EMPLOYMENT BENEFITS.”

PAYMENT OF SHORT-TERM PARITY OBLIGATIONS MAY DEPEND ON MARKET ACCESS AND POSSIBLE MARKET DISRUPTIONS

The Authority may issue up to $275 million of CP Notes if needed to pay for costs of its Capital Improvement plan, including cost overruns, or to offset delays or a reduction in federal funding. The Authority is obligated to redeem the CP Notes within two years after expiration of the supporting line of credit or standby letter of credit, as applicable, unless the CP Notes are sooner refunded. The Authority may also issue parity Additional Obligations that are short-term obligations or subject to mandatory tender by the owners thereof and purchase or redemption by the Authority, with or without a supporting credit or liquidity facility.

Given recent history of the financial markets, the Authority cannot provide any assurance that it will have market access to remarket or refund such obligations, if issued, upon mandatory tender thereof for purchase or at maturity. The Authority may be unable to remarket or refund such parity obligations at that time due to then-existing market conditions or an unanticipated and

30 substantial deterioration in the financial condition of the Authority. The Authority is not obligated to fund or maintain any reserve fund for payment of the CP Notes or Additional Obligations, but, if it elects to do so, such Senior Lien Obligations could be entitled to be paid from one of the Reserve Funds. In addition, Pledged Revenues in excess of monthly accruals of debt service may be expended for other purposes. Consequently, if the CP Notes or any parity short-term or demand obligations cannot be remarketed or refunded and if Pledged Revenues and other legally available funds on hand are not sufficient to pay or redeem such obligations when due and pay principal of and interest on the other parity Senior Lien Obligations, the Reserve Funds could be depleted, and the Authority may be unable to pay principal of and interest on the Obligations in full when due.

The credit markets experience substantial disruption from time to time. There can be no assurance as to the timing of any disruption or the extent of any recovery. Disruptions in the credit markets could delay the Authority's ability to finance projects or result in increased borrowing costs for projects currently under construction or contemplated.

MAINTENANCE COSTS

Successful operation of the Authority’s transit system will require timely and adequate maintenance and replacement of components. No assurance can be given that sufficient funds will be available to maintain the transit system adequately over the long term. Any significant deterioration in the transit system may result in increased operating costs, reduced usage and, accordingly, reduced fare box revenues. Increased maintenance and operating costs may adversely affect the Authority's financial condition.

OPERATING REVENUES; NO PROPERTY TAXES

The Authority derives operating revenue from transportation fares, which include bus, rail and METROLift fare box receipts plus ticket sales from special events and the Texas Medical Center Route Guarantee Services. Although the Obligations are payable from fare revenue as well as sales and use tax revenue, under the Authority Act, the expenses of operating and maintaining the Authority’s transit system are a first lien on and charge against any revenue from operation or ownership of the system. The Authority has not historically earned (and does not expect to earn) any net revenue from the operation or ownership of its transit system. Consequently, prospective investors should not rely on operating revenue as a source of payment of the Obligations.

The Obligations are not payable from funds raised or to be raised by property taxes. The Authority has no authority to levy property taxes.

THE STATE COMPTROLLER MAY OFFSET CURRENT DISTRIBUTIONS FOR OVERPAYMENTS OR REMIT SALES AND USE TAX REVENUE LESS FREQUENTLY

The Comptroller periodically identifies underpayments and overpayments of sales and use tax revenues and responds to claims by taxpayers. In the event that the Comptroller determines that the Authority received an overpayment, the sales and use tax revenues for future periods are subject to reduction or the Authority may be required to make a repayment in order to reimburse the overpayment. Under State law, the Authority has no legal standing or ability to intervene or appeal the Comptroller’s determination. State law requires the Comptroller to remit sales and use tax revenue to the Authority as often as feasible and at least quarterly. The Comptroller remits sales and use tax revenues to the Authority and other taxing entities on a monthly basis. While the Authority has no reason to believe that the Comptroller’s current practice will be discontinued, there is no assurance that the Comptroller will continue to remit sales and use tax revenues to the Authority on a monthly basis. Thus, temporary cash flow irregularities could occur.

ADVERSE LEGISLATION COULD BE ENACTED

The Texas Legislature and the U.S. Congress may enact legislation that could materially affect the operations, financial condition and financial prospects of the Authority. In odd-numbered years, the Texas Legislature meets in a regular session lasting 140 days. The most recent session of the Texas Legislature ended on August 5, 2013. When the Texas Legislature is not in regular session, the Governor of Texas may call one or more special sessions, at his discretion, each lasting no longer than 30 days. There can be no assurance that the Texas Legislature or the U.S. Congress will not enact tax moratoriums or exemptions or other legislation that may adversely affect the operations of the Authority or its ability to pay the Obligations.

Tax legislation, administrative actions taken by tax authorities, and court decisions may cause interest on the Obligations to be subject, directly or indirectly, to federal income taxation or state income taxation, or otherwise prevent the beneficial owners of the Obligations from realizing the full current benefit of the tax status of such interest. For example, future legislation to resolve certain federal budgetary issues, including proposed legislation from House Ways and Means Committee Chairman Dave Camp, may significantly reduce the benefit of, or otherwise affect, the exclusion from gross income for federal income tax purposes of interest on all state and local obligations, including Obligations. On February 26, 2014, Chairman Camp released a discussion draft of a proposed bill which would significantly overhaul the Code, including the repeal of many deductions, changes to the marginal tax rates, and a provision which, as to certain high income taxpayers, effectively would impose a 10% surcharge on their “modified adjusted gross income,” defined to include tax-exempt interest received or accrued on municipal bonds. In addition, such legislation or actions (whether currently proposed, proposed in the future or enacted) could affect the market price

31 or marketability of the Obligations. Prospective purchasers of the Obligations should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and its impact on their individual situations, as to which Co-Bond Counsel expresses no opinion.

RIGHTS OF OWNERS ARE LIMITED

The Resolution does not establish specific events of default with respect to the Obligations. The Resolution provides no right to the acceleration of maturity of the Obligations upon the failure of the Authority to observe any covenant under the Resolution. In addition, under State law, the Authority is immune from a suit for damages from any default by the Authority on the Obligations or under the Resolution. Even if a judgment against the Authority could be obtained, it could not be enforced by direct levy and execution against the Authority’s property, which under State law is exempt from forced sale. An owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel Authority officers to observe or perform any of their undisputed obligations under the Resolution. The enforcement of any such remedy may be difficult and time consuming, and an owner of the Obligations could be required to enforce such remedy on a periodic basis. Except for acting as custodian for the Pledged Revenues until disbursed, the Trustee is not empowered to represent the interests of the owners of the Obligations upon any failure of the Authority to perform in accordance with the terms of the Resolution, or upon any other condition. The opinions of Co-Bond Counsel will note that all opinions relative to the enforceability of the Resolution and the Obligations are qualified with respect to the customary rights of debtors relative to their creditors.

The Authority is authorized by State law to file a petition for the adjustment of its debts under the United States Bankruptcy Code. The Authority may do so under Chapter 9 of the Bankruptcy Code if it is unable to pay its debts as they become due and it desires to effect a plan to adjust its debts. If the Authority files a petition for the adjustment of its debts under Chapter 9, owners of the Obligations would be automatically stayed from taking action to enforce their claims against the Authority during the pendency of the case, unless permitted by the court; the Authority’s pledge of Pledged Revenues as security for the Obligations would be ineffective as to revenues collected after the commencement of the case; and with the approval of the court the Authority could use previously collected Pledged Revenues for purposes other than paying the Obligations if it provides “adequate protection” to the owners of the relevant Obligations, among other consequences. In a proceeding for the adjustments of its debts, the Authority could propose, and the court could order, a plan that changes payment terms on the Obligations without the consent of the owners of the affected Obligations, if the plan is accepted by at least one class of Authority creditors and the court determines that the plan is in the best interests of the Authority’s creditors and does not discriminate unfairly among, and is fair and equitable to, each class of creditors whose claims are impaired and have not accepted the plan. For these purposes, a plan would be deemed accepted by the owners of the Obligations if approved by the owners of two-thirds in amount and a majority in number of the claims for the Obligations. All descriptions herein of contractual obligations of the Authority on the Obligations and under the Resolution are subject to these provisions of the Bankruptcy Code.

TAX MATTERS

TAX EXEMPTION

The delivery of the Obligations is subject to the opinion of Co-Bond Counsel to the effect that interest on the Obligations for federal income tax purposes (1) will be excludable from gross income, as defined in Section 61 of the Internal Revenue Code of 1986, as amended to the date of such opinion (the “Code”), pursuant to Section 103 of the Code and existing regulations, published rulings, and court decisions, and (2) will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as described below, corporations. Forms of Co-Bond Counsel’s anticipated opinions are reproduced as APPENDIX C. The statute, regulations, rulings, and court decisions on which such opinion will be based are subject to change.

Interest on the Obligations owned by a corporation, other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT) will be included in such corporation’s adjusted current earnings for purposes of calculating such corporation’s alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed.

In rendering the foregoing opinions, Co-Bond Counsel will rely upon representations and certifications of the Authority made in a certificate dated the date of initial delivery of the Obligations pertaining to the use, expenditure, and investment of the proceeds of the Obligations and will assume continuing compliance by the Authority with the provisions of the Supplemental Ordinance subsequent to the issuance of the Obligations. The Supplemental Ordinance contains covenants by the Authority with respect to, among other matters, the use of the proceeds of the Obligations and the facilities or equipment financed or refinanced therewith by persons other than state or local governmental units, the manner in which the proceeds of the Obligations are to be invested, the periodic calculation and payment to the United States Treasury of any “arbitrage profits” from the investment of the proceeds, and the reporting of certain information to the United States Treasury. Failure to comply with any of these covenants may cause interest on the Obligations to be includable in the gross income of the owners thereof from the date of the issuance of the Obligations.

Co-Bond Counsel’s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Authority described above. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to the matters addressed in the opinion of Co-Bond Counsel, and Co-Bond Counsel’s opinion is not binding on the IRS. The IRS has an ongoing program of auditing the tax-exempt status of the interest on tax-exempt obligations. If an audit of the Obligations is commenced, under current procedures the IRS is likely to treat the Authority as the “taxpayer,” and the beneficial owners (“Owners”) of the Obligations would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest of the Obligations, the Authority may have different or conflicting interests from the Owners of the Obligations. 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 its ultimate outcome.

Except as described above, Co-Bond Counsel will express no other opinion with respect to any federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Obligations. Prospective purchasers of the Obligations should be aware that the ownership of tax-exempt obligations such as the Obligations may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances.

PROPOSED TAX LEGISLATION

Tax legislation, administrative actions taken by tax authorities, and court decisions may cause interest on the Obligations to be subject, directly or indirectly, to federal income taxation or state income taxation, or otherwise prevent the beneficial owners of the Obligations from realizing the full current benefit of the tax status of such interest. For example, future legislation to resolve certain federal budgetary issues may significantly reduce the benefit of, or otherwise affect, the exclusion from gross income for federal income tax purposes of interest on all state and local obligations, including the Obligations. In addition, such legislation or actions (whether currently proposed, proposed in the future or enacted) could affect the market price or marketability of the Obligations. Prospective purchasers of the Obligations should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and its impact on their individual situations, as to which Co-Bond Counsel express no opinion.

TAX ACCOUNTING TREATMENT OF PREMIUM ON THE OBLIGATIONS

The initial public offering price of the Obligations (the “Premium Bonds”) is greater than the amount payable on such Obligations at maturity. An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Bond. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium that is amortizable each year by an initial purchaser is determined by using such purchaser’s yield to maturity.

Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Bonds.

CONTINUING DISCLOSURE OF INFORMATION

In the Resolution, the Authority has made the following agreement for the benefit of the holders and beneficial owners of the Obligations. The Authority is required to observe the agreement for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the Authority will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified events, to the Municipal Securities Rulemaking Board (the “MSRB”). Access to such information will be made available to the public without charge by the MSRB on its Electronic Municipal Market Access (“EMMA”) website at www.emma.msrb.org.

ANNUAL REPORTS

The Authority will provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the Authority of the general type included in this Official Statement under Tables numbered 1 through 7 and in APPENDIX B.

The Authority may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by Rule 15c2-12 (the “Rule”) of the United States Securities and Exchange Commission (the “SEC”). The updated information will include audited financial statements, if the Authority commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Authority will provide unaudited financial information and operating data which is customarily prepared by the Authority by the required time, and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in APPENDIX B or such other accounting principles as the Authority may be required to employ from time to time pursuant to state law or regulation.

The Authority’s current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the Authority changes its fiscal year. If the Authority changes its fiscal year, it will notify the MSRB of the change.

CERTAIN EVENT NOTICES

The Authority will notify the MSRB in a timely manner not in excess of ten (10) business days after the occurrence of the event, of any of the following events with respect to the Obligations, to the extent applicable: (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 Obligations; (7) modifications to rights of holders of the Obligations, if material; (8) Obligation calls, if material, and tender offers; (9) defeasances; (10) the 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 Authority; (13) the consummation of a merger, consolidation or acquisition involving the Authority or the sale of all or substantially all of the assets of the Authority other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or name change of a trustee, if material

In addition, the Authority will provide timely notice to the MSRB of any failure by the Authority to provide information, data, or financial statements in accordance with its agreement described above under “– ANNUAL REPORTS.

LIMITATIONS AND AMENDMENTS

The Authority has agreed to update information and to provide notices of material events only as described above. The Authority 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 Authority 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 Authority 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. Holders or beneficial owners of Obligations may seek as their sole remedy a writ of mandamus to compel the Authority to comply with its agreement. No default by the Authority with respect to its continuing disclosure agreement shall constitute a breach of or default under the Resolution for purposes of any other provision of the Resolution. Nothing in this paragraph is intended or shall act to disclaim, waive or otherwise limit the duties of the Authority under federal and state securities laws. The Authority’s undertakings and agreements are subject to appropriation of necessary funds and to applicable legal restrictions.

The Authority 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 Authority, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Obligations in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (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 Authority (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 Authority 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 Authority 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

For the past five years, the Authority has not failed to comply with any previous undertaking in accordance with the Rule.

OTHER INFORMATION

RATINGS

Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”) have assigned the following respective municipal bond ratings to the Obligations based on the Authority’s underlying credit.

Moody’s S&P Aa2 AA+

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 Authority makes no representation as to the appropriateness of the ratings. The Authority is not obligated to maintain the current ratings on the Obligations and 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. Neither the Authority nor the Co-Financial Advisors nor the Underwriters will undertake responsibility to oppose any revision or withdrawal of such ratings.

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, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Obligations by municipalities or other political subdivisions or public agencies of the State, 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 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 Authority 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 Authority will furnish a complete transcript of proceedings incident to the authorization and issuance of the Obligations to the Underwriters, including the unqualified approving legal opinions of the Attorney General of Texas approving the initial Obligations and to the effect that the Obligations are valid and legally binding obligations of the Authority, and based upon examination of such transcript of proceedings, the approving legal opinions of Andrews Kurth LLP and Bates & Coleman, P.C., Co-Bond Counsel, including to the effect that the interest on the Obligations will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code and the alternative minimum tax imposed on individuals, subject to the matters described under “TAX MATTERS.” The Form of Co-Bond Counsel’s Opinion are attached hereto as APPENDIX C. The legal fees to be paid to Co-Bond Counsel for services rendered in connection with the issuance of the Obligations is contingent upon the issuance of the Obligations. Certain matters will be passed upon for the Authority by its General Counsel and its Special Disclosure Counsel, Escamilla & Poneck, LLP, Houston, Texas. Certain matters will be passed upon for the Underwriters by their co-counsel, Greenberg Traurig, LLP, Houston, Texas, and West & Associates, L.L.P., Houston, Texas.

Co-Bond Counsel are engaged by, and represent only, the Authority. Andrews Kurth LLP and Bates & Coleman, P.C. represent the Underwriters from time to time in matters unrelated to the issuance 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 that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction.

AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION

The financial data and other information contained herein have been obtained from Authority 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

35 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.

CO-FINANCIAL ADVISORS

Public Financial Management, Inc., Estrada Hinojosa & Company, Inc. and Rice Financial Products Company are employed as Co-Financial Advisors to the Authority in connection with the issuance of the Obligations. The Co-Financial Advisors’ fees for services rendered with respect to the sale of the Obligations are contingent upon the issuance and delivery of the Obligations. Public Financial Management, Inc., Estrada Hinojosa & Company, Inc. and Rice Financial Products Company, in their capacity as Co-Financial Advisors, do 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 Co-Financial Advisors to the Authority have provided the following sentence for inclusion in this Official Statement. The Co-Financial Advisors have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to the Authority and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Co-Financial Advisors do not guarantee the accuracy or completeness of such information.

UNDERWRITING

Wells Fargo Securities, as representative of the Underwriters, has agreed, subject to certain conditions, to purchase the Obligations at a discount of $561,093.76 from their initial offering prices, as specified inside the cover page. The Underwriters will be obligated to purchase all of the Obligations if any such Obligations are purchased.

The Obligations to be offered to the public may be offered and sold to certain dealers (including the respective Underwriters and other dealers depositing Obligations into investment trusts) at prices lower than the public offering prices of such Obligations, and such public offering prices may be changed, from time to time, by the Underwriters. The Authority has also agreed to reimburse the Underwriters for certain expenses in connection with the offering.

The offering of the Obligations by the Underwriters is subject to receipt and acceptance and subject to the Underwriters’ right to reject any order in whole or in part.

The Obligations are a new issue of securities with no established trading market. The Authority has been advised by the Underwriters that they intend to make a market in the Obligations but are not obligated to do so and may discontinue market- making at any time without notice. No assurance can be given as to the liquidity of the trading market for the Obligations.

The Underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the Authority, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the Authority. The Underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association (“WFBNA”). WFBNA, one of the Underwriters of the Obligations, has entered into an agreement (the “Distribution Agreement”) with its affiliate, Wells Fargo Advisors, LLC (“WFA”) for the distribution of certain municipal securities offerings, including the Obligations. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting compensation with respect to the Obligations with WFA. WFBNA also utilizes the distribution capabilities of its affiliates, Wells Fargo Securities, LLC (“WFSLLC”) and Wells Fargo Institutional Securities, LLC (“WFIS”), for the distribution of municipal securities offerings, including the Obligations. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC’s expenses based on its municipal securities transactions. WFBNA, WFSLLC, WFIS and WFA are each wholly-owned subsidiaries of Wells Fargo & Company.

WFBNA is serving as both the initial Trustee and Paying Agent/Registrar and as one of the Underwriters for the Obligations.

Citigroup Global Markets Inc., an underwriter of the Obligations, has entered into a retail distribution agreement with each of TMC Bonds L.L.C. (“TMC”) and UBS Financial Services Inc. (“UBSFS”). Under these distribution agreements, Citigroup Global Markets Inc. may distribute municipal securities to retail investors through the financial advisor network of UBSFS and the electronic primary offering platform of TMC. As part of this arrangement, Citigroup Global Markets Inc. may compensate TMC (and TMC may compensate its electronic platform member firms) and UBSFS for their selling efforts with respect to the Obligations.

INDEPENDENT AUDITORS

The Authority’s financial statements, as of and for the year ending September 30, 2013, included in this Official Statement in APPENDIX B, have been audited by KPMG LLP, independent auditors, as stated in their report appearing herein, which is based on their audit and the reports of other auditors. The report of KPMG LLP includes references to the introduction and statistical sections of the Authority’s Comprehensive Annual Financial Report (“CAFR”) for the year ending September 30, 2013, which are not included in APPENDIX B. A complete copy of the CAFR is available from the Authority upon request.

KPMG LLP has not been engaged to perform and has not performed, since the date of its report included in APPENDIX B, any procedures on the financial statements addressed in that report. KPMG LLP also has not performed any procedures relating to this Official Statement.

GENERAL INFORMATION

This Official Statement does not create a contract between or among the Authority, the Underwriters and the purchasers of the Obligations. The Resolution approves the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorizes its further use in the reoffering of the Obligations by the Underwriters.

This Official Statement has been approved by the Authority.

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APPENDIX A

SELECTED PROVISIONS OF THE RESOLUTION

Presented below are excerpts of certain provisions contained in the Resolution. Such excerpts are not to be considered full statements pertaining thereto. Reference is directed to the Resolution for the complete text thereof. Copies of such documents are available upon request from the Authority or the Authority’s Co-Bond Counsel.

1. Definitions. Throughout this Official Statement the following terms and expressions as used herein shall have the meanings set forth below:

“2009 Contractual Obligations” means the Authority’s Sales and Use Tax Contractual Obligations, Series 2009B and Sales and Use Tax Contractual Obligations, Series 2009D, previously issued as Senior Lien Obligations.

“2010 Contractual Obligations” means the Authority’s Sales and Use Tax Contractual Obligations, Series 2010A, previously issued as Senior Lien Obligations.

“2011 Contractual Obligations” means the Authority’s Sales and Use Tax Contractual Obligations, Series 2011B, previously issued as Senior Lien Obligations.

“Acts” means, together, Chapters 1201, 1371, Texas Government Code, as amended, and the Public Property Finance Act, Chapter 271, Subchapter A, Texas Local Government Code, as amended.

“Acquisition Fund” means that certain fund established pursuant to and used in accordance with Section 27 of the Resolution.

“Additional Obligations” means any bonds, notes or other debt obligations which the Authority reserves the right to issue or incur, as provided in Section 33 of the Resolution, which are secured by a senior lien on Pledged Revenues.

“Adjustable Rate Obligations” means any Senior Lien Obligations that initially bear interest at an adjustable or variable rate of interest, including Adjustable Rate Obligations which may be, but have not yet been, converted to Senior Lien Obligations bearing a fixed rate of interest.

“Attorney General” means the Attorney General of Texas.

“Authority” means the Metropolitan Transit Authority of Harris County, Texas.

“Authority Act” has the meaning provided in the recitals hereto.

“Authorized Representative” means the Chair of the Board or, in the event of his or her inaccessibility or incapacity, the President and Chief Executive Officer of the Authority or, in the event of his or her inaccessibility or capacity, the Vice Chair of the Board or, in the event of his or her inaccessibility or incapacity, the Chief Financial Officer and, except for purposes of executing an Officer’s Pricing Certificate, their designees. The execution of a document by any such officer as an Authorized Representative shall conclusively evidence the inaccessibility or incapacity of any other such officer with superior authority.

“BABs” means any Series 2009 Bonds which the Authority has designated as a “Build America Bond” pursuant to Section 54AA of the Code.

“Board” means the Board of Directors of the Authority.

“Bond Insurance Policy” means the financial guaranty insurance policy or policies, if any, issued by the Bond Insurer that guarantees the scheduled payment of principal of and interest on the Contractual Obligations when due, as provided in the Officer’s Pricing Certificate.

“Bond Insurer” means the provider of a Bond Insurance Policy, if any, as provided in the Officer’s Pricing Certificate.

“Bond Purchase Agreement” means the purchase agreement between the Authority and the Underwriters relating to the Contractual Obligations, substantially in the form attached hereto as Exhibit C.

“Bullet Obligation” means all Senior Lien Obligations of a Series maturing in any single year in a principal amount that totals at least 15% of the initial aggregate principal amount of the entire series of such Senior Lien Obligations.

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“Business Day” means any day other than a Saturday, a Sunday, or another day on which commercial banks generally located in the State of New York or the State of Texas are authorized or required by law or executive order to close.

“Code” means the Internal Revenue Code of 1986, as amended to the date of delivery of the Contractual Obligations.

“Comptroller” means the Comptroller of Public Accounts of the State of Texas.

“Contractual Obligations” means the Authority’s Sales and Use Tax Contractual Obligations, Series 2014A issued and to be issued as Senior Lien Obligations pursuant to the Resolution.

“CP Notes” means the Sales and Use Tax Commercial Paper Notes, Series A of the Authority currently authorized to be issued in the maximum aggregate principal amount of $275,000,000.

“Credit Agreement” means a credit agreement, as such term is defined in Chapter 1371, Texas Government Code: as amended, including but not limited to a loan agreement, revolving credit agreement, agreement establishing a line of credit, letter of credit, reimbursement agreement, insurance contract, commitment to purchase obligations, purchase or sale agreement, interest rate swap, cap, floor, collar, or similar agreement, or other commitment or agreement authorized by the Board in anticipation of, related to, or in connection with the authorization, issuance, sale, resale, security, exchange, payment, purchase, remarketing, or redemption of some or all of the Authority’s obligations (as such term is defined in Chapter 1371) or interest on obligations, or both, or as otherwise authorized by such chapter.

“Credit Provider” means a party to a Credit Agreement other than the Authority.

“Debt Service Requirements” means, with respect to any Senior Lien Obligations for any period of time for which such calculation applies, an amount equal to the sum of the following:

a. Interest: Current interest scheduled to be paid during such period on or under such Senior Lien Obligations; plus

b. Principal: That portion of the principal of, or compounded interest on, such Senior Lien Obligations payable during such period (either at maturity or by reason of scheduled mandatory redemptions or upon demand, but after taking into account all prior optional and mandatory redemptions of Senior Lien Obligations); provided, however, that, in making such calculation, the following rules shall apply:

i. Refinancing Assumption: For any series of Senior Lien Obligations issued as Short Term Obligations, Demand Obligations, or Bullet Obligations, Debt Service Requirements may be computed on the assumption that the principal amount shall be refinanced at maturity (or an earlier date on which principal thereof is payable on demand) by fixed rate Senior Lien Obligations bearing interest at (a) if the interest on such obligations is excludable from gross income of the owners thereof for federal income tax purposes, a Revenue Bond Index published by the Bond Buyer or any successor publication or (b) if the interest on such obligations is not excludable from gross income of the owners thereof for federal income tax purposes, the yield on the Treasury Constant Maturity Series as reported in Federal Reserve Statistical Release H. 15, Selected Interest Rates of the Board of Governors of the Federal Reserve System, or any successor publication, as certified by the Authority’s financial advisor, in both cases (a) and (b) within 30 days prior to the date of such calculation (or the gross fixed or capped rate payable by the Authority under an interest rate swap or cap agreement that substantially hedges the rate of interest on such Senior Lien Obligations) and maturing in substantially equal annual payments of principal and interest over a term of 25 years (or such longer period as a nationally recognized financial advisor or investment banker certifies is then reasonably attainable) or less; and

ii. Interest Rate Assumption: For any series of Senior Lien Obligations issued as Adjustable Rate Obligations that are not Short Term Obligations, Demand Obligations, or Bullet Obligations, Debt Service Requirements may be computed on the assumption that such Senior Lien Obligations will bear interest at (a) to the extent the rate of interest thereon is effectively hedged by an interest rate swap or cap agreement, the gross fixed or capped rate payable by the Authority under such agreement, and (b) otherwise the greater of (i) the average rate on such Senior Lien Obligations over a 12-month period ending within two months of the date of such calculation and (ii) a rate estimated by the Authority’s financial advisor in a written certificate delivered to the Authority at the time of such calculation to be the average rate of interest such Senior Lien Obligations would bear if issued as long- term bonds, in the same principal amount and with the same priority of lien, bearing interest at fixed rates based on the average life of the Adjustable Rate Obligations; and

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iii. Effect of Federal Subsidies: For any series of Senior Lien Obligations for which the Authority is entitled to receive payments from the federal or state government in such period on account of, and substantially contemporaneously with, interest paid on such Senior Lien Obligations, the amount to be received in such period may be deducted from such interest in computing Debt Service Requirements.

Debt Service Requirements shall be calculated with the assumption that no Senior Lien Obligations Outstanding at the time of calculation will cease to be Outstanding except by reason of the payment of scheduled principal maturities or scheduled mandatory redemptions, except as provided above.

“Demand Obligation” means any Senior Lien Obligation the principal of which is payable by the Authority on demand of the owner or holder thereof.

“DTC” means The Depository Trust Company, New York, New York, or any successor securities depository.

“DTC Participant” means brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC Participants.

“Equipment” has the meaning specified in Section 2.

“Fiscal Year” means the Fiscal Year of the Authority, currently beginning on October 1 of any year and ending on September 30 of the next succeeding year, but which may be changed by the Board.

“Interest and Sinking Fund” means the fund confirmed by the Authority pursuant to Section 26 of the Resolution.

“Interest Payment Date,” means November 1, 2014, and each May 1 and November 1 thereafter until maturity or prior redemption, unless otherwise provided in the Officer’s Pricing Certificate.

“Junior Lien Obligations” means any one or more of those series of bonds, notes or other debt obligations (including capital lease obligations and obligations to make deferred payments for goods and services in furtherance of METRO Solutions Phase 2, which deferred payments have been assigned to a third party and used to make payments to owners of public securities) or Credit Agreements that are secured, with or without other security, by a lien on Pledged Revenues that is junior and subordinate to the lien thereon securing the Senior Lien Obligations but is senior and superior to the lien thereon securing the Subordinate Lien Obligations.

“Maximum Annual Debt Service Requirements” for any Senior Lien Obligations means the maximum Debt Service Requirements for such Senior Lien Obligations calculated to occur in any future Fiscal Year or the then current Fiscal Year.

“Officer’s Pricing Certificate” means a certificate to be signed by the Authorized Representative and containing the information regarding the Contractual Obligations specified in the Officer’s Pricing Certificate.

“Outstanding” means, when used with respect to Senior Lien Obligations, as of the date of determination, all Senior Lien Obligations theretofore delivered under the Resolution or other authorizing resolution, except:

a. Cancelled Obligations. Senior Lien Obligations theretofore canceled and delivered to the Authority or delivered to the Paying Agent/Registrar for cancellation;

b. Transferred and Exchanged Obligations. Senior Lien Obligations upon transfer of or in exchange for and in lieu of which other Senior Lien Obligations have been delivered; and

c. Defeased Obligations. Senior Lien Obligations which have been released, discharged or extinguished in accordance with the terms thereof, or due to the deposit of cash or investments with the paying agent therefor or an escrow agent, the obligation of the Authority to pay the same is payable solely from and to the extent of such cash and investments and income therefrom.

“Owner” or “Registered Owner” means any person who shall be the registered owner of any outstanding Contractual Obligation.

“Paying Agent/Registrar” means the entity identified as such in the Paying Agent/Registrar Agreement.

“Paying Agent/Registrar Agreement” means the paying agent/registrar agreement relating to the Contractual Obligations.

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“Person” means any individual, corporation, partnership, joint venture, unincorporated association, association, trust, joint stock company, unincorporated organization, government or government agency or other legal entity capable of carrying on a trade or business.

“Pledged Revenues” means seventy-five percent (75%) of the revenues collected and received by the Trustee or the Authority from its levy of the Sales and Use Tax, plus any investment income earned on any moneys in the Revenue Fund, the Interest and Sinking Fund and any reserve fund for Senior Lien Obligations, including the Reserve Fund, which are hereby pledged as security for payment of the Contractual Obligations and any other Senior Lien Obligations and all other funds or revenues, if any, including additional Sales and Use Tax revenues, which the Authority pledges hereafter as security for payment of the Senior Lien Obligations.

“Record Date” for interest due on the Contractual Obligations on any Interest Payment Date means the fifteenth day of the month next preceding such Interest Payment Date whether or not such day is a Business Day.

“Register” means the books of registration kept by the Paying Agent/Registrar in which are maintained the names and addresses of, and the principal amounts of the Contractual Obligations of each maturity registered to, each Owner.

“Reserve Fund” means the shared reserve fund for the Reserve Fund Participants confirmed by the Authority pursuant to Section 24 of the Resolution.

“Reserve Fund Participant” means the 2009 Contractual Obligations, the 2010 Contractual Obligations, the 2011 Contractual Obligations, and Additional Obligations which the Authority designates at or before the time of issue as Reserve Fund Participants to share the Reserve Fund. All such issues designated as a Reserve Fund Participant shall be entitled to a parity claim on the funds deposited in the shared Reserve Fund as and to the extent provided in Section 28 of the Resolution. None of the Series 2009 Bonds, the Series 2011 Bonds, or the Contractual Obligations are Reserve Fund Participants.

“Reserve Fund Requirement” means an amount equal to 50% of the Maximum Annual Debt Service Requirements on the Reserve Fund Participants. The reserve fund requirement, if any, for the Contractual Obligations or any Additional Obligations which are not Reserve Fund Participants shall be provided in the order or resolution authorizing their issuance.

“Reserve Fund Surety Policy” shall mean any reserve fund surety policy or bond, letter of credit or other instrument, however denominated, provided by a qualifying financial institution as described in the following sentence, pursuant to which the Trustee or Paying Agent may draw on such Reserve Fund Surety Policy to enable the Reserve Fund to make a required transfer to the Interest and Sinking Fund. Reserve Fund Surety Policies may only be acquired from a financial institution with a long term credit rating in one of the two highest generic rating categories from at least two nationally recognized rating services and having a credit rating or claims paying ability such that the purchase of such surety policy will not cause any rating agency then rating any Senior Lien Obligations to withdraw or lower its rating.

“Resolution” as used herein means the Resolution authorizing the Contractual Obligations.

“Revenue Fund” means the fund confirmed by the Authority pursuant to Section 24 of the Resolution.

“Sales and Use Tax” means the tax levied by the Authority pursuant to the Authority Act, orders of the Authority’s Board and an election held within the Authority on August 12, 1978. Under the authority of the Authority Act and pursuant to such resolutions, the rate of such tax is equal to 1% of the receipts from the sale at retail or on the sale price or the lease or rental price on the storage, use or other consumption of all taxable items within the boundaries of the Authority.

“Senior Credit Agreement” means any Credit Agreement to the extent the obligations of the Authority thereunder are Senior Lien Obligations.

“Senior Lien Obligations” means the Series 2009 Bonds, the Series 2011 Bonds, the 2009 Contractual Obligations, the 2010 Contractual Obligations, the 2011 Contractual Obligations, the Contractual Obligations, the CP Notes, any Additional Obligations, and any Senior Credit Agreements.

“Series 2009 Bonds” means the Authority’s Sales and Use Tax Bonds, Series 2009A and the Authority’s Sales and Use Tax Bonds, Taxable Series 2009C (Direct-Subsidy Build America Bonds), each previously issued as Senior Lien Obligations.

“Series 2011 Bonds” means the Authority’s Sales and Use Tax Bonds, Series 2011A, previously issued as Senior Lien Obligations.

“Short Term Obligations” means each series of bonds, notes and other debt obligations issued pursuant to a commercial paper or other similar financing program, the payment of principal of which is scheduled to be payable within one

A-4 year from the date of issuance and is contemplated at the time of issuance to be refinanced through the issuance of Additional Obligations.

“Subordinate Lien Obligations” means any one or more of any series of bonds, notes or other obligations (including lease obligations and obligations to make deferred payments for goods and services in furtherance of METRO Solutions Phase 2 and which have been assigned to a third party and used by such third party to make payments to owners of public securities) or Credit Agreements secured, with or without other security, by a lien on Pledged Revenues that is junior and subordinate to the lien thereon of the Senior Lien Obligations and the Junior Lien Obligations.

“Trustee” means Wells Fargo Bank, N.A., as the trustee under the Resolution and any successor to or replacement of such trustee appointed to serve in such capacity in accordance with the Resolution.

“Underwriters” means the entities defined as such in the Bond Purchase Agreement.

22. Pledges and Sources of Payment; Tax Levy; Other Security.

(a) Pledge of Pledge Revenues. The Authority has heretofore, transferred, set over and assigned, and does hereby again TRANSFER, SET OVER and ASSIGN, to the Trustee all of the Pledged Revenues in trust, in order to provide for the payment of the principal of, interest on, and other payment obligations under the Senior Lien Obligations, Junior Lien Obligations and Subordinate Lien Obligations and all expenses of paying the same, subject to paragraph (c) below, and to provide for the disposition of the remaining Pledged Revenues in accordance with the Resolution. In order to facilitate the transfer made in the foregoing sentence, the Authority has heretofore, appointed and does hereby confirm its irrevocable appointment of the Trustee as its lawful agent and attorney-in-fact for the purpose of (i) performing those duties of its treasurer which consist of receiving the Pledged Revenues from the Comptroller pursuant to the Act and other applicable law and (ii) taking such steps as may be necessary, if any, to perfect and maintain the liens granted hereunder. The Pledged Revenues shall be set aside for and are hereby irrevocably pledged to the payment of the Senior Lien Obligations, including the Series 2009 Bonds, the 2009 Contractual Obligations, the 2010 Contractual Obligations, the Series 2011 Bonds, the 2011 Contractual Obligations, the Contractual Obligations, any Additional Obligations, any Senior Credit Agreements, any Junior Lien Obligations and any Subordinate Lien Obligations.

(b) Parity Senior Lien Obligations. The Senior Lien Obligations may be payable from all legally available funds of the Authority and shall be equally and ratably secured by (i) a senior lien on and pledge of the Pledged Revenues, as collected and received by the Authority or the Trustee, which pledge and lien is expressly made senior to the pledge of and lien on Pledged Revenues which the Authority has granted or may grant to secure the Junior Lien Obligations and the Subordinate Lien Obligations and (ii) to the extent such Senior Lien Obligations are Reserve Fund Participants, the Reserve Fund.

(c) Deposit of Pledged Revenues. The Authority shall, by appropriate notice, direction, request or other legal method, cause the Comptroller to pay all Pledged Revenues (or, if required by the Comptroller, all Sales and Use Tax collections) directly to the Trustee for the account of the Revenue Fund. If the Comptroller shall refuse or shall not be legally obligated to make transfers in accordance with such notice, direction or request, then the Authority shall itself cause the Pledged Revenues to be transferred to the Trustee in their entirety immediately upon receipt thereof by the Authority or by others for its account wherever located. If all Sales and Use Tax collections are paid to the Trustee by the Comptroller, then the Trustee shall promptly remit all such payment that is not Pledged Revenues to the Authority. All Pledged Revenues received by the Trustee shall be deposited in the Revenue Fund and applied in accordance with the Resolution.

(d) Limitation on Security for Termination Payments. The lien on and pledge of Pledged Revenues granted by the Resolution shall not secure payment of any termination payment under an interest rate management agreement provided, however, that nothing in the Resolution shall prevent the Authority from granting a junior or subordinate lien on and pledge of the Pledged Revenues for such purpose.

23. Levy of Sales and Uses Tax; Covenant to Levy Sales and Use Tax. The orders levying the Authority’s Sales and Use Tax previously adopted by the Board are hereby approved, ratified and readopted in full, and the Resolution shall be cumulative of such orders.

24. Special Funds. The Authority hereby recognizes and confirms the prior establishment of (a) the Revenue Fund, which Fund shall be maintained with the Trustee and shall be kept separate and apart from all other funds and accounts of the Authority (b) the Interest and Sinking Fund, which shall be maintained as a separate fund with the Trustee, which shall hold such Fund in trust for the registered owners of the Senior Lien Obligations, and (c) the Reserve Fund, which shall be maintained as a separate fund with the Trustee, which shall hold such Fund in trust for the registered owners of the Reserve Fund Participants. All of the foregoing Funds shall be used solely as herein provided so long as any Senior Lien Obligation remains Outstanding.

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The Authority or the Trustee may create accounts and subaccounts within any Fund created by the Resolution when, in the judgment of the Authority or the Trustee, the creation of such accounts or subaccounts will enable the Authority or the Trustee to better administer the Funds.

25. Flow of Funds. The Trustee shall deposit the portion of the Sales and Use Tax payment that constitutes Pledged Revenues into the Revenue Fund promptly after receipt. Immediately upon such deposit and upon each deposit to the Revenue Fund thereafter, the Trustee shall apply moneys from time to time on deposit to the credit of the Revenue Fund in the following order of priority:

(a) First, to make all deposits into the Interest and Sinking Fund as provided herein and, if the Contractual Obligations are ratably secured thereby, in any other interest and sinking fund provided in any order or resolution authorizing the issuance of any other Senior Lien Obligations;

(b) Second, to make all deposits into the Reserve Fund as provided herein and in any other reserve fund provided in any order or resolution authorizing the issuance of any Senior Lien Obligations other than Reserve Fund Participants, provided that on any date on which there is a deficiency in the Reserve Fund, the Trustee shall not apply any moneys to any other such fund in an amount greater than that required to produce a balance therein equal to 50% of the Maximum Annual Debt Service Requirements on the Senior Lien Obligations payable from such other reserve fund ratably over a 36-month period from the original date of any deficiency therein unless an additional deposit to the Reserve Fund is made to cure such deficiency in the Reserve Fund at the same rate;

(c) Third, to make all other deposits not made pursuant to clause (ii) above into any reserve fund provided in any order or resolution authorizing the issuance of any Senior Lien Obligations;

(d) Fourth, to make all other deposits required by any order or resolution authorizing the issuance of any Senior Lien Obligations and any related agreement or Credit Agreement;

(e) Fifth, to make all deposits required by any order or resolution authorizing the issuance of any Junior Lien Obligations (a copy of which shall be provided by the Authority to the Trustee on or before the date of issuance of such Junior Lien Obligations);

(f) Sixth, to make all deposits required by any order or resolution authorizing the issuance of any Subordinate Lien Obligations (a copy of which shall be provided by the Authority to the Trustee on or before the date of issuance of such Subordinate Lien Obligations); and

(g) Seventh, to the Authority for any lawful purpose.

In case such moneys on deposit in the Revenue Fund shall at any time be insufficient to make in full all deposits and transfers then due and unpaid as provided above then such deposits and transfers shall be made from such moneys in the priority set out above, but ratably according to the aggregate amount within each priority to be deposited and without preference within a priority.

26. Revenue Fund and Interest and Sinking Fund. Moneys from time to time on deposit to the credit of the Revenue Fund shall be applied by the Trustee as follows:

(a) Transfers to Interest and Sinking Fund. Subject to subsections (b) and (c) below, for so long as any Contractual Obligations remain Outstanding, the Trustee shall transfer from the Revenue Fund to the Interest and Sinking Fund on each date on which funds are deposited to the Revenue Fund such amounts which, when added to other amounts in the Interest and Sinking Fund, will provide for the accumulation, in substantially equal monthly installments, of amounts sufficient to pay (i) the interest scheduled to become due on all Outstanding Senior Lien Obligations on the next succeeding interest payment date (other than interest scheduled to become due but anticipated to be paid with the proceeds of Senior Lien Obligations), (ii) the principal of all Outstanding Senior Lien Obligations scheduled to mature on the next succeeding principal payment date (other than maturing principal anticipated to be paid with the proceeds of Senior Lien Obligations), (iii) payments due and payable to Credit Providers on Senior Credit Agreements on ensuing payment dates; and (iv) the redemption price of all Outstanding Senior Lien Obligations called or scheduled for redemption on the next redemption date, plus all fees, charges and other amounts payable to any Paying Agent/Registrar, market agent, broker/dealer, remarketing agent or Credit Provider in respect of Senior Lien Obligation; provided that in all cases the Trustee shall transfer an amount sufficient to ensure that the Interest and Sinking Fund has adequate funds on deposit to make all required principal, interest, and other payments on Senior Lien Obligations through the immediately succeeding month, assuming accrual of interest at the maximum rate for any period for which the rate has not been fixed and payment thereof on the last day of such succeeding month.

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(b) Limitation on Use of Capitalized Interest. Proceeds of any issue of Senior Lien Obligations on deposit in the Interest and Sinking Fund shall be available to pay interest only on such Senior Lien Obligations and shall be credited against the transfer requirements described in subsection (a)(i) above only for such issue of Senior Lien Obligations.

(c) BABs Subsidies. The refundable credit received pursuant to Section 6431 of the Code in respect of the Series 2009 Bonds designated Series 2009C shall be deposited directly into the Interest and Sinking Fund upon receipt and shall be used solely for the purposes of paying interest on the Series 2009 Bonds designated Series 2009C while they remain Outstanding. In determining the amount to be transferred to the Interest and Sinking Fund, no balance therein attributable to the Series 2009 Bonds designated Series 2009C shall be credited against the principal, interest or other payment requirements on any other Senior Lien Obligations.

(d) Suspension of Payments. Whenever the total amount on deposit to the credit of the Interest and Sinking Fund shall be equal to the sum of the aggregate principal amount of all Outstanding Senior Lien Obligations plus the aggregate amount of all interest accrued and to accrue thereon and all bank charges and other costs and expenses related to the payment thereof, no further payments need be made into such Funds, and the Senior Lien Obligations shall not be regarded as being Outstanding except for the purpose of being paid with the moneys on deposit in such Funds.

(e) Application of Interest and Sinking Fund. Monies deposited to the credit of the Interest and Sinking Fund shall be used solely for the purpose of paying the principal of and interest and other payments on the Outstanding Senior Lien Obligations, plus all bank charges, fees and expenses of the Trustee and paying agents and registrars and Credit Providers, and other costs and expenses, relating to such payment. On or before each due date for the payment of principal and/or interest or other amounts on Senior Lien Obligations, the Trustee shall pay (or transfer to the applicable paying agent for the payment of) the principal of and interest and other amounts payable on the Senior Lien Obligations on such date, together with an amount equal to all bank charges, fees and expenses of the Trustee and paying agents and registrars and Credit Providers and other costs and expenses relating to such payment; provided that, if the balance of the Interest and Sinking Fund is insufficient on any such date to pay such principal, interest and other amounts then due in full, then the Trustee shall apply all available funds therein to pay (or transfer to the applicable paying agents for the payment of) such principal, interest, and other amounts ratably, in proportion to the amounts then due, without any preference or priority of any Senior Lien Obligation over any other Senior Lien Obligations. Any moneys remaining in the Interest and Sinking Fund after all Senior Lien Obligations are no longer Outstanding shall be transferred to the Revenue Fund.

(f) Payment of the Contractual Obligations. The Trustee shall pay, out of the Interest and Sinking Fund, to the Paying Agent in no event later than each applicable principal payment date and Interest Payment Date for any Outstanding Contractual Obligations, an amount (as determined by the Paying Agent) sufficient for the Paying Agent to pay principal of and interest on the Outstanding Contractual Obligations due on such dates (and to be paid by such Paying Agent).

27. Acquisition Fund. The Series 2014A Acquisition Fund (the “Acquisition Fund”) is created as a special fund of the Authority held by the Authority. Money on deposit in the Acquisition Fund shall be used only for the purposes set forth in Section 2 of the Resolution. Money on deposit in the Acquisition Fund may, at the option of the Authority, be invested as permitted by Texas law, provided that all such deposits and investments shall be made in such manner that the money required to be expended from the Acquisition Fund will be available at the proper time or times.

28. Reserve Fund.

(a) Funding of Reserve Fund. If the Reserve Fund is not fully funded on the date of issuance of any Reserve Fund Participant with proceeds of such issuance, other funds of the Authority or a combination of both, or if the balance of the Reserve Fund is less than the Reserve Fund Requirement as of any other valuation date, then on each date on which funds are deposited to the Revenue Fund, the Trustee shall transfer into the Reserve Fund, out of money held in the Revenue Fund, an amount equal to 1/36 of the Reserve Fund Requirement or the amount needed to attain the Reserve Fund Requirement, whichever is lesser, which transfers shall continue until the Reserve Fund contains the Reserve Fund Requirement; provided, however, that the Authority may provide for other or greater transfers in connection with the purchase or acquisition of any Reserve Fund Surety Policy or otherwise.

(b) Application of Reserve Fund. If, on any Interest Payment Date, any date a principal installment is due or any other date, after giving effect to all transfers pursuant to Section 25, the Paying Agent/Registrar and other paying agents for the Reserve Fund Participants have not received sufficient funds to make all payments of interest on and principal of the Reserve Fund Participants then due and payable or to make any other then required payments on Reserve Fund Participants, the Trustee shall transfer amounts from the Reserve Fund to the Paying Agent/Registrar and other paying agents for the Reserve Fund Participants to the extent necessary to enable them to make such payments; provided that, if the balance of the Reserve Fund is insufficient on any such date to make all such transfers in full, then the Trustee shall apply all available funds therein to make transfers to the applicable paying agents ratably, in proportion to the transfers then due, without any preference or priority of any Reserve Fund Participant over any other Reserve Fund Participant.

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(c) Use to Retire Reserve Fund Participant. When the amount in the Reserve Fund, together with the amounts in the Interest and Sinking Fund available for such purpose, is sufficient to fully pay all Outstanding Reserve Fund Participants in accordance with their terms (including principal or redemption price and interest thereon), the funds on deposit in the Reserve Fund at the direction of the Authority may be used to pay the principal and redemption price of and interest on all Outstanding Reserve Fund Participants.

(d) Surety Bonds. In lieu of cash or investment securities, the Reserve Fund Requirement may be satisfied in whole or in part with one or more Reserve Fund Surety Policies. Such policies may be drawn upon only after all other amounts in the Reserve Fund have been used or applied, and other amounts in the Reserve Fund may be used to reimburse and repay issuers of such policies for amounts drawn thereon together with interest thereon and related costs.

(e) Application of Surplus. Whenever the amount in the Reserve Fund exceeds the Reserve Fund Requirement and all reimbursement and repayment obligations pursuant to any debt service Reserve Fund Surety Policy have been satisfied, the Authority may direct the Trustee to transfer such excess to the Interest and Sinking Fund or to any other Fund hereunder.

29. Investment of Trust Funds. Amounts in any fund or account held by the Trustee may, to the extent permitted by applicable law, be invested in accordance with the Authority’s investment policy upon written instruction of an Authorized Representative and the Trustee shall have no obligation or responsibility for selecting such investments or for any loss therefrom. Such investments shall mature in such amounts and at such times as may, in the judgment of such Authorized Representative, be necessary to provide funds when needed to make timely payments from such fund or account. In order to comply with the directions of such Authorized Representative, the Trustee may cause the liquidation prior to their maturities of obligations in which funds have been invested, and the Trustee shall not be liable for any loss or penalty of any nature resulting therefrom. In order to avoid loss in the event of a need for funds, the Authority may instruct the Trustee, in lieu of a liquidation of investments in the fund or account needing funds, to exchange such investments for investments in another fund or account that may be liquidated at no, or at a reduced, loss.

Obligations purchased as an investment of any money credited to any Fund or any account thereof shall be deemed at all times to be a part of such Fund or account. Except as otherwise provided herein, the interest accruing on obligations so purchased and any profit realized from such investment shall be credited to the Revenue Fund and any loss resulting from such investment shall be charged to such Fund or account. For the purpose of determining the amount on deposit to the credit of any such Fund, obligations in which money in such Fund shall have been invested shall be computed at the fair market value thereof.

All money in excess of the amount guaranteed by the Federal Deposit Insurance Corporation or other federal agency shall be continuously secured by the Trustee, for the benefit of the Authority and the owners of the Senior Lien Obligations, as their interests appear, either (a) in the manner provided by the Public Funds Collateral Act, Chapter 2257, Texas Government Code, or (b) in any other manner as may then be required or permitted by applicable state or federal laws and regulations regarding the security for, or granting a preference in the case of, the deposit of trust funds; provided, however, that it shall not be necessary for the Trustee or the Paying Agent/Registrar to give such security for the deposit with it of any money to be used to pay principal (and premium, if any) or interest which is at the time of such deposit due and payable with respect to any Senior Lien Obligations, or for the Trustee to give security for any money which shall be represented by obligations purchased under the provisions of this Section as an investment of such money.

The Trustee shall retain all records of its application and investment of funds hereunder for at least six years after the final maturity of Contractual Obligations.

33. Additional Obligations.

(a) Right to Issue: Subject to the requirements of subsection (b) of this Section, the Authority reserves the right to issue or enter into, at any time and from time to time, in one or more installments, for any lawful purpose, the Bonds, the CP Notes, Additional Obligations, and Senior Credit Agreements, all of which, when issued or otherwise entered into and delivered, shall be payable from and secured by the senior lien on and pledge of the Pledged Revenues to the Trustee confirmed by the Resolution on a parity with all other Senior Lien Obligations and shall in all respects be on a parity and of equal dignity with and shall be secured in the same manner as the Contractual Obligations. Such pledge of and lien on the Pledged Revenues securing the Senior Lien Obligations is and shall be senior to the pledge of and lien on the Pledged Revenues which the Authority has granted or may grant to secure the Junior Lien Obligations and the Subordinate Lien Obligations.

(b) Conditions to Issuance: Except as provided in paragraph (c) of this Section, no Additional Obligations may be issued and no Senior Credit Agreements may be entered into unless the Chief Financial Officer of the Authority shall certify to the Trustee in writing that, for either the preceding Fiscal Year or any consecutive 12-month period out of the 18-month period preceding the month in which the order or resolution authorizing such Additional Obligations or Senior Credit Agreement is adopted (the “Base Period”):

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(1) Historical/Pro Forma Coverage: The Pledged Revenues were not less than 200% of the Maximum Annual Debt Service Requirements, after giving effect to the issuance of the Additional Obligations or execution of the Senior Credit Agreement, as applicable; or

(2) Pro Forma Coverage: Pledged Revenues, adjusted to give effect to the occurrence prior to the adoption of the order or resolution authorizing such Additional Obligations of (A) any increase in the Sales and Use Tax rate or (B) any increase in the percentage of the Sales and Use Tax revenues designated by the Authority as Pledged Revenues, as if either such increase had been in effect for the entire Base Period, would have been not less than 200% of the Maximum Annual Debt Service Requirements after giving effect to the issuance of the Additional Obligations or execution of the Senior Credit Agreement, as applicable.

(c) Exception. Additional Obligations issued to refund Senior Lien Obligations are not subject to subsection (b) of this Section if their issuance will not increase Maximum Annual Debt Service Requirements by more than 10%.

34. Covenant to Maintain Sales and Use Tax Rate. The Authority agrees and covenants that at all times while there are Outstanding Contractual Obligations, (i) it will not reduce the rate at which the Sales and Use Tax is levied below its current rate of 1% of the receipts from the sale at retail or on the sale price or the lease or rental price on the storage, use or other consumption of all taxable items within the boundaries of the Authority or take action to apply such tax to less than all of such transactions and (ii) it will maintain Outstanding Series 2009 Bonds, Outstanding 2009 Contractual Obligations, Outstanding 2010 Contractual Obligations, Outstanding Series 2011 Bonds, Outstanding 2011 Contractual Obligations, other bonds issued pursuant to the authority of the election held within the Authority on November 4, 2003 or other bonds issued pursuant to Chapter 451, Texas Transportation Code, as amended.

36. The Trustee.

(a) Appointment. Wells Fargo Bank, N.A. has heretofore been appointed, and is hereby again appointed as Trustee, for the sole purpose of holding, investing, securing and disbursing the Pledged Revenues in accordance with the Resolution and is not acting in a fiduciary capacity for the Owners. The Trustee shall not be responsible for any Pledged Revenues until such Pledged Revenues are actually received by the Trustee. The Trustee undertakes to perform such functions and duties and only such functions and duties as are specifically set forth in the Resolution, and no implied duties or obligations shall be read into the Resolution against the Trustee.

(b) Limited Obligations. The Trustee shall be under no obligation to perform any duty or exercise any right or power under the Resolution until it is provided with adequate funds to do so and receives an indemnity reasonably satisfactory to it against any and all costs and expenses, outlays, and counsel fees and other disbursements, and against all liability not due to its negligence or willful misconduct. No provision of the Resolution shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or to take any action, which in the judgment of the Trustee would conflict with any rule of law or with the terms of the Resolution or would expose it to liability.

(c) Compensation. The Authority shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee’s compensation shall not be limited by any law on compensation of a trustee of an express trust. The Authority shall promptly reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expense shall include the reasonable compensation and out-of-pocket expenses of its agents and counsel.

(d) Limited Liability. The Trustee shall be protected and shall incur no liability in acting or proceeding, or in not acting or not proceeding, in good faith, reasonably and in accordance with the terms of the Resolution, upon any resolution, order, notice, request, consent, waiver, certificate, statement, affidavit, requisition, bond or other paper or documents which it shall in good faith reasonably believe to be genuine and to have been adopted or signed by the proper board or person, or to have been prepared and furnished pursuant to any of the provisions of the Resolution, or upon the written opinion of any attorney (who may be an attorney for the Authority), engineer, appraiser or accountant (any of which, unless otherwise specified herein, may be an employee of the Authority) reasonably believed by the Trustee to be qualified in relation to the subject matter. The Trustee shall not be liable for any error of judgment made in good faith by the Trustee unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the express provisions of the Resolution.

(e) Establishing Facts Prior to Action. Whenever, in the administration of the trust confirmed by the Resolution, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof is specifically prescribed herein) may, in the absence of bad faith on the part of the Trustee, be deemed to be proved and established by a certificate of an Authorized Representative; and, in the absence of bad faith on the part of the Trustee, such certificate shall constitute full authority for any action taken, suffered or omitted by the Trustee under the provisions of the Resolution in reliance thereon.

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(f) Use of Released Funds. The Trustee shall not be concerned with or accountable to anyone for the subsequent use or application of any money which shall be released or withdrawn and used in accordance with the provisions hereof.

(g) Executing Powers Through Third Parties. The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, accountants, agents or receivers and may, in all cases, pay, and be reimbursed for, the reasonable fees and expenses thereof. The Trustee shall not be responsible for the conduct of such attorneys, accountants, agents or receivers it appointed with due care.

(h) Limited Responsibility for the Bonds and Bond Documents. The Trustee shall not be responsible for any recital or statement in the Resolution, any amendment to the Resolution, the Contractual Obligations, or any official statement or other disclosure document prepared or distributed in connection with the Contractual Obligations or for the validity of the execution by the Authority of the Resolution, any amendment to the Resolution or the Contractual Obligations, or for the validity of the execution of any other or supplemental instrument by the Authority, or for the validity or sufficiency of the security for the Contractual Obligations issued hereunder or intended to be secured hereby, or for the value of or title to the security for the Contractual Obligations pledged hereunder or for the creditworthiness of the Authority. Except as otherwise expressly provided herein, the Trustee shall have no duty to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in an amendment to the Resolution, but the Trustee may require of the Authority full information and advice as to the performance of such covenants, conditions and agreements set forth herein and in an amendment to the Resolution.

(i) No Representation of Warranty. The Trustee makes no representation or warranty, express or implied, as to the title, value, design, compliance with specifications or legal requirements, quality, operation, condition, merchantability or fitness for any particular purpose for the use contemplated by the Authority of the Equipment. In no event shall the Trustee be liable for incidental, indirect, special or consequential damages in connection with or arising from the Resolution for the existence, furnishing or use of the Equipment.

(j) No Obligation or Duty. The permissive right of the Trustee to do things enumerated in the Resolution shall not be construed as an obligation or duty of the Trustee. The Trustee shall not be required to give any bond or surety in respect of the execution of its trusts and powers hereunder or otherwise in respect of these premises, except as provided in Section 29. Nothing contained herein or in the Contractual Obligations shall be construed to impose any duties upon the Trustee beyond those expressly contained in the Resolution or in an amendment to the Resolution. All immunities, indemnities and other provisions of the Resolution as related to the duties and liabilities of the Trustee shall apply to its duties and liabilities with respect to the Contractual Obligations.

(k) No Individual Liability. Under no circumstances shall the Trustee be liable in its individual capacity for the obligations evidenced by the Contractual Obligations. In accepting the trust hereby created, the Trustee acts solely as Trustee for the trust estate hereunder and not in its individual capacity and, except as otherwise provided herein, all persons, including without limitation the Owners and the Authority, having any claim against the Trustee arising from the Resolution shall look for payment only from the funds and accounts held by the Trustee hereunder.

(l) Indemnification of the Trustee. The Authority hereby covenants and agrees, to the extent permitted by applicable law and solely from the amounts held or required to be held hereunder, to indemnify the Trustee for any loss, liability, outlays and reasonable fees of its in- house and/or outside counsel, other reasonable disbursements, expenses or advances reasonably incurred or made, without negligence or willful misconduct on the part of the Trustee, arising out of or in connection with its acceptance or administration of the trust or performance of its duties hereunder. All indemnifications and releases from liability granted to the Trustee hereunder shall extend to its directors, officers, employees, officials and agents.

(m) Trustee May Purchase Senior Lien Obligations. The Trustee shall not be disqualified from buying, selling, holding, owning or dealing in Senior Lien Obligations solely because it is trustee hereunder, nor is the Trustee disqualified from being the depository of the Authority of moneys not entrusted to it hereunder.

(n) Trustee May Resign or be Removed. The Trustee may resign and thereby become discharged from the trusts confirmed upon the acceptance thereof by a successor by notice in writing to be given to the Authority and by notice mailed, postage prepaid to all Owners not less than 60 days before such resignation is to take effect, but such resignation shall take effect immediately upon the appointment of a successor Trustee pursuant to this Section, if such successor Trustee shall be appointed before the time specified by such notice and shall accept such appointment. If no successor Trustee is appointed within 60 days after the date of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. The Trustee may be removed, with or without cause, at any time by an instrument or concurrent instruments in writing, filed with the Trustee, and signed by the Owners of a majority in principal amount of the Senior Lien Obligations.

(o) Successor Trustee. The Authority covenants that at all times while any Contractual Obligations are Outstanding it will engage a legally qualified bank, trust company, financial institution or other agency with a minimum capital and surplus at the time of deposit of at least $1,000,000,000 to act as Trustee for the Contractual Obligations. The Authority

A-10 reserves the right to change the Trustee for the Contractual Obligations on not less than sixty (60) days’ written notice to the Trustee, as long as any such notice is effective not less than 60 days prior to the next succeeding principal or interest payment date on the Contractual Obligations. Any successor Trustee appointed under the Resolution shall execute, acknowledge, and deliver to its predecessor Trustee, and also to the Authority, an instrument accepting such appointment, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become fully vested with all moneys, estates, properties, rights, powers, duties, and obligations of such predecessor Trustee, with like effect as if originally named as Trustee; but the Trustee ceasing to act shall nevertheless, on the written request of the Authority, or of the successor Trustee, execute, acknowledge, and deliver such instruments of assignment and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor Trustee all the right, title, and interest of the predecessor Trustee in and to any property held by it under the Resolution, and shall pay over, assign, and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Any such successor Trustee shall promptly notify any paying agents and registrars of its appointment as Trustee. Each Trustee hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of the Resolution. No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Section shall become effective until the acceptance of appointment by the successor Trustee under this Section.

37. Related Matters. To satisfy in a timely manner all of the Authority’s obligations under the Resolution, the Paying Agent/Registrar Agreement and the Bond Purchase Agreement, the Authorized Representative and all other appropriate officers, agents and representatives of the Authority are hereby authorized and directed to take all other actions that are reasonably necessary to provide for the issuance of the Contractual Obligations, including, without limitation, executing and delivering on behalf of the Authority all certificates, consents, receipts, requests and other documents as may be reasonably necessary to satisfy the Authority’s obligations under the Bond Purchase Agreement, the Paying Agent/Registrar Agreement and the Resolution and to direct the transfer and application of funds of the Authority consistent with the provisions of the Resolution.

38. Resolution a Contract - Amendments. The Authority hereby contractually obligates and commits itself to utilize the net proceeds of the Contractual Obligations, after payment of the costs of issuance and capitalized interest and any Bond Insurance Policy premium related thereto, for the acquisition of the Equipment in accordance with the terms and provisions hereof. The Resolution shall constitute a contract with the Owners from time to time, be binding on the Authority and the Trustee, and shall not be amended or repealed by the Authority so long as any Contractual Obligation remains Outstanding except as permitted in this Section. The Authority may, without the consent of or notice to any Owners, but with notice to the Trustee, from time to time and at any time, amend the Resolution in any manner not detrimental to the interests of the Owners, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the Authority may, with the written consent of the Trustee and Owners who own in the aggregate 51% of the principal amount of the Contractual Obligations then Outstanding, amend, add to, or rescind any of the provisions of the Resolution; provided that, without the consent of all Owners of Outstanding Contractual Obligations, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Contractual Obligations, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Contractual Obligations, (ii) give any preference to any Contractual Obligation over any other Contractual Obligation, or (iii) reduce the aggregate principal amount of Contractual Obligations required to be held by Owners for consent to any such amendment, addition, or rescission.

No one or more Owner of Outstanding Contractual• Obligations shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Resolution to affect, disturb, or prejudice the rights of any other Owner of Outstanding Contractual Obligations or the Trustee, or to obtain or to seek to obtain priority or preference over any other Owner of Outstanding Contractual Obligations or to enforce any right under the Resolution, except in the manner herein provided and for the equal and ratable benefit of all Owners of Outstanding Senior Lien Obligations and, on a basis subordinate thereto, all Owners of Junior Lien Obligations and Subordinate Lien Obligations.

43. Defeasance. The Authority may defease the provisions of the Resolution (except as herein expressly stated), and discharge its obligation to the Owners of any or all of the Senior Lien Obligations (except to the extent otherwise expressly provided therein) to pay the principal of and interest thereon from other funds, by depositing with the Paying Agent/Registrar, the Comptroller or any other entity with which such deposits may be made (as specified in Section 1207.061, Texas Government Code, as amended) which has a minimum capital and surplus at the time of deposit of at least $100,000,000 either:

(a) Cash Deposit: Cash in an amount equal to the principal amount of and interest thereon to the date of maturity or earlier redemption, if any, or

(b) Governmental Obligations: Pursuant to an escrow or trust agreement, cash and/or (i) direct noncallable obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent; or (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality

A-11 by a nationally recognized investment rating firm not less than “AAA” or its equivalent, which, in the case of (i), (ii) or (iii), may be in book- entry form, and the principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, shall be verified by a nationally recognized firm of accountants or actuaries sufficient to provide for the timely payment of the principal of and interest thereon to the date of maturity or earlier redemption, if any; provided, however, that if any of such Contractual Obligations are to be redeemed prior to their respective dates of maturity, irrevocable provision shall have been made for giving notice of redemption as provided in the Resolution. Upon such deposit, such Contractual Obligations shall no longer be regarded to be Outstanding and shall no longer be subject to other redemption at the option of the Authority. Any surplus amount not required to accomplish such defeasance shall be returned to the Authority.

Upon such defeasance of all Senior Lien Obligations as provided in this Section, the lien on and pledge of the Pledged Revenues and powers of the Trustee granted under the Resolution and all covenants, agreements and other obligations of the Authority to the Owners thereof shall thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Trustee shall cause an accounting for such period or periods as shall be requested by the Authority to be prepared and filed with the Authority and, upon the request of the Authority, shall execute and deliver to the Authority all such instruments as may be desirable to evidence such discharge and satisfaction, and shall pay over or deliver to the Authority all moneys or securities held by it pursuant to the Resolution which are not required for the payment of principal or redemption price, if applicable, on Senior Lien Obligations not theretofore surrendered for such payment, or redemption.

45. Legal Holidays. In any case where the date interest becomes payable on the Contractual Obligations or principal of the Contractual Obligations matures or the date fixed for redemption of any Contractual Obligations shall not be a Business Day, then payment of interest or principal need not be made on such date, but payment may be made on the next succeeding Business Day and in the same amount with the same force and effect as if made on the scheduled date for payment and no interest shall accrue for the period from the date of maturity or redemption to the date of actual payment.

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A-12

APPENDIX B

AUDITED FINANCIAL STATEMENTS AND UNAUDITED MANAGEMENT’S DISCUSSION AND ANALYSIS AND SUPPLEMENTAL INFORMATION

TABLE OF CONTENTS*

Independent Auditors’ Report 17 Management’s Discussion and Analysis 20 Basic Financial Statements 32 Statements of Net Position 33 Statements of Revenues, Expenses, and Changes in Net Position 34 Statements of Cash Flows 35 Notes to the Basic Financial Statements 36 Required Supplemental Information 61 Schedule of Funding Progress for the Non-Union and Transport Workers Union Pension Plan and Other Postemployment Benefits 61

* The information contained in this APPENDIX B consists of excerpts from the Metropolitan Transit Authority of Harris County, Texas Comprehensive Annual Financial Report for the Year Ended September 30, 2013 and 2012 (October 1, 2012 to September 30, 2013) (the “Report”) and is not intended to be a complete statement of the Authority’s financial condition. Page numbers and references to page numbers of the excerpts of the Report are as they appear in the Report. For further information please see the complete Report.

B-1

INDEPENDENT AUDITOR’S REPORT

KPMG LLP 811 Main Street Houston, TX 77002

Independent Auditors’ Report

The Board of Directors Metropolitan Transit Authority Harris County, Texas:

We have audited the accompanying financial statements of Metropolitan Transit Authority of Harris County, Texas (the Authority), as of and for the years ended September 30, 2013 and September 30, 2012, 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 U.S. generally accepted accounting principles; 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 an opinion on these financial statements based on our audits. We did not audit the financial statements of the Metropolitan Transit Authority Transport Workers Union Pension Plan Local 260, the Metropolitan Transit Authority Non-Union Pension Plan and Trust, and the Transport Workers Union Metropolitan Transit Authority Health and Welfare Trust (the Retirement Plans) in 2013 or 2012. The financial information related to the Retirement Plans is included in note 4 of the notes to the financial statements. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts and disclosures included for the Retirement Plans, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

17 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Opinion In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly in all material respects, the financial position of Metropolitan Transit Authority of Harris County, Texas as of September 30, 2013 and 2012, and the respective changes in financial position, and cash flows thereof for the years then ended in accordance with U.S. generally accepted accounting principles. Other Matters Required Supplementary Information U.S. generally accepted accounting principles require that the management’s discussion and analysis on pages 20 thru 31 and schedules of funding progress for the Authority’s Non-Union and Transport Workers Union Pension Plans and other post employment benefits on page 61 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 and other auditors have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Metropolitan Transit Authority of Harris County, Texas’ basic financial statements. The introduction section and statistical section are presented for the purposes of additional analysis and are not a required part of the basic financial statements. Such information has 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.

Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 27, 2014 on our consideration of the System’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 Authority’s internal control over financial reporting and compliance.

Houston, Texas February 27, 2014

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis (MD&A)

Governmental Accounting Standard No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Government, requires externally issued financial reports that are prepared in accordance with generally accepted accounting principles to include an MD&A section. This section is to provide an objective and easily readable analysis of the government’s financial activities based on currently known facts, decisions, or conditions. MD&A should discuss the current-year results in comparison with prior year, with emphasis on the current year. This fact-basis analysis should discuss the positive and the negative aspects of the comparison with the prior year. Governments are encouraged to use charts, graphics, and tables to enhance the understandability of the information presented.

20 METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS MANAGEMENT’S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2013, 2012, AND 2011

This section of the CAFR of the Metropolitan Transit Authority of Harris County, Texas (METRO) presents a discussion and analysis of METRO’s financial performance during the fiscal years that ended September 30, 2013, 2012, and 2011. Please read it in conjunction with the introductory section of the report and METRO’s financial statements, which immediately follow this section. Numbers presented in the Management’s Discussion and Analysis tables are rounded and may differ slightly from the financial statements.

FINANCIAL HIGHLIGHTS

Fiscal Year 2013 vs. 2012

Sales Tax revenues increased by 8.2% from $593.7 in FY2012 to $642.5 million in FY2013 (Table A-3). Sales Tax growth resulted from the strong business climate driven by population increase and job formation. Fares in FY2013 were $72.8 million, 8.8% higher than in FY2012 (Table A-1). The increase in fare revenue is primarily due to growth in METRO’s Q fare card and HOT lanes revenue.

FY2013 total operating expenses (including depreciation) were $591.9 million, an increase of 3.2% over FY2012. Increases and decreases by major activity are identified in Table A-2.

The net position as of September 30, 2013 was $2,118.2 million, an increase of 14.8% over September 30, 2012. Increases and decreases by major activity are identified in Table A-4.

Total capital assets (net of depreciation) were $2,979.5 million as of September 30, 2013, an increase of 15.5% over September 30, 2012 (Table A-5). This increase is directly related to the expansion of METRORail.

Fiscal Year 2012 vs. 2011

FY2012 Sales Tax revenues were $593.7 million (Table A-3), 10.6% higher than in FY2011 (Table A-3). Fares in FY2012 were $66.9 million, 2.6% less than in FY2011 (Table A-1). Sales Tax growth resulted from the strong business climate driven by population increase and strong job formation. While there was no significant variation in fixed-route ridership, which remained essentially flat at 77 million for both years, the Authority’s analysis of the deferred revenue largely accounted for the higher fares of $1.8 million reported in FY2011.

FY2012 total operating expenses (including depreciation) were $573.5 million, an increase of 0.5% over FY2011 (Table A-2).

The balance sheet shows net position as of September 30, 2012 was $1,844.5 million, an increase of 17.0% over September 30, 2011 (Table A-4).

Total capital assets (net of depreciation) were $2,580.1 million as of September 30, 2012, an increase of 12.5% over September 30, 2011 (Table A-5). This increase is primarily due to the continued expansion of METRORail.

21 OVERVIEW OF THE FINANCIAL STATEMENTS

The financial section of this report consists of four parts: management’s discussion and analysis (this section), the basic financial statements, the notes to the financial statements, and required supplementary information.

METRO’s financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) as applied to government units on an accrual basis. Under this basis, revenues are recognized in the period in which they are earned, expenses are recognized in the period in which they are incurred, and depreciation of assets is recognized in the Statements of Revenues, Expenses, and Changes in Net Position. METRO’s Statements of Net Position presents information similar to a balance sheet.

FINANCIAL ANALYSIS OF METRO

Net Position

Fiscal Year 2013 vs. 2012

The increase in net position from FY2012 to FY2013 was approximately $273.7 million (Table A-1) or 14.8%. This increase primarily relates to rail expansion that was funded by the Federal Transit Administration (FTA) and sales tax receipts.

METRO’s total operating revenue increased by $5.9 million to $72.8 million (see Operating revenue for additional analysis), with total operating expenses increasing by $18.4 million to $591.9 million (Table A-2). Accordingly, the operating subsidy (Operating Loss) including depreciation increased 12.5 million or 2.5% (see Expense Factors section).

Non-operating revenues (expenses) and capital contributions as reflected in Table A-3 increased by $17.6 million or 2.3%. This increase is primarily due to additional sales tax revenues, a decrease in local infrastructure assistance payments offset by lower operating and capital grants.

Total assets (Table A-4) increased by 8.5% to $3,661.9 million and total liabilities increased by 1.1% to $1,542.4 million. Net position restricted for debt payments decreased by $14.5 million.

Fiscal Year 2012 vs. 2011

The increase in net position from FY2011 to FY2012 was approximately $268.6 million (Table A-1) or 17.0%. The $268.6 million increase in net position (end of year) from FY2011 to FY2012 is the net of an increase of $128.7 million in total assets and a decrease of $146.7 million in total liabilities. The $128.7 million increase in total assets results largely from increased cash investments from FFGA reimbursements offset by a decrease in prepaid rental payments. The $146.7 million decrease in total liabilities is largely due to a decrease in the balance of deferred rental payments remaining for lease and sublease agreements for operating facilities and buses.

METRO’s total operating revenue decreased by $1.8 million to $66.9 million (see Operating revenue for additional analysis), with total operating expenses increasing by $3 million to $573.5 million (Table A-2). Accordingly, the operating subsidy (Operating Loss) including depreciation increased 1% (see Expense Factors section).

The net Non-operating revenues (expenses) increased by $25.3 million or 6.4% and capital contribution increased by $265.5 million or 290.2% due to receipts from FTA for rail expansion under the Full Funding Grant Agreement (FFGA).

22 Total assets (Table A-4) increased 4.0% to $3,374.5 million and total liabilities decreased by 8.8% to $1,526.3 million. Net position restricted for debt payments decreased by $3.2 million.

Table A-1 Changes in Net Position (in millions) Amount of Percentage FY2013 FY2012 Change Change FY2011 Increased by: Transportation fares $ 72.8 $ 66.9 $ 5.9 0.088 $ 68.7 Non-operating revenues (expenses) 537.9 419.7 118.2 0.282 394.4 Capital grant proceeds 256.9 357.0 (100.1) (0.280) 91.5 Decreased by: Operating expenses 455.3 436.4 18.9 0.043 432.2 Depreciation and amortization 136.6 137.1 (0.5) (0.004) 138.3 Funds passed to subrecipients 2.0 1.5 0.5 0.333 2.5 Changes in net position 273.7 268.6 5.1 0.019 (18.4) Net position - beginning of the year 1,844.5 1,575.9 268.6 0.170 1,594.3 Net position - end of the year $ 2,118.2 $ 1,844.5 $ 273.7 0.148 $ 1,575.9

Operating Revenue

Fiscal Year 2013 vs. 2012

METRO’s total operating revenue increase by $5.9 million to $72.8 million. The increase in FY2013 operating revenue over FY2012 of 5.9 million is primarily due to growth in METRO’s Q card and HOT lanes toll revenue. (Table A-1)

Fiscal Year 2012 vs. 2011

The decrease in FY2012 operating revenue over FY2011 is largely due to METRO’s analysis of the deferred revenue account. The unclaimed fare media resulted in a $1.2 million increase in unearned revenue in FY2012 and a $3.0 million increase in FY2011. The net effect of these adjustments in their respective years is largely responsible for the 2.6% of $1.8 million decrease in transportation fares in FY2012 over FY2011.

23 Table A-2 Total Operating Expenses (in millions)

Amount of Percentage FY 2013 FY 2012 change Change FY2011 Scheduled services-fixed route Bus & rail operations-direct $ 170.9 $ 165.9 $5.0 0.030 $ 165.7 Contract service 46.6 47.4 (0.8) (0.017) 44.7 Materials 5.5 6.0 (0.5) (0.083) 6.0 Preventive maintenance 51.0 48.9 2.1 0.043 49.4 Central shop & maintenance support 19.1 18.1 1.0 0.055 15.2 Safety and training 1.0 0.8 0.2 0.250 0.9 Subtotal scheduled services - fixed route 294.1 287.1 7.0 0.024 281.9

Non-scheduled services-special METROLift 45.2 40.2 5.0 0.124 39.7 METROVan 5.0 5.3 (0.3) (0.057) 5.0 HOT lanes 5.2 2.0 3.2 1.600 0.6 Special events 0.4 0.3 0.1 0.333 - Subtotal non-scheduled service - special 55.8 47.8 8.0 0.167 45.3

Service support Service planning and evaluation 3.5 3.1 0.4 0.129 4.2 Marketing 7.3 6.9 0.4 0.058 7.4 Transit security 11.8 13.2 (1.4) (0.106) 15.0 Insurance and claims 5.9 5.7 0.2 0.035 5.6 Ticket and fare collection 3.7 3.4 0.3 0.088 3.9 Facility maintenance 21.7 20.0 1.7 0.085 16.6 Subtotal service support 53.9 52.3 1.6 0.031 52.7

Traffic management - services 6.8 7.0 (0.2) (0.029) 7.8

Organization support Business, community and governmental development 4.2 5.0 (0.8) (0.160) 4.6 Administrative, financial and personnel 14.6 15.4 (0.8) (0.052) 18.1 Information systems 14.0 14.3 (0.3) (0.021) 12.4 Purchasing 3.0 2.5 0.5 0.200 2.9 Oversight, audit and legal 8.9 5.0 3.9 0.780 6.5 Subtotal organization support 44.7 42.2 2.5 0.059 44.5

Depreciation and amortization 136.6 137.1 (0.5) (0.004) 138.3 Total operating expenses $ 591.9 $ 573.5 $ 18.4 0.032 $ 570.5

24 Expense Factors Fiscal Year 2013 vs. 2012

Total operating expenses increased by $18.4 million or 3.2%. This increase relates to providing more scheduled transit services including METROLift and more HOT lanes becoming fully operational. The operating subsidy (Operating Loss) including depreciation increased $12.5 million or 2.5%. The $12.5 million is a net result of an increase in operating revenue of $5.9 million and an increase in total operating expenses of $18.4 million.

Fiscal Year 2012 vs. 2011

Total operating expenses increased by $3.0 million or 0.5%. This increase was primarily due to increases in operational costs related to both scheduled services (including Contract Services and Central Shop and Maintenance Support) and nonscheduled services primarily related to Special Events. Facility Maintenance costs increased mainly due to the High Occupancy Toll (HOT) Lanes, a new service introduced in FY2012. To offset these increases, there were reductions realized in service support costs notably service planning and evaluation costs, transit security, and organizational support costs including Administrative, Financial & Personnel, and Oversight, Audit & Legal expenses.

Depreciation and Amortization

Fiscal Year 2013 vs. 2012

In FY2013, depreciation expense stays relatively flat at $136.6 million comparing to $137.1 million in FY2012, a $0.5 million decrease or 0.4%.

Fiscal Year 2012 vs. 2011

In FY2012, some of METRO’s property was fully depreciated and some expenses fully amortized resulting in a decrease of $1.2 million or 0.9% in depreciation and amortization expense.

Sales Tax

Fiscal Year 2013 vs. 2012

Sales Tax revenues increased in FY2013 by $48.8 million to $642.5 million. This 8.2% increase is primarily due to continued improvements in the local economy.

Fiscal Year 2012 vs. 2011

FY2012 Sales Tax revenues were $57.1 million higher than in FY2011, a 10.6% increase. Population and employment are the major drivers of Sales Tax. Houston has long been recognized as being among the most competitive U.S. cities for corporate relocation and expansion activity. As a global leader in oil and gas technology, existing data suggests that in FY2012, Houston continued to experience strong job formation primarily in technical and professional service jobs and population growth largely due to domestic and international migration trends that tend to favor the region’s geographical, cultural, and economic strengths.

25 Non-operating Income Discussion Table A-3 Changes in Non-Operating Revenues (Expenses) and Capital Contributions (in millions)

Amount of Percentage FY2013 FY2012 Change Change FY2011

Sales Tax $ 642.5 $ 593.7 $ 48.8 0.082 $ 536.6 Investment income 0.8 0.6 0.2 0.333 0.3 Inter-government revenue 2.0 2.0 – – 2.0 Non-capitalized interest expense (10.1) (13.7) 3.6 (0.263) (13.5) Other income 1.8 3.0 (1.2) (0.400) 0.6 Grant proceeds 71.8 56.5 15.3 0.271 59.6 Local infrastructure assistances (170.4) (222.1) 51.7 (0.233) (188.5) Loss on sale of assets (0.5) (0.3) (0.2) 0.667 (2.7) Total non-operating revenues (expenses) 537.9 419.7 118.2 0.282 394.4 Capital grant proceeds 256.9 357.0 (100.1) (0.280) 91.5 Funds passed to subrecipients (2.0) (1.5) (0.5) 0.333 (2.5) Total non-operating revenues (expenses) and capital contributions $ 792.8 $ 775.2 $ 17.6 0.023 $ 483.4

Capital Contributions (Grants)

Fiscal Year 2013 vs. 2012

METRO continues to be the recipient of a number of federal and state grants for a variety of programs including Formula Funds, New Starts, Fixed Guideway Modernization, Bus/Bus Facility, and Congestion Mitigation/Air Quality (CMAQ). As projects are advanced and expenditures incurred, revenues from the grants are accrued and recognized. In FY2013, total grants were $328.7 million. In FY2012, the total grant revenue was $413.5 million, which included a back billing of $164.4 million for North and East Corridor. The timing of the billing for both Operating and Capital Grant caused a decrease of $84.8 million from FY2012 to FY2013.

Fiscal Year 2012 vs. 2011

METRO is the recipient of a number of federal and state grants from a variety of programs including Formula Funds, New Starts, Fixed Guideway Modernization, Bus and Bus Facility, and Congestion Mitigation/Air Quality (CMAQ). These funds are received on the basis of project expenditures made. As projects are advanced and expenditures incurred, the grants are accrued and recognized. In FY2011, total grants were $151.1 million. In FY2012, the total grant revenue was $413.5 million, an increase of $262.4 million. The increase is primarily due to federal reimbursements of current and FY2011 expenditures for Light-Rail expansion eligible expenses following the award to the Authority of the Full Funding Grant Agreement (FFGA) in November 2011.

26 Funds Passed to Subrecipients

Fiscal Year 2013 vs. 2012

The Authority receives grants from the federal agency, some of which are passed through to other entities, i.e., subrecipients who carry out or administer the JARC programs (Job Access and Reverse Commute) and have certain responsibilities for programmatic decision making. In FY2013, this amount was $2 million or 33% percent higher than the previous year.

Fiscal Year 2012 vs. 2011

The Authority receives grants from the federal agency, some of which are passed through to other entities, i.e., subrecipients who carry out or administer programs and have certain responsibilities for programmatic decision making. In FY2012, this amount was $1.5 million or 40 percent lower than the previous year.

Investment Income

Fiscal Year 2013 vs. 2012

During FY2013, the investment portfolio declined approximately 29.5 percent from $525.4 million to $370.5 million. This decline occurred primarily because funds received and invested from debt proceeds and previous sale tax receipts were needed to pay for rail and other capital expenditures.

The investment portfolio is divided into three separate pools consisting of General, Construction, and General Mobility. Investments and related returns for each pool vary depending on liquidity requirements. FY2013 returns for individual pools were General .351%, Construction .039% and General Mobility .039%. Investment returns for all pools exceeded their benchmark.

Fiscal Year 2012 vs. 2011

METRO’s average invested General Funds for FY2012 were $217.5 million and for FY2011 were $78.6 million. The increase was primarily due to the award of the full funding grant agreement and receipt of reimbursements in the first and second quarters of FY2012 for eligible expenditures made in previous years. Annualized yield on METRO’s portfolio decreased to 0.37% in 2012 from 0.61% for 2011, reflecting dilution resulting from the inflow of substantial reimbursements from FTA in an extremely low interest rate environment. The investment portfolio consisted of the following: U.S. Treasuries and Agencies, Texas Municipal Bonds and Commercial Paper, a collateralized Certificate of Deposit with a local bank, participation in Local Government Investment Pools, and Money Market Mutual Funds and Cash during FY2012.

Local Infrastructure Assistance

Fiscal Year 2013 vs. 2012

METRO invests a significant amount of its resources into the construction, rebuilding, and rehabilitation of streets, bridges, and sidewalks in the Greater Houston region as well as other infrastructure improvements that contribute to the enhanced mobility and reduced congestion in its service area – a key part of the Authority’s mission. These investments include land conveyances to the City of Houston, upgrades to traffic signalization, e.g., the Main Street Corridor Regional Computerized Traffic Signal System (RCTSS), and its continued contribution to the General Mobility Program –METRO’s inter–local agreement with its member entities (City of Houston, Harris County, and the 14 Multi-Cities) to which by voter referendum METRO must allocate 25% of its sales tax revenue.

As the streets are not the property of METRO, the construction expenditures are reported as current period non-operating expenses. The investment in General Mobility decreased from $222.1 million in FY

27 2012 to $170.4 million in FY2013, which primarily related to a decrease in land conveyed to the City of Houston from $65.3 million in FY2012 to $19.1 million in FY2013.

Fiscal Year 2012 vs. 2011

Investments in regional mobility totaled $222.1 million in FY2012 and $188.5 million in FY2011 (Table A-3). The increase in local infrastructure assistance is due primarily to an increase in the invoicing of General Mobility expenses by the City of Houston and Harris County and an increase in land conveyed to the City of Houston.

Long-Term Debt

Fiscal Year 2013 vs. 2012

Long-term debt consists of commercial paper, deferred rental payments, capital leases, and sales and use tax bonds. Long-term debt was used to finance capital assets reported as noncurrent. Long-term debt decreased from $1,150.1 billion in FY2012 to $950.9 million in FY2013. This $199.2 million reduction is due to amortization of the deferred rental payments of 12.2 million, principal payments and amortization of bonds of $24.6 million, and $162.4 million of outstanding Commercial Paper being reclassified from long-term to short-term debt. No new debt was issued during FY2013 and the current debt ratings for METRO improved with Standard & Poor’s rating on sales tax bonds and contractual obligations moving higher to ‘AA+’ from ‘AA’ and the certificates of participation (COPs) moving one notch higher to AA’ from ‘AA-. The Aa2 rating by Moody remained unchanged from FY2012.

Fiscal Year 2012 vs. 2011

Long-term debt consists of commercial paper, deferred rental payments, capital leases, and sales and use tax bonds. Long-term debt was used to finance capital assets reported as noncurrent long-term debt. Long-term debt decreased from $1,325.5 billion in FY2011 to $1,150.1 billion in FY2012. This reduction was primarily due to early termination of deferred rental payments, scheduled principal payments on existing debt, and $26.6 million of outstanding Commercial Paper being reclassified from long-term to short-term debt. No new debt was issued during FY2012 and the current debt ratings for METRO are AA for Standard and Poor’s and Aa2 for Moody’s, which remain unchanged since FY2011.

Loss on Sale of Assets

Fiscal Year 2013 vs. 2012

In FY2013, the Authority recorded a loss of $0.5 million due to the sale of obsolete parts and retired transit equipment, neither of which had remaining useful value to the Authority.

Fiscal Year 2012 vs. 2011 In FY2012, the Authority recorded a loss of $0.3 million due to the sale of obsolete parts and retired transit equipment, neither of which had remaining useful value to the Authority. In FY2011, the Authority recorded a loss of $2.7 million due to the sale of obsolete parts and retired transit equipment, neither of which had remaining useful value to the Authority.

28 Table A-4 Net Assets (in millions)

Amount of Percentage FY2013 FY 2012 Change Change FY 2011 Current Assets $ 562.0 $ 562.5 $ (0.5) (0.001) $ 306.7 Capital Assets (Net) 2,979.5 2,580.1 399.4 0.155 2,292.8 Prepaid and Other Assets 120.4 231.9 (111.5) (0.481) 646.3 Total Assets 3,661.9 3,374.5 287.4 0.085 3,245.8

Deferred outflow of resources – – – – 3.2 Current Liabilities 415.4 226.9 188.5 0.831 217.7 Other Liabilities 1,127.0 1,299.4 (172.4) (0.133) 1,455.4 Total Liabilities 1,542.4 1,526.3 16.1 0.011 1,673.1

Deferred inflow of resources 1.3 3.7 (2.4) (0.649) – Net Position: Investment in capital assets 1,949.1 1,730.0 219.1 0.127 1,641.3 Restricted for debt payments 56.8 71.3 (14.5) (0.203) 74.5 Unrestricted 112.3 43.2 69.1 1.600 (139.9) Total Net Position $ 2,118.2 $ 1,844.5 $ 273.7 0.148 $ 1,575.9

CAPITAL ASSETS

Fiscal Year 2013 vs. 2012

As of September 30, 2013, METRO’s investments in net capital assets (Table A-5) totaled $2,979.5 million and consisted of buses, rail, buildings, equipment, HOV/HOT lanes, leasehold improvements, construction in progress and land. The increase of $399.4 million or 15.5% from September 30, 2012 relates primarily to $555.4 million in METRORail expansion, bus replacements, and finalizing the conversion of HOV to HOT lanes reduced by accumulated depreciation. Additional information is located in financial note 3.

Fiscal Year 2012 vs. 2011

As of September 30, 2012, METRO had invested approximately $3,925.2 million in capital assets, including rail and equipment, buildings, buses and equipment, transitways, other property and equipment, leasehold improvements, land, and construction in progress. Net of accumulated depreciation, METRO’s net capital assets at September 30, 2012 totaled $2,580.1 million (Table A-5). This amount represents a net increase (including additions and disposals, net of depreciation) of $287.3 million or 12.5% over September 30, 2011. A significant addition in FY2012 was $432.8 million used to expand METRORail. Additional information is located in financial note 3.

The increase in total capital assets (before depreciation) from FY2011 to FY2012 was $359.0 million, an increase of 10.1%.

29 Table A-5 Capital Assets (in millions)

Amount Percentage FY2013 FY 2012 of Change Change FY 2011 Rail and equipment $ 370.8 $ 296.8 $ 74.0 0.249 $ 292.7 Buildings and improvements 421.4 413.5 7.9 0.019 416.8 Park and ride lots 281.8 281.0 0.8 0.003 284.7 Buses and equipment 738.6 745.0 (6.4) (0.009) 712.0 Transitways 571.6 538.0 33.6 0.062 516.9 Other property and equipment 79.4 70.1 9.3 0.133 74.5 Total assets 2,463.6 2,344.4 119.2 0.051 2,297.6 Less: Accumulated depreciation & amortization (1,454.9) (1,345.1) (109.8) 0.082 (1,273.4)

Net depreciable property and improvement 1,008.7 999.3 9.4 0.009 1,024.2

Land 290.7 308.1 (17.4) (0.056) 364.0 Construction-in-progress 1,680.1 1,272.7 407.4 0.320 904.6 Net capital assets $ 2,979.5 $ 2,580.1 $ 399.4 0.155 $ 2,292.8

OUTSTANDING COMMITMENTS

Fiscal Year 2013 vs. 2012

The Authority has entered into various contracts and purchase orders to acquire goods and services or to assist in developing infrastructure improvements within the Authority service area. Many of these contracts extend beyond a single fiscal year. These items total approximately $767 million and $940 million as of September 30, 2013 and September 30, 2012, respectively. Additional analysis is located in note 7.

ECONOMIC OUTLOOK FY2014

As mentioned at the 2013 Economic Symposium in November 2013 held by University of Houston, C.T Bauer College of Business, according to Dr. Robert W. Gilmer, “For a decade, oil and emerging markets have powered the Houston economy and the lack of stimulus from the struggling U.S. economy was barely missed. But now, the picture is changing. Emerging markets are slowing, bringing much discussion of the end of a decade-long commodity cycle. And the U.S. economy is finally showing signs of putting the Great Recession behind it, with a revival in housing, reduced consumer debt loads, and healthy revenues for state and local government. By 2014, historic rates of growth may again return to the U.S. economy, finally putting an end to the Great Recession and its aftermath. Revival of U.S. growth will bring with it the end of monetary stimulus. Long-term rates will rise first as the Federal Reserve pulls back on quantitative easing, followed later by increased short-term rates. While energy remains central to Houston’s economic outlook and the prospects for continued job growth remains solid, the broader economic backdrop that supports energy prices – and Houston’s economy – is rapidly changing.”

BASIC FINANCIAL STATEMENTS

Basic Financial Statements Generally Accepted Accounting Principles Generally accepted accounting principles (GAAP) are uniform minimum standards of and guidelines to financial accounting and reporting. Adherence to GAAP assures that financial reports of all state and local governments regardless of jurisdictional legal provisions and customs contain the same types of financial statements and disclosures, for the same categories and types of funds and activities, based on the appropriate measurement and classification criteria. Adherence to GAAP is essential to assuring a reasonable degree of comparability among the financial reports of state and local governmental units. Governmental accounting systems thus must provide data that permit reporting on the financial status and operations of a government in conformity with GAAP. GAAP establishes standards for preparing a comprehensive annual financial report, which includes management’s discussion and analysis (MD&A), basic financial statements, notes, required supplementary and statistical information.

32 Metropolitan Transit Authority of Harris County, Texas Statements of Net Position September 30, 2013 and 2012

2013 2012 Assets Current assets Cash $ 3,499,304 $ 1,769,157 Investments 313,657,041 358,828,979 Investments – restricted 28,942,440 37,265,000 Receivables Sales tax 110,821,904 103,035,680 Federal government - Federal Transit Administration 73,106,988 26,811,825 Bus passes and other receivables 10,277,726 13,570,522 Total receivables 194,206,618 143,418,027 Material and supplies inventory 20,407,175 17,532,502 Derivative instrument – diesel fuel swaps 1,348,147 3,691,843 Total current assets 562,060,725 562,505,508 Noncurrent assets Investments – restricted 27,851,305 129,308,971 Capital assets, net of depreciation 2,979,521,713 2,580,100,752 Prepaid pension 26,346,959 26,678,091 Other noncurrent assets 14,002,247 11,549,753 Prepaid rental payments 52,168,306 64,374,346 Total noncurrent assets 3,099,890,530 2,812,011,913 Total assets 3,661,951,255 3,374,517,421 Liabilities Current liabilities Trade payables 149,021,462 125,067,467 Accrued compensation and benefits 27,430,216 23,759,406 Liabilities for injuries and damages 3,679,238 3,385,061 Commercial paper 187,000,000 26,600,000 Other current liabilities 8,824,195 9,005,559 Capital lease obligations 8,129,906 7,899,879 Debts payable 13,365,000 12,895,000 Debt interest payable 17,976,710 18,287,887 Total current liabilities 415,426,727 226,900,259 Noncurrent liabilities Liabilities for injuries and damages 7,014,731 5,715,969 Commercial paper – 162,400,000 Deferred rental payments 52,168,306 64,374,346 Capital lease obligations 75,423,971 83,711,279 Debts payable 823,268,698 839,645,874 Other postemployment benefits 169,059,735 143,594,021 Total noncurrent liabilities 1,126,935,441 1,299,441,489 Total liabilities 1,542,362,168 1,526,341,748 Deferred inflow of resources - diesel fuel swaps 1,348,147 3,691,843 Net position Net investment in capital assets 1,949,158,508 1,729,961,468 Restricted assets – debt payments 56,793,745 71,335,683 Unrestricted assets 112,288,687 43,186,679 Total net position $ 2,118,240,940 $ 1,844,483,830

The accompanying notes are an integral part of the financial statements

33 Metropolitan Transit Authority of Harris County, Texas Statements of Revenues, Expenses, and Changes in Net Position for the Years Ended September 30, 2013 and 2012

2013 2012 Operating revenues: Transportation fares $ 72,782,991 $ 66,887,319 Operating expenses: Scheduled services - fixed route Bus and rail operations - direct 170,940,122 165,925,733 Contract service 46,620,525 47,431,837 Material distribution 5,540,367 5,966,531 Preventative maintenance 51,040,854 48,876,170 Central shop and maintenance support 18,961,766 18,103,288 Safety and training 973,447 816,598 Subtotal scheduled services - fixed route 294,077,081 287,120,157 Non-scheduled services -special METROLift 45,181,913 40,204,841 METROVan 4,967,172 5,250,084 HOT lanes and special events 5,582,712 2,346,041 Subtotal non-scheduled services - special 55,731,797 47,800,966 Service support Service planning and evaluation 3,521,365 3,130,879 Marketing 7,306,538 6,910,999 Transit security 11,778,274 13,214,108 Insurance and claims 5,927,146 5,673,304 Ticket and fare collection 3,751,006 3,369,283 Facility maintenance 21,660,854 20,020,810 Subtotal service support 53,945,183 52,319,383 Traffic management - services 6,809,307 6,985,562 Organizational support Business, community, and governmental development 4,228,909 5,043,321 Administrative, financial, and personnel 14,612,492 15,357,730 Information systems 13,948,037 14,276,491 Purchasing 2,994,284 2,502,794 Oversight, audit and legal 8,875,645 5,000,056 Subtotal organizational support 44,659,367 42,180,392 Depreciation and amortization 136,642,238 137,094,956 Total operating expenses 591,864,973 573,501,416 Operating loss (519,081,982) (506,614,097) Non-operating revenues (expenses): Sales tax 642,515,462 593,732,843 Investment income 768,527 625,042 Inter-government revenue 1,986,480 1,986,480 Non-capitalized interest expense (10,102,779) (13,719,644) Other income 1,845,296 3,030,912 Grant proceeds 71,766,635 56,460,316 Local infrastructure assistance (170,373,931) (222,054,292) Loss on sale or disposal of assets (470,021) (316,485) Total non-operating revenues (expenses) 537,935,669 419,745,172 Net increase (decrease) before capital grants 18,853,687 (86,868,925) Capital grant proceeds 256,919,845 356,987,060 Funds passed to subrecipients (2,016,422) (1,528,115) Changes in net position 273,757,110 268,590,020 Net position - beginning of the year 1,844,483,830 1,575,893,810 Net position - end of the year $ 2,118,240,940 $ 1,844,483,830 The accompanying notes are an integral part of the financial statements 34 Metropolitan Transit Authority of Harris County, Texas Statement of Cash Flows for the Years Ending September 30, 2013 and 2012

2013 2012 Cash flows from operating activities: Receipts from transportation fares $ 74,192,592 $ 65,245,199 Payments to employees (245,937,157) (237,817,909) Payments to suppliers for goods and services (188,227,778) (177,589,026) Net cash used in operating activities (359,972,343) (350,161,736) Cash flows from noncapital financing activities: Sales tax 634,400,703 588,178,778 Proceeds from grants 39,768,863 72,476,157 Receipts from miscellaneous income 1,845,297 2,806,316 Payments for local infrastructure assistance (144,581,922) (161,564,126) Net cash provided by noncapital financing activities 531,432,941 501,897,125 Cash flows from capital and related financing activities: Proceeds from grants 241,492,741 330,337,962 Principal payments related to commercial paper (2,000,000) (1,000,000) Principal payments related to debts (20,794,879) (16,834,700) Long-term debt issuance cost – (971,406) Interest payments related to debts (48,134,093) (38,267,081) Sale of investments relating to sales tax bonds proceeds 109,780,224 313,596,553 Interest rebates from Build America Bonds 1,986,480 1,986,480 Proceeds from sale of assets 333,256 853,680 Capital purchases (498,573,227) (474,606,272) Net cash flows (used in) provided by capital and related financing activities (215,909,498) 115,095,216 Cash flows from investing activities: Proceeds from sale and maturities of investments 658,365,424 368,622,016 Purchase of investments (613,585,121) (635,859,562) Interest income 1,398,744 315,446 Net cash flows provided by (used in) investing activities 46,179,047 (266,922,100) Net change in cash 1,730,147 (91,495) Cash at beginning of year 1,769,157 1,860,652 Cash at end of year $ 3,499,304 $ 1,769,157 Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (519,081,982) $ (506,614,097) Depreciation and amortization 136,642,238 137,094,956 Changes in assets and liabilities: Decrease (increase) in accounts receivable 751,429 (3,349,235) Decrease (increase) in inventory and other assets (4,210,509) 3,913,598 Decrease in prepaid pension 331,132 103,526 (Decrease) increase in accrued compensation and benefits 3,670,810 (1,296,092) Increase in other postemployment benefits 25,465,714 27,327,035 Increase (decrease) in liabilities for injuries and damages 1,592,939 (8,203,187) Increase (decrease) in trade payables and other liabilities (5,134,114) 861,760 Net cash used in operating activities $ (359,972,343) $ (350,161,736) Noncash investing activities The net decrease in fair value of investments $ 255,023 $ 208,130 Inflows from reissuance of commercial paper 760,150,000 813,200,000 Outflows from reissuance of commercial paper (760,150,000) (813,200,000) Land conveyed to the City of Houston due to rail construction 19,111,275 65,291,832

The accompanying notes are an integral part of the financial statements

35 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

1. Summary of Significant Accounting Policies:

The Metropolitan Transit Authority of Harris County, Texas (METRO) prepares its financial statements in accordance with generally accepted accounting principles established or approved by the Governmental Accounting Standards Board (GASB), the more significant of which are described below:

Reporting Entity

METRO is a stand-alone governmental entity as defined by GASB Statement No. 14, The Financial Reporting Entity, amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units.

METRO is a political subdivision of the State of Texas established in 1977. METRO began operations in 1979 to develop, maintain, and operate a public mass transportation system, principally within Harris County, Texas, and is governed by a nine-member Board of Directors (the Board). Five are nominated by the Mayor of the City of Houston and confirmed by the City Council. Two are nominated by the Harris County Judge and confirmed by the Harris County Commissioners Court, and two are elected by the Mayors of the 14 cities other than Houston within METRO’s service area.

Related Organizations

The City of Houston, Texas (the City) provides governmental services as authorized or required by its charter. While the City appoints a voting majority of METRO’s board members, it is not financially accountable for the actions of METRO since it is unable to impose its will, and a financial benefit or burden relationship does not exist.

Nature of Operating and Nonoperating Activities

Operating

METRO uses the flow of economic resources measurement focus and accrual basis of accounting when preparing financial statements. Under this approach, revenues are recognized when earned and expenses are recognized when incurred.

Operating revenue consists of transit fares while operating expenses consist of transit operations, traffic management, and organizational support.

Transit operations provide the public with a high-quality and cost-effective public transportation system. Transit operations include designing/constructing maintenance facilities, rail lines, transit centers, Park & Ride lots, and bus storage facilities; selecting bus/rail routes; purchasing buses/rail equipment; maintaining equipment; and hiring/training personnel who deliver transit services and provide security.

Traffic management operations provide comprehensive, effective, and efficient management of traffic and vehicular movement in order to enhance utilization of METRO’s regional street and road network, thereby improving regional mobility. METRO also provides traffic and transportation law enforcement activities in order to increase safety for the area’s motorists and pedestrians.

Organizational support provides METRO with oversight, direct assistance, and community/business development opportunities.

Non-operating

Non-operating revenue and expenses include the one percent sales tax levied in METRO’s service area, investment income, inter-government revenue, other expenses (income), which includes leasing of

36 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas property not used in transit operations and cash receipts from lease/sublease arrangements, grant proceeds used in operations, local infrastructure assistance, and loss on sale or disposal of assets.

Cash and Investments Activities which Include Compliance with the Texas Public Fund Investment Act (TPFIA)

Cash consists of amounts maintained in demand deposit and petty cash accounts.

METRO’s deposit and investment activities comply with policies established by the Board of Directors and the TPFIA. The TPFIA requires, as part of the annual financial statement audit, the independent auditor perform compliance reviews some of which include: the Board of Directors has: adopted a written investment policy and strategies that comply with TPFIA, the policy and investment strategies are reviewed at least annually, and adequately trained investment officers have been designated and ensure that investment activity is reported, reviewed, and accepted by the Board of Directors at least quarterly. The investment policy must also include a listing of authorized investments, which can include: Obligations of the United States of America, its agencies, and instrumentalities, money market mutual funds, commercial paper, fully collateralized repurchase agreements, local government investment pools, certificates of deposit, and other investments authorized by the TPFIA. The Board of Directors may also place additional limits on investment options.

All investments are reported at fair value with investments from borrowing reflected as Restricted investments in the Statements of Net Position. Restricted assets reflected as current will be used to pay amounts reported as current liabilities.

Receivables

Receivables generally consist of amounts due from customers, grantor agencies, cost sharing agreements, employees, warranties, and miscellaneous activities.

Inventories of Materials and Supplies

Inventories are valued using a weighted average costing method and consist principally of diesel fuel, repair parts, and other supplies that are used to maintain buses, rail cars, equipment, and facilities.

Capital Assets

METRO’s overall capitalization policy requires expenditures to be capitalized when they exceed $5,000 and (a) the useful life of the asset acquired exceeds one year and/or (b) the useful life of an existing asset is increased beyond its original useful life. Depreciation of such property and equipment is calculated using the straight-line method over the following estimated useful lives:

Park and ride lots 4 - 30 years Buses 3 - 12 years Other property and equipment 3 - 10 years Transitways 4 - 30 years Rail cars 4 - 25 years Rail infrastructure 4 - 30 years Buildings and improvements 4 - 40 years

Capital assets, including capital leases, are recorded at historical cost and expenditures relating to normal repair and maintenance are expensed as incurred. The cost and accumulated depreciation of assets retired or sold are removed from the accounts with any gain or loss reported as part of nonoperating revenues (expenses) on the Statements of Revenues, Expenses, and Changes in Net Position. Liabilities relating to capital leases are reflected separately in the Statements of Net Position. 37 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Compensated Absences

Compensated absences are earned by all full-time and part-time employees. Employees covered by METRO’s Union Contract earn vacation hours each December 31 based on years of service. A maximum of 200 vacation hours per year can be earned. Earned vacation hours must be used in the next calendar year. These employees also accumulate 8 sick hours per month up to a maximum of 240 hours based on date of hire and years of service. Accumulated sick pay in excess of 64 hours may be sold each September 30 back to METRO. Vacation and sick pay for these employees are expensed when earned with unpaid balances being reported as part of accrued compensation and benefits (a liability) on the Statements of Net Position.

Non-Union employees can earn vacation hours up to 16.67 each month and can accumulate, based on years of service, up to 520 hours. Vacation expense is recorded when earned with the unused balance being reported as part of accrued compensation and benefits (a liability) in the Statements of Net Position. Employees are paid for their unused vacation time upon termination or retirement. In addition, these employees receive 80 hours of sick days per year at the beginning of each calendar year. Unused sick leave cannot be carried forward to subsequent years and there is no payment at the end of a calendar year, termination, or retirement. Sick leave for Non-Union employees is expensed when incurred.

Commercial Paper

Obligations for the issuance of tax-exempt commercial paper are reported as a current liability unless they are supported by a non-cancellable, revolving credit and term loan agreement that exceeds one year as of date of the Statements of Net Position. In addition, the agreement must be issued by an organization with the financial capacity to support their commitment. Obligations that meet these requirements have been reported as a non-current liability in the Statements of Net Position.

Sales Tax

Revenue from the 1 percent sales tax is recognized when taxable sale transactions occur within METRO’s service area. The Comptroller of the State of Texas collects and distributes these amounts to the appropriate governmental organizations with funding normally occurring within 60 days from date of the sale. The amount reported is net of a 2 percent collection and distribution service fee withheld by the State of Texas.

Use of Estimates

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

New Accounting and Reporting Standards

During FY2013, METRO implemented GASB Standards No. 60, Accounting and Financial Reporting for Service Concession Arrangements, No. 61, The Financial Reporting Entity: Omnibus, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. These standards did not materially affect METRO’s financial report.

38 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

New GASB Standards that are being evaluated by METRO include: Effective GASB Standard No. 65, Items Previously Reported as Assets and FY2014 Liabilities GASB Standard No. 66, Technical correction to GASB Statements FY2014 No. 10 and No. 62 GASB Standard No 67, Financial Reporting for Pension Plans FY2015 GASB Standard No 68, Accounting and Financial Reporting for FY2015 Pensions GASB Standard No. 70, Accounting and Financial Reporting for FY2014 Non Exchange Guarantees

2. Deposits and Investment Securities:

Deposits and Investments Including Compliance with the Texas Public Fund Investment Act (TPFIA)

METRO’s deposit and investment activity complies with the TPFIA or policies (if more restrictive) established by the Board of Directors. Some items required by the TPFIA include: written investment policies, designation of adequately trained investment managers, submissions (at least quarterly) of investment reports to the Board of Directors, and compliance reviews performed annually by the external auditors as part of the financial statement audit. Also, the investment policy must be approved by the Board of Directors annually and include a list of authorized investments that can include: obligations of the United States of America, its agencies, and instrumentalities, money market mutual funds, commercial paper, fully collateralized repurchase agreements, local government investment pools, certificates of deposit, and other investments authorized by the TPFIA.

Interest Rate and Credit Risk

METRO’s investment policy is to minimize interest rate and credit risk by investing a majority of the portfolio in short-term investments such as commercial paper, money market mutual funds, and obligations of the United States with maturities generally less than two years. Investments not insured or guaranteed by a governmental entity must be rated by a nationally recognized organization with rating not less than AAAm, A-1, P-1, F-1, or equivalent.

Custodial Credit Risk

METRO’s investment policy requires bank deposits to be insured by Federal Deposit Insurance Corporation or collateralized at least 102 percent of value with the collateral held by a nonaffiliated, federally insured financial institution. Investment securities are registered in METRO’s name and held by an independent custodian.

Concentration of Credit Risk

METRO’s investment policy requires a diversified portfolio that minimizes the risk of loss resulting from overconcentration of assets in specific maturity, specific issuer, or specific class of securities and places limits on the allocation of investments between investment types. Investments issued or explicitly guaranteed by the U.S. government, its agencies, or instrumentalities, money market mutual funds, and investment pools are not subject to concentration of credit risk disclosure and represented $296,839,671 or 80.1% of total investments. None of the remaining investments represented a significant concentration of credit risk.

39 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Deposits

METRO’s checking accounts deposits and cash book balances as of September 30, 2013 and 2012 were as follows:

Fiscal 2013 Fiscal 2012 Unrestricted Bank balances $ 3,122,173 $ 1,684,353 Book balances 3,499,304 1,769,157

Investments

The fair value of METRO’s investments is estimated based on quoted market prices. The investments held at September 30, 2013 and 2012 are indicative of the type of investments made by METRO during each fiscal year and consist of the following: Fiscal 2013 Fiscal 2012 Credit Fair Value Fair Value Ratings Unrestricted investments U.S. Treasury security $ – $ 10,214,844 U.S. Agency securities 52,171,412 101,122,725 Local government investment pool 187,873,742 171,877,949 AAAm Money market mutual fund 772 10,276,868 AAAm Municipal commercial paper 37,396,815 38,996,053 A-1+, P-1,F1+ Certificate of deposit 10,000,000 10,000,000 Collateral =Aaa Municipal bonds 26,214,300 16,340,540 SP-1+, F1+/Aaa/AAA Aa3/AA Total unrestricted investments 313,657,041 358,828,979 Restricted investments Local government investment pools 56,793,745 166,573,971 AAAm Total restricted assets 56,793,745 166,573,971 Total Investments $ 370,450,786 $ 525,402,950

Investment by type and weighted average maturity as of September 30, 2013 and 2012 consisted of the following: Investment Maturity Fiscal 2013 Less Than Less Than Average Fair Value 1 Year 2years Maturity Investment securities U.S. Agency securities 52,171,412 52,171,412 – 204 days Local government investment pool 244,667,487 244,667,487 – 52 days Money market mutual fund 772 772 – 1 day Municipal commercial paper 37,396,815 37,396,815 – 36 days Certificate of deposit 10,000,000 10,000,000 – 65 days Municipals bonds 26,214,300 26,214,300 – 337 days Total investments $ 370,450,786 $ 370,450,786 –

40 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Investment Maturity Fiscal 2012 Less Than Less Than Average Fair Value 1 Year 2 years Maturity Investment securities U.S. Treasury security $ 10,214,844 $ 10,214,844 $ – 227 days U.S. Agency securities 101,122,725 66,057,825 35,064,900 307 days Local government investment pool 338,451,920 338,451,920 – 46 days Money market mutual fund 10,276,868 10,276,868 – 37 days Municipal commercial paper 38,996,053 38,996,053 – 23 days Certificate of deposit 10,000,000 10,000,000 – 69 days Municipals bonds 16,340,540 16,340,540 – 325 days Total investments $ 525,402,950 $ 490,338,050 $ 35,064,900

The Board has authorized METRO to enter into a securities lending agreement with JPMorgan Chase Bank of Texas (CT) and its affiliate JPMorgan Chase Manhattan Bank (CM) for securities held by METRO. This agreement authorizes CT to act as METRO’s agent and deliver to CM securities that may be loaned to those organizations that are reported on the approved borrowers list maintained by CM. METRO has the right to further limit the organizations that CM may conduct securities lending transactions on its behalf. In addition, METRO or the borrower may terminate the loan on demand.

As of September 30, 2013 and 2012, collateral received by CM for securities lending transactions is held in the name of METRO and consists of cash or governmental securities and equals 102 percent or more of the fair value of the securities loaned, which is determined at the end of each business day by CM. Investment of METRO’s cash collateral by CM is limited to U.S. Treasury and Agency securities and repurchase agreements with maturities not to exceed 90 days. Repurchase agreements must be fully collateralized by securities that are issued or guaranteed as to principal and interest by the U.S. government, its agencies, or instrumentalities. Because of these restrictions, METRO is not subject to any credit risk. METRO is responsible for any deficits that result from the sale of investments that relate to the cash collateral held by CM. When the collateral is in the form of securities, CM will indemnify METRO if the borrower fails to return any of the borrowed securities upon termination of the loan. The collateral is held by CM in the name of METRO and can be pledged or sold only if the borrower defaults.

Only U.S. Treasury and Agencies securities were available for use in the security lending program. There was no security landing activities for FY2013. Security lending activity for fiscal year FY2012 consisted of the following: Fiscal 2013 Fiscal 2012 Investment securities available for lending $ 52,171,412 $ 111,337,569 Amount on loan – – Gross earnings – 6,187 Rebates – – Agent fees – 2,472 Amount reported in investment income – 3,715 Percentage on loan – –

41 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

3. Capital Assets

Changes in capital assets for fiscal year 2013 were as follows: Transfers Reductions and and Completed September 30, Capital assets October 1, 2012 Additions Retirements Projects 2013 Capital assets not depreciated: Land $ 308,091,230 $ – $ (19,265,112) $ 1,840,608 $ 290,666,726 Construction in progress 1,272,701,433 555,425,631 (10,102) (147,990,068) 1,680,126,894 Total capital assets not depreciated 1,580,792,663 555,425,631 (19,275,214) (146,149,460) 1,970,793,620 Capital assets depreciated: Administration & operating facilities 413,533,888 – – 7,893,562 421,427,450 Park and ride lots & transit centers 280,975,507 – – 782,734 281,758,241 Buses and equipment 745,074,118 – (26,816,072) 20,375,733 738,633,779 Rail cars 47,790,125 – – 67,957,599 115,747,724 Rail infrastructure 248,977,316 – – 6,061,369 255,038,685 Transitways/HOT lanes 537,974,316 – – 33,610,615 571,584,931 Other property and equipment 70,087,171 111,587 (275,841) 9,467,848 79,390,765 Total capital assets depreciated 2,344,412,441 111,587 (27,091,914) 146,149,460 2,463,581,575 Less: Accumulated depreciation and amortization Administration & operating facilities (231,811,153) (15,315,120) – – (247,126,273) Park and ride lots & transit centers (172,531,176) (9,237,631) – – (181,768,807) Buses and equipment (475,454,501) (63,399,397) 26,617,267 – (512,236,631) Rail cars (24,666,603) (7,446,421) – – (32,113,024) Rail infrastructure (84,795,984) (11,595,794) – – (96,391,778) Transitways/HOT lanes (304,676,218) (22,061,559) – – (326,737,777) Other property and equipment (51,168,717) (7,586,316) 275,841 – (58,479,192) Total accumulated depreciation and amortization (1,345,104,352) (136,642,238) 26,893,108 – (1,454,853,482) Total capital assets being depreciated, net 999,308,089 (136,530,651) (198,805) 146,149,460 1,008,728,093 Total capital assets, net $ 2,580,100,752 $ 418,894,980 $(19,474,019) $ – $ 2,979,521,713

METRO has an agreement with the City of Houston to replace their land converted for rail operations. As part of this agreement, METRO conveyed land valued at $19,111,275 and $65,291,832 for FY2013 and 2012, respectively, to the City of Houston, which is reported as part of Infrastructure assistance in the Statements of Revenues, Expenses, and Changes in Net Position. Additional land will be conveyed to the City of Houston during the next several years as rail construction is continuing. In addition to land, METRO will transfer the value of utility work and street improvements to the City of Houston as the rail lines are completed.

Total interest cost incurred for the current and previous fiscal year was $44,653,340, and $44,927,011 of which $34,550,561 and $31,207,367 were capitalized.

Construction activity is currently focused on the North, East End, and Southeast rail lines with anticipated completion occurring in FY2014. Various environmental, engineering, and utility activities have taken place on the University and Uptown rail lines with expenditures (excluding land) totaling approximately $98.7 million. This cost is currently reported as part of construction in progress. METRO is reviewing the best way to fund and complete these two rail lines with citizens and local leaders.

42 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Changes in capital assets for fiscal year 2012 were as follows: Transfers Reductions and and Completed September 30, Capital assets October 1, 2011 Additions Retirements Projects 2012 Capital assets not depreciated: Land $ 363,980,988 $ – $ (65,291,832) $ 9,402,074 $ 308,091,230 Construction in progress 904,589,821 490,115,732 (29,053) (121,975,067) 1,272,701,433 Total capital assets not depreciated 1,268,570,809 490,115,732 (65,320,885) (112,572,993) 1,580,792,663 Capital assets depreciated: Administration & operating facilities 416,752,621 – (4,340,492) 1,121,759 413,533,888 Park and ride lots & transit centers 284,706,317 – (4,051,980) 321,170 280,975,507 Buses and equipment 712,026,069 – (49,623,517) 82,671,566 745,074,118 Rail cars 46,000,431 – – 1,789,694 47,790,125 Rail infrastructure 246,707,241 – (1,651,875) 3,921,950 248,977,316 Transitways/HOT lanes 516,941,640 – – 21,032,676 537,974,316 Other property and equipment 74,492,835 – (6,119,842) 1,714,178 70,087,171 Total capital assets depreciated 2,297,627,154 – (65,787,706) 112,572,993 2,344,412,441 Less: Accumulated depreciation and amortization Administration & operating facilities (220,826,176) (15,325,469) 4,340,492 – (231,811,153) Park and ride lots & transit centers (166,318,849) (10,264,306) 4,051,979 – (172,531,176) Buses and equipment (461,806,431) (62,912,557) 49,264,487 – (475,454,501) Rail cars (18,629,072) (6,037,531) – – (24,666,603) Rail infrastructure (72,955,091) (13,492,767) 1,651,874 – (84,795,984) Transitways/HOT lanes (286,647,842) (18,028,376) – – (304,676,218) Other property and equipment (46,197,548) (11,033,950) 6,062,781 – (51,168,717) Total accumulated depreciation and amortization (1,273,381,009) (137,094,956) 65,371,613 – (1,345,104,352) Total capital assets being depreciated, net 1,024,246,145 (137,094,956) (416,093) 112,572,993 999,308,089 Total capital assets, net $ 2,292,816,954 $ 353,020,776 $ (65,736,978) $ – $ 2,580,100,752

4. Retirement Plans:

METRO has three pension plans and two postemployment healthcare plans. Two of the pension plans are noncontributory, single-employer, defined benefit plans and one is a defined contribution plan. The postemployment healthcare plans are single-employer, defined benefit plans that are available to eligible retirees.

Pension and postemployment healthcare contributions are authorized by METRO’s Board of Directors during the annual budgeting process. Monthly pension contributions are placed into separate trust accounts that will be used to fund pension payments as they become due. Other postemployment benefits are funded on a pay-as-you-go basis. Independently audited financial statements are available for both defined benefit pension plans and the Health and Welfare Trust from METRO’s Treasury Division located at 1900 Main Street Houston, Texas. METRO has no access to pension plan assets as they are kept in separate trust accounts and managed by two separate administrative committees. The Plans’ asset custodian, State Street Bank, is responsible for executing and recording all investment transactions authorized by the Plans’ money managers or committees.

Calculating the annual required contribution and obligations for the defined benefit pensions and the defined postemployment healthcare benefit plans requires the use of actuarial estimates that include: future employment, mortality, asset returns, salaries, funding, and healthcare cost trend rates, which are 43 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas listed in tables on the following pages. These actuarial calculations reflect a long-term perspective and use techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and assets. The required schedule of funding progress immediately following the notes to the financial statements presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities.

Defined Benefits Plans

Transport Workers Union Pension Plan Local 260, AFL-CIO (TWUPP) is for employees hired before October 1, 2012 and whose jobs are covered by a collective bargaining agreement. These employees primarily consist of operators, mechanics, and related support staff. The TWUPP provides a monthly normal retirement benefits based on participants’ years of service but not less than $300 per month. The calculation for monthly normal retirement benefits is based on the designated dollar amount times the number of credited years of service. The designated dollar amount used to determine monthly normal retirement benefit is based on date of retirement and the current union contract. The designated dollar amount will change periodically (benefiting only future retirees) as a result of new contracts and has ranged from $50 effective August 1, 2002 to $60 effective February 1, 2009. Participants can only choose monthly distributions. No lump-sum payments are available unless the participant has a balance of $5,000 or less. The TWUPP is managed by a four-member administrative committee.

Plan participants are 100% vested after five years of credited services. Participants become eligible to receive benefits at the earlier of 28 years of credited services or age 60 with five years of credited services. The requirements for early retirement with reduced benefits are that an employee reaches age 55 and has 25 years of credited services. In addition, the plan provides disability retirement benefits with the requirement being five years of credited service. Additional requirements include five years of vesting service for vested deferred retirement benefits and for preretirement spousal benefits.

TWUPP annual required contributions (ARC) are made based on actuarial valuations prepared annually by an independent actuary from data furnished by METRO. The unfunded actuarial accrued liability as of January 1, 2013 was $85,698,753 and the pension expense recognized in the financial statements for the current and previous two fiscal years were $14,544,413, $14,344,181, and $14,055,722, respectively. Actual contributions for the current and previous two fiscal years were $14,362,412, $14,206,770, and $13,224,450, respectively.

The Non-Union Pension Plan (NUPP) is primarily for full time administrative staff and police officers hired before October 1, 2007. Participants are 100% vested in employer contributions to the plan after five years of credited service. Participants become eligible to receive benefits at age 65 with special provisions allowing for retirement at an earlier age. The minimum monthly normal retirement benefit of a participant who retires on or after their normal retirement date is $300 a month, provided the participant has at least ten years of credited service at retirement regardless of the date of their retirement. The monthly benefit is based on the average monthly salary of the participant for the last three years of service, number of service years, and the retirement factor. Participants can choose a lump-sum distribution or a monthly distribution. Participants with balances equal to or less than $1,000 are automatically distributed a lump-sum payment or rolled into another qualified plan. The requirement for early retirement with reduced benefits is that an employee reaches age 55 with 15 years of credited services. In addition, the plan provides for disability retirement benefits with the requirement being total and permanent disability at any age with benefits deferred to normal retirement date. Additional requirements include five years of vesting services for vested deferred retirement benefits and preretirement spousal benefits. NUPP is managed by a seven-member administrative committee.

NUPP annual required contributions (ARC) are based on actuarial valuations prepared annually by an independent actuary from data furnished by METRO. The unfunded actuarial accrued liability as of January 1, 2013 was $37,364,173 and the pension expense recognized in the financial statements for the 44 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

current and previous two fiscal years was $8,764,797, $8,873,835, and $10,962,239, respectively. Actual contributions for the current and previous two fiscal years were $8,615,666, $8,907,720, and $10,725,234, respectively.

Significant actuarial assumptions used in METRO’s plan valuations and funded status is listed below:

TWUPP NUPP Valuation date January 1st of each year January 1st of each year Cost method Projected unit credit Projected unit credit Inflation rate 3.0% per year IRS salary limit 3.0% per year IRS salary limit Asset valuation method Five-year smoothed market value Five-year smoothed market value Investment rate of return 8.0% per annum 8.0% per annum Funding policy Meeting the ARC requirements Meeting the ARC requirements Cost of living adjustments None None Projected salary increase None 2.5% per annum Assumed annual Varying percentage ranging Varying percentage ranging retirement rate from 5% to 100% for age 60 from 20% to 100% for ages 55 through 70 through 70 Mortality and Disabled Mortality RP-2000 Combined Mortality with RP-2000 Combined Mortality with Projection Scale AA to year 2013 Projection Scale AA to year 2013 Amortization of gains/losses Level dollars/reestablished Level dollars/reestablished Method annually Annually Period 30 years closed 30 years closed Open to new members No (as of October 1, 2012) No (as of October 1, 2007)

The current and previous fiscal year contributions and changes in the net pension obligations for the last two fiscal years were: Fiscal Year 2013 Fiscal Year 2012 TWUPP NUPP TWUPP NUPP Annual required contributions (ARC) $ 14,362,413 $ 8 ,689,450 $ 14,206,770 $ 8,833,935 Interest on net pension obligation (1,649,407) (456,439) (1,245,299) (361,598) Adjustment to ARC 1,831,407 531,786 1,382,710 401,498 Annual pension cost 14,544,413 8,764,797 14,344,181 8,873,835 Contributions 14,362,412 8,615,666 14,206,770 8,907,720 Change in net pension obligation 182,001 149,131 137,411 (33,885) Beginning net pension obligation/(asset) (20,617,580) (6,060,511) (20,754,991) (6,026,626) Ending net pension obligation/(asset) $ (20,435,579) $ (5,911,380) $ (20,617,580) $ (6,060,511) Percentage of pension cost contributed 98.75% 98.30% 99.04% 100.38% Percentage of ARC contributed 100.00% 99.15% 100.00% 100.84%

45 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

The funded status of the TWUPP and NUPP pension plans as of January 1, 2013 (in thousands) was as follows: Actuarial UAAL as a Actuarial Accrued Funded Percentage Value of Liabilities Unfunded Ratio Covered of Covered Assets (AAL) (UAAL) Percentage Payroll Payroll TWUPP $ 181,661 $ 267,359 $ 85,698 67.9% $ 91,830 93.3% NUPP 113,145 150,509 37,364 75.2 44,389 84.2

The TWUPP and NUPP Annual Pension Cost (APC) and Net Pension Obligations are as follows: Year-End Annual Percentage of Net Pension Pension Cost APC Funded Obligation/(Asset) TWUPP 2011 $ 14,055,722 94.09% $ (20,754,991) 2012 14,344,181 99.04 (20,617,580) 2013 14,544,413 98.75 (20,435,579)

NUPP 2011 $ 10,962,239 97.84% $ (6,026,626) 2012 8,873,835 100.38 (6,060,511) 2013 8,764,797 98.30 (5,911,380)

Defined Contribution Pension Plan (DCPP)

The NUPP was closed October 1, 2007 and the TWUPP was closed October 1, 2012 to new employees. Individuals hired after those dates are placed into a DCPP. As part of DCPP, METRO will contribute two percent of the employee’s annual salary and will match up to an additional four percent of their contributions. All contributions are placed into a third-party trust account. Employee’s vesting rates are 40 percent after the second year and 20 percent annually thereafter. Contributions by METRO for the current and previous two fiscal years were $1,121,291, $769,874, and $604,251, with employees contributing $1,040,871, $757,795, and $501,089.

Other Postemployment Benefits Other Than Pension

METRO sponsors two, single-employer, defined benefit Other Postemployment Healthcare Plans, which include the Transport Workers Union Metropolitan Transit Authority Health & Welfare Trust (Trust) and the Non-Union Plan. These plans cover medical, dental, and life insurance for retirees with retiree’s contribution being based on years of service for the Non-Union Plan. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and historical pattern of cost sharing between the employer and plan members. METRO is on a pay-as-you-go funding basis for these benefits.

The Trust is a separate legal entity that is managed by four trustees who are responsible for managing resources and establishing benefits. Two of the trustees are from the Transport Workers Union Local 260, AFL-CIO and two are from METRO. Payments to the Trust are irrevocable and made monthly based on amounts established during contract negotiations with the union. To qualify for this retirement benefit, an employee must be 60 years old with 5 years of credited services, any age with 28 years of credited services, or 55 years old with 25 years of credited services or meet disability qualifications. Actual

46 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas contributions for the current and previous two fiscal years were $8,116,228, $7,347,943, and $7,168,000, respectively.

The Non-Union Plan is administered by METRO and covers full-time employees with payments made as services are provided. To qualify for this benefit, an employee must be 55 years or older with 5 years of credited services. Employees hired after December 31, 2009 are not eligible for postretirement medical and dental benefits. Effective October 1 2012, METRO moved Post 65 retirees and spouses to Extend Health. This plan is capped at $2,801 per person annually, including medical, dental, vision, and pharmacy. Actual contributions for the current and previous two fiscal years were $3,211,888, $4,709,585, and $2,503,469, respectively. Significant actuarial assumptions used in METRO’s Other Post Employment Plans valuations are as follows:

Trust Non-Union Valuation date Biennially on January 1st Biennially on January 1st Cost method Projected unit credit Projected unit credit Healthcare cost trend rate Varying from 6.2% declining Varying from 8% declining to 3.9 % after 2100 to 4.6% after 2083 Investment rate of return without prefunding 4.0% per annum 4.0% per annum Funding policy Pay-as-you-go Pay-as-you-go Assumed annual Varying percentage ranging Varying percentage ranging retirement rate from 5% to 100% for age 55 from 20% to 100% for ages 55 through 70 through 70

Inflation assumption 2.75% per annum, compound 2.75% per annum, compound annually annually Mortality basis after normal Healthy lives (sex distinct) Healthy lives (sex distinct) retirement RP-2000 Combined Mortality RP-2000 Combined Mortality Table projected to 2012 using Table projected to 2013using Projection Scale AA Projection Scale AA

Disabled lives (sex distinct) Disabled lives (sex distinct) RP-2000 Disabled Mortality RP-2000 Disabled Mortality Table projected to 2012 using Table projected to 2013using Projection Scale AA Projection Scale AA Amortization of gains and losses Method Level dollars/reestablished Level dollars/reestablished annually annually Period 30 years closed 30 years closed Open to new members Yes No (as of January 1, 2010)

47 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

The following calculations for Other Postemployment Cost, Net Postemployment Benefit Obligation, and Funded Status of the plans are based on independent actuarial reports. The Non-Union report was dated January 1, 2013 while the Trust was dated January 1, 2012.

Fiscal Year 2013 Fiscal Year 2012 Trust Non-Union Trust Non-Union Annual required contributions $ 28,567,946 $ 10,155,179 $ 28,567,946 $ 12,469,800 Interest on prior year net post employment benefit obligation 3,209,716 1,735,335 3,209,716 1,027,621 Adjustment to annual required contributions ( 4,461,976) (2,412,370) ( 4,461,976) (1,428,544) Other postemployment cost 27,315,686 9,478,144 27,315,686 12,068,877 Contribution 8,116,228 3,211,888 7,347,943 4,709,585 Change in net postemployment benefit obligation 19,199,458 6,266,256 19,967,743 7,359,292 Beginning net postemployment benefit obligation 100,210,647 43,383,374 80,242,904 36,024,082 Ending net postemployment benefit obligation $119,410,105 $ 49,649,630 $100,210,647 $ 43,383,374 Percentage of postemployment benefit cost contributed 29.71% 33.89% 26.90% 39.02%

The Trust and Non-Union Other Postemployment Benefit (OPEB) cost and Net OPEB Obligation are as follows: Year-End Annual Percentage of Net OPEB OPEB Cost OPEB Funded Obligation Trust 2011 $ 27,606,406 25.96% $ 80,242,904 2012 27,315,686 26.90 100,210,647 2013 27,315,686 29.71 119,410,105 Non-Union 2011 $ 12,068,877 20.74% $ 36,024,082 2012 12,068,877 39.02 43,383,374 2013 9,478,144 33.89 49,649,630

The funded status of the Trust and Non-Union OPEB plans are as follows:

Actuarial Actuarial Accrued Funded Valuation Value of Liabilities Unfunded Ratio Date Assets (AAL) AAL Percentage October 1, 2012 Trust – $ 338,260,120 $ 338,260,120 – October 1, 2012 Non-Union – 108,927,425 108,927,425 –

48 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

5. Self-Insurance:

The Risk Management Department is responsible for developing and implementing safety/training programs, purchasing insurance policies and establishing a self-insured liability for workers’ compensation and third-party property and bodily injury claims. This self-insured liability is adjusted biennially based on an independent actuarial study. Prior to the next actuarial update, the Risk Management Department will make monthly adjustments to the self-insured liability balance for cash payments, new claims, and estimated amount for incurred but not yet reported claims.

The purchased insurance policies cover property risk, some of which include premises, auto, tanker fleet, fiduciary, commercial crime, windstorm, national flood insurance (at certain locations), railroad, and pollution. Settlements for these activities have not exceeded METRO’s insurance coverage for any of the past three fiscal years.

METRO is protected by governmental immunity, except as provided by the Texas Tort Claims Act (TTCA). Under the TTCA, METRO’s liability is capped at $100,000 per person and $300,000 per accident for property damage, personal injury, and death proximately caused by wrongful act or omission or the negligence of an employee acting within his scope of employment.

Balance and related changes for the self-insured liability for FY2013 and FY2012 were:

Balance at the Beginning of Claims and Balance at the the Fiscal Changes in Claim End of the Year Estimates Payments Fiscal Year October 1,2012 - September 30, 2013 $ 9,101,030 $5,272,177 $ (3,679,238) $ 10,693,969

October 1,2011 - September 30, 2012 $ 17,304,217 $ (4,818,126) $ (3,385,061) $ 9,101,030

METRO’s ultimate liability for claims may be more or less than the amount accrued; however, management believes the differences will not materially affect its financial position.

6. Public/Private Development and Partnership:

Development

During FY2006, METRO leased 11.5 acres of land for 99 years to A-S 90 HWY 290-Skinner, L.P. (lessee), the right (a ground lease) to develop, construct, operate, and maintain a mixed-use residential and commercial facility. METRO maintains a continuing financial interest in the property and must grant prior approval for certain activities, sales, assignments, transfers, and subleasing by the lessee.

As part of the development program, METRO paid $16,630,466 to the lessee for the construction of a multilevel parking garage. The garage provides parking for tenants and Park & Ride patrons and is maintained by METRO with up to 20 percent of certain expenses billed to the lessee. The lessee is responsible for maintaining the grounds and may bill METRO up to 33.89 percent of the cost to maintain the drainage facilities/detention pond and certain common areas. The remaining cost associated with the property and improvement (excluding the garage) is paid by the lessee with most payments being included when calculating METRO’s 25 percent share of cash flow participation rent.

49 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

METRO receives $50,000 annually in base rent, paid monthly, and cash flow participation rent calculated as 25 percent of the net cash flows of the leases less most expenses, reasonable reserves, and the base rent. Upon certain payment events, METRO will receive participation payments calculated as 25 percent of the net proceeds. These payment events include: sale, casualty, condemnation action, or permanent financing of the project. All cash flow participation rent will cease if the lessee sells its interest to a third party. No cash flow participation rents or payment events have been received by METRO through FY2013.

Partnership

METRO entered into a taxable limited partnership (Wellington Fisher, Ltd.) during FY2005 for the acquisition and development of certain land for transit-related projects. METRO is the limited partner with Wellington Fisher One LLC as the general partner. This partnership will continue for 50 years unless the general partner enters bankruptcy or the general partner determines, with the approval of the limited partner, that the partnership should be dissolved.

The partnership owns land located near downtown Houston, and net earnings generally consists of parking fees reduced by property taxes, administrative cost, and fees paid to the general partner.

METRO’s share of the partnership through December 31, 2012 was $13,312,587, which included $13,169,171 for land and inception-to-date net earnings of $143,416. METRO’s share of land is reported in the Statements of Net Position as part of capital assets, net of depreciation while the net income is reported in the Statements of Revenues, Expenses, and Changes in Net Position as non-operating income.

7. Commitments and Contingencies:

In addition to the retirement plans discussed in note 4, METRO has various commitments and contingencies that include outstanding contracts and purchase orders, infrastructure assistance, capital and operating leases, long-term debt, financial hedges for diesel fuel purchases, compensation absences, litigation, and audit by other governmental entities. Descriptions and changes for these items are listed below:

Outstanding value of contracts

METRO has various contracts for materials, services, and construction activities some of which cover multiple fiscal years. The outstanding value of contracts as of September 30, 2013 was approximately $767 million of which $380 million relates to the expansion of rail service. Payments to vendors will be made from sales tax collections, transit fares, bond proceeds, and grants.

Agreements to fund local infrastructure improvements and mobility programs through September 30, 2014 (extended by voters in the November 2012 referendum to December 31, 2025)

METRO makes payments to or on behalf of Harris County, the City of Houston, and 14 cities (Multi- cities) within METRO’s service area for infrastructure improvement and mobility programs. These payments were reauthorized during a special election held during FY2004, which designated 25 percent of METRO’s sales tax through September 30, 2014. Funds not spent may be carried over and used, as appropriated by the Board, in future funding periods through September 30, 2014. On November 6, 2012, the voters again approved continuing the dedication of up to 25% of METRO’s sales and use tax revenues for street improvements and related projects for the period October 1, 2014 through December 31, 2025, as authorized by law and with no increase to the current rate of METRO’s sales and use tax. Final distribution of funds to local governments will be based on inter-local agreements as approved by the Board of Directors. Funds collected but not yet disbursed is approximately $62.4 million dollars.

50 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Expenses related to these agreements are reported as Local infrastructure assistance in the Statements of Revenues, Expenses, and Changes in Net Position as funding requests are received and accepted by METRO.

Lease/sublease agreements for operating facilities and buses

METRO has five remaining lease/sublease agreement as of September 30, 2013. Two are for facilities, two are for buses, and one is for fare boxes/radios. Under each of the agreements, METRO entered into a head-lease as lessor with an investor and simultaneously entered into a sublease agreement as lessee to lease back the assets. METRO received upfront head-lease rent prepayments, which it placed into a trust invested in fixed-income deposits in an amount that, including interest, would be sufficient to fund all of METRO’s scheduled sublease rent payments through the date on which METRO can exercise a designated purchase option.

The facility lease agreements require METRO to maintain third-party payment guarantees by organizations with credit ratings of AA-/Aa3 or higher or purchase replacement coverage acceptable to the equity investors. American International Group, Inc. (AIG) and Financial Security Assurance (FSA) continue to have credit ratings below the minimal requirements and METRO has been working with all parties to resolve all agreement issues.

METRO continues to negotiate with Bank of America, which is the equity investor in the two remaining facility leases and Wells Fargo, which is the equity investor for the two buses and fare boxes/radio leases. As of September 30, 2013, Bank of America is the only equity investor that officially requested METRO to replace the initial lease Equity Payment Agreement and the Letter of Credit (LOC) due to the downgrade of AIG. The estimated cost to early terminate the remaining five leases is approximately $18 million. This estimate will fluctuate based on the schedule of termination payments, market conditions, and credit ratings for AIG and FSA.

Amounts remaining with the payment undertakers are amortized on a straight-line basis over the life of the specific lease, which is also the assets’ useful life. Final amount may be higher if the lease ends due to METRO exercising the purchase option. METRO anticipates it will exercise its early purchase options as they become available. Unamortized balances are reported on the Statements of Net Position as Prepaid lease payments with a corresponding liability titled Deferred rental payments. Lease terms and remaining amounts to be amortized are:

Sublease Original Lease Sublease Amortization Early Expiration Expiration Period Purchase Date Option Date Date (Years) Facility Buffalo Bayou Dec 14, 2075 Jan 1, 2026 Jun 14, 2035 34 Kashmere Jun 14, 2083 Jan 1, 2026 Jun 14, 2037 36 Transit Buses May 2, 2052 – Jan 1, 2012-15 10-13 Transit Buses Dec 19, 2052 – Jan 1, 2016 14 Fare boxes/radios Apr 22, 2043 – Jan 1, 2018 16

51 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Activities for the last two fiscal years are as follows:

September 30, 2012 Current September 30, 2013 Unamortized Year Unamortized Balance Amortization Balance Facility Buffalo Bayou $ 6 ,065,801 $ 275,719 $ 5,790,082 Kashmere 31,301,532 1,304,231 29,997,301 Transit buses 7,758,003 4,265,027 3,492,976 Transit buses 2,145,550 2,145,550 – Transit buses 2,429,571 607,392 1,822,179 Transit buses 1,394,967 1,394,967 – Fare boxes/radios 13,278,922 2,213,154 11,065,768 Total $ 64,374,346 $ 12,206,040 $ 52,168,306

During FY2013, METRO exercised its normal purchase option for two of the four remaining buses leases. No additional cost was incurred as the funds in the trust accounts were sufficient to make all final payments. The remaining unamortized balance for these bus leases have been included in current year amortization amount.

September 30, 2011 Current Negotiated September 30, 2012 Unamortized Year Early Unamortized Balance Amortization Purchase Balance Facility Buffalo Bayou $ 6,341,520 $ 275,719 $ – $ 6,065,801 Fallbrook 36,611,174 – 36,611,174 – Field Service 14,723,692 – 14,723,692 – Center Hiram Clarke 18,379,800 – 18,379,800 – Kashmere 32,605,763 1,304,231 – 31,301,532 Northwest 18,117,543 – 18,117,543 – West 22,204,104 – 22,204,104 – Transit buses 13,493,634 5,735,631 – 7,758,003 Transit buses 8,261,821 6,116,271 – 2,145,550 Transit buses 3,036,963 607,392 – 2,429,571 Transit buses 2,092,451 697,484 – 1,394,967 Fare boxes/radios 15,492,076 2,213,154 – 13,278,922 Total $ 191,360,541 $16,949,882 $ 110,036,313 $ 64,374,346

During FY2012, METRO negotiated early purchase of five bus facilities leases. In addition, METRO notified the participants of certain transit bus leases that it would exercise its purchase options as they become available. No additional cash payments from METRO should be required, except for some minor administrative cost, because the funds placed into the trusts at the beginning of the leases will be adequate to make all final payments. METRO anticipates it will exercise all other purchase options as they become available.

Long-Term Debt

Long-term debt consists of commercial paper, capital leases, bonds, and contractual obligations, which are supported by sales and use taxes revenues.

52 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Commercial paper

METRO is authorized to issue up to $400 million in Sales and Use Tax Revenue Commercial Paper Notes (CP). These notes are supported by pledging 75% of METRO’s Sales and Use Tax Revenue and interest earned on related investments. To support the CP program in case of a remarketing failure, METRO has two revolving credit and term loan agreements totaling $275 million. A-1 is for $200 million with JPMorgan Chase Bank, National Association, which expires June 20, 2014. A-3 is for $75 million with State Street Bank and Trust Company, which expires June 15, 2014. Commercial paper is reported as a current liability on the Statements of Net Position since both revolving credit and term loan agreements expire in less than a year. In the event of a remarketing failure, the credit line will be invoked to fund maturities and will incur interest costs as follows:

Period Bank Rate

Day 1 through Day 14 Initial Base Rate

Day 15 through Day 90 Base Rate

Day 91 through Day 180 Base Rate plus 2.00% per annum

Day 181 through the day the amount Term Out Rate is due and payable Where the “Initial Base Rate” means for any day the higher of (a) the Bank’s U.S. prime commercial lending rate in effect for such day (as such U.S. prime commercial lending rate is announced from time to time by the Bank at its principal New York office) and (b) the sum of 1.00% per annum plus the Federal Funds Rate for such day (it being understood that each change in such Initial Base Rate is to be effective for purposes of this agreement on the day on which such change is effective for the Bank’s purposes). Each determination of the Initial Base Rate by the Bank will be conclusive and binding on METRO and the Bank, absent manifest error; “Base Rate” means for any day the higher of (a) the Bank’s U.S. prime commercial lending rate in effect for such day (as such U.S. prime commercial lending rate is announced from time to time by the Bank at its principal New York office) plus 2.00% per annum (b) the sum of 3.00% per annum plus the Federal Funds Rate for such day (it being understood that each change in such Base Rate is to be effective for purposes of this Agreement on the day on which such change is effective for the Bank’s purposes), and (c) 9.00% per annum. Each determination of the Base Rate by the Bank will be conclusive and binding on METRO and the Bank, absent manifest error; where “Term Out Rate” shall never exceed the “Maximum Interest Rate” meaning the lesser of (a) maximum non-usurious interest rate that may, under applicable federal law and applicable state law (including specifically Chapter 1204, Texas Government Code), be contracted for, charged, or received under such laws and (b) 25% per annum. METRO is also required to pay an annual commitment fee of 1.20% for funds that are available, whether used or unused.

Proceeds from CP were used to make payments for General Mobility expenditures, expanding, maintaining, and improving public transit, or eliminating outstanding notes of the same series. Changes and outstanding CP by series as of September 30, 2013 were as follows:

Series October 1, 2012 Proceeds Repayments September 30, 2013 A-1 $ 162,400,000 $ 610,950,000 $ (612,950,000) $ 160,400,000 A-3 26,600,000 149,200,000 (149,200,000) 26,600,000 Total $ 189,000,000 $ 760,150,000 $ (762,150,000) $ 187,000,000

53 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Remaining Days Nominal Rate Series Amount Issued Maturity Date Outstanding % A-1 $ 91,500,000 2/11/2014 134 0.14 A-1 38,250,000 2/06/2014 129 0.17 A-1 30,650,000 2/20/2014 143 0.15 160,400,000

A-3 3,600,000 10/11/2013 11 0.08 A-3 9,000,000 3/27/2014 178 0.17 A-3 14,000,000 3/20/2014 171 0.17 26,600,000 Total $ 187,000,000

Changes for CP by series for FY 2012 were as follows:

Series October 1, 2011 Proceeds Repayments September 30, 2012 A-1 $ 162,400,000 $ 707,200,000 $ (707,200,000) $ 162,400,000 A-3 27,600,000 106,000,000 (107,000,000) 26,600,000 Total $ 190,000,000 $ 813,200,000 $ (814,200,000) $ 189,000,000

Capital Leases, Bonds, and Contractual Obligations

Future payments for capital leases, bonds, and contractual obligations are as follows:

Capital Leases Bonds and Contractual Obligations Fiscal Year Principal Interest Total Principal Interest Total Total 2014 $ 8,129,906 $ 3,881,965 $ 12,011,871 $ 13,365,000 $ 39,148,956 $ 52,513,956 $ 64,525,827 2015 8,543,263 3,472,233 12,015,496 13,920,000 38,595,956 52,515,956 64,531,452 2016 8,951,781 3,061,314 12,013,095 22,160,000 37,851,981 60,011,981 72,025,076 2017 9,352,311 2,655,643 12,007,954 23,115,000 36,852,406 59,967,406 71,975,360 2018 9,745,000 2,184,494 11,929,494 24,205,000 35,751,781 59,956,781 71,886,275 2019-2023 37,415,000 3,572,379 40,987,379 135,780,000 160,268,644 296,048,644 337,036,023 2024-2028 – – – 108,085,000 130,207,568 238,292,568 238,292,568 2029-2033 – – – 129,870,000 100,525,845 230,395,845 230,395,845 2034-2038 – – – 155,000,000 61,020,438 216,020,438 216,020,438 2039-2043 – – – 151,440,000 15,717,141 167,157,141 167,157,141 Payments $82,137,261 $18,828,028 $100,965,289 $ 776,940,000 $ 655,940,716 $ 1,432,880,716 $ 1,533,846,005 Unamortized premium/ discount 1,416,616 59,693,698 Total debt $83,553,877 $836,633,698

54 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Capital Leases

The Board has authorized the use of a Master Lease Purchase Finance Program (MLPFP) for the purchase of buses and rail cars. Funds from the MLPFP were used to purchase 158 buses that were placed into service during FY2008 and FY2009. In addition to the MLPFP, METRO entered into other leases, which include: a 5-year lease for copiers and a 50-year lease with three 15 year extensions for the use of land and related improvements for a Park & Ride lot. Land improvements for the Park & Ride lot have been capitalized and will be depreciated over its remaining useful life (6 years) with payments for the land being reported as an operating lease. Capital leased assets are depreciated over their estimated useful life or the life of the lease, if shorter, and have been reported as part of capital assets, net with a corresponding capital lease liability on the Statements of Net Position. Scheduled lease payments over the remaining lease terms are as follows: MLPFP Series A Series B Total Fiscal Year Principal Interest Principal Interest Principal Interest 2014 $ 4,770,000 $ 1,958,862 $ 3,290,000 $ 1,910,625 $ 8,060,000 $ 3,869,487 2015 4,995,000 1,721,612 3,475,000 1,741,500 8,470,000 3,463,112 2016 5,245,000 1,491,837 3,630,000 1,563,875 8,875,000 3,055,712 2017 5,455,000 1,276,103 3,820,000 1,377,625 9,275,000 2,653,728 2018 5,675,000 1,009,207 4,070,000 1,175,287 9,745,000 2,184,494 2019-2023 18,780,000 1,312,135 18,635,000 2,260,244 37,415,000 3,572,379 $ 44,920,000 $ 8,769,756 $ 36,920,000 $ 10,029,156 $ 81,840,000 $ 18,798,912

Future payments for other leases:

Park & Ride Land Improvements Total Capital Leases Fiscal Year Principal Interest Total Principal Interest 2014 $ 69,906 $ 12,478 $ 82,384 $ 8,129,906 $ 3,881,965 $ 12,011,871 2015 73,263 9,121 82,384 8,543,263 3,472,233 12,015,496 2016 76,781 5,602 82,383 8,951,781 3,061,314 12,013,095 2017 77,311 1,915 79,226 9,352,311 2,655,643 12,007,954 2018 9,745,000 2,184,494 11,929,494 2019-2023 37,415,000 3,572,379 40,987,379 $ 297,261 $ 29,116 $ 326,377 $ 82,137,261 $18,828,028 $100,965,289

Changes during the last two years for capital lease obligations are as follows:

Remaining Combined Balance of October 1, 2012 Current Year Balance Capital Leases Principal Unamortized Amortization September 30, October 1, 2012 Additions Payments Premium of Premium 2013 MLPFP Series A $ 49,525,000 $ – $ (4,605,000) $ 662,627 $ (66,263) $ 45,516,364 Series B 40,020,000 – (3,100,000) 911,391 (91,139) 37,740,252 Copiers 128,177 – (128,177) – – – Park & Ride Land Improvements 363,963 – (66,702) – – 297,261 Total $ 90,037,140 $ – $ (7,899,879) $ 1,574,018 $ (157,402) $ 83,553,877

55 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Remaining Combined Balance of October 1, 2011 Current Year Balance Capital Leases Principal Unamortized Amortization September 30, October 1, 2011 Additions Payments Premium of Premium 2012 MLPFP Series A $ 53,910,000 $ – $ (4,385,000) $ 728,889 $ (66,262) $ 50,187,627 Series B 42,995,000 – ( 2,975,000) 1,002,530 (91,139) 40,931,391 Copiers 258,057 – (129,880) – – 128,177 Park & Ride Land Improvements 423,784 – (59,821) – – 363,963 Total $ 97,586,841 $ – $ (7,549,701) $ 1,731,419 $ (157,401) $ 91,611,158

Bonds and Contractual Obligations

As of September 30, 2011, METRO completed the issuance of the $640 million bonds authorized by the voters during the November 2003 election to fund transit projects. Contractual obligations for the purchase of buses and rail cars do not count against the voter-authorized amount. METRO has seven series of bonds and contractual obligations outstanding as of September 30, 2013. Four of the seven series are contractual obligations with proceeds used to purchase buses and rail cars and the remaining three series were used to pay for construction activity on the North and Southeast rail lines. Interest and principal payments are guaranteed from sales tax receipts that are deposited directly by the bank each month into a third-party trust account. Funds deposited in the third-party trust account or debt proceeds not yet disbursed are reported as Investments – restricted in the Statements of Net Position. Scheduled payments over the remaining life of the bonds and contractual obligations with changes during the last two fiscal years are as follows:

Sales and Use Tax Bonds and Contractual Obligations Bonds Contractual Obligations Build America Bonds Series 2009A Series 2009B Series 2009C Principal Interest Principal Interest Principal Interest 2014 $ 3,265,000 $ 4,184,875 $ 1,185,000 $ 1,773,900 $ – $ 5,675,656 2015 3,430,000 4,017,500 1,225,000 1,731,625 – 5,675,656 2016 3,610,000 3,841,500 1,275,000 1,681,625 – 5,675,656 2017 3,795,000 3,656,375 1,330,000 1,629,525 – 5,675,656 2018 3,990,000 3,461,750 1,385,000 1,575,225 – 5,675,656 2019-2023 23,230,000 14,021,750 7,885,000 6,913,925 – 28,378,281 2024-2028 29,825,000 7,423,125 9,805,000 4,989,537 – 28,378,281 2029-2033 14,185,000 718,125 12,455,000 2,339,876 23,920,000 25,960,344 2034-2038 – – 2,885,000 72,125 47,740,000 12,243,688 2039-2043 – – – – 10,895,000 374,516 $ 85,330,000 $ 41,325,000 $ 39,430,000 $ 22,707,363 $ 82,555,000 $ 123,713,390

The Build America Bonds Series 2009C receives a special interest cost rebate each year from the federal government. This amount varies annually starting with $1.8 million in FY2010, increasing to $2 million in FY2011 and declining to $131 thousand in FY2039. The anticipated remaining rebate due as of September 30, 2013 is approximately $43 million. The rebate is reported as Inter-government grant revenue in the Statements of Revenues, Expenses, and Changes in Net Position as earned. Interest cost reported in this schedule has not been reduced for this rebate.

56 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Sales and Use Tax Bonds and Contractual Obligations Contractual Obligations Contractual Obligations Bonds Series 2009D Series 2010A Series 2011A Fiscal Year Principal Interest Principal Interest Principal Interest 2014 $ 2,640,000 $ 1,074,025 $ 2,880,000 $ 1,513,100 $ – $ 23,050,500 2015 2,730,000 986,875 3,000,000 1,395,500 – 23,050,500 2016 2,815,000 903,700 3,120,000 1,296,500 7,660,000 22,859,000 2017 2,915,000 803,175 3,195,000 1,177,625 8,050,000 22,466,250 2018 3,030,000 684,275 3,350,000 1,014,000 8,465,000 22,053,375 2019-2023 13,520,000 1,339,913 19,310,000 2,486,625 49,295,000 103,293,625 2024-2028 – – – – 63,310,000 89,288,000 2029-2033 – – – – 79,310,000 71,507,500 2034-2038 – – – – 104,375,000 48,704,625 2039-2043 – – – – 140,545,000 15,342,625 $ 27,650,000 $ 5,791,963 $ 34,855,000 $ 8,883,350 $ 461,010,000 $ 441,616,000

Sales and Use Tax Bonds and Contractual Obligations Contractual Obligations Series 2011B Total Fiscal Year Principal Interest Principal Interest Total 2014 $ 3,395,000 $ 1,876,900 $ 13,365,000 $ 39,148,956 $ 52,513,956 2015 3,535,000 1,738,300 13,920,000 38,595,956 52,515,956 2016 3,680,000 1,594,000 22,160,000 37,851,981 60,011,981 2017 3,830,000 1,443,800 23,115,000 36,852,406 59,967,406 2018 3,985,000 1,287,500 24,205,000 35,751,781 59,956,781 2019-2023 22,540,000 3,834,525 135,780,000 160,268,644 296,048,644 2024-2028 5,145,000 128,625 108,085,000 130,207,568 238,292,568 2029-2033 – – 129,870,000 100,525,845 230,395,845 2034-2038 – – 155,000,000 61,020,438 216,020,438 2039-2043 – – 151,440,000 15,717,141 167,157,141 $ 46,110,000 $ 11,903,650 $ 776,940,000 $ 655,940,716 $ 1,432,880,716

57 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Changes during the last two years for sales and use tax bonds consist of the following:

Changes in Bonds and Contractual Obligations Changes in Premium/(Discount) Current Year Payments October 1, 2012 Amortization Combined to Unamortized of Balance October 1, 2012 Retire Premium/ (Premium)/ September 30, Principal Addition Bonds (Discount) Discount 2013 Series 2009A $ 88,465,000 $ – $ (3,135,000) $ 5,499,424 $ (323,495) $ 90,505,929 2009B 40,580,000 – (1,150,000) 791,062 (37,670) 40,183,392 2009C 82,555,000 – - (971,855) 37,379 81,620,524 2009D 30,195,000 – (2,545,000) 2,187,672 (198,879) 29,638,793 2010A 37,625,000 – (2,770,000) 3,253,744 (361,527) 37,747,217 2011A 461,010,000 – - 45,977,913 (1,585,445) 505,402,468 2011B 49,405,000 – (3,295,000) 5,967,912 (542,537) 51,535,375 Total $ 789,835,000 $ – $(12,895,000) $ 62,705,872 $ (3,012,174) $ 836,633,698

Changes in Bonds and Contractual Obligations Changes in Premium/(Discount) Current Year Payments October 1, 2011 Amortization Combined to Unamortized of Balance October 1, 2011 Retire Premium/ (Premium)/ September 30, Principal Addition Bonds (Discount) Discount 2012 Series 2009A $ 91,510,000 $ – $ (3,045,000) $ 5,822,920 $ (323,496) $ 93,964,424 2009B 41,695,000 – (1,115,000) 828,732 (37,670) 41,371,062 2009C 82,555,000 – – (1,009,234) 37,379 81,583,145 2009D 32,655,000 – (2,460,000) 2,386,552 (198,879) 32,382,673 2010A 40,290,000 – (2,665,000) 3,615,271 (361,527) 40,878,744 2011A 461,010,000 – – 47,563,358 (1,585,445) 506,987,913 2011B 49,405,000 – – 6,510,450 (542,537) 55,372,913 Total $ 799,120,000 $ – $ (9,285,000) $ 65,718,049 $ (3,012,175) $ 852,540,874

The weighted average interest rate paid on outstanding debt is approximately 3.55 percent and ranges from 0.16 for commercial paper to 4.96 percent for long-term debt.

58 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Operating lease

METRO leases land, buildings, and software under various operating leases. In most cases, management expects to renew or replace these leases as they expire. Actual rental expenses for FY2013 and FY2012 were $3,980,331 and $4,785,144, respectively. Future payments for operating leases assume a 2 percent annual increase from the current year expense and consist of the following:

Total Minimum Year Ending Operating Leases September 30, 2013 Payments 2014 $ 4,059,938 2015 4,141,136 2016 4,223,959 2017 4,308,438 2018 4,394,607 Total $ 21,128,078

Fuel Hedge Policy

The Board adopted a fuel hedge policy. As part of this policy, METRO can develop and implement a plan through physical forward contracts and/or financial contracts, which will provide fuel price certainty for up to 24 months of expected consumption. The tactics to achieve this goal could include: Fixed Price Future Delivery Contracts, Guaranteed Price Contracts (Swaps), Maximum/Minimum Price Contracts (Collars), and Maximum Price Contracts (Caps). Credit risk is minimized because all counterparties of contracts shall either have a minimum long-term rating of A3 or A- by at least two of the three nationally recognized rating agencies or have collateral posting requirements for entities with ratings below this level. Fuel purchases and related swap agreements cover the same time period and use the same index, which is the Platts US Gulf Coast Ultra Low Sulfur Diesel. No upfront cash is received or paid by METRO when entering into any of these transactions. Diesel fuel swaps are considered effective with the positive or negative fair value being reflected in the Statements of Net Position as either a deferred inflow or outflow with a related current asset or current liabilities. No derivatives were reclassified during the previous two years from a hedging derivative to an investment derivative.

Outstanding Diesel Fuel Swaps

METRO had 37 and 69 diesel fuel swap agreements outstanding as of September 30, 2013 and 2012, respectively. 26 of those swaps total 11,088,000 gallons and will settle during FY2014. The remaining 11 will settle in FY2015 and total 7,560,000 gallons. The outstanding swaps represent approximately 88 and 61 percent of the anticipated fuel requirements for each fiscal year. The swaps had a positive value of $1,348,147 and $3,691,843 as of September 30, 2013 and 2012, respectively, as calculated by the counterparties both of whom are nationally recognized commodity traders, Koch Supply & Trading, LLP and Goldman, Sachs & Co. This amount has been reported as a deferred inflow of resources – diesel fuel swaps with an offset to derivative instrument – diesel fuel swaps on the Statement of Net Position. The swaps, which settled during FY2013 and FY2012, reduced operating cost by $2,215,454 and $1,322,798, respectively, and were reported as part of bus and rail operations in the Statement of Revenues, Expenses, and Changes in Net Position.

Compensated absences are earned, as discussed in note 1, based on employee classification. The ending balance is payable next fiscal year and has been reported in the current liability section of the Statements of Net Position as part of accrued compensation and benefits.

59 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority of Harris County, Texas

Changes during the last two years were:

Beginning Ending Balance Expensed Additions Balance October 1, 2012 - September 30, 2013 $ 14,218,355 $(14,386,282) $ 14,830,166 $ 14,662,239 October 1, 2011 - September 30, 2012 $ 15,103,541 $(13,885,104) $ 12,999,918 $ 14,218,355

Litigation

METRO is a defendant in various legal actions occurring in the normal course of its operations and has recognized, to the extent it believes necessary, liabilities for any reasonably expected losses that might arise from the final resolution of such litigation. In certain cases, however, management is not presently able to determine the ultimate liability, if any, that might arise upon final resolution of the various legal actions. In these instances, management believes the ultimate liability in excess of amounts recorded, if any, will not materially affect METRO’s financial position.

Federal and State Grants

Expenditures financed by federal and state grants are subject to audit by the granting agencies. Management believes no significant liability will arise from any such audits.

Inter-local Agreements METRO has entered into several inter-local agreements, which are designed to reduce operating and capital cost while improving mobility throughout the service area. Some of these agreements include coordinating major procurement activities, maintaining traffic lights along the rail lines, reimbursing for betterments, land/easement conveyances, motorist assistance program (MAP), infrastructure improvements/mobility program, and the future construction modifications to the West Park Toll Road. 8. Subsequent Events Management has evaluated subsequent events through February 27, 2014. No changes were made, or are necessary to be made, to the financial statements, as a result of this evaluation.

REQUIRED SUPPLEMENTAL INFORMATION

Required Supplemental Information

Metropolitan Transit Authority of Harris County, Texas Non-Union and Transport Workers Union Pension and Other Postemployment Benefit Plans (Amounts in Thousands) (Unaudited)

Actuarial Accrued UAAL as a Actuarial Liability Unfunded Funded Percentage of Actuarial Value of (AAL) AAL Ratio Covered Covered Valuation Assets Unit credit (UAAL) Percentage Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c)

Non-Union Pension plan Jan 1, 2013 $ 113,145 $ 150,509 $ 37,364 75.2% $ 44,389 84.2% Jan 1, 2012 110,276 142,052 31,776 77.6% 47,185 67.3% Jan 1, 2011 114,082 151,592 37,510 75.3% 57,702 65.0%

Other Postemployment Oct 1, 2012 – 108,927 108,927 – – – Oct 1, 2010 – 129,261 129,261 – – – Oct 1, 2008 – 114,269 114,269 – – –

Transport Workers Union Pension Plan Jan 1, 2013 181,661 267,359 85,698 67.9% 91,830 93.3% Jan 1, 2012 173,838 255,553 81,715 68.0% 94,043 86.9% Jan 1, 2011 168,964 241,018 72,054 70.1% 93,675 76.9%

Other Postemployment Benefits Oct 1, 2012 – 338,260 338,260 – – – Oct 1, 2010 – 301,284 301,284 – – –

Other Postemployment Benefits actuarial studies are updated biennially.

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APPENDIX C

FORM OF CO-BOND COUNSELS’ OPINION

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ANDREWS KURTH LLP BATES & COLEMAN, P.C. 600 Travis, Suite 4200 1402 Alabama Houston, Texas 77002 Houston, Texas 77004

April 22, 2014

WE HAVE ACTED as Co-Bond Counsel for the METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS (the “Authority”) in connection with an issue of contractual obligations (the “Obligations”) described as follows:

METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS, SALES AND USE TAX CONTRACTUAL OBLIGATIONS, SERIES 2014A, in the aggregate principal amount of $130,605,000 maturing on November 1 in each year from 2015 through 2029, inclusive. The Obligations are issuable in fully registered form only, in denominations of $5,000 and any integral multiple of $5,000 in excess thereof, bear interest, and may be transferred and exchanged as set out in the Obligations and in the resolution (the “Resolution”) adopted by the Board of the Authority (the “Board”) authorizing their issuance.

WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Obligations under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Obligations from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Obligations. The transcript contains certified copies of certain proceedings of the Authority; certain certifications and representations and other material facts within the knowledge and control of the Authority, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Obligations. We have also examined executed Obligation No. T-1 of this issue.

WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the Authority or the disclosure thereof in connection with the sale of the Obligations. Our role in connection with the Authority’s Official Statement prepared for use in connection with the sale of the Obligations has been limited as described therein.

BASED ON SUCH EXAMINATION, it is our opinion as follows:

(1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Obligations in full compliance with the Constitution and laws of the State of Texas presently in effect; the Obligations constitute valid and legally binding obligations of the Authority enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Obligations may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, * Preliminary, subject to change HOU:3415493.2 April 15, 2014 Page 2

reorganization, or moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Obligations have been authorized and delivered in accordance with law; and

(2) The Obligations are payable from all legally available funds of the Authority and are secured, as to both principal and interest, by a lien on and pledge of the Pledged Revenues (as defined in the Resolution), including, but not limited to, seventy-five percent (75%) of the revenues collected and received by the Authority from the levy of its Sales and Use Tax (as defined in the Resolution) plus any investment income earned on any moneys in the Revenue Fund (as defined in the Resolution), the Interest and Sinking Fund (as defined in the Resolution) and the Reserve Fund (as defined in the Resolution) which lien is senior to any other lien on or pledge of such Pledged Revenues, except parity liens and pledges permitted by the Resolution.

IT IS OUR FURTHER OPINION, also based on our examination as described above, and subject to the restrictions hereinafter described, that, pursuant to section 103 of the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), and existing regulations, published rulings, and court decisions thereunder, and assuming continuing compliance by the Authority with the provisions of the Resolution after the date hereof, interest on the Obligations (1) will be excludable from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes, and (2) will not be included in computing the alternative minimum taxable income for federal income tax purposes of the owners thereof who are individuals or, except as described below, corporations.

WE CALL TO YOUR ATTENTION THAT, with respect to our opinion in clause (2) of the previous paragraph, interest on the Obligations owned by a corporation will be included in such corporation’s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund, a real estate mortgage investment conduit (REMIC), a real estate investment trust (REIT), or a financial asset securitization investment trust (FASIT). A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code is computed.

EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Obligations. Prospective purchasers of the Obligations should be aware that the ownership of tax-exempt obligations, such as the Obligations, may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax- exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income tax credit. Prospective purchasers should consult their tax advisors as to the consequences of investing in the Obligations.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to HOU:3415493.2 April 15, 2014 Page 3

update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

HOU:3415493.2

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APPENDIX D

SELECTED INFORMATION REGARDING HARRIS COUNTY, TEXAS

Harris County is a southeast Texas county and a major component of the Houston Primary Metropolitan Statistical Area (“PMSA”). 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 County seat is Houston, Texas.

The Authority does not provide service to or collect sales and use taxes in certain portions of eastern Harris County, including the cities of Baytown, La Porte and Pasadena. The chart below presents selected demographic statistics for all of Harris County, including those portions not served by the Authority, for years 2003 through 2013.

Demographic Statistics (2003 – 2013) (Unaudited)

Per Capita Harris County Harris County Unemployment Fiscal PMSA Per Capita Personal Income Total Retail Unemployment Rate (State Year Population(a) Personal Income(a) (State of Texas)(b) Sales (c) Rate(a) of Texas) (d) 2013 5,747.0 $50,621 Unavailable Unavailable 6.2% 6.0% 2012 5,588.3 48,431 $42,638 $87,781,338,410 6.8% 6.8% 2011 5,413.4 46,290 41,103 78,371,560,202 7.9% 7.9% 2010 5,287.6 44,326 38,103 72,528,950,956 8.2% 8.2% 2009 5,212.0 44,136 36,931 73,839,251,893 7.6% 7.5% 2008 5,087.4 45,461 39,654 77,203,361,474 4.8% 4.9% 2007 4,906.1 43,924 36,869 65,819,741,113 4.3% 4.3% 2006 4,719.3 41,917 35,474 60,379,883,343 5.0% 4.9% 2005 4,563.5 38,858 33,213 58,832,594,856 5.6% 5.4% 2004 4,428.4 36,208 31,087 52,984,352,793 6.2% 6.0% 2003 4,376.6 34,406 30,032 48,012,859,690 6.7% 6.7%

Source: (a) Institute for Regional Forecasting A Division of the Center for Public Policy University of Houston. (b) U.S. Department of Commerce, Bureau of Economic Analysis. (c) Windows on State Governments, the website of Susan Combs, Texas Comptroller of Public Accounts. (d) Texas Workforce Commission.

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